As filed with the Securities and Exchange Commission on November 8, 2022
Registration No. 333-235275
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 3
TO
FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
(Exact Name of Registrant as Specified in its Charter)
| Not Applicable | ||
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
Telephone:
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
Tel.
(Name, address and telephone number of agent for service)
Copies to:
Pang Zhang-Whittaker, Esq.
Steven J. Glusband, Esq.
Carter Ledyard & Milburn LLP
28 Liberty Street
New York, New York 10005
212-732-3200
Approximate date of commencement of proposed sale to the public: From time to time after effectiveness of this registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☒
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act or Rule 12b-2 of the Securities Exchange Act of 1934.
Emerging
growth company
If
an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, 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 7(a)(2)(B) of the Securities Act.
The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission acting pursuant to said Section 8(a) may determine.
EXPLANATORY NOTE
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The information in this prospectus is not complete and may be changed. Neither we nor the Selling Shareholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION, DATED NOVEMBER 8, 2022
HUAHUI EDUCATION GROUP LIMITED
This prospectus relates to the resale from time to time by the Selling Shareholders identified herein under the caption “Selling Shareholders” of up to 31,901,900 ordinary shares (the “Shares”),$0.0001 par value per share (the “Ordinary Shares”) of Huahui Education Group Limited (the “Company”).
For the details about the Selling Shareholders, please see “Principal and Selling Shareholders - Selling Shareholders.” The Selling Shareholders may sell some or all of their Shares from time to time at a fixed price of $0.08 per Share until our Ordinary Shares are quoted on the OTCQB or a higher market and thereafter in the principal market on which our Ordinary Shares are traded at the prevailing market price, in negotiated transactions or through any other means described in the section titled “Plan of Distribution.” The Selling Shareholders may be deemed underwriters within the meaning of the Securities Act of 1933, as amended, of the Shares that they are offering. The Company will pay the expenses of registering the Shares. The Company will not receive proceeds from the sale by the Selling Shareholders of the Shares that are covered by this prospectus.
The Shares are being registered to permit the Selling Shareholders, or their respective pledgees, donees, transferees or other successors-in-interest, to sell the Shares from time to time in the public market. The Company does not know when or in what amount the Selling Shareholders may offer the securities for sale. The Selling Shareholders may sell some, all or none of the securities offered by this prospectus.
There is no market for our Ordinary Shares and there can be no assurance that a market for the Ordinary Shares will develop. However, management intends to seek to have the Ordinary Shares admitted to quotation on the OTCQB. There can be no assurance that the Company’s Ordinary Shares will be approved for trading on the OTCQB or any other trading exchange.
The Company is an emerging growth company, as defined in the U.S. Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and, as such, has elected to comply with certain reduced public company reporting requirements. For more information, see “Implications of Being an Emerging Growth Company and a Foreign Private Issuer.”
Investors are cautioned that you are buying shares of a Cayman Islands holding company with operations conducted in the People’s Republic of China (“PRC” or China”) by the Company’s operating subsidiaries. Investors in this offering will not directly hold equity interests in any of the Company’s operating subsidiaries.
The Company is a holding company incorporated in the Cayman Islands with no material operations of its own. As a holding company with no material operations of its own, the Company conducts operations in China through its operating subsidiaries, Zhongdehui (Shenzhen) Education Development Co., Limited (“ZDSE”), Shenzhen Huahui Media Technology Co., Limited (“HHMT”) and Huahui (Shenzhen) Education Management Co., Limited (“HEMC”), all of which are incorporated in the PRC (together, the “Operating Subsidiaries”). The Shares offered in this offering are shares of the Cayman Islands holding company, and not shares of the Operating Subsidiaries.
The Company’s corporate structure may involve unique risks for investors and could be disallowed by Chinese regulatory authorities, which would likely result in a material change in the Company’s operations and/or a material change in the value of the Company’s Ordinary Shares, including the possibility that its Ordinary Shares could significantly decline in value or become worthless. See “Risk Factors - Risks Related to Doing Business in the People’s Republic of China” on page 19 of this prospectus.
The Company’s Operating Subsidiaries conduct business operations in the PRC. The Chinese government may exercise significant oversight and discretion over the conduct of the Operating Subsidiaries’ businesses in China and may intervene in or influence their operations at any time, which could result in a material change in their operations and/or the value of the Company’s Ordinary Shares. In addition, the Company may be materially affected by 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 companies including, but not limited to, cybersecurity review and regulatory review of the overseas listing of a company’s shares through an offshore holding company. The Company is also subject to the risks of uncertainty about any future actions the Chinese government may take in this regard.
Should the Chinese government choose to exercise significant oversight and discretion over the conduct of the Company’s Operating Subsidiaries’ businesses, it may intervene in or influence the Operating Subsidiaries’ operations. Such governmental actions:
| ● | could result in a material change in the Operating Subsidiaries’ operations; | |
| ● | could hinder the Company’s ability to continue to offer securities to investors; and | |
| ● | may cause the value of the Company’s Ordinary Shares to significantly decline or to become worthless. |
Management of the Company is aware that recently the PRC government initiated a series of regulatory actions and statements to regulate business operations in certain areas in China with little advance notice, including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas using a variable interest entity (“VIE”) structure, adopting new measures to extend the scope of cybersecurity reviews and expanding efforts in anti-monopoly enforcement. See “Prospectus Summary - Regulatory Oversight in China” and “Risk Factors - Risks Related to Doing Business in the People’s Republic of China.” The Company does not have any contractual arrangements to establish a VIE structure with any entity in China; however, the Company is subject to certain other legal and operational risks associated with its Operating Subsidiaries being based in China.
Given that the Company’s Operating Subsidiaries are in the PRC, the Company may face material changes to its Operating Subsidiaries’ operations or to the value of its Ordinary Shares resulting from the legal and operational risks relating to these statements and regulatory actions which, in the event such regulatory actions are found to apply, could significantly limit or completely hinder the Company’s ability to complete this offering or cause the value of its Ordinary Shares to significantly decline or become worthless.
However, since these statements and regulatory actions are new, it is highly uncertain how soon the legislative or administrative regulation making bodies will respond and what existing or new laws or regulations or detailed implementations and interpretations will be modified or promulgated, if any. It is also highly uncertain what the potential impact such modified or new laws and regulations will have on the daily business operations of Company’s Operating Subsidiaries, its ability to accept foreign investments and the listing of its Ordinary Shares on a U.S. exchange. See “Risk Factors - Risks Related to Doing Business in the People’s Republic of China” on page 21 of this Prospectus.”
Furthermore, as more stringent criteria, including the Holding Foreign Companies Accountable Act, which became law in December 2020 (the “HFCAA”), recently have been imposed by the SEC and the Public Company Accounting Oversight Board (the “PCAOB”), the Company’s Ordinary Shares may be prohibited from trading if its auditor cannot be fully inspected by the PCAOB.
The HFCAA prohibits foreign companies from listing their securities on U.S. exchanges if that company’s auditor has been unavailable for PCAOB inspection or investigation for three consecutive years. As a result, an exchange may determine to delist the Company’s Ordinary Shares if the PCAOB is not allowed to inspect or investigate the Company’s auditor. In June 2021, the Senate passed the Accelerating Holding Foreign Companies Accountable Act (the “AHFCAA) which, if signed into law, would reduce the time period for the delisting of foreign companies under the HFCAA to two consecutive years instead of three years. In the event the HFCAA is amended to prohibit an issuer’s securities from trading on any U.S. stock exchange and the Company’s auditor is not subject to PCAOB inspections for two consecutive years instead of three, it will reduce the time before the Company’s Shares may be prohibited from trading or delisted from an exchange.
Pursuant to the HFCAA, the PCAOB issued a Determination Report on December 16, 2021 (the “Determination Report”), which found that the PCAOB was unable to inspect or investigate completely registered public accounting firms headquartered in: (1) mainland China of the People’s Republic of China because of a position taken by one or more authorities in mainland China; and (2) Hong Kong, a Special Administrative Region and dependency of the PRC, because of a position taken by one or more authorities in Hong Kong. In addition, the Determination Report identified the specific registered public accounting firms subject to these determinations.
On August 26, 2022, the PCAOB signed a Statement of Protocol with the China Securities Regulatory Commission and the Ministry of Finance of the People’s Republic of China – the first step toward opening access for the PCAOB to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong completely, consistent with U.S. law. While this Statement of Protocol may lead to full resolution of the previously identified issues, there can be no assurance that this will be the case. In such an event, there can be no assurance that we will continue to be able to comply with the requirements imposed by the U.S. regulators or Nasdaq.
The Company’s auditor, Pan-China Singapore PAC (“Pan-China Singapore”), the independent registered public accounting firm that issued the audit report included in this prospectus, is subject to PCAOB inspections. Pan-China Singapore is headquartered in Singapore and there are no limitations in Singapore on PCAOB inspections. Therefore, the Company believes that, as of the date of this prospectus, its auditor is not subject to the determinations announced by the PCAOB on December 16, 2021 relating to the PCAOB’s inability to inspect or investigate completely registered public accounting firms headquartered in the PRC or Hong Kong because of a position taken by one or more authorities in the PRC or Hong Kong. See “Risk Factors - Risks Related to the Company’s Ordinary Shares.” However, to the extent that the Company’s auditor’s work papers may, in the future, become located in China, such work papers will not be subject to inspection by the PCAOB because the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities. Inspections of certain other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. In addition to subjecting the Company’s securities to the possibility of being prohibited from trading or delisted from a US exchange, the inability of the PCAOB to conduct inspections of the Company’s auditors’ work papers in China would make it more difficult to evaluate the effectiveness of its auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. As a result, the Company’s investors would be deprived of the benefits of the PCAOB’s oversight of its auditor through such inspections and they may lose confidence in the Company’s reported financial information and procedures and the quality of its financial statements. The Company cannot assure you whether Nasdaq or other regulatory authorities will apply additional or more stringent criteria to it. Such uncertainty could cause the market price of the Company’s Ordinary Shares to be materially and adversely affected.
As a holding company, the Company may rely on dividends and other distributions on equity paid by the Company’s Operating Subsidiaries for its cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to its shareholders, fund inter-company loans, service any debt the Company may incur outside of China and pay expenses. Any limitation on the ability of the Company’s PRC Operating Subsidiaries to transfer cash out of China and/or make remittances to pay dividends to the Company could limit its ability to access cash generated by the operations of its Operating Subsidiaries.
Under PRC laws, rules and regulations, each of the Company’s Operating Subsidiaries is required to set aside at least 10% of its after-tax profits each year, after making up for previous years’ accumulated losses, if any, to fund certain statutory reserves, until the aggregate amount of such fund reaches 50% of its registered capital. As a result of these laws, rules and regulations, the Company’s Operating Subsidiaries are restricted in their ability to transfer a portion of their respective net assets to us. As of December 31, 2021, none of our Operating Subsidiaries had any such restricted assets. However, there can be no assurance that the PRC government will not intervene or impose restrictions on the Company’s Operating Subsidiaries’ ability to transfer or distribute cash among themselves or to foreign investors, which could result in an inability or prohibition against making transfers or distributions outside of China and may adversely affect the Company’s business, financial condition and results of operations. See “Risk Factors - Risk Related to Doing Business in the People’s Republic of China” on page 19.”
The Company is permitted under the laws of the Cayman Islands to provide funding to its subsidiaries incorporated in Seychelles, China and Hong Kong through loans or capital contributions without restrictions on the amount of the funds. The Company’s subsidiaries are permitted under the respective laws of the Seychelles, China and Hong Kong to provide funding to it through dividend distribution without restrictions on the amount of the funds, other than as described above. If any of the Company’s subsidiaries incurs debt on its own behalf in the future, the instruments governing such debt may restrict its ability to pay dividends to the Company.
The structure of cash flows within the Company’s organization and a summary of the applicable regulations, is as follows:
| ● | The Company’s equity structure is a direct holding structure, that is, the overseas entity that is applying to trade the Ordinary Shares on the OTCQB Market in the United States is Huahui Education Group Limited, a Cayman Islands company. Huahui Education Group Limited owns 100% of the issued and outstanding stock of Huahui Group Stock Limited (“HGSL”), a Seychelles company. HGSL owns 100% of the issued and outstanding stock of Huahui Group (HK) Co., Limited (“HGHK”), a Hong Kong company. HGHK owns 100% of the issued and outstanding stock of Huahui (Shenzhen) Education Management Co., Limited (“HEMC”), a PRC company. HEMC owns 100% of the issued and outstanding stock of Shenzhen Huahui Shangxing Education Consulting Co. Limited (“HSEC”), a PRC company. HSEC owns 100% of the issued and outstanding stock of Zhongdehui (Shenzhen) Education Development Co., Limited (“ZDSE”), a PRC company and the Company’s primary Operating Subsidiary, and Shenzhen Huahui Media Technology Co., Limited (“HHMT”), a PRC company and also an Operating Subsidiary. In addition, HGSL and HSEC have other direct and indirect subsidiaries that are either holding companies or have not yet commenced operations; HHMT has a wholly-owned subsidiary that is in essentially the same business as HHMT; and ZDSE has two wholly-owned subsidiaries that have assumed the operations of two of its former branches. See “Our Business - History of the Company” and “Our Business - Corporate Structure” for additional details. | |
| ● | Within the Company’s direct holding structure, the cross-border transfer of funds within the Company’s corporate group is legal and compliant with the laws and regulations of the PRC. After investors’ funds enter Huahui Education Group Limited, the funds can be directly transferred to HGSL and then to HGHK. HGHK can then directly transfer funds to HEMC, and those funds can then be transferred to HSEC and ZDSE, its subordinate operating entities. | |
| ● | If the Company intends to distribute dividends, the PRC Operating Subsidiaries will transfer the dividends to HEMC , which will then transfer the dividends to HGHK, which will transfer them to HGSL, which will transfer them to Huahui Education Group Limited. Huahui Education Group Limited will then transfer the dividends to all of its shareholders, respectively, in proportion to the number of Ordinary Shares they hold, regardless of whether the shareholders are U.S. investors or investors in other countries or regions. | |
| ● | As of the date of this prospectus, neither the Company nor any of its subsidiaries has ever paid dividends or made distributions to U.S. investors. The Company has not transferred any funds to its Operating Subsidiaries in the fiscal years ended December 31, 2020 or 2021 and through the date of this prospectus to fund their business operations. The Company has not received any transfer of funds from its subsidiaries in the fiscal years ended December 31, 2020 or 2021 and through the date of this prospectus. In the future, any cash proceeds raised from overseas financing activities may be transferred by the Company to its Operating Subsidiaries via capital contributions or shareholder loans, as the case may be. For a detailed description of the transfers from the Company to its subsidiaries and from its subsidiaries to the Company, see “Transfers of Cash to and from the Company’s Subsidiaries” in the “Summary of the Prospectus” section of this prospectus. |
| ● | The ability of the Company’s Operating Subsidiaries to distribute dividends is based upon their distributable earnings. Current PRC regulations permit the Company’s Operating Subsidiaries to pay dividends to their respective shareholders only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, each of the Company’s Operating Subsidiaries is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of each of their registered capitals. These reserves are not distributable as cash dividends. See “The Company’s Business-Regulations in China Applicable to Our Business-Regulations On Dividend Distribution” for more information. |
As of the date of this prospectus, the Company has not approved or adopted any cash management policies that would dictate how funds are transferred between the Company and its subsidiaries, including its Operating Subsidiaries, or investors. See “Prospectus Summary - Transfers of Cash to and from the Company’s Subsidiaries.
To address persistent capital outflows and the RMB’s depreciation against the U.S. dollar in the fourth quarter of 2016, the People’s Bank of China and the State Administration of Foreign Exchange, or SAFE, implemented a series of capital control measures, including stricter vetting procedures for China-based companies to remit foreign currency for overseas acquisitions, dividend payments and shareholder loan repayments. The PRC government may continue to strengthen its capital controls and the Company’s Operating Subsidiaries’ dividends and other distributions may be subject to tightened scrutiny in the future. The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. Therefore, the Company may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from its Operating Subsidiaries’ profits, if any. Furthermore, if the Company’s subsidiaries in the PRC incur debt on their own in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments.
In addition, the Enterprise Income Tax Law and its implementation rules provide that a withholding tax at a rate of 10% will be applicable to dividends payable by Chinese companies to non-PRC-resident enterprises unless reduced under treaties or arrangements between the PRC central government and the governments of other countries or regions where the non-PRC-resident enterprises are tax resident. Pursuant to the tax agreement between Mainland China and the Hong Kong Special Administrative Region, the withholding tax rate in respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise may be reduced to 5% from a standard rate of 10%. However, if the relevant tax authorities determine that our transactions or arrangements are for the primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may adjust the favorable withholding tax in the future. Accordingly, there is no assurance that the reduced 5% withholding rate will apply to dividends received by the Company’s Hong Kong subsidiary from its PRC subsidiaries. This withholding tax will reduce the amount of dividends the Company may receive from its PRC subsidiaries.
Investing in our Ordinary Shares involves a high degree of risk. See “Risk Factors” beginning on page 12 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
The Selling Shareholders may sell their Shares described in this prospectus in a number of different ways, at prevailing market prices or privately negotiated prices and there is no termination date of the Selling Shareholders’ offering.
The date of this prospectus is November 8, 2022
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TABLE OF CONTENTS
The Company has not authorized any person to provide you with information different from that contained in this prospectus or any related free-writing prospectus that the Company authorizes to be distributed to you. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any jurisdiction where the offer or sale is not permitted. The information in this prospectus speaks only as of the date of this prospectus unless the information specifically indicates that another date applies, regardless of the time of delivery of this prospectus or of any sale of the securities offered hereby.
For investors outside of the United States: The Company has not done anything that would permit this Offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. Persons outside of the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the Offering and the distribution of this prospectus outside of the United States.
Notes on Prospectus Presentation
Numerical figures included in this prospectus have been subject to rounding adjustments. Accordingly, numerical figures shown as totals in various tables may not be arithmetic aggregations of the figures that precede them. Certain market data and other statistical information contained in this prospectus is based on information from independent industry organizations, publications, surveys and forecasts. Some market data and statistical information contained in this prospectus are also based on management’s estimates and calculations, which are derived from management’s review and interpretation of the independent sources listed above and management’s internal research and knowledge of the executive coaching industry. While management believes such information is reliable, it has not independently verified any third-party information and its internal data has not been verified by any independent source.
Accordingly, actual events or circumstances may differ materially from events and circumstances that are assumed in this information and you are cautioned not to give undue weight to such data.
All references in this prospectus to “$,” “U.S.$,” “U.S. dollars,” “dollars,” “US$” and “USD” mean United States dollars unless otherwise noted. All references to the “PRC” or “China” in this prospectus refer to the People’s Republic of China. All references to “Hong Kong” or “H.K.” in this prospectus refer to the Hong Kong Special Administrative Region of the People’s Republic of China. All references to the “United States,” “U.S.” or “US” refer to the United States of America.
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COMMONLY USED DEFINED TERMS
| ● | “Exchange Act” refers to the U.S. Securities Exchange Act of 1934, as amended. | |
| ● | HEMC” means Huahui (Shenzhen) Education Management Co. Limited, a limited liability company incorporated under the laws of the PRC, and an Operating Subsidiary of the Company. | |
| ● | “HGSL” means Huahui Group Stock Limited, a limited liability company incorporated under the laws of the Republic of Seychelles on May 17, 2017, which became a wholly owned subsidiary of the Company in July 2019 upon consummation of the Share Exchange, and which is a holding company not conducting any business operations. | |
| ● | “HGHK” means Huahui Group (HK) Co. Limited, a limited liability company incorporated under the laws of Hong Kong on January 4, 2017, which is a holding company not conducting any business operations. | |
| ● | “HHMT” means Shenzhen Huahui Media Technology Co., Limited, a limited liability company incorporated under the laws of the PRC on August 25, 2020, which is one of the Company’s Operating Subsidiaries and which is engaged in operations relating to several areas including business planning and event planning and production. | |
| ● | “HSEC” means Shenzhen Huahui Shangxing Education Consulting Co., Limited, a limited liability company incorporated under the laws of the PRC on January 5, 2018 as an education consulting company, which is not conducting any business operations. | |
| ● | “Hong Kong” or “H.K.” refers to Hong Kong Special Administrative Region of the People’s Republic of China. | |
| ● | “Memorandum and Articles of Association” means the memorandum and articles of association of the Company adopted on December 13, 2018 and as supplemented, amended or otherwise modified from time to time, a copy of which is filed as Exhibit 3.1 to the Company’s Report on Form 6-K filed with the SEC on July 5, 2019. | |
| ● | “Offering” refers to the resale of the Shares offered by the Selling Shareholders included herein. | |
| ● | “Operating Companies” means Zhongdehui (Shenzhen) Education Development Co., Limited, Shenzhen Huahui Media Technology Co., Limited and Huahui (Shenzhen) Education Management Co. Limited. | |
| ● | “Ordinary Resolution” refers to a resolution passed by a simple majority of votes cast or approved in writing by all of the votes entitled to be cast by the Members entitled to vote at a general meeting of the Company. | |
| Ordinary Shares refers to the Company’s ordinary shares, par value $0.0001 per share, and does not refer to any shares of any of the Company’s subsidiaries. | ||
| ● | “PRC” and “China” refer to the People’s Republic of China. | |
| ● | “Securities and Exchange Commission,” “SEC,” “Commission” or similar terms refer to the United States Securities and Exchange Commission. | |
| ● | “Sarbanes-Oxley Act” refers to the Sarbanes-Oxley Act of 2002. | |
| ● | “Securities Act” refers to the U.S. Securities Act of 1933, as amended. |
| ● | “Selling Shareholders” refers to the Company’s pre-existing shareholders who are selling their Shares pursuant to the Registration Statement on Form F-1 of which this prospectus is a part. | |
| ● | “Shares” refers to the 31,901,900 Ordinary Shares being offered pursuant to this Prospectus. | |
| ● | “United States,” “U.S.,” “USA” and “US” refer to the United States of America. | |
| ● | “ZDSE” means Zhongdehui (Shenzhen) Education Development Co., Limited, a limited liability company incorporated under the laws of the PRC on January 19, 2016, which is currently one of the Company’s Operating Subsidiaries conducting operations in the business of professional leadership development. | |
| ● | “$,” “U.S. $,” “U.S. dollars,” “dollars,” “US$” and “USD” refer to United States dollars. |
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. A forward-looking statement is a projection about a future event or result, and whether the statement comes true is subject to many risks and uncertainties. These statements often can be identified by the use of terms such as “may,” “will,” “expect,” “believe,” “anticipate,” “estimate,” “approximate” or “continue,” or the negative thereof. The actual results, performance, achievements or activities of the Company, either express or implied, will likely differ from projected results or activities of the Company as described in this prospectus, and such differences could be material. You should review carefully all information included in this prospectus.
You should rely only on the forward-looking statements that reflect management’s view as of the date of this prospectus. Management undertakes no obligation to publicly revise or update these forward-looking statements to reflect subsequent events or circumstances. You should also carefully review the risk factors described in other documents we file from time to time with the Securities and Exchange Commission (the “SEC”). The Company is hereby identifying important factors that could cause actual results to differ materially from those contained in any forward-looking statements made by it or on its behalf. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled “Risk Factors.”
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in the Company’s Ordinary Shares, you should carefully read the entire prospectus, including the Company’s financial statements and the related notes included elsewhere in this prospectus. You should also consider, among other things, the matters described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in each case appearing elsewhere in this prospectus. Unless otherwise stated, all references to the “Company” or the “group” and similar designations refer to Huahui Education Group Limited, a Cayman Islands exempted company with limited liability. All references to “Operating Subsidiaries” refers to Zhongdehui (Shenzhen) Education Development Co., Limited, Shenzhen Huahui Media Technology Co., Limited and Huahui (Shenzhen) Education Management Co. Limited.
History of the Company
The Company was originally incorporated in Nevada under the name “Duonas Corp.” on September 19, 2014. The Company was formed to produce and sell stylish decorative items made from concrete, such as a variety of sculptures, candleholders, lamps, tabletops, bookcases, vases of various shapes and forms and decorations for the garden.
The Company filed a registration statement on Form S-1 with the SEC on August 25, 2016, which was declared effective on October 12, 2016. In November 2017, subsequent to a change of control, the Company’s name was changed to Huahui Education Group Corporation, its ticker symbol was changed to “HHEG” and management of the Company abandoned its business plan and determined to seek a possible business combination. Accordingly, the Company became a “shell company” as such term is defined in Rule 12b-2 under the Exchange Act, with nominal assets and no business operations.
On July 3, 2019 (the “Closing Date”), the Company closed on a share exchange (the “Share Exchange”) with Huahui Group Stock Limited, (“HGSL”), a Seychelles company limited by shares, and HGSL’s shareholders (the “HGSL Shareholders”). As a result, HGSL is now a wholly owned subsidiary of the Company and the Company, through its indirect subsidiaries, ZDSE, HHMT and HEMC, is engaged in the businesses of professional management coaching, business planning and event planning and production and consulting, respectively. As a result of the Share Exchange, management of the Company believes that the Company is no longer a shell company.
The Company’s equity structure is a direct holding structure, that is, the overseas entity that is applying to trade on the OTCQB Market in the United States is Huahui Education Group Limited, a Cayman Islands company. Huahui Education Group Limited owns 100% of the issued and outstanding stock of Huahui Group Stock Limited (“HGSL”), a Seychelles company. HGSL owns 100% of the issued and outstanding stock of Huahui Group (HK) Co., Limited (“HGHK”), a Hong Kong company. HGHK owns 100% of the issued and outstanding stock of Huahui (Shenzhen) Education Management Co., Limited (“HEMC”), a PRC company. HEMC owns 100% of the issued and outstanding stock of Shenzhen Huahui Shangxing Education Consulting Co. Limited (“HSEC”), a PRC company. The Company conducts operations through its indirect PRC subsidiaries, Zhongdehui (Shenzhen) Education Development Co., Limited (“ZDSE”), currently the Company’s primary operating subsidiary, Shenzhen Huahui Media Technology Co., Limited (“HHMT”) and HEMC (collectively, the “Operating Subsidiaries”). In addition, HGSL and HSEC have other direct and indirect subsidiaries that are either holding companies or have not yet commenced operations; HHMT has a wholly-owned subsidiary that is in essentially the same business as HHMT; and ZDSE has two wholly-owned subsidiaries that have assumed the operations of two of its former branches.
Other than the statutory rights under the respective laws of organization regarding corporate ownership and control, there are no other contracts or arrangements through which the Company claims to have economic rights and exercise control with respect to its subsidiaries.
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The following chart sets forth the Company’s corporate structure immediately following the Share Exchange.
Purchasers in this Offering are buying shares of the Cayman Islands company, whereas all of the Company’s operations are conducted through its Operating Subsidiaries. At no time will the Company’s shareholders directly own shares in the Operating Subsidiaries.
When we refer in this prospectus to business and financial information for periods prior to the consummation of the Share Exchange, we are referring to the business and financial information of HGSL and its subsidiaries unless the context suggests otherwise; when we use phrases such as “we,” “our,” “company” and “us,” we are referring to the Company and all of its subsidiaries, as a combined entity.
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The Company filed a registration statement on Form F-1 with the SEC on November 26, 2019, which was declared effective on October 14, 2020. The registration statement registered 31,901,900 of the Company’s outstanding Ordinary Shares for resale in the United States. The remaining 270,833,000 outstanding Ordinary Shares may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirement.
The Company maintains its principal executive offices at 13th Floor, Building B1, Wisdom Plaza, Qiaoxiang Road, Nanshan District, Shenzhen, Guangdong Province, China 518000.
Business of ZDSE
ZDSE, the Company’s primary Operating Subsidiary, is engaged in the business of professional management coaching, including researching, developing and applying methods for helping individuals to improve their personal and professional leadership skills and effectiveness. ZDSE’s clients consist of executive managers from large scale, small and medium-sized enterprises, as well as professionals and employees in various fields.
ZDSE has developed “The Way of Management” program with ten modules now, and more modules to be developed in the future. The current ten modules comprise the experiential course, which is comprised 60% of scenario exercises, 20% of group interactions and 20% of specified topics. ZDSE also monitors the performance and the changes and developments of clients in their workplaces, and ZDSE’s coaches provide guidance and support to the company’s clients both during completion of the modules and during the provision of post-completion services. The current ten modules are:
| ● | Exploration Management - helps clients recognize their behavioral patterns in corporate management and decision-making, identify their own deficiencies or human frailties, such as selfishness or greed, and discover the gap between themselves and the ideal manager. | |
| ● | Innovation Management - helps clients learn how to build an effective and productive team. | |
| ● | Practice Management - helps each client accomplish a personal business goal that the client has derived from the two previous modules. | |
| ● | Management Art - helps clients develop communication skills, including listening and questioning, as well as how to give constructive feedback. | |
| ● | Personality Management - helps clients learn how to deal with difficult personalities. | |
| ● | Foundations of Management - helps clients discover their core values and how they impact their decisions and their management style. | |
| ● | Relationship Management - helps clients understand and accept themselves - their strengths and their weaknesses - and helps them understand their own needs. | |
| ● | Positivity - helps clients achieve a positive mindset and approach work and life with a positive attitude. | |
| ● | Leadership Development for Women - helps female clients succeed within a masculine culture. | |
| ● | Fund Management - helps clients learn how to manage capital, use capital correctly and diversify their investments, as well as how to understand their relationship with money and to keep the acquisition of money in perspective. |
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ZDSE believes that its team of professional and innovative coaches, most of whom have either a master’s or a doctoral degree in their various professions as well as experience in the field of leadership development coaching, is crucial to its success. It also believes in the importance of innovation and continual improvement, and its four-member program development team analyzes the latest market trends and demand and regularly collects feedback from clients to improve the quality of the coaching experience offered by ZDSE.
ZDSE had coached over 5,000 entrepreneurs as well as personnel from more than 65 corporate training services and large listed companies. The types of companies served include real estate, high technology, medicine, health, schools, government agencies, auto industry, communications, logistics, robotics, property, construction, engineering, manufacturing, textile, rag trade, furniture and other fields.
Business of HHMT
Its business includes cultural exchange event planning, conference planning, corporate image planning, marketing planning, exhibition planning, stage lighting, audio equipment, display equipment and technology development and sales, leasing, door-to-door integration of multimedia teaching systems installation, on-site maintenance, domestic trade and import and export of goods and technologies. HHMT’s strategy is to empower the entire education industry chain with technology. HHMT’s main customer groups are schools and other government institutions.
HHMT and its subsidiary, SJMC, are also negotiating to provide stage, audio and lighting equipment for artistic performances at sub-district offices of the SHENZHEN Culture and Sports Bureau and at the Shenzhen prison. In addition, HHMT intends to expand its business into the provision of intelligent systems for campuses and government offices, such as face recognition, attendance, invigilator, remote conference, intelligent home and other types of systems.
Business of HEMC
HEMC’s business includes consulting services for entrepreneurs, staff training and introduction services for investors and government. The company’s main customer groups are enterprise groups and government. During the fiscal year ended December 31, 2021, HEMC accounted for approximately 6% of the Company’s total revenue.
Regulatory Oversight in China
Recently, the PRC government initiated a series of regulatory actions and made a number of public statements on the regulation of business operations in China with little advance notice, including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas using a variable interest entity structure, adopting new measures to extend the scope of cybersecurity reviews and expanding efforts in anti-monopoly enforcement.
The Chinese government may exercise significant oversight and discretion over the conduct of business in the PRC and may intervene in or influence the Company’s Operating Subsidiaries’ operations at any time, which could result in a material change in the Company’s operations and/or the value of its securities. The Company is also currently not required to obtain any pre-approval from Chinese authorities to list on a U.S. stock exchange; however, if the Company is required to obtain approval in the future and is denied permission from Chinese authorities to list on U.S. exchanges, it will not be able to list on a U.S. exchange, which may cause the value of the Company’s Ordinary Shares to significantly decline or be worthless. . See “Risk Factors - Risks Related to Doing Business in the People’s Republic of China on page 19 of this prospectus.”
The Company’s Operating Subsidiaries may be subject to a large number of regulatory measures imposed by various governmental entities in the PRC as follows: (i) Regulations Relating to Consumer Protection; (ii) Regulations Relating to Product Quality; (iii) Regulations Relating to Competition; (iv) Administrative Measures for the Administration of Sales Promotional Activities of Retailers; (v) Regulations Related to Online Trading: Administrative Measure for Online Trading; (vi) Electronical Commerce Law; (vii) Regulations Relating to Intellectual Property: Copyright, Trademark, Patent and Domain Name; (viii) Regulations on Offshore Parent Holding Companies’ Direct Investment in and Loans to their PRC Subsidiaries; (ix) Regulations Relating to Foreign Exchange; (x) Regulations Relating to Dividend Distributions; (xi) Regulations Relating to Overseas Listings; (xii) Regulations Relating to Employment; (xiii) Regulations Relating to Customer Rights Protection; and (xiv) Regulations Relating to Tax: Income Tax, Value-Added Tax. As of the date of this prospectus, the Company’s Operating Subsidiaries have received all necessary governmental approvals for operations in the PRC and have not been denied any such approvals. However, if the Operating Subsidiaries do not receive or maintain the approvals, or inadvertently conclude that such approvals are not required, or if applicable laws, regulations or interpretations change such that the Operating Subsidiaries are required to obtain approval in the future, the Company may be subject to investigations by regulators, fines or penalties, ordered to suspend its relevant operations and rectify any non-compliance, prohibited from engaging in the relevant business or conducting any offering, and these risks could result in a material adverse change in the Company’s operations or significantly limit or completely hinder its ability to offer or continue to offer securities to investors. For further discussion, see “Regulations in China Applicable to our Business” on page 52 of this prospectus.
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As of the date of this prospectus, the Company: (i) is not required to obtain permissions from any PRC authorities to operate or to issue its Ordinary Shares to foreign investors; (ii) is not subject to permission requirements from the China Securities Regulatory Commission (the “CSRC”), the Cyberspace Administration of China (the “CAC”) or any other entity that is required to approve of its PRC subsidiaries’ operations; and (iii) has not received or been denied such permissions by any PRC authorities. The Company engaged the services of legal counsel in China, which has provided it with an opinion that the Company is: (i) not required to obtain permissions from any PRC authorities to issue its Ordinary Shares; and (ii) not subject to permission requirements from the CSRC, the CAC or any other entity required to approve its PRC subsidiaries’ operations. The Company is also currently not required to obtain any pre-approval from Chinese authorities to list on the OTCQB or a U.S. stock exchange, including the NYSE, the NYSE American or any of the NASDAQ Markets. Given the current PRC regulatory environment, it is uncertain when and whether the Company will be required to obtain permission from the PRC government to list on U.S. exchanges in the future, and even when such permission is obtained, whether it will be denied or rescinded. As of the date of this prospectus, the Company has not received any inquiry, notice, warning, sanctions or regulatory objection to this offering from the CSRC or other PRC governmental authorities. However, if the Company is required to obtain approval in the future and are denied permission from Chinese authorities to list on U.S. exchanges, it will not be able to list on a U.S. exchange, which would cause the value of the Company’s Ordinary Shares to significantly decline or become worthless. See “Risk Factors - Risks Related to Doing Business in the People’s Republic of China” on page 19 of this prospectus.
In response to recent data security concerns arising from overseas listings of Chinese internet companies operating in the PRC, on January 4, 2022, the Cyberspace Administration of China (the “CAC”) issued revised measures to expand the types of businesses and circumstances that would require cybersecurity review by the CAC. Management does not believe that the Company is directly subject to these regulatory actions or statements, as the Company does not have a variable interest entity structure and its business does not involve the collection of user data, implicate cybersecurity or involve any other type of restricted industry. Because these statements and regulatory actions are new, however, it is highly uncertain how soon legislative or administrative regulation making bodies in China will respond to them, or what existing or new laws or regulations will be modified or promulgated, if any, or what the potential impact any such modified or new laws and regulations will be on the Company’s daily business operations or its ability to accept foreign investments and list on a U.S. exchange. For further information, see “Risks Factors - Risks Related to Doing Business in the People’s Republic of China” on page 19 of this prospectus.
Lastly, in accordance with the HFCAA, the Company’s Ordinary Shares may be prohibited from trading if its auditor cannot be fully inspected. Pursuant to the HFCAA, the PCAOB issued the Determination Report, which found that the PCAOB was unable to inspect or investigate completely registered public accounting firms headquartered in: (1) mainland China of the People’s Republic of China because of a position taken by one or more authorities in mainland China; and (2) Hong Kong, a Special Administrative Region and dependency of the PRC, because of a position taken by one or more authorities in Hong Kong. In addition, the Determination Report identified the specific registered public accounting firms subject to these determinations.
The HFCAA prohibits foreign companies from listing their securities on U.S. exchanges if that company’s auditor has been unavailable for PCAOB inspection or investigation for three consecutive years.
The Company’s auditor, Pan-China Singapore, the independent registered public accounting firm that issued the audit report included in this prospectus, is subject to PCAOB inspections. Pan-China Singapore is headquartered in Singapore and there are no limitations in Singapore on PCAOB inspections. Therefore, the Company believes that, as of the date of this prospectus, its auditor is not subject to the determinations announced by the PCAOB on December 16, 2021 relating to the PCAOB’s inability to inspect or investigate completely registered public accounting firms headquartered in the PRC or Hong Kong because of a position taken by one or more authorities in the PRC or Hong Kong. See “Risk Factors - Risks Related to the Company’s Ordinary Shares.” However, to the extent that the Company’s auditor’s work papers may, in the future, become located in China, such work papers will not be subject to inspection by the PCAOB because the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities. Inspections of certain other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. In addition to subjecting the Company’s securities to the possibility of being prohibited from trading or delisted from a US exchange, the inability of the PCAOB to conduct inspections of the Company’s auditors’ work papers in China would make it more difficult to evaluate the effectiveness of its auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. As a result, the Company’s investors would be deprived of the benefits of the PCAOB’s oversight of its auditor through such inspections and they may lose confidence in the Company’s reported financial information and procedures and the quality of its financial statements. The Company cannot assure you whether Nasdaq or other regulatory authorities will apply additional or more stringent criteria to it. Such uncertainty could cause the market price of the Company’s Ordinary Shares to be materially and adversely affected.
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Risk Factors
Investing in the Company’s Ordinary Shares involves risks. The risks summarized below are qualified by reference to “Risk Factors” beginning on page 12 of this prospectus, which you should carefully consider before making a decision to purchase Ordinary Shares. If any of these risks actually occurs, the Company’s business, financial condition or results of operations would likely be materially adversely affected. In such case, the trading price of the Company’s Ordinary Shares would likely decline, and you may lose all or part of your investment.
These risks include but are not limited to the following:
Risks Related to the Company’s Business
| ● | The Company has a limited operating history and its Operating Subsidiaries are in the process of developing their businesses. You should consider the Company’s future prospects in light of the risks and uncertainties experienced by early stage companies. If the Company’s Operating Subsidiaries are unsuccessful in addressing any of these risks and uncertainties, their businesses and, consequently, that of the Company may be materially and adversely affected. See “Risks Related to the Company’s Business - The Company’s limited operating history makes it difficult to evaluate its future prospects and results of operations” on page 12 of this prospectus. | |
| ● | The Company has experienced negative cash flow and losses from operations for the fiscal years ended December 31, 2020 and 2021 There can be no assurance that the Company will not continue to experience negative cash flow and losses from operations, which could result in a loss of your entire investment in the Ordinary Shares. See “Risks Related to the Company’s Business - The Company has incurred net losses in the past and may incur losses again in the future” on page 12 of this prospectus. | |
| ● | If the Company fails to implement and maintain an effective system of internal controls over financial reporting, the Company may be unable to accurately report its results of operations, meet reporting obligations or prevent fraud. As a result, holders of the Company’s securities could lose confidence in its financial and other public reporting, which would harm its business and the trading price of its securities. See “Risks Related to the Company’s Business - The Company has identified material weaknesses in its internal control over financial reporting. If the Company fails to maintain an effective system of internal control over financial reporting, the Company may not be able to accurately report its financial results or prevent fraud. As a result, stockholders could lose confidence in the Company’s financial and other public reporting, which would harm its business and the trading price of its Ordinary Shares.” on page 14 of this prospectus. | |
| ● | The Holding Foreign Companies Accountable Act (“HFCAA”) calls 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. Although the Company’s current auditor is located in Singapore, and not China or Hong Kong, these developments could add uncertainties to our offering. | |
| If the Company’s auditor’s work papers become located in China, the PCAOB’s HFCAA Determination Report dated December 16, 2021 that the Board is unable to inspect or investigate completely registered public accounting firms headquartered in China or Hong Kong, a Special Administrative Region and dependency of the PRC, because of a position taken by one or more authorities in China or Hong Kong (“the Determination”), could result in the prohibition of trading in the Company’s securities by the Company not being allowed to list on a U.S. exchange, and as a result an exchange may determine to delist the Company’s securities, which would materially affect the interest of its investors. See “Risk Factors - Risks Related to the Company’s Business - The PCAOB’s HFCAA Determination Report dated December 16, 2021, that the Board is unable to inspect or investigate completely registered public accounting firms headquartered in China or Hong Kong, a Special Administrative Region and dependency of the PRC, because of a position taken by one or more authorities in China or Hong Kong (“the Determination”) could result in the prohibition of trading in the Company’s securities by not being allowed to list on a U.S. exchange, and as a result, an exchange may determine to delist the Company’s securities, which would materially affect the interest of its investors.” on page 15 of this prospectus. |
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Risks Related to the Operating Subsidiaries’ Businesses
| ● | The Company’s Operating Subsidiaries may not be able to obtain or maintain all necessary licenses, permits and approvals and to make all necessary registrations and filings for their business activities in multiple jurisdictions and related to residents therein. See “Risks Related to the Company’s Operating Subsidiaries’ Businesses-Any lack of requisite approvals, licenses or permits applicable to the Company’s Operating Subsidiaries’ businesses may have a material and adverse impact on the Company’s business, financial condition and results of operation.” on page 21 of this prospectus. | |
| ● | A sustained outbreak of the COVID-19 pandemic could continue to have a material adverse impact on the Operating Subsidiaries’ businesses, operating results and financial condition. See “Risks Related to the Company’s Operating Subsidiaries’ Businesses-The Company’s business is subject to risks arising from epidemic diseases, such as the recent COVID-19 outbreak” on page 18 of this prospectus. |
Risks Related to Doing Business in the People’s Republic of China
| ● | A downturn in the Chinese or the global economy and economic and political policies of China could materially and adversely affect the Company’s Operating Subsidiaries’ businesses and financial condition. See “Risk Factors - Risks Related to Doing Business in the People’s Republic of China - The Company’s Operating Subsidiaries’ businesses are sensitive to general economic conditions” on page 19 of this prospectus. | |
| ● | Uncertainties with respect to the PRC legal system could adversely affect the Company’s Operating Subsidiaries . See “Risk Factors - Risks Related to Doing Business in the People’s Republic of China - The PRC legal system embodies uncertainties, which could limit law enforcement availability” on page 22 of this prospectus. | |
| ● | Changes in the policies, regulations and rules, and the enforcement of laws of the PRC government may be quick with little advance notice and could have a significant impact upon the Company’s Operating Subsidiaries’ ability to operate profitably in the PRC. See “Risk Factors - Risks Related to Doing Business in the People’s Republic of China If the Chinese government were to impose new requirements for approval from the PRC authorities to issue the Company’s Ordinary Shares to foreign investors or list on a foreign exchange, such action could significantly limit or completely hinder the Company’s ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless” on page 19 of this prospectus. | |
| ● | Any actions by the Chinese government to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers could significantly limit or completely hinder the Company’s ability to offer or continue to offer securities to investors and cause the value of its securities to significantly decline or the securities to become worthless. See “Risk Factors - Risks Related to Doing Business in the People’s Republic of China -Any actions by the Chinese government to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers, based on new laws such as the Measures for Cybersecurity Review, could significantly limit or completely hinder the Company’s ability to offer or continue to offer securities to overseas investors and cause such securities to significantly decline in value or to be worthless” on page 20 of this prospectus. | |
| ● | The Company is also currently not required to obtain any pre-approval from Chinese authorities to list on a U.S. stock exchange; however, if the Company is required to obtain approval in the future and denied permission from Chinese authorities to list on U.S. exchanges, the Company will not be able to list on a U.S. exchange, which would materially affect the interest of its investors. See “Risk Factors - Risks Related to Doing Business in the People’s Republic of China The Company is not required to obtain any pre-approvals to list on any U.S. exchange” on page 20 of this prospectus. |
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| ● | As of the date of this prospectus, the Company : (i) is not required to obtain permissions from any PRC authorities to operate or issue its Ordinary Shares to foreign investors; (ii) is not subject to permission requirements from the China Securities Regulatory Commission (the “CSRC”), the Cyberspace Administration of China (the “CAC”) or any other entity that is required to approve of our PRC subsidiaries’ operations; and (iii) has not received or were denied such permissions by any PRC authorities. See “Risk Factors - Risks Related to Doing Business in the People’s Republic of China If the Chinese government were to impose new requirements for approval from the PRC authorities to issue the Company’s Shares to foreign investors or list on a foreign exchange, such action could significantly limit or completely hinder the Company’s ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless” on page 19 of this prospectus. | |
| ● | Any PRC regulations pertaining to the Company’s corporate structure, loans to and investment in PRC entities by offshore holding companies may delay the Company from making loans or capital contributions to its Operating Subsidiaries, which could materially and adversely affect the Company’s liquidity and ability to fund and expand its business. See “Risk Factors - Risks Related to Doing Business in the People’s Republic of China - Any PRC regulations pertaining to the Company’s corporate structure, loans to and investment in PRC entities by offshore holding companies may delay the Company from making loans or capital contributions to the Company’s Operating Subsidiaries, which could materially and adversely affect the Company’s liquidity and its ability to fund and expand its business” on page 20 of this prospectus. | |
| ● | Any future action by the Chinese government expanding the categories of industries and companies whose foreign securities offerings are subject to government review could significantly limit or completely hinder the Company’s ability to offer or continue to offer securities to investors and could cause its securities to significantly decline in value or to be worthless. See “Risk Factors - Risks Related to Doing Business in the People’s Republic of China- Any future action by the PRC government expanding the categories of industries and companies whose foreign securities offerings are subject to review by the CRSC or the CAC could significantly limit or completely hinder the Company’s ability to offer or continue to offer securities to overseas investors and could cause such securities to significantly decline in value or to be worthless” on page 20 of this prospectus. | |
| ● | The PRC government may intervene or influence the Company’s business operations at any time or may exert more control over offerings conducted overseas and foreign investment in China-based issuers, which could result in a material change in its business operations or the value of its securities. See “Risk Factors - Risks Related to Doing Business in the People’s Republic of China - The Chinese government may exert substantial influence over the manner in which the Company’s Operating Subsidiaries conduct their respective business operations in China” on page 20 of this prospectus. | |
| ● | The Company may rely on dividends and other distributions on equity paid by its Operating Subsidiaries for its cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to its shareholders, fund inter-company loans, service any debt the Company may incur outside of China and pay expenses. Any limitation on the ability of the Company’s PRC Operating Subsidiaries to transfer cash out of China and/or make remittance to pay dividends to it could limit the Company’s ability to access cash generated by the operations of its Operating Subsidiaries. See “Risks Associated with Doing Business in the People’s Republic of China - The Company may rely on dividends and other distributions on equity paid by its PRC subsidiaries to fund any cash and financing requirements the Company may have, and any limitation on the ability of its PRC subsidiaries to make payments to the Company could have a material and adverse effect on its ability to conduct its business” on page 23 of this prospectus. |
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Risks Related to the Company’s Ordinary Shares
| ● | The price of the Company’s Ordinary Shares may be volatile. See “Risks Related to the Company’s Ordinary Shares - It is likely that there will be significant volatility in the trading price of the Company’s Ordinary Shares” on page 25 of the prospectus. | |
| ● | The Company does not anticipate paying cash dividends in the foreseeable future. See “Risks Related to the Company’s Ordinary Shares - The Company does not intend to pay dividends” on page 25 of the prospectus. | |
| ● | The Company is an “emerging growth company,” and any decision to comply with certain reduced disclosure requirements applicable to emerging growth companies could make its securities less attractive to investors. See “Risks Related to the Company’s Ordinary Shares - The Company is an emerging growth company within the meaning of the Securities Act and will take advantage of certain reduced reporting requirements” on page 24 of the prospectus. | |
| ● | The recent joint statement by the SEC and PCAOB, proposed rule changes submitted by NASDAQ and the Holding Foreign Companies Accountable Act (“HFCAA”) 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. Although the Company’s current auditor is located in Singapore, and not China or Hong Kong, these developments could add uncertainties to our offering. See “Risk Factors - Risks Related to the Company’s Ordinary Shares - The PCAOB’s HFCAA Determination Report dated December 16, 2021, that the Board is unable to inspect or investigate completely registered public accounting firms headquartered in China or Hong Kong, a Special Administrative Region and dependency of the PRC, because of a position taken by one or more authorities in China or Hong Kong (“the Determination”) could result in the prohibition of trading in the Company’s securities by not being allowed to list on a U.S. exchange, and as a result, an exchange may determine to delist the Company’s securities, which would materially affect the interest of its investors” on page 15 of this prospectus. | |
| ● | If the Company’s auditor’s work papers become located in China, the PCAOB’s HFCAA Determination Report dated December 16, 2021 that the Board is unable to inspect or investigate completely registered public accounting firms headquartered in China or Hong Kong, a Special Administrative Region and dependency of the PRC, because of a position taken by one or more authorities in China or Hong Kong (“the Determination”), could result in the prohibition of trading in the Company’s securities by the Company not being allowed to list on a U.S. exchange, and as a result an exchange may determine to delist the Company’s securities, which would materially affect the interest of its investors. See “Risk Factors - Risks Related to the Company’s Ordinary Shares - The PCAOB’s HFCAA Determination Report dated December 16, 2021, that the Board is unable to inspect or investigate completely registered public accounting firms headquartered in China or Hong Kong, a Special Administrative Region and dependency of the PRC, because of a position taken by one or more authorities in China or Hong Kong (“the Determination”) could result in the prohibition of trading in the Company’s securities by not being allowed to list on a U.S. exchange, and as a result, an exchange may determine to delist the Company’s securities, which would materially affect the interest of its investors” on page 15 of this prospectus. |
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Risk Related to Certain Legal Consequences of Foreign Incorporation and Operations
| ● | The Company is a Cayman Islands exempted company and, because judicial precedent regarding the rights of shareholders is different under Cayman Islands law than under U.S. law, you could have less protection of your shareholder rights than you would under U.S. law. See “Risks Related to Certain Legal Consequences of Foreign Incorporation and Operations - Because the Company is incorporated in the Cayman Islands, you may not have the same protections as shareholders of U.S. corporations” on page 28 of this prospectus. |
| ● | You will have limited ability to bring an action against the Company or against its directors and officers, or to enforce a judgment against the Company or them, because the Company is incorporated in the Cayman Islands, because the Company conducts all of its operations in China and because all of its directors and officers reside outside the United States. See “Risks Related to Certain Legal Consequences of Foreign Incorporation and Operations - Judgments against the Company and management may be difficult to obtain or enforce” on page 27 of the prospectus. | |
| ● | As a “foreign private issuer” under the rules and regulations of the SEC, the Company is permitted to, and will, file less or different information with the SEC than a company incorporated in the United States or otherwise subject to these rules. See “Risks Related to Certain Legal Consequences of Foreign Incorporation and Operations - The Company’s shareholders do not have the same protections or information generally available to shareholders of U.S. corporations because the reporting requirements for foreign private issuers are more limited than those applicable to public corporations organized in the United States” on page 28 of the prospectus. |
Transfers of Cash to and from the Company’s Subsidiaries
The Company conducts its primary operations through its China subsidiaries. The Company has not established a VIE structure with any entity in China. Hong Kong is a special administrative region of the PRC and the basic policies of the PRC regarding Hong Kong are reflected in the Basic Law, which provides Hong Kong with a high degree of autonomy and executive, legislative and independent judicial powers, including that of final adjudication under the principle of “one country, two systems.” The laws and regulations of the PRC currently have restrictions on currency conversion, cross-border remittance and offshore investment for PRC citizens. See “Risk Factors - The Company may rely on dividends and other distributions on equity paid by its PRC subsidiaries to fund any cash and financing requirements it may have, and any limitation on the ability of the Company’s PRC subsidiaries to make payments to it could have a material and adverse effect on its ability to conduct its business.”
However, the laws and regulations of the PRC do not currently have any material impact on the transfer of cash from the Company to its Seychelles or Hong Kong subsidiaries, or from its Seychelles and Hong Kong subsidiaries to the Company and the investors in the U.S. As a result, cash can be transferred freely between the Company and its Seychelles and Hong Kong subsidiaries, across borders, and to U.S. investors.
Subject to the Companies Act and our Memorandum and Articles of Association, as amended and restated from time to time, the Company’s board of directors may authorize and declare a dividend to shareholders from time to time out of the profits from the Company, realized or unrealized, or out of the share premium account, provided that the Company will remain solvent, meaning the Company is able to pay its debts as they come due in the ordinary course of business. There is no further Cayman Islands statutory restriction on the amount of funds which may be distributed by the Company in the form of dividends.
Our Securities
The Company’s authorized capital is $50,000, consisting of 500,000,000 Ordinary Shares, $0.0001 par value per Ordinary Share. Holders of the Company’s Ordinary Shares are entitled to one vote for each whole Ordinary Share on all matters to be voted upon by shareholders, including the election of directors. Holders of the Company’s Ordinary Shares do not have cumulative voting rights in the election of directors. All of the Company’s Ordinary Shares are equal to each other with respect to dividend rights. Holders of the Company’s Ordinary Shares are entitled to receive dividends if and when declared by its Board of Directors out of funds legally available therefor under Cayman Islands law. In the event of the Company’s liquidation, the liquidator may, after having discharged the debts, if any, of the Company, divide among the shareholders on a pari passu basis, in specie or in kind, the whole or any part of the assets of the Company (whether they shall consist of property of the same kind or not) and may for such purpose set such value as he deems fair upon any property to be divided as aforesaid. Holders of the Company’s Ordinary Shares have no preemptive rights to purchase any additional unissued Ordinary Shares. The Board of Directors has the ability to determine the rights, preferences and restrictions of preferred shares at their discretion.
As of June 30, 2022, there were 302,734,900 of the Company’s Ordinary Shares issued and outstanding. All of the outstanding Ordinary Shares were fully paid for. The Company does not have any options to purchase Ordinary Shares or any preferred shares outstanding. (For a more complete description of the Company’s Ordinary Shares, see “Description of Share Capital,” below.)
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Implications of Being an Emerging Growth Company and a Foreign Private Issuer
The Company qualifies as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As an emerging growth company, the Company may take advantage of certain exemptions from specified disclosure and other requirements that are otherwise generally applicable to public companies. These exemptions include:
| ● | being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure; | |
| ● | not being required to comply with the auditor attestation requirements for the assessment of the Company’s internal control over financial reporting provided by Section 404 of the Sarbanes-Oxley Act of 2002; | |
| ● | reduced disclosure obligations regarding executive compensation; and | |
| ● | not being required to hold a nonbinding advisory vote on executive compensation or seek shareholder approval of any golden parachute payments not previously approved. |
The Company may take advantage of these provisions for up to five years or such earlier time that it is no longer an emerging growth company. The Company would cease to be an emerging growth company upon the earliest to occur of (i) the last day of the fiscal year in which it has more than $1.0 billion in annual revenue; (ii) the date it qualifies as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; (iii) the issuance, in any three-year period, of more than $1.0 billion in non-convertible debt securities; or (iv) the last day of the fiscal year ending after the fifth anniversary of the date of the first sale of common equity securities pursuant to an effective registration statement.
The Company is also considered a “foreign private issuer” and will report under the Exchange Act as a non-U.S. company with foreign private issuer status. This means that, even after the Company no longer qualifies as an emerging growth company, as long as it qualifies as a foreign private issuer under the Exchange Act, the Company will be exempt from certain provisions of the Exchange Act that are applicable to U.S. domestic public companies, including:
| ● | the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; | |
| ● | the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and | |
| ● | the rules under the Exchange Act requiring the filing with the Securities and Exchange Commission of quarterly reports on Form 10-Q containing unaudited financial and other specified information, or current reports on Form 8-K, upon the occurrence of specified significant events. |
The Company may take advantage of these exemptions until such time as it is no longer a foreign private issuer. The Company would cease to be a foreign private issuer at such time as more than 50% of its outstanding voting securities are held by U.S. residents and any of the following three circumstances applies: (i) the majority of the Company’s executive officers or directors are U.S. citizens or residents; (ii) more than 50% of the Company’s assets are located in the United States; or (iii) the Company’s business is administered principally in the United States.
The Company may choose to take advantage of some but not all of these reduced burdens. The Company has taken advantage of reduced reporting requirements in this prospectus. Accordingly, the information contained herein may be different from the information you receive from its competitors that are public companies, or other public companies in which you have made an investment.
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Securities Being Offered by Selling Shareholders
The Selling Shareholders are offering up to 31,901,900 Ordinary Shares. The Selling Shareholders may sell their Shares at a fixed price of $0.08 per Share until the Company’s Ordinary Shares are quoted on the OTCQB or a higher market and thereafter in the principal market on which its Ordinary Shares are traded at the prevailing market price, in negotiated transactions or through any other means described in the section titled “Plan of Distribution.” The Company will not receive any proceeds from the sales of Shares by the Selling Shareholders.
Transfer Agent
The transfer agent for the Company’s Ordinary Shares is V Stock Transfer, 18 Lafayette Place, Woodmere, New York 11598; telephone: 212-828-8436, toll-free: 855-9VSTOCK; facsimile: 646-536-3179.
RISK FACTORS
Investing in the Company’s Ordinary Shares involves a high degree of risk. You should carefully consider the following risks and all other information contained in this prospectus, including the Company’s consolidated financial statements, ZDSE’s financial statements and the related notes, before making an investment decision regarding the Company’s securities. The risks and uncertainties described below are those significant risk factors, currently known and specific to the Company that management believes are relevant to an investment in the Company’s securities. If any of these risks materialize, the Company’s business, financial condition or results of operations could suffer, the price of the Company’s Ordinary Shares could decline and you could lose part or all of your investment.
Risks Related to the Company’s Business
The Company’s limited operating history makes it difficult to evaluate its future prospects and results of operations.
The Company has a limited operating history and its Operating Subsidiaries are in the process of developing their businesses. You should consider the Company’s future prospects in light of the risks and uncertainties experienced by early stage companies. Some of these risks and uncertainties relate to the Operating Subsidiaries’ ability to:
| ● | offer products and services of sufficient quality to attract and retain a larger client base; | |
| ● | attract additional clients and increase spending per client; | |
| ● | increase awareness of their products and services and continue to develop client loyalty; | |
| ● | respond to competitive market conditions; | |
| ● | respond to changes in their regulatory environment; | |
| ● | maintain effective control of their costs and expenses; | |
| ● | raise sufficient capital to sustain and expand their businesses; and | |
| ● | attract, retain and motivate qualified personnel. |
If the Company’s Operating Subsidiaries are unsuccessful in addressing any of these risks and uncertainties, their businesses and, consequently, that of the Company may be materially and adversely affected.
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The Company has incurred net losses in the past and may occur losses again in the future.
The Company has experienced negative cash flow and losses from operations. During the fiscal years ended December 31, 2020 and 2021 and the six months ended June 30, 2021 and 2022, the Company experienced net losses of $240,580, 127,090, 191,159 and 315,159, respectively. There can be no assurance that the Company will not continue to experience negative cash flow and losses from operations, which could result in a loss of your entire investment in the Ordinary Shares.
Management of the Company envisions a period of rapid growth that may impose a significant burden on the Company’s administrative and operational resources which, if not effectively managed, could impair the Company’s Operating Subsidiaries’ growth.
Management’s strategy envisions a period of rapid growth that may impose a significant burden on the Company’s administrative and operational resources. The growth of the Operating Subsidiaries’ businesses will require significant investments of capital and management’s close attention. Management’s ability to effectively manage the Operating Subsidiaries’ growth will require it to substantially expand the capabilities of the Company’s and the Operating Subsidiaries’ administrative and operational resources and their ability to attract, train, manage and retain qualified management, IT, sales and marketing, coaching and other personnel; management may be unable to do so. In addition, management’s failure to successfully manage the Operating Subsidiaries’ growth could result in their sales not increasing commensurately with capital investments. If management is unable to successfully manage the Operating Subsidiaries’ growth, the Company may be unable to achieve its goals.
Management may not be able to raise the additional capital necessary to execute the Company’s and the Operating Subsidiaries’ respective business strategies, which could result in the curtailment of operations.
Management will need to raise additional funds to fully fund the Operating Subsidiaries’ existing operations and for development and expansion of their businesses. Management has no current arrangements with respect to sources of additional financing and the needed additional financing may not be available on commercially reasonable terms on a timely basis or at all. The inability to obtain additional financing when needed would have a negative effect on the Company and its Operating Subsidiaries, including possibly requiring the Company to curtail its Operating Subsidiaries’ operations. If any future financing involves the sale of equity securities, the Ordinary Shares held by the Company’s shareholders could be substantially diluted. If the Company borrows money or issues debt securities, the Company will be subject to the risks associated with indebtedness, including the risk that interest rates may fluctuate and the possibility that the Company may not be able to pay principal and interest on the indebtedness when due. Insufficient funds would prevent the Company from implementing its and its Operating Subsidiaries’ respective business plans and would require the Company to delay, scale back or eliminate certain of their and its operations.
The Company will be required to hire and retain skilled managerial, IT, sales and marketing, coaching and other personnel for itself and for its Operating Subsidiaries.
The Company’s continued success depends in large part on its ability to attract, train, motivate and retain qualified management, IT, sales and marketing, coaching and other personnel. Any failure to attract and retain the required specialized personnel that are integral to the Operating Subsidiaries’ businesses may have a negative impact on their operations, which would have a negative impact on their and the Company’s revenues. There can be no assurance that the Company will be able to attract and retain skilled persons and the loss of skilled coaches or managerial, technical, sales or other personnel would adversely affect both the Operating Subsidiaries and the Company.
The Company is dependent upon its officers and management for direction and the loss of any of these persons could adversely affect the Company’s operations and results.
The Company is dependent upon its officers for implementation of its proposed strategy and execution of its business plan. The loss of any of the Company’s officers could have a material adverse effect upon its results of operations and financial position. The Company does not maintain “key person” life insurance for any of its officers. The loss of any of the Company’s officers could delay or prevent the achievement of its business objectives.
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The Company is currently dependent on its Operating Subsidiaries for its revenue.
Although the Company currently has a total of 14 subsidiaries, the Company is totally dependent on its Operating Subsidiaries, particularly ZDSE, for its revenue. Accordingly, the Company’s financial condition and results of operations are, and will continue to be, directly tied to those of its Operating Subsidiaries unless and until the Company’s other subsidiaries commence generating significant revenue. There can be no assurance that either the Company’s Operating Subsidiaries or any of its other direct or indirect subsidiaries will generate net income at any future time.
The Company may be sued or become a party to litigation, which could require significant management time and attention and result in significant legal expenses and may result in an unfavorable outcome, which could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.
The Company may be subject to a number of lawsuits from time to time arising in the ordinary course of its and its Operating Subsidiaries’ businesses. The expense of defending itself and its Operating Subsidiaries’ against such litigation may be significant. The amount of time to resolve these lawsuits is unpredictable and defending the litigation may divert management’s attention from the day-to-day operations of its business, which could adversely affect the Company’s business, results of operations and cash flows. In addition, an unfavorable outcome in such litigation could have a material adverse effect on the Company’s business, results of operations and cash flows.
Sales of the Company’s Ordinary Shares in the public market by the Selling Shareholders following the commencement of trading may limit appreciation and may cause the market price of the Company’s Ordinary Shares to decline.
Sales of the Shares offered hereby in the public market by Selling Shareholders following the commencement of trading in the Company’s Ordinary Shares may limit appreciation in the trading price of the Ordinary Shares and could result in the market price of the Company’s Ordinary Shares declining.
The Company has identified material weaknesses in its internal control over financial reporting. If the Company fails to maintain an effective system of internal control over financial reporting, the Company may not be able to accurately report its financial results or prevent fraud. As a result, stockholders could lose confidence in the Company’s financial and other public reporting, which would harm its business and the trading price of its Ordinary Shares.
Effective internal control over financial reporting is necessary for the Company to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could cause the Company to fail to meet its reporting obligations. Ineffective internal control could also cause investors to lose confidence in the Company’s reported financial information, which could have a negative effect on the trading price of the Ordinary Shares.
Management has identified material weaknesses in its internal control over financial reporting in the Company and its subsidiaries. As defined in Regulation 12b-2 under the Exchange Act, a “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim consolidated financial statements will not be prevented, or detected on a timely basis. Specifically, management determined that it had the following material weaknesses in its internal control over financial reporting: (i) the Company does not have a financial expert on U.S. GAAP in top management; (ii) the Company does not have an audit committee; and (iii) the Company does not have standard procedures for all accounting cycles. Although the financial statements and footnotes are reviewed by management, the Company does not have a formal policy to review significant accounting transactions and the accounting treatment of such transactions.
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Even if the Company develops effective internal controls over financial reporting, such controls may become inadequate due to changes in conditions, or the degree of compliance with such policies or procedures may deteriorate, which could result in the discovery of additional material weaknesses and deficiencies. In any event, the process of determining whether the Company’s existing internal control over financial reporting is compliant with Section 404 of the Sarbanes-Oxley Act (“Section 404”) and is sufficiently effective requires the investment of substantial time and resources by senior management. As a result, this process may divert internal resources and take a significant amount of time and effort to complete. In addition, the Company cannot predict the outcome of this process and whether management will need to implement remedial actions in order to establish effective controls over financial reporting. The determination of whether or not the Company’s internal controls are sufficient, and any remedial actions required could result in the Company incurring additional costs that it did not anticipate, including the hiring of additional outside consultants. The Company may also fail to timely complete its evaluation, testing and any remediation required to comply with Section 404.
The Company is required, pursuant to Section 404, to furnish a report by management on, among other things, the effectiveness of its internal control over financial reporting. However, for as long as the Company is not an “accelerated filer”, the Company’s independent registered public accounting firm will not be required to attest to the effectiveness of its internal control over financial reporting pursuant to Section 404. While the Company could be a smaller reporting company for an indefinite amount of time, and thus relieved of the above-mentioned attestation requirement, an independent assessment of the effectiveness of its internal control over financial reporting could detect problems that management’s assessment might not detect. Such undetected material weaknesses in the Company’s internal control over financial reporting could lead to financial statement restatements and require it to incur the expense of remediation.
The PCAOB’s HFCAA Determination Report dated December 16, 2021, that the Board is unable to inspect or investigate completely registered public accounting firms headquartered in China or Hong Kong, a Special Administrative Region and dependency of the PRC, because of a position taken by one or more authorities in China or Hong Kong (“the Determination”) could result in the prohibition of trading in the Company’s securities by not being allowed to list on a U.S. exchange, and as a result, an exchange may determine to delist the Company’s securities, which would materially affect the interest of its investors.
The HFCAA, which was enacted on December 18, 2020, states that if the SEC determines that a company has filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit the company’s shares from being traded on a national securities exchange or in the over-the-counter trading market in the United States. Thus, under the HFCAA, in the event the Company’s auditor is not subject to PCAOB inspections for three consecutive years, the Company’s Shares could be prohibited from trading on any U.S. stock exchange or in the OTC Markets.
On March 24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and documentation requirements of the HFCAA. A company will be required to comply with these rules if the SEC identifies it as having a “non-inspection” year under a process to be subsequently established by the SEC. The SEC is assessing how to implement other requirements of the HFCAA, including the listing and trading prohibition requirements described above.
On June 22, 2021, the Senate passed the Accelerating Holding Foreign Companies Accountable Act (the “AHFCAA) which, if signed into law, would reduce the time period for the delisting of foreign companies under the HFCAA to two consecutive years instead of three years. In the event the HFCAA is so amended, it will reduce the time before the Company’s Ordinary Shares may be prohibited from trading or delisted from an exchange if its auditor is not subject to inspection by the PCAOB. Thus, under the AHFCAA, in the event the Company’s auditor is not subject to PCAOB inspections for two consecutive years, the Company’s Shares could be prohibited from trading on any U.S. stock exchange or in the OTC Markets.
On December 2, 2021, the SEC issued amendments to finalize rules implementing the submission and disclosure requirements in the HFCAA. 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 the PCAOB is unable to inspect or investigate completely because of a position taken by an authority in foreign jurisdictions.
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On December 16, 2021, the PCAOB issued a Determination Report (the “Determination Report”), which found that the PCAOB was unable to inspect or investigate completely registered public accounting firms headquartered in: (1) mainland China of the People’s Republic of China because of a position taken by one or more authorities in mainland China; and (2) Hong Kong, a Special Administrative Region and dependency of the PRC, because of a position taken by one or more authorities in Hong Kong. In addition, the Determination Report identified the specific registered public accounting firms subject to these determinations.
On August 26, 2022, the PCAOB signed a Statement of Protocol with the China Securities Regulatory Commission and the Ministry of Finance of the People’s Republic of China – the first step toward opening access for the PCAOB to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong completely, consistent with U.S. law. While this Statement of Protocol may lead to full resolution of the previously identified issues, there can be no assurance that this will be the case. In such an event, there can be no assurance that we will continue to be able to comply with the requirements imposed by the U.S. regulators or Nasdaq
The Company’s auditor, Pan-China Singapore PAC (“Pan-China Singapore”), the independent registered public accounting firm that issued the audit report included in this prospectus, is subject to PCAOB inspections. Pan-China Singapore is headquartered in Singapore and there are no limitations in Singapore on PCAOB inspections. Therefore, the Company believes that, as of the date of this prospectus, its auditor is not subject to the determinations announced by the PCAOB on December 16, 2021, relating to the PCAOB’s inability to inspect or investigate completely registered public accounting firms headquartered in the PRC or Hong Kong because of a position taken by one or more authorities in the PRC or Hong Kong. However, Pan-China Singapore is a member firm of Pan-China Certified Public Accountants LLP, which is located in Mainland China, (“Pan-China”) and Pan China has been identified as a specific registered public accounting firm subject to the PCAOB Determination Report. Pan-China has five member firms, which are located in Mainland China, Hong Kong, Taiwan, Singapore and Germany. The member firms operate as separate, distinct, independent and autonomous CPA firms. Pan-China in Mainland China may be required and engaged on an “as needed” basis to assist as second staff in the audit of the Company. Any such engaged second staff are and will be under the direct supervision and direction of Pan-China Singapore. Any and all relevant copies of the Company’s records and work papers are and will be transmitted to Singapore where they are and will be readily available for PCAOB inspection. Therefore, we believe that, as of the date of this prospectus, our auditor is not subject to the determinations announced by the PCAOB on December 16, 2021, relating to the PCAOB’s inability to inspect or investigate completely registered public accounting firms headquartered in the PRC or Hong Kong because of a position taken by one or more authorities in the PRC or Hong Kong. However, there can be no assurance that the SEC will not determine that our auditor is subject to the PCAOB’s December 16, 2021 determinations.
In addition, to the extent that the Company’s auditor’s work papers may, in the future, become located in China, such work papers will not be subject to inspection by the PCAOB because the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities. Inspections of certain other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The inability of the PCAOB to conduct inspections of the Company’s auditor’s work papers in China would make it more difficult to evaluate the effectiveness of its auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. As a result, the Company’s investors may be deprived of the benefits of the PCAOB’s oversight of its auditor through such inspections and they may lose confidence in the Company’s reported financial information and procedures and the quality of its financial statements. The Company cannot assure you whether Nasdaq or other regulatory authorities will apply additional or more stringent criteria to it. Such uncertainty could cause the market price of the Company’s Ordinary Shares to be materially and adversely affected.
The Company will be required to comply with the rules adopted by the SEC if the SEC identifies it as having a “non-inspection” year under a process to be subsequently established by the SEC. The SEC is assessing how to implement other requirements of the HFCAA, including the listing and trading prohibition requirements described above. Further, the United States Senate passed the Accelerated Holding Foreign Companies Accountable Act, which, if enacted, would amend the HFCAA to require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchange if its auditor is not subject to PCAOB inspections for two consecutive years instead of three.
During the prior fiscal years ended December 31, 2020 and 2021, including through the date of this prospectus, the Company’s auditor does not have any documentation related to their audit reports located in China. However, to the extent that the Company’s independent registered public accounting firm’s audit documentation related to their audit reports for the Company may be located in China in the future, the PCAOB may not be able to inspect such audit documentation and, as a result, you may be deprived of the benefits of such inspection.
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There may be conflicts of interest between the Company’s management and its non-management shareholders.
Conflicts of interest create the risk that the Company’s officers and directors may have an incentive to act adversely to the interests of the Company. A conflict of interest may arise between the Company’s officers and directors’ personal pecuniary interests and their fiduciary duty to its shareholders.
Risks Related to the Operating Subsidiaries’ Businesses
The Operating Subsidiaries’ businesses depend on the market recognition of their brands. If the Operating Subsidiaries are not able to maintain their reputations and enhance their brand recognition, their businesses and operating results may be materially and adversely affected.
The Operating Subsidiaries’ track records in providing quality services will determine whether they become recognized as leading brands in their industries. Management believes that market recognition of its Operating Subsidiaries’ brands is a key factor to ensuring the Company’s future success. As the Operating Subsidiaries continue to grow in size and broaden the scope of their programs and services, however, it may become increasingly difficult to maintain the quality and consistency of the services they offer, which may negatively impact their brands and the popularity of the products and services offered thereunder.
The Operating Subsidiaries’ brand values will also be affected by client perceptions. Those perceptions are affected by a number of factors; some of them are based on first-hand observation of the Operating Subsidiaries’ product and service quality while others may be based on indirect information from media or other sources. Incidents and any negative publicity related thereto, even if factually incorrect, may lead to significant deterioration of the Operating Subsidiaries’ brand images and reputations, and consequently negatively affect clients’ interest in their services and products, as well as top-notch executive coaches’ interest in being associated with ZDSE’s brand. Particularly in the age of digital media and social network, impacts of negative publicity associated with any single incident could be easily amplified and potentially cause impacts that go beyond our estimation or control.
In addition, with respect to ZDSE, scientific studies on education are constantly evolving and new or innovative conclusions on education methodologies or philosophies may affect clients’ perceptions of ZDSE’s services and products. If ZDSE is unable to maintain its reputation, enhance its brand recognition or increase positive awareness of its coaching products and services, it may be difficult to maintain and grow client enrollment or attract more business partners to join ZDSE’s network, and its business and growth prospects may be materially and adversely affected. Similarly, if HHMT and HEMC are unable to maintain their reputations, enhance their brand recognition or increase positive awareness of their products and services, it may be difficult to maintain and grow their customer bases and their businesses and growth prospects may be materially and adversely affected.
If the Operating Subsidiaries fail to maintain and increase their client bases, the Company’s revenues may decline, and the Company may not be able to sustain profitability.
The success of the Operating Subsidiaries’ businesses depends largely on their numbers of clients. Therefore, their ability to continue to attract new clients and to retain existing clients is critical to their continued success and growth. ZDSE’s client enrollment is affected by several factors, including its ability to develop new program materials and improve existing modules, expand its geographic reach and maintain consistent and high coaching and service quality; all of the Operating Subsidiaries must manage their growth while maintaining consistent and high service quality, effectively market and precisely target their services to a broader base of prospective clients and respond effectively to competition. If the Operating Subsidiaries are unable to continue to attract a sufficient number of new clients or to retain existing clients, their revenues may decline or they may not be able to sustain profitability, either of which could have a material adverse effect on their businesses, financial condition and results of operations.
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ZDSE’s business relies on its ability to recruit, train and retain dedicated and qualified coaches and management personnel.
ZDSE’s coaches are critical to the quality of its services and reputation. Management seeks to recruit, train and retain qualified and dedicated coaches; however, there is a limited pool of executive coaches with the attributes that management requires. In addition, any foreign management hires must hold valid working permits, which may not be obtained in a timely manner, or at all. Despite management’s various initiatives, investments to secure qualified personnel and competitive compensation, management still may not be able to recruit, train and retain sufficient qualified coaches to keep pace with ZDSE’s growth while maintaining consistent coaching quality in the different markets it serves. A shortage of qualified coaches or a deterioration in the quality of coaches’ services, whether actual or perceived, or a significant increase in the average compensation paid by competitors to their coaches would have a material adverse effect on ZDSE’s and, consequently, the Company’s business, financial condition and results of operations.
The leadership and executive coaching market in China is rapidly evolving, highly fragmented and intensely competitive.
The leadership and executive coaching market in China is rapidly evolving, highly fragmented and intensely competitive with relatively easy entry. Competition in this industry may persist and even intensify. As more competitors enter the market, ZDSE will have to compete based on brand image, program content and structure and service quality. New competitors may enter the market and one or more competitors may develop and implement training courses or methodologies that may adversely affect ZDSE’s ability to sell its services to new clients. Competitors continually introduce new programs and services that may compete directly with ZDSE’s services, or that may make its programs uncompetitive or obsolete. Larger competitors may have superior abilities to compete for clients and skilled professionals, reducing ZDSE’s ability to deliver quality work to its clients. Some of ZDSE’s competitors may have greater financial or other resources than it does. The Company’s other Operating Subsidiaries face similar competitive challenges. Management cannot assure you that any of its Operating Subsidiaries will be able to compete successfully against existing or potential competitors, and if they fail to gain or maintain, or if they lose market share, the Company’s business, financial condition and results of operations may be materially and adversely affected.
ZDSE may not be successful in introducing new products or enhancing its existing products.
ZDSE currently offers only one module sequence - “The Way of Management.” It intends to continue developing new products, as well as further enhancing its existing products. This process is subject to risks and uncertainties, such as unexpected technical, operational, logistical or other problems that could delay the process temporarily or permanently. Moreover, management cannot assure you that any of these new products or enhancements of existing products will fulfill client needs, match the quality or popularity of those developed by competitors, achieve widespread market acceptance or generate incremental revenues.
In addition, introducing new products or enhancing existing products requires the Company to make various investments in program and materials development and management, incur personnel expenses and potentially reallocate other resources. If ZDSE is unable to develop new products or cannot do so in a cost-effective manner or is otherwise unable to manage effectively the quality of those products, the Company’s financial condition and results of operations could be adversely affected.
The Operating Subsidiaries’ success depends on the continuing efforts of their senior management teams and other key personnel and their businesses may be harmed if they lose their services.
The Operating Subsidiaries’ success depends in part on the continued application of services, efforts and motivation of their senior management teams and key personnel. If one or more of their senior management members or key personnel are unable to continue in their present positions, the affected subsidiary may not be able to find replacements successfully, and its business may be disrupted.
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The Operating Subsidiaries will need to continue to hire additional personnel as their businesses grow. A shortage in the supply of personnel with the requisite skills could negatively impact their ability to manage their existing businesses, including launching new products and services and expanding operations. In addition, there is competition for experienced personnel in the executive coaching industry and key personnel could leave ZDSE to join competitors. Losing the services of experienced personnel may be disruptive to and cause uncertainty for the Operating Subsidiaries’ businesses, which may have a material adverse effect on their and, consequently, the Company’s business, financial condition and results of operations.
The Operating Subsidiaries could incur additional liabilities or their reputations could be damaged if they do not protect client data or if their information systems are breached.
ZDSE is dependent on information technology networks and systems to process, transmit and store electronic information and to communicate between and among its locations in China and with its clients. Security breaches of this infrastructure could lead to shutdowns or disruptions of ZDSE’s systems and potential unauthorized disclosure of confidential information. ZDSE is also required at times to manage, utilize and store sensitive or confidential client or employee data. As a result, ZDSE is subject to laws and regulations designed to protect this information. If any person, including any of ZDSE’s employees, mismanages or misappropriates such data, ZDSE could be subject to monetary damages, fines and/or criminal prosecution. Unauthorized disclosure of sensitive or confidential client or employee data, whether through systems failure, employee negligence, fraud or misappropriation, could damage ZDSE’s reputation and cause it to lose clients.
Legal requirements relating to the collection, storage, handling, and transfer of personal data continue to evolve. China’s Cybersecurity Law (“CSL”), which came into effect in June 2017, regulates how organizations should protect digital information and outlines measures to safeguard Internet systems, products and services against cyberattacks. The CSL was supplemented in May 2018 with the Personal Information Security Specification, which was amended and strengthened in February 2019. Although these amendments attempt to ease the compliance burden placed on businesses, the laws could impose significant limitations, require changes to ZDSE’s business or restrict its use or storage of personal information, which may increase ZDSE’s compliance expenses and make its business more costly or less efficient to conduct.
The Company’s Operating Subsidiaries’ businesses are sensitive to general economic conditions.
The Company’s Operating Subsidiaries’ businesses may be negatively affected by a downturn in general economic conditions and rising labor and material costs in China. Furthermore, a serious and/or prolonged economic downturn combined with a negative or uncertain political climate could adversely affect their clients’ financial condition and the amount they are able to spend for such services. These conditions may reduce the demand for the Company’s Operating Subsidiaries’ services or depress the pricing of those services and have an adverse impact on the Company’s results of operations. Changes in global economic conditions may also shift demand to services for which the Company does not have competitive advantages, and this could negatively affect the amount of business that the Company is able to obtain. Such economic, political and client spending conditions are influenced by a wide range of factors that are beyond the Company’s control and that the Company has no comparative advantage in forecasting. If the Company is unable to successfully anticipate these changing conditions, the Company may be unable to effectively plan for and respond to those changes, and the Company’s business could be adversely affected.
ZDSE’s business success also depends in part upon continued growth in the use of coaching. In challenging economic environments, its clients may reduce or defer their spending on new services and solutions in order to focus on other priorities. At the same time, many companies have already invested substantial resources in their current means of conducting their business and they may be reluctant or slow to adopt new approaches that could disrupt existing personnel and/or processes. If growth in the general use of coaching services in business or ZDSE’s clients’ spending on these items declines, or if ZDSE cannot convince its clients or potential clients to embrace new services and solutions, the Company’s results of operations could be adversely affected.
In addition, the executive coaching business tends to lag behind economic cycles and, consequently, the benefits of an economic recovery following a period of economic downturn may take longer for ZDSE to realize than other segments of the economy.
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Cyber security risks and the failure to maintain the integrity of data belonging to the Company, employees and customers could expose the Company to data loss, litigation and liability, and its reputation could be significantly harmed.
The Company collects and retains large volumes of data relating to its business and from its employees and clients for business purposes, including for transactional and promotional purposes, and its various information technology systems enter, process, summarize and report such data. The integrity and protection of this data is critical to its business. The Company is subject to significant security and privacy regulations, as well as requirements imposed by the credit card industry. Maintaining compliance with these evolving regulations and requirements could be difficult and may increase the Company’s expenses. In addition, a penetrated or compromised data system or the intentional, inadvertent or negligent release or disclosure of data could result in theft, loss or fraudulent or unlawful use of data relating to the Company, its employees or its customers, which could harm the Company’s reputation, disrupt our operations or result in remedial and other costs, fines or lawsuits.
The Company’s business is subject to risks arising from epidemic diseases, such as the recent COVID-19 outbreak.
In December 2019, a novel strain of coronavirus (“COVID-19”) was reported in Wuhan, China. On March 11, 2020, the World Health Organization categorized it as a pandemic. To reduce the spread of COVID-19, the Chinese government has employed measures including city lockdowns, quarantines, travel restrictions, suspension of business activities and school closures.
The Company’s business has been and may continue to be adversely impacted. The Company’s Operating Subsidiaries are located in China, as are all of their employees and customers. Due to the outbreak, ZDSE (the Company’s primary Operating Subsidiary) had to temporarily suspend offline teaching and conduct all of its coaching and student support activities online. As a result of the epidemic, ZDSE’s revenues in the first half of 2020 fell by 70.6% and, although ZDSE resumed operations on June 1, 2020, its revenue for the fiscal year ended December 31, 2020 was 44.5% lower than its revenue for the fiscal year ended December 31, 2019. In addition, lockdown measures and travel restrictions impeded ZDSE’s ability to work towards expanding its coaching network. Reoccurrences of the coronavirus in China have resulted in continuing lockdown measures being imposed by the government. As a result, ZDSE’s revenues in 2021 were 25% below its revenue for the fiscal year ended December 31, 2019 and its revenues for the six months ended June 30, 2022 were 43% below its revenues for the six months ended June 30, 2021.
The potential long-term downturn caused by and the duration of the COVID-19 outbreak is difficult to assess or predict and the full impact of the virus on the Company’s operations will depend on many factors beyond its control. A prolonged slowdown in the Chinese economy and/or negative business sentiment could potentially have a significant negative impact on the executive coaching market. There can be no assurance that there will not be large re-occurrences of COVID-19 in the future. A major resurgence of the epidemic in China could be expected to significantly reduce the demand for the Company’s Operating Subsidiary’s services. In addition, ZDSE’s business operations could be disrupted again if any of its employees is suspected of contracting COVID-19, since employees could be quarantined and/or facilities shut down for disinfection. An additional negative result of a resurgence would be if the government reinstituted bans on large-scale events and gatherings because such bans could cause the cancellation of many large-scale events that could not be rescheduled, which would have a direct negative impact on HHMT’s revenue. The extent to which the COVID-19 outbreak will impact the Company’s Operating Subsidiaries’ businesses, results of operations and financial condition remains uncertain. The Company’s business, results of operations, financial condition and prospects could be materially adversely affected to the extent that COVID-19 persists in China or harms the Chinese and global economies in general. The Company will continue to pay close attention to the development of the coronavirus epidemic situation, and evaluate and actively respond to other possible impacts on the Company’s financial situation and operating results.
The Company may also experience negative effects from future public health crises beyond its control. These events are impossible to forecast, their negative effects may be difficult to mitigate and they could adversely affect the Company’s business, financial condition and results of operations.
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Risks Related to Doing Business in the People’s Republic of China
Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on the Operating Subsidiaries’ businesses and operations.
Substantially all of the Company’s assets and operations are located in the PRC. Accordingly, the Company’s business, financial condition, results of operations and prospects may be influenced to a significant degree by political, economic and social conditions in the PRC generally. The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in the PRC is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over the PRC’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.
While the Chinese economy has experienced significant growth over past decades, growth has been uneven, both geographically and among various sectors of the economy. Any adverse changes in economic conditions in the PRC, in the policies of the Chinese government or in the laws and regulations in the PRC could have a material adverse effect on the overall economic growth of the PRC. Such developments could adversely affect the Operating Subsidiaries’ businesses and operating results, lead to a reduction in demand for their services and adversely affect their competitive position. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on the Company’s Operating Subsidiaries. For example, the Operating Subsidiaries’ financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations. In addition, in the past the Chinese government has implemented certain measures, including interest rate adjustment, to control the pace of economic growth. These measures may cause decreased economic activity in the PRC, which may adversely affect the Company’s business and operating results.
Because all of the Operating Subsidiaries’ operations are in China, their businesses are subject to the complex and rapidly evolving PRC laws and regulations. The Chinese government may exercise significant oversight and discretion over the conduct of the Company’s Operating Subsidiaries’ businesses and may intervene in or influence their operations at any time, which could result in a material decrease in the value of the Shares being registered and a material change in the Company’s operations.
As a business operating in China, the Company’s Operating Subsidiaries are subject to the laws and regulations of the PRC, which can be complex and evolve rapidly. The PRC government has the power to exercise significant oversight and discretion over the conduct of their business, and the regulations to which the Operating Subsidiaries are subject may change rapidly and with little notice to the Company or its shareholders. As a result, the application, interpretation, and enforcement of new and existing laws and regulations in the PRC are often uncertain. In addition, these laws and regulations may be interpreted and applied inconsistently by different agencies or authorities, and inconsistently with the Company’s current policies and practices. New laws, regulations, and other government directives in the PRC may also be costly to comply with, and such compliance or any associated inquiries or investigations or any other government actions may: (i) delay or impede the Company’s Operating Subsidiaries’ development; (ii) result in negative publicity or increase their operating costs; (iii) require significant management time and attention; and (iv) subject the Operating Subsidiaries to remedies, administrative penalties and even criminal liabilities that may harm the Company’s business, including fines assessed for current or historical operations.
The promulgation of new laws or regulations, or the new interpretation of existing laws and regulations, in each case that restrict or otherwise unfavorably impact the ability or manner in which the Company conducts its Operating Subsidiaries’ businesses and could require the Company to change certain aspects of its Operating Subsidiaries’ businesses to ensure compliance, which could decrease demand for their products, reduce revenues, increase costs, require the Company’s Operating Subsidiaries to obtain more licenses, permits, approvals or certificates, or subject the Company to additional liabilities. To the extent any new or more stringent measures are required to be implemented, the Company’s business, financial condition and results of operations could be adversely affected and the value of the Company’s Ordinary Shares that are being registered could be materially decreased. See “Regulations in China Applicable to Our Business” on page 52 of this prospectus.
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If the Chinese government were to impose new requirements for approval from the PRC authorities to issue the Company’s Ordinary Shares to foreign investors or list on a foreign exchange, such action could significantly limit or completely hinder the Company’s ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless.
Based on the opinion of the Company’s PRC counsel, Zhuojian Law Firm, as of the date of this prospectus, the Company: (i) is not required to obtain permissions from any PRC authorities to operate or issue its Shares to foreign investors, (ii) is not subject to permission requirements from the China Securities Regulatory Commission (the “CSRC”), the Cyberspace Administration of China (the “CAC”) or any other entity that is required to approve the Company’s PRC Operating Subsidiary’s operations; and (iii) has not received or been denied such permissions by any PRC authorities. In addition, the Company is currently not required to obtain any pre-approval from Chinese authorities to list on a U.S. stock exchange. However, 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 were 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.
Given the current PRC regulatory environment, it is uncertain when and whether the Company will be required to obtain permission from the PRC government to list on U.S. exchanges in the future, and even when such permission is obtained, whether it will be denied or rescinded. The Company has been closely monitoring regulatory developments in China regarding any necessary approvals from the CSRC or other PRC governmental authorities required for overseas listings, including this offering. As of the date of this prospectus, the Company has not received any inquiry, notice, warning, sanctions or regulatory objection to this offering from the CSRC or other PRC governmental authorities. However, there remains significant uncertainty as to the enactment, interpretation and implementation of regulatory requirements related to overseas securities offerings and other capital markets activities. If the Company is required to obtain approval in the future and is denied permission from Chinese authorities to list on U.S. exchanges, it will not be able to list on a U.S. exchange, which would cause the Company’s Ordinary Shares to significantly decline in value or be worthless.
According to the Administration Provision and the Measures (Draft for Comments), only new initial public offerings and refinancing by existent overseas listed Chinese companies will be required to go through the filing process with PRC administrations; other existent overseas listed companies will be allowed sufficient transition period to complete their filing procedure, which means if the Company completes the offering prior to the effectiveness of Administration Provisions and Measures, the Company will certainly go through the filing process in the future, perhaps because of refinancing or given by sufficient transition period to complete filing procedure as an existent overseas listed Chinese company. However, it is uncertain when the Administration Provision and the Measures will take effect or if they will take effect as currently drafted.
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If it is determined in the future that the approval of the CSRC, the CAC or any other regulatory authority is required for this offering, the Company may face sanctions by the CSRC, the CAC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on the Company’s operations in China, limit its ability to pay dividends outside of China, limit its operations in China or take other actions that could have a material adverse effect on the Company’s business, financial condition, results of operations and prospects, as well as the trading price of its securities. The CSRC, the CAC or other PRC regulatory agencies also may take actions requiring the Company, or making it advisable for the Company, to halt this offering before settlement and delivery of its Ordinary Shares. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that settlement and delivery may not occur. In addition, if the CSRC, the CAC or other regulatory PRC agencies later promulgate new rules requiring that the Company obtains their approvals for this offering, the Company may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding such an approval requirement could have a material adverse effect on the Company’s ability to continue to offer securities to investors, or could cause the trading price of its securities and the value of its securities to significantly decline or cause its Shares to be worthless.
Any actions by the Chinese government to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers, based on new laws such as the Measures for Cybersecurity Review, could significantly limit or completely hinder the Company’s ability to offer or continue to offer securities to overseas investors and cause such securities to significantly decline in value or to be worthless.
Recent statements by the Chinese government have indicated an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investments in China-based issuers. The PRC, through the Cyberspace Administration of China (the “CAC”), has recently proposed new rules and enacted new laws that would require companies collecting or holding large amounts of data to undergo a cybersecurity review prior to listing in foreign countries, a move that would significantly tighten oversight over China-based Internet giants. Pursuant to Article 6 of the Measures for Cybersecurity Review (Draft for Comments), companies holding data on more than 1 million users must now apply for cybersecurity approval when seeking listings in other nations due to the risk that such data and personal information could be “affected, controlled, and maliciously exploited by foreign governments.” On January 4, 2022 and effective February 15, 2022, the CAC issued the Revised Measures on Cyberspace Security (the “Revised Measures”), which requires that operators of critical information infrastructure (“CII”) intending to procure network products and services that may affect national security undergo cybersecurity review. This has impacted and could potentially impact a broad range of data-rich tech companies. The Revised Measures expand the scope of reviewed business entities to now include network platform (“NP”) operators intending to engage in certain activities, such as applying to list abroad. The Revised Measures establish a Cybersecurity Review Office (the “CRO”), an administrative body within the CAC, to formulate the regulations for cybersecurity review and to lead the cybersecurity review process. Applicable CII operators and NP operators are required to submit an application to the CRO, and the CRO will assess whether a cybersecurity review is required.
If an entity is a CII operator or a NP operator, it is required to apply for cybersecurity review if any of the following three conditions is met: (i) the CII operator proposes to procure network products and services that affect or may affect national security; (ii) the NP operator proposed to carry out data processing activities that affect or may affect national security; (iii) or the NP operator controls personal information of more than 1,000,000 users and proposes to apply for overseas listing. The term “overseas listings” is often interpreted as listings outside of China, such as in the U.S., “network products and services” include core network equipment, high capability computers and servers, high capacity data storage, large databases and applications, network security equipment, cloud computing services; “data processing” means the collection, storage, use, processing, transmission, provision and disclosure of data.
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Any future action by the PRC government expanding the categories of industries and companies whose foreign securities offerings are subject to review by the CRSC or the CAC could significantly limit or completely hinder the Company’s ability to offer or continue to offer securities to overseas investors and could cause such securities to significantly decline in value or to be worthless.
The Company is primarily in the business of professional management coaching through ZDSE and business planning and event planning and production through HHMT, which do not involve the collection of user data, implicate cybersecurity or involve any other type of restricted industry. Based on the opinion of the Company’s PRC counsel, it is management’s understanding that its Operating Subsidiaries are not subject to cybersecurity review under the Revised Measures nor are the Ordinary Shares subject to the review or prior approval of the CAC or the CRSC. Uncertainties still exist, however, due to the possibility that laws, regulations or policies in the PRC could change rapidly in the future. Any future action by the PRC government expanding the categories of industries and companies whose foreign securities offerings are subject to review by the CRSC or the CAC could significantly limit or completely hinder the Company’s ability to offer or continue to offer securities to overseas investors and could cause such securities to significantly decline in value or to be worthless.
The Chinese government may exert substantial influence over the manner in which the Company’s Operating Subsidiaries conduct their respective business operations in China.
The Chinese government has exercised, and continues to exercise, substantial control over virtually every sector of the Chinese economy through regulation and state ownership. The Company’s Operating Subsidiaries’ ability to conduct their operations in China may be harmed by changes in its laws and regulations, including those relating to regulation of the coaching, business planning and event planning and production industries, taxation and other matters. Management believes that the Company’s Operating Subsidiaries’ operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which the Operating Subsidiaries’ operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on their part to ensure compliance with such regulations or interpretations. Accordingly, government actions in the future could have a significant effect on the Company and its business.
China’s economic policies could affect the Company’s Operating Subsidiaries’ businesses.
Substantially all of the Company’s Operating Subsidiaries’ assets are located in China and substantially all of their revenue is derived from their operations in China. Accordingly, the Company’s results of operations and prospects are subject, to a significant extent, to economic, political and legal developments in China.
While China’s economy has experienced significant growth over the past decades, growth has been irregular, both geographically and among various sectors of the economy, and the rate of growth has been slowing since 2012. Any adverse changes in economic conditions in China, in the policies of the Chinese government or in the laws and regulations in China could have a material adverse effect on the overall economic growth of China. Such developments could adversely affect the Company’s Operating Subsidiaries’ businesses and operating results, lead to reduction in demand for their services and adversely affect their competitive positions. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall economy of China but may also have a negative effect on the Company. For example, the Company’s operating results and financial condition may be adversely affected by government control over capital investments or changes in tax regulations.
The economy of China has been transitioning from a planned economy to a more market-oriented economy. In recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform and the reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises; however, a substantial portion of productive assets in China are still owned by the Chinese government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. It also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.
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Any lack of requisite approvals, licenses or permits applicable to the Company’s Operating Subsidiaries’ businesses may have a material and adverse impact on the Company’s business, financial condition and results of operation.
In accordance with the relevant laws and regulations in the PRC, the Company’s Operating Subsidiaries are required to maintain various approvals, licenses and permits to operate their businesses, including but not limited to, business licenses. These approvals, licenses and permits are obtained upon satisfactory compliance with, among other things, the applicable laws and regulations.
The large number of regulatory measures imposed by various governmental entities in the PRC include the following: (i) Regulations Relating to Consumer Protection; (ii) Regulations Relating to Product Quality; (iii) Regulations Relating to Competition; (iv) Administrative Measures for the Administration of Sales Promotional Activities of Retailers; (v) Regulations Related to Online Trading: Administrative Measure for Online Trading; (vi) Regulations Relating to Intellectual Property: Copyright, Trademark, Patent and Domain Name; (vii) Regulations on Offshore Parent Holding Companies’ Direct Investment in and Loans to their PRC Subsidiaries; (viii) Regulations Relating to Foreign Exchange; (ix) Regulations Relating to Dividend Distributions; (x) Regulations Relating to Overseas Listings; (xi) Regulations Relating to Employment; (xii) Regulations Relating to Customer Rights Protection; and (xiv) Regulations Relating to Tax: Income Tax, Value-Added Tax.
As of the date of this prospectus, the Company’s Operating Subsidiaries have received all necessary governmental approvals for operations in the PRC and have not been denied any such approvals. For further discussion, including the possible consequences for non-compliance, see “Regulations in China Applicable to our Business.”
Any PRC regulations pertaining to the Company’s corporate structure, loans to and investment in PRC entities by offshore holding companies may delay the Company from making loans or capital contributions to the Company’s Operating Subsidiaries, which could materially and adversely affect the Company’s liquidity and its ability to fund and expand its business.
With regards to the Company’s corporate structure, any funds the Company may transfer to its Operating Subsidiaries, either as a loan or as an increase in registered capital, are subject to approval by or registration with relevant government authorities in China regardless of the amount of the transfer. According to the relevant PRC regulations, capital contributions to the Company’s Operating Subsidiaries are subject to the submission of reports of changes through the enterprise registration system and registration with a local bank authorized by SAFE. In addition, any foreign loan procured by the Company’s Operating Subsidiaries is required to be registered with SAFE and such loan is required to be registered with the NPRC. The Company 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 it to its Operating Subsidiaries. If the Company fails to complete such registration or other procedures, the Company’s ability to maintain its corporate structure while capitalizing its Operating Subsidiaries’ operations may be negatively affected, which could adversely affect the Company’s liquidity and its ability to fund and expand its business.
The Company relies to a significant extent on dividends and other distributions on equity paid by its Operating Subsidiaries to fund offshore cash and financing requirements and any limitation on the ability of its PRC Operating Subsidiaries to transfer cash out of China and/or make remittance to pay dividends to the Company could limit its ability to access cash generated by the operations of those entities.
The Company is a holding company and relies to a significant extent on dividends and other distributions on equity paid by its Operating Subsidiaries for its offshore cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to its shareholders, fund inter-company loans, service any debt it may incur outside of China and pay expenses. The laws, rules and regulations applicable to the Company’s PRC subsidiaries permit payments of dividends only out of their retained earnings, if any, determined in accordance with applicable accounting standards and regulations.
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Under PRC laws, rules and regulations, each of the Operating Subsidiaries is required to set aside at least 10% of its after-tax profits each year, after making up for previous years’ accumulated losses, if any, to fund certain statutory reserves, until the aggregate amount of such fund reaches 50% of its registered capital. As a result of these laws, rules and regulations, the Company’s Operating Subsidiaries incorporated in China are restricted in their ability to transfer a portion of their respective net assets to their shareholders as dividends. As of December 31, 2021 and 2020, none of our Operating Subsidiaries had any such restricted assets. However, there can be no assurance that the PRC government will not intervene or impose further restrictions on the Company’s ability to transfer or distribute cash within its organization or to foreign investors, which could result in an inability or prohibition on making transfers or distributions outside of China and may adversely affect the Company’s business, financial condition and results of operations.
Limitations on the ability of the Company’s PRC subsidiaries to make remittance to pay dividends to the Company could limit the Company’s ability to access cash generated by the operations of those entities, including to make investments or acquisitions that could be beneficial to the Company’s business, to pay dividends to its shareholders or to otherwise fund and conduct its business.
Fluctuation of the RMB may affect our financial condition by affecting the volume of cross-border money flow.
The value of the RMB fluctuates and is subject to changes in the PRC’s political and economic conditions. Since July 2005, the conversion of RMB into foreign currencies, including USD, has been based on rates set by the People’s Bank of China which are set based upon the interbank foreign exchange market rates and current exchange rates of a basket of currencies on the world financial markets.
The Company may face obstacles from the communist system in the PRC.
Foreign companies conducting operations in the PRC face significant political, economic and legal risks. The communist regime in the PRC may hinder Western investment.
The Company may have difficulty establishing adequate management, legal and financial controls in the PRC.
The PRC historically has been deficient in Western style management and financial reporting concepts and practices, as well as in modern banking, computer and other control systems. The Company may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. As a result of these factors, the Company may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet Western standards.
Because the Company’s assets and operations are located in China, you may have difficulty enforcing any civil liabilities against the Company under the securities and other laws of the United States or any state.
The Company is a holding company, and all of its assets are located in the PRC. In addition, the Company’s directors and officers are non-residents of the United States, and all or a substantial portion of the assets of these non-residents are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon these non-residents, or to enforce against them judgments obtained in United States courts, including judgments based upon the civil liability provisions of the securities laws of the United States or any state.
There is uncertainty as to whether courts of the PRC would enforce:
| ● | Judgments of United States courts obtained against the Company or these non-residents based on the civil liability provisions of the securities laws of the United States or any state; or | |
| ● | In original actions brought in the PRC, liabilities against the Company or non-residents predicated upon the securities laws of the United States or any state. |
Enforcement of a foreign judgment in the PRC also may be limited or otherwise affected by applicable bankruptcy, insolvency, liquidation, arrangement, moratorium or similar laws relating to or affecting creditors’ rights generally and will be subject to a statutory limitation of time within which proceedings may be brought.
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It may be difficult for overseas regulators to conduct investigation or collect evidence within China.
Shareholder claims or regulatory investigations that are common in the United States generally are difficult to pursue as a matter of law or practicality in China. For example, in China, there are significant legal and other obstacles to providing information needed for regulatory investigations or litigation initiated outside China. Although the authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such cooperation with the securities regulatory authorities in the Unities States may not be efficient in the absence of a mutual and practical cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law, or Article 177, which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC. While detailed interpretation or implementation of rules under Article 177 have yet to be promulgated, the inability for an overseas securities regulator to directly conduct investigation or evidence collection activities within China may further increase difficulties faced by the Company’s shareholders in protecting their interests.
The PRC legal system embodies uncertainties, which could limit law enforcement availability.
The PRC legal system is a civil law system based on written statutes. Unlike common law systems, decided legal cases have little precedence. 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 several decades has significantly enhanced the protections afforded to various forms of foreign investment in China. The Company’s PRC subsidiaries are subject to PRC laws and regulations. However, these laws and regulations change frequently, and the interpretation and enforcement involve uncertainties. For instance, the Company may have to resort to administrative and court proceedings to enforce the legal protection that it is entitled to by law or contract. However, since PRC administrative and court authorities have significant discretion in interpreting statutory and contractual terms, it may be difficult to evaluate the outcome of administrative court proceedings and the level of law enforcement that the Company would receive in more developed legal systems. Such uncertainties, including the inability to enforce the Company’s contracts, could affect its business and operation. In addition, confidentiality protections in China may not be as effective as in the United States or other countries. Accordingly, the Company cannot predict the effect of future developments in the PRC legal system, particularly with regard to its business, including the promulgation of new laws. This may include changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the availability of law enforcement, including the Company’s ability to enforce its agreements.
Failure to make adequate contributions to various employee benefit plans as required by PRC regulations may subject the Company to penalties.
Companies operating in China are required to participate in various government sponsored employee benefit plans, including certain social insurance, housing funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain percentages of salaries, including bonuses and allowances, of employees up to a maximum amount specified by the local government from time to time at locations where they operate their businesses. The requirement of employee benefit plans has not been implemented consistently by the local governments in China given the different levels of economic development in different locations. The Company’s failure in making contributions to various employee benefit plans and in complying with applicable PRC labor-related laws may subject it to late payment penalties. The Company may be required to make up the contributions for these plans as well as to pay late fees and fines. If the Company is subject to late fees or fines in relation to the underpaid employee benefits, its financial condition and results of operations may be adversely affected.
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The Company may rely on dividends and other distributions on equity paid by its PRC subsidiaries to fund any cash and financing requirements the Company may have, and any limitation on the ability of its PRC subsidiaries to make payments to the Company could have a material and adverse effect on its ability to conduct its business.
The Company is a Cayman Islands holding company and it relies principally on dividends and other distributions on equity from its PRC subsidiaries for its cash requirements, including for services of any debt the Company may incur. The Company’s PRC subsidiaries’ ability to distribute dividends is based upon their distributable earnings. Current PRC regulations permit the Company’s PRC subsidiaries to pay dividends to their respective shareholders only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, the Company’s PRC subsidiaries are required to set aside at least 10% of their after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of their registered capital. The Company’s PRC subsidiaries, as foreign invested enterprises, or FIEs, are also required to further set aside a portion of their after-tax profit to fund an employee welfare fund, although the amount to be set aside, if any, is determined at their discretion. These reserves are not distributable as cash dividends. If the Company’s PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to the Company. Any limitation on the ability of the Company’s PRC subsidiaries to distribute dividends or other payments to their shareholders could materially and adversely limit its ability to grow, make investments or acquisitions that could be beneficial to its business, pay dividends or otherwise fund and conduct its business.
Changes to PRC tax laws may subject the Company to greater taxes.
The Company bases its tax position upon the anticipated nature and conduct of its business and upon the Company’s understanding of the tax laws of the various administrative regions and countries in which it has assets or conduct activities. However, the Company’s tax position is subject to review and possible challenge by taxing authorities and to possible changes in law, which may have retroactive effect. The Company cannot determine in advance the extent to which some jurisdictions may require it to pay taxes or make payments in lieu of taxes.
Chinese regulations relating to overseas investment by Chinese residents may restrict the Company’s overseas and cross-border investment activities and adversely affect the implementation of its strategy as well as its business and prospects.
On July 4, 2014, the State Administration of Foreign Exchange of China, or SAFE, issued the Circular on the Administration of Foreign Exchange Issues Related to Overseas Investment, Financing and Roundtrip Investment by Domestic Residents through Offshore Special Purpose Vehicles, or the SAFE Circular 37, which replaced the former circular commonly known as “SAFE Circular 75” promulgated on October 21, 2005. The SAFE Circular 37 requires Chinese residents to register with the competent local SAFE branch in connection with their direct establishment or indirect control of an offshore special purpose vehicle, for the purpose of overseas investment and financing, with such Chinese residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests. The SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as any change of basic information (including change of the Chinese residents, name and operation term), increase or decrease of capital contribution by Chinese individuals, share transfer or exchange, merger, division or other material event. In the event that a Chinese shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the Chinese subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its Chinese subsidiary. Moreover, failure to comply with the various SAFE registration requirements described above could result in liability under Chinese law for evasion of foreign exchange controls.
The failure of the Company’s Chinese beneficial owners to comply with the registration procedures set forth in the SAFE Circular 37 may subject such beneficial owners and its Chinese subsidiaries to fines and legal sanctions. Such failure may also result in restrictions on the Company’s Chinese subsidiaries’ ability to distribute profits to it or the Company’s ability to inject capital into its Chinese subsidiaries or otherwise materially adversely affect its business, financial condition and results of operations.
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Risks Related to the Company’s Ordinary Shares
There is currently no trading market for the Company’s Ordinary Shares.
There currently is no trading market for the Company’s Ordinary Shares.
The Company has registered 31,901,900 of its outstanding Ordinary Shares for resale in the United States and is in the process of applying for its Ordinary Shares to be admitted to quotation on the OTCQB. The Company cannot assure you that its Ordinary Shares will be admitted to quotation on the OTCQB, or that, if the Ordinary Shares are admitted to quotation on the OTCQB, a regular public market will ever develop. There is no guarantee that the Company’s Ordinary Shares will ever be quoted on the OTCQB or any exchange. Furthermore, you will likely not be able to sell your securities if a regular trading market for the Company’s securities does not develop and the Company cannot predict the extent, if any, to which investor interest will lead to the development of a regular trading market in its Ordinary Shares. There is a risk that the absence of potential buyers will prevent any potential sellers from selling their Ordinary Shares.
The Company is an emerging growth company within the meaning of the Securities Act and will take advantage of certain reduced reporting requirements.
The Company is an “emerging growth company,” as defined in the JOBS Act and may take advantage of certain exemptions from various requirements applicable to other public companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act for so long as it is an emerging growth company. As a result, if the Company elects not to comply with such auditor attestation requirements, the Company’s investors may not have access to certain information they may deem important.
The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. The Company has elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the Jobs Act that allows the Company to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies.
The offering price of the Company’s Ordinary Shares was determined based on management’s assessment of the market for similar companies in the United States OTC Market and should not be used as an indicator of the future market price of the securities.
Since the Company’s Ordinary Shares were not listed or quoted on any exchange or quotation system, the offering price of $0.08 per share for the Shares was determined based on management’s assessment of the market for similar companies in the United States OTC Market. The facts considered in determining the offering price were the Company’s financial condition and prospects, the Company’s limited operating history and the general condition of the securities market. The offering price bears no relationship to the book value, assets or earnings of the Company or any other recognized criterion of value. The offering price should not be regarded as an indicator of the future market price of the Ordinary Shares.
Enforcement actions by FINRA will make it difficult for investors to dispose of their Ordinary Shares as long as they remain an OTC security.
In order to be able to publicly trade a security, such security is required to have a trading symbol. Trading symbols for OTC securities are assigned by FINRA following a submission by a market maker of a Form 211. In the past, the review of such submissions by FINRA was a routine matter that would typically be completed within weeks. Recently, FINRA reviews have often taken well in excess of six months, with many securities being subject to indefinite delays. As a result of the enhanced regulatory scrutiny and long review process, many market makers are now declining to submit Forms 211.
In addition, and in response to increased scrutiny and recent regulatory actions by FINRA, many brokers have started to refuse deposits of OTC securities, whether restricted or free trading and regardless of the price at which these securities are traded, even after they obtained a trading symbol. As a result, investors may find it increasingly difficult to dispose of their Ordinary Shares.
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The Company may not be able to achieve secondary trading of its Ordinary Shares in certain states because its Shares are not nationally traded, which could subject its shareholders to significant restrictions and costs.
The Company’s Ordinary Shares are not eligible for trading on the NASDAQ Capital Market or on a national securities exchange. Therefore, the Company’s Ordinary Shares are subject to the securities laws of the various states and jurisdictions of the United States in addition to federal securities law. While the Company may register its Ordinary Shares or qualify for exemptions for its Ordinary Shares in one or more states, if the Company fails to do so the investors in those states where the Company has not taken such steps may not be allowed to purchase the Company’s Ordinary Shares or those who presently hold the Company’s Ordinary Shares may not be able to resell their Ordinary Shares without substantial effort and expense. These restrictions and potential costs could be significant burdens on the Company’s shareholders.
It is likely that there will be significant volatility in the trading price of the Company’s Ordinary Shares.
In the event that a public market for the Company’s Ordinary Shares is created or maintained in the future, market prices for the Ordinary Shares will be influenced by many factors and will be subject to significant fluctuations in response to variations in the Company’s operating results and other factors. The Company’s stock price will also be affected by the trading price of the stock of its competitors, investor perceptions of its Operating Subsidiaries, interest rates, general economic conditions and those specific to its industry, developments with regard to its Operating Subsidiaries’ operations and activities, its future financial condition and changes in its management.
Risks relating to low priced stocks
The Company’s Ordinary Shares are not quoted and traded on any market or on any exchange, and the price at which the Ordinary Shares will trade in the future cannot currently be estimated. There can be no assurance that trading will be commenced or sustained, although management intends to take such actions as are necessary to initiate trading on the OTCQB. The trading price of the Ordinary Shares will most likely be below $5.00. If the Company’s Ordinary Shares trade below $5.00 per share, trading in the Shares may be subject to the requirements of certain rules promulgated under the Exchange Act, which require additional disclosure by broker-dealers in connection with any trades involving a stock defined as a penny stock (generally, any non-Nasdaq equity security that has a market price of less than $5.00 per share, subject to certain exceptions) and a two business day “cooling off period” before broker-dealers can effect transactions in penny stocks. For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to the sale. The broker-dealer also must disclose the commissions payable to the broker-dealer, current bid and offer quotations for the penny stock 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. These, and the other burdens imposed upon broker-dealers by the penny stock requirements, could discourage broker-dealers from effecting transactions in the Company’s Ordinary Shares which could severely limit the market liquidity of its Ordinary Shares and the ability of holders of the Company’s Ordinary Shares to sell them.
The Company does not intend to pay dividends.
The Company has not paid any cash dividends on any of its securities since inception and the Company does not anticipate paying any cash dividends on any of its securities in the foreseeable future.
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Future sales of the Company’s securities, or the perception in the markets that these sales may occur, could depress its stock price.
The Company currently has issued and outstanding approximately 302,734,900 Ordinary Shares, 31,901,900 of which have been registered for resale in the U.S. The remaining 270,833,000 Ordinary Shares also may be sold in the future if registered under the Securities Act or if the shareholder qualifies for an exemption from registration under Rule 144, Rule 701 or other applicable exemption under the Securities Act. The market price of the Company’s capital stock could drop significantly if the holders of these restricted Ordinary Shares sell them or are perceived by the market as intending to sell them. These factors also could make it more difficult for the Company to raise capital or make acquisitions through the issuance of additional Ordinary Shares or other equity securities.
The ability of the Board of Directors of the Company to issue preferred shares and any anti-takeover provisions we adopt may depress the value of its Ordinary Shares.
The Company’s Articles of Association authorize its Board of Directors to provide for preferred shares in one or more classes or series within a class upon authority of the Board without further shareholder approval. Any preferred shares issued in the future may rank senior to the Ordinary Shares with respect to the payment of dividends or amounts upon liquidation, dissolution or winding up of the Company, or both, and any such preferred shares may have class or series voting rights. In addition, the Board of Directors may, in the future, adopt anti-takeover measures (albeit the Board of Directors may not introduce any anti-takeover measures in our Articles of Association within a Special Resolution of Shareholders). The authority of the Board of Directors to issue preferred shares and any future anti-takeover measures it may adopt may, in certain circumstances, delay, deter or prevent takeover attempts and other changes in control of the Company not approved by its Board of Directors. As a result, the Company’s shareholders may lose opportunities to dispose of their Ordinary Shares at favorable prices generally available in takeover attempts or that may be available under a merger proposal and the market price of the Ordinary Shares and the voting and other rights of the Company’s shareholders may also be affected.
A sale or perceived sale of a substantial number of the Company’s Ordinary Shares may cause the price of its Shares to decline.
If the Company’s shareholders sell substantial amounts of its Ordinary Shares in the public market, the market price of the Ordinary Shares could fall. Moreover, the perceived risk of this potential price decline could cause shareholders to attempt to sell their Ordinary Shares and investors to short the Company’s Ordinary Shares. These sales also may make it more difficult for the Company to sell equity or equity-related securities in the future at a time and price that it deems reasonable or appropriate.
Resales of the Company’s Ordinary Shares in the public market by the Selling Shareholders may cause the market price of its Ordinary Shares to decline.
Sales of the Shares offered hereby could have the effect of depressing the market price for the Company’s Ordinary Shares.
The Company is controlled by Feier Co. Limited, whose interest may differ from those of the other shareholders.
As of the date of this prospectus, Feier Co. Limited, which is wholly owned by Mr. Guiting Rao, is the record and beneficial owner of approximately 50.54% of the Company’s outstanding Ordinary Shares. Mr. Rao is in a position to elect the entire Board of Directors and to control the business and affairs of the Company including significant corporate actions such as mergers and acquisitions, the sale or purchase of assets and the issuance and sale of the Company’s securities. The Company also may be prevented from entering into transactions that could be beneficial to the Company’s other shareholders. The interest of the Company’s largest shareholder may differ from the interests of its other shareholders.
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The Company’s principal shareholder may engage in a transaction to cause the Company to repurchase its Ordinary Shares.
In order to provide an interest in the Company to a third party, the Company’s principal shareholder may choose to cause the Company to sell its securities to third parties, with the proceeds of such sale being utilized by the Company to repurchase its Ordinary Shares. As a result of such transaction, our management, principal shareholders and Board of Directors may change.
This prospectus contains forward-looking statements and information relating to the Company, its industry and other businesses.
The forward-looking statements contained in this prospectus are based on the beliefs of the Company’s management, as well as assumptions made by and information currently available to its management. When used in this prospectus, the words “estimate,” “project,” “believe,” “anticipate,” “intend,” “expect” and similar expressions are intended to identify forward-looking statements. These statements reflect the Company’s current views with respect to future events and are subject to risks and uncertainties that may cause its actual results to differ materially from those contemplated in its forward-looking statements. The Company cautions you not to place undue reliance on these forward-looking statements, which speak only as of the date of this prospectus. The Company does not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this prospectus or to reflect the occurrence of unanticipated events.
Risks Related to Certain Legal Consequences of Foreign Incorporation and Operations
The Company’s shareholders may face difficulties in protecting their interests, and their ability to protect their rights through the U.S. federal courts may be limited because the Company is incorporated under Cayman Islands law, the Company conducts substantially all of its operations in China and all of its directors and officers reside outside the United States.
The Company is incorporated in the Cayman Islands and conducts substantially all of its operations through its Operating Subsidiaries in China. All of the Company’s directors and officers reside outside the United States and their assets are located outside of the United States. As a result, it may be difficult or impossible for a shareholder to bring an action against the Company or against these individuals in the Cayman Islands or in China in the event that a shareholder believes that his rights have been infringed under the securities laws or otherwise. Even if a shareholder is successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render the shareholder unable to enforce a judgment against the Company’s assets or the assets of its directors and officers. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.
The Company’s corporate affairs are governed by its memorandum and articles of association, as amended and restated from time to time, and by the Companies Law (Revised) and common law of the Cayman Islands. The rights of shareholders to take legal action against the Company and its directors, actions by minority shareholders and the fiduciary responsibilities of its directors are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which provides persuasive, but not binding, authority on a court in the Cayman Islands. The rights of the Company’s shareholders and the fiduciary responsibilities of its directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States and provides significantly less protection to investors. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in U.S. federal courts.
As a result, the Company’s shareholders may have more difficulty in protecting their interests through actions against the Company, its management, its directors or its major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.
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The Company’s shareholders do not have the same protections or information generally available to shareholders of U.S. corporations because the reporting requirements for foreign private issuers are more limited than those applicable to public corporations organized in the United States.
The Company is a foreign private issuer within the meaning of rules promulgated under the Exchange Act. The Company is not subject to certain provisions of the Exchange Act applicable to United States public companies, including: the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K, the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations with respect to a security registered under the Exchange Act and the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction (i.e., a purchase and sale, or sale and purchase, of the issuer’s equity securities within six months or less). Because the Company is not subject to these rules, its shareholders are not afforded the same protections or information generally available to investors in public companies organized in the United States.
Judgments against the Company and management may be difficult to obtain or enforce.
The Company is organized as an exempted company under the laws of the Cayman Islands and its principal executive offices are located in the PRC. Outside the United States, it may be difficult for investors to enforce judgments obtained against the Company in actions brought in the United States, including actions predicated upon the civil liability provisions of United States federal securities laws. In addition, the Company’s sole officer and director resides outside the United States, and his assets are located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon him or to enforce against the Company or him judgments predicated upon the liability provisions of United States federal securities laws.
There is uncertainty as to whether the courts of the Cayman Islands and the PRC, respectively, would:
| ● | recognize or enforce judgments of United States courts obtained against the Company or its directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or | |
| ● | entertain original actions brought in each respective jurisdiction against the Company or its directors or officers predicated upon the securities laws of the United States or any state in the United States. |
It is uncertain whether the courts of the Cayman Islands will allow shareholders of our Company to originate actions in the Cayman Islands based upon securities laws of the United States. In addition, there is uncertainty with regard to Cayman Islands law related to whether a judgment obtained from the U.S. courts under civil liability provisions of U.S. securities laws will be determined by the courts of the Cayman Islands as penal or punitive in nature. If such a determination is made, the courts of the Cayman Islands will not recognize or enforce the judgment against a Cayman Islands company, such as the Company. As the courts of the Cayman Islands have yet to rule on making such a determination in relation to judgments obtained from U.S. courts under civil liability provisions of U.S. securities laws, it is uncertain whether such judgments would be enforceable in the Cayman Islands. Although there is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States (and the Cayman Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments), a judgment obtained in such jurisdiction will be recognized and enforced in the courts of the Cayman Islands at common law, without any reexamination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment (a) is given by a foreign court of competent jurisdiction, (b) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given, (c) is final, (d) is not in respect of taxes, a fine or a penalty, and (e) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands.
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The recognition and enforcement of foreign judgments are provided for under PRC Civil Procedure Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of PRC Civil Procedure Law based either on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the United States or the Cayman Islands that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedure Law, courts in the PRC will not enforce a foreign judgment against the Company or its directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States or in the Cayman Islands.
Because the Company is incorporated in the Cayman Islands, you may not have the same protections as shareholders of U.S. corporations.
The Company is organized under the laws of the Cayman Islands. Principles of law relating to matters affecting the validity of corporate procedures, the fiduciary duties of its management, directors and controlling shareholder and the rights of its shareholders differ from, and may not be as protective of shareholders as, those that would apply if the Company were incorporated in a jurisdiction within the United States. The Company’s directors have the power to take certain actions without shareholder approval, including approving certain fundamental corporate transactions, such as reorganizations and the sale or transfer of assets. In addition, there is doubt that the courts of the Cayman Islands would enforce liabilities predicated upon United States federal securities laws.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Shares by the Selling Shareholders pursuant to this prospectus. All proceeds from the sale of the Shares will be for the account of the Selling Shareholders. The Selling Shareholders may sell these Shares in the open market or otherwise, at market prices prevailing at the time of sale, at prices related to the prevailing market price or at negotiated prices.
The Selling Shareholders will pay any underwriting discounts and commissions and expenses incurred by the Selling Shareholders for brokerage or legal services or any other expenses incurred by the Selling Shareholders in disposing of the Shares included in this prospectus. The Company will bear all other costs, fees and expenses incurred in effecting the registration of the Shares covered by this prospectus, including all registration and filing fees and fees and expenses of its counsel and accountants.
DETERMINATION OF OFFERING PRICE
Since the Company’s Ordinary Shares are not listed or quoted on any exchange or quotation system, the offering price of the Shares was determined by management’s assessment of the market for similar companies in the United States OTC Market.
The price at which the Ordinary Shares covered by this prospectus may actually be sold will be $0.08 per share until the Company’s Ordinary Shares are quoted on the OTCQB or a higher market, and thereafter will be determined by the prevailing public market price for the Ordinary Shares, by negotiations between the Selling Shareholders and buyers of their Shares in private transactions or as otherwise described in “Plan of Distribution.”
The offering price of the Shares does not necessarily bear any relationship to market value, the Company’s book value, assets, past operating results, financial condition or any other established criteria of value. Accordingly, the offering price should not be considered an indication of the actual value of the Shares.
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MARKET FOR SHARES AND RELATED SHAREHOLDER MATTERS
The Company’s Ordinary Shares are not currently traded on any exchange and at the present time it does not have a trading symbol assigned to its Ordinary Shares.
A Form 211 has been filed in order to obtain a trading symbol for the Company’s Ordinary Shares and the Company is applying for quotation of its Ordinary Shares on the OTCQB; however, there can be no assurance that the Company’s Ordinary Shares will be approved for trading on the OTCQB or any other trading exchange.
As of November 22, 2021, there were 57 shareholders of record of the Company’s Ordinary Shares and 302,734,900 Ordinary Shares outstanding. Of the 302,734,900 Ordinary Shares outstanding, 31,901,900 Ordinary Shares have been registered by Selling Shareholders.
DIVIDEND POLICY
The Company has never declared or paid cash dividends to its shareholders, and the Company does not intend to pay cash dividends in the foreseeable future. The Company intends to reinvest any earnings in developing and expanding its business. Any future determination relating to the Company’s dividend policy will be at the discretion of its Board of Directors and will depend on a number of factors, including future earnings, its financial condition, operating results, contractual restrictions, capital requirements, business prospects, its strategic goals and plans to expand its business, applicable law and other factors that our Board of Directors may deem relevant.
Under Cayman Islands law, dividends may be declared and paid only out of funds legally available therefor, namely out of either profit or the Company’s share premium account, and provided further that a dividend may not be paid if this would result in the Company being unable to pay its debts as they fall due in the ordinary course of business.
(See “Risk Factors - We do not intend to pay dividends.”)
CAPITALIZATION
The following table sets forth the Company’s capitalization as of June 30, 2022.
| Unaudited | ||||
| Cash and Cash Equivalents | $ | 120,356 | ||
| Total liabilities | $ | 2,003,345 | ||
| SHAREHOLDERS’ EQUITY/(DEFICIT): | ||||
| Ordinary Shares, par value $0.0001; 500,000,000 Ordinary Shares authorized, 302,734,900 issued and outstanding as of June 30, 2022 | $ | 30,273 | ||
| Additional paid in capital | $ | (1,140 | ) | |
| Foreign currency translation reserve | $ | 22,232 | ||
| (Accumulated loss) | $ | (505,600 | ) | |
| Non-controlling interest fix column | $ | (610 | ) | |
| Total shareholders’ equity (deficit | $ | (454,845 | ) | |
| Total Capitalization | $ | 334,489 | ||
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of the consolidated results of operations of the Company and its subsidiaries for the years ended December 31, 2021 and 2020 and the six months ended June 30, 2022 and 2021 and the consolidated financial condition as of June 30, 2022 and December 31, 2021 should be read in conjunction with “Selected Financial Data” and the Company’s consolidated financial statements and the notes to those financial statements that are included elsewhere in this prospectus. The Company’s discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as its plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the “Risk Factors,” “Cautionary Notice Regarding Forward-Looking Statements” and “Our Business” sections in this prospectus. The Company uses words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could” and similar expressions to identify forward-looking statements.
OVERVIEW
The Company was originally incorporated in Nevada as “Duonas Corp.” on September 19, 2014. In November 2017, subsequent to a change of control, its name was changed to Huahui Education Group Corporation and its ticker symbol was changed to “HHEG.” In February 2019, the Company was redomiciled from Nevada to the Cayman Islands. Immediately prior to the Share Exchange discussed below, the Company was a “shell company” (as such term is defined in Rule 12b-2 under the Exchange Act) with nominal assets and no business operations.
On July 2, 2019, the Company entered into a definitive Share Exchange Agreement with HGSL and the HGSL Shareholders, whereby the Company would acquire all of the outstanding common stock of HGSL in exchange for the issuance of its Ordinary Shares to the HGSL Shareholders. On July 3, 2019 (the “Closing Date”), HGSL became the Company’s wholly owned subsidiary and the HGSL Shareholders became the owners of approximately 99.1% of its voting shares. The acquisition of HGSL by the Company has been accounted for as a reverse merger because on a post-merger basis, the former shareholders of HGSL held a majority of its outstanding shares on a voting and fully diluted basis. As a result of entering into the Share Exchange Agreement, on July 2, 2019, the Company’s Board of Directors unanimously approved modifying the Company’s accounting fiscal year end from June 30 to December 31.
Neither the Company nor HGSL conducts any substantive operations of its own; the Company conducts its primary business operations through ZDSE. ZDSE was incorporated in Shenzhen under the laws of the PRC on January 19, 2016 and was acquired by HGSL on June 28, 2018. ZDSE is engaged in providing executive coaching services in the PRC and in consulting.
On August 25, 2020, the Company formed HHMT as a wholly owned subsidiary of HSEC and on November 1, 2020, HEMC commenced providing consulting services. HHMT and HEMC’s financial data has been included in the Company’s consolidated financial statements as of and for the years ended December 31, 2020 and 2021.
In June, 2021, ZDSE sold 100% equity interest in Shenzhen Zhengxinhui Education Technology Co., Ltd.(“Zhengxinhui”) to an unrelated third party for a cash consideration of US$310. As of the disposal date, Zhengxinhui had net assets $42,656. The disposal loss recognized by the Group was US$42,346, which was recorded in the consolidated statements of operations for the year ended December 31, 2021.
Beginning in January 2020, the emergence and wide spread of COVID-19 resulted in quarantines, travel restrictions and the temporary closure of businesses in China and elsewhere. Since late July 2021, the Delta variant of COVID-19, followed by the Omicron variant, have resurged in several provinces across China, resulting in lockdowns. Consequently, the COVID-19 outbreak and its continuous resurgences, together with governmental sanctions, have deeply affected our business operations, financial condition and operating results. Due to the coronavirus outbreak in China, ZDSE’s revenues in 2020 fell by 45% compared to 2019. Revenue for 2021 increased by 37% compared with that of 2020; however, due to recurrences of coronavirus in China, ZDSE’s revenues in 2021 were still 25% below its revenues for the fiscal year ended December 31, 2019. Similarly, ZDSE’s revenues in the first half of 2022 fell by 3% compared to the first half of 2021.
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Critical Accounting Policies And Estimates
The Company prepares its financial statements in conformity with U.S. GAAP, which requires management to make certain estimates and apply judgments. Management bases its estimates and judgments on historical experience, current trends and other factors that management believes to be important at the time the financial statements are prepared. On a regular basis, management reviews its accounting policies and how they are applied and disclosed in the Company’s condensed financial statements. Actual results could differ from those estimates made by management.
Management believes that of the Company’s significant accounting policies, which are described in note 2 to its consolidated financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies management believes are the most critical to aid in fully understanding and evaluating the Company’s financial condition and results of operations.
Revenue Recognition
The primary sources of the Company’s revenues are as follows:
| ● | Coach course service revenue derived from ZDSE |
Revenue is reported net of business taxes and VAT. The educational services consist of training programs and courses. Tuition is generally paid in advance and is initially recorded as deferred revenue. The Company had revenues of $1,143,564, $1,052,413, $531,121 and $297,695,for the years ended December 31, 2020 and 2021 and the six months ended June 30, 2021 and 2022, respectively. As of December 31, 2021 and June 30, 2022 the Company had $302,885 and $178,976 of deferred revenue, respectively. Revenue is recognized proportionately as the instruction is delivered over the period of the course for the course fees collected.
| ● | Conference and exhibition planning service revenue derived from HHMT, which was established on August 25, 2020 |
Conference and exhibition planning service revenue for the years ended December 31, 2020 and 2021 and the six months ended June 30, 2021 and 2022, were $102,720, $ 345,604, $131,047 and $96,686, respectively. Revenue was approximately 23% of the total revenue in 2022.
| ● | HEMC’s commenced providing consulting services in the second half of 2020. |
Consulting service revenues in the years ended December 31, 2020 and 2021 and the six months ended June 30, 2021 and 2022 were $32,293,$101,277,$64,253 and $18,248 , respectively.
| ● | Human resources outsourcing service revenue derived from SDYL which commenced business operations in May 2022. |
Human resources outsourcing service revenue in the first half 2022 was $24.
Revenue is generated through the delivery of services. Revenue is recognized when a client receives services and is recognized in an amount that reflects the consideration that the Company expects to receive in exchange for those services. In addition, the standard requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with clients. The amount of revenue that is recorded reflects the consideration that the Company expects to receive in exchange for those services. The Company applies the following five-step model in order to determine this amount:
| ● | identification of the services in the contract; | |
| ● | determination of whether the services are performance obligations, including whether they are distinct in the context of the contract; | |
| ● | measurement of the transaction price, including the constraint on variable consideration; | |
| ● | allocation of the transaction price to the performance obligations; and | |
| ● | recognition of revenue when (or as) the Company satisfies each performance obligation. |
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The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the client. Once a contract is determined to be within the scope of ASC 606 at contract inception, the Company reviews the contract to determine which performance obligations the Company must deliver and which of these performance obligations are distinct. The Company recognizes as revenues the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied. Generally, the Company’s performance obligations are transferred to clients at a point in time, typically upon delivery.
For all reporting periods, the Company has not disclosed the value of unsatisfied performance obligations for all service revenue contracts with an original expected length of one year or less, which is an optional exemption that is permitted under the adopted rules.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to significant concentration of credit risk consist primarily of cash and cash equivalents. As of December 31, 2021 and June 30, 2022, substantially all of the Company’s cash and cash equivalents were deposited with financial institutions with high-credit ratings and quality.
Accounts receivable represent tuition fees due from customers, which are typically collected within a short period of time. Other receivables are mainly comprised of a short-term loan to a third party, Dongguan Anxiang Technology Co., Ltd., and rental and utilities deposits paid for the Guangzhou and Liaoning office which are fully refundable.
The Company did not have any clients constituting 10% or more of net revenues for the year ended December 31, 2021 or the six months ended June 30, 2022.
Recently Issued and Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance supersedes existing guidance on accounting for leases with the main difference being that operating leases are to be recorded in the statement of financial position as right-of-use assets and lease liabilities, initially measured at the present value of the lease payments. For operating leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and liabilities. For public business entities, the guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the guidance is permitted. In transition, entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. Effective January 1, 2019, the Company adopted this standard, which resulted in the recognition of right-of-use assets and operating lease liabilities of $453,708 and $453,708 as of December 31, 2021 and June 30, 2022.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements.” This ASU requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. This Accounting Standards Update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables and any other financial assets not excluded from the scope that have the contractual rights to receive cash. For public business entities, the amendments in this Update are effective for fiscal years beginning after January 1, 2023, including interim periods within those fiscal years. All entities may adopt the amendments in this Update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). The Company is in the process of evaluating the impact of the adoption of this pronouncement on its consolidated financial statements.
The Company reviews new accounting standards as issued. Management has not identified any other new standards that it believes will have a significant impact on the Company’s financial statements.
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RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements of Huahui Education Group Limited included elsewhere in this prospectus.
Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020
Revenue
Net revenue for the year ended December 31, 2021 was $1,705,225, compared to $1,246,285 for the year ended December 31, 2020, an increase of $458,940, or 37%.
Education and training revenue for the year ended December 31, 2021 was $1,052,413, compared to $1,111,272 for the year ended December 31, 2020, a decrease of $58,859, or 5%. The decrease was primarily due to the fact that, as a result of the government’s efforts to curb the ongoing COVID-19 pandemic, ZDSE was not allowed to offer in-person classes. This resulted in the suspension of operations at ZDSE’s Shandong branch from August 2021. In addition, ZDSE’s Shenyang branch experienced a major COVID-19 outbreak in 2021.
Exhibition planning service revenue for the year ended December 31, 2021 was $551,535, compared to $102,720 for the year ended December 31, 2020, an increase of $448,815, or 437%. The reason for the substantial increase in revenue during the year ended December 31, 2021 was that HHMT commenced business operations in the second half of 2020 and SJMC commenced business operations in the second half of 2021.
Consulting service revenue for the year ended December 31, 2021 was $101,277 compared to $32,293 for the year ended December 31, 2020, an increase of $68,984, or 214%. The reason for the increase in revenue was that HEMC didn’t commence business operations until the second half of 2020.
Cost of Revenue
Cost of revenue for the year ended December 31, 2021 was $537,427 compared to $371,488 for the year ended December 31, 2020, an increase of $165,939, or 45%. The increase is due to the commencement of two businesses in the second half of 2021 by HHMT and SJMC.
Gross Profit
Gross profit for the year ended December 31, 2021 was $1,167,798 compared with $874,797 for the year ended December 31, 2020. Our gross profit percentage for the years ended December 31, 2021 and 2020 were 68% and 70%, respectively.
Operating Expenses
By far the most significant component of our operating expenses for both the year ended December 31, 2021 and 2020 was general and administrative expenses ($1,228,669 and $1,111,748, respectively). Selling and marketing expenses for the year ended December 31, 2021 were $7,365, compared to $3,686 for the same period of 2020, an increase of $3,949, or 107%, because the increase in revenue necessitated an increase in expenses.
General and administrative expenses for the year ended December 31, 2021 were $1,228,669, compared to $1,111,748 for the same period of 2020, an increase of $116,921, or 10%. The increase in general and administrative expenses is primarily due to increases in personnel wages and rental expenses that resulted from rent reduction policies and a salary reduction for employees when operations were temporarily suspended during 2020 that were not in effect during 2021.
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The following table sets forth the main components of our general and administrative expenses for the years ended December 31, 2021 and 2020.
For the year ended December 31, 2021 | For the year ended December 31, 2020 | |||||||||||||||
Amount (US$) | % of Total | Amount (US$) | % of Total | |||||||||||||
| General and administrative expense: | ||||||||||||||||
| Salary and welfare | $ | 499,305 | 41 | % | $ | 415,037 | 37 | % | ||||||||
| Depreciation and amortization | 46,676 | 4 | % | 39,051 | 4 | % | ||||||||||
| Travel and accommodations | 10,062 | 1 | % | 16,664 | 1 | % | ||||||||||
| Rental expenses | 412,070 | 33 | % | 320,569 | 29 | % | ||||||||||
| Office expenses | 111,104 | 9 | % | 96,891 | 9 | % | ||||||||||
| Legal and professional fees | 66,030 | 5 | % | 93,031 | 8 | % | ||||||||||
| Consulting service fee | - | 0 | % | 18,747 | 2 | % | ||||||||||
| Audit Fee | 14,000 | 1 | % | 18,500 | 2 | % | ||||||||||
| Other | 69,422 | 6 | % | 93,258 | 8 | % | ||||||||||
| Total general and administrative expenses | $ | 1,228,669 | 100 | % | $ | 1,111,748 | 100 | % | ||||||||
Net Loss
The Company had a net loss of $113,496 for the year ended December 31, 2021 compared to a net loss of $240,580 for the year ended December 31, 2020, a decrease of $127,090, or 53%. The decrease is due to the commencement of business in the second half of 2021 by HHMT, SJMC and HEMC.
Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021
Revenue
Net revenue for the six months ended June 30, 2022 was $412,653, compared to $726,422 for the six months ended June 30, 2021, a decrease of $313,769, or 43%.
Education and training revenue in the first half of 2022 was $297,695, compared to $531,121 for the first half of 2021. The reduction is mainly attributable to the continued outbreak of the COVID-19 pandemic in the first half of 2022 in Guangzhou, China. Many branches including GZZDH were unable to carry out their businesses as normal. In the first half of 2022, the income of GZZDH declined by $266,894, or 66%, compared with that of 2021.
Exhibition planning service revenue in the first half of 2022 was $96,686, compared to $131,047 for the first half of 2021, an decrease of $34,361, or 26%. The main reason for the decrease is the flare-ups of COVID-19 across the country since March 2022. SJMC did not have any operating income in the first half 2022.
Consulting service revenue in the first half of 2022 was $18,248, compared to $64,253 for the first half of 2021, a decrease of $46,005, or 71%. The main reason for the decrease is the flare-ups of COVID-19 across the country since March 2022.
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Cost of Revenue
Cost of revenue for the six months ended June 30, 2022 was $129,472 compared to $222,206 for the six months ended June 30, 2021, a decrease of $92,734, or 41%, reflecting the decrease in revenues.
Gross Profit
Gross profit for the six months ended June, 2022 was $283,181 compared with $504,216 for the six months ended June 30, 2021.Our gross profit percentage for the six months ended June 30, 2022 and 2021 was 68% and 69%, respectively.
Operating Expenses
General and administrative expenses for the six months ended June 30, 2022 were $585,683 compared to $648,667 for the same period of 2021, an decrease of $62,984, or 10%. The decrease in general and administrative expenses is primarily due to decreases in office expenses and others. The following table sets forth the main components of our general and administrative expenses for the six-month periods ended June 30, 2022 and 2021:
| For the six months ended June 30, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
Amount (US$) | % of Total | Amount (US$) | % of Total | |||||||||||||
| General and administrative expense: | ||||||||||||||||
| Salary and welfare | $ | 264,985 | 45 | % | $ | 257,264 | 40 | % | ||||||||
| Depreciation and amortization | 10,531 | 2 | % | 28,045 | 4 | % | ||||||||||
| Travel and accommodations | 6,222 | 1 | % | 8,061 | 1 | % | ||||||||||
| Rental expenses | 225,515 | 39 | % | 202,022 | 31 | % | ||||||||||
| Office expenses | 29,937 | 5 | % | 48,550 | 7 | % | ||||||||||
| Legal and professional fees | 31,329 | 5 | % | 29,317 | 5 | % | ||||||||||
| Audit fee | 10,000 | 2 | % | 15,102 | 2 | % | ||||||||||
| Other | 7,164 | 1 | % | 60,306 | 10 | % | ||||||||||
| Total general and administrative expenses | $ | 585,683 | 100 | % | $ | 648,667 | 100 | % | ||||||||
Net Loss
Net loss for the six months ended June 30, 2022 was $315,159 compared with a net loss of $191,159 for the same period of 2021. primarily due to the significant decrease in revenue that resulted from the COVID-19 outbreak.
Liquidity and Capital Resources
The Company’s liquidity and working capital requirements primarily relate to its operating expenses. Historically, the Company has met its working capital and other liquidity requirements primarily through a combination of cash generated from operations and loans from related parties. Going forward, management expects to fund the Company’s working capital and other liquidity requirements from various sources, including but not limited to cash generated from operations, loans from related parties, if and when needed, and other equity and debt financings when appropriate.
Our principal sources of liquidity have been cash generated from operating activities, loans from related parties and funds raised from financing activities. As of December 31, 2021 and June 30, 2022 we had $184,596 and $120,356 in cash and cash equivalents, respectively. Our cash and cash equivalents consist primarily of bank deposits. We believe that our current cash and anticipated cash flow from operations, along with loans from related parties if, and when, needed, will be sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital expenditures, for at least the next 12 months.
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As of June 30, 2022, we had $2,003,345 in total liabilities, which was primarily comprised of amounts due to related parties ($851,769), non-current operating lease liabilities ($449,586), accounts payables, other payables and accruals ($318,997),deferred revenue ($178,976) and current operating lease liabilities ($204,017) as compared to $1,476,229 in total liabilities as of December 31, 2021, which was primarily comprised of amount due to related parties($674,537),non-current operating lease liabilities ($291,530), accounts payables, other payables and accruals ($228,642),current operating lease liabilities ($162,178) and deferred revenue ($119,028).
During the six months ended June 30, 2022, $246,908 was used in operating activities compared to $66,131 used in operating activities during the six months ended June 30,2021. The Company resumed business operation in the second quarter of 2022 and its revenues increased. Nil was used in investing activities during the six months ended June 30, 2022, as compared to $56,309 used in investing activities during the six months ended June 30, 2021 as we attempted to conserve our capital. During the six months ended June 30, 2022, $190,230 was used in financing activities compared to $111,059 used in financing activities during the six months ended June 30, 2021. The net advances from related parties was $185,119 in the six months ended June 30, 2022 compared with $111,059 net repayments to related parties in the same period of 2021. The advances from related parties are unsecured, non-interest bearing and repayable on demand. The resulting change in cash for the six months ended June 30, 2022 was a decrease of $64,238. The cash and cash equivalents balance on January 1, 2022 was $184,596, and on June 30, 2022 it was $120,356.
During the year ended December 31, 2021, $339,571 was used in operating activities compared to $647,279 provided by operating activities in 2020. The Company resumed business after the COVID-19 lockdown in 2020 resulting in increased operating income.. During the year ended December 31, 2021, $63,145 was used in investing activities, as compared to $189,584 used in investing activities in 2020, and $283,024 was used in financing activities, as compared to $55,963 provided by financing activities in 2020. The resulting change in cash for the year was a decrease of $113,510 for 2021, as compared to a decrease of $867,687 for 2020.
Impact of Inflation
In accordance with the National Bureau of Statistics of China, the year-over-year percentage changes in the consumer price index for March 2019, 2020 ,2021 and 2022 were 2.3%, 4.3% , 4.4%,5.9% respectively. Inflation in China has not materially affected our profitability and operating results. However, we can provide no assurance that we will be unaffected by higher inflation rates in China in the future.
Taxation
As an exempt company limited by shares, we are not subject to taxation in the Cayman Islands on income arising in or derived from other jurisdictions.
On July 3, 2019, we completed the Share Exchange whereby ZDSE, a PRC company, became our sole operating subsidiary. ZDSE is a general VAT taxpayer with a tax rate of 6%; its three branch companies are small-scale taxpayers with a tax rate of 3%. The corporate income tax rate in China is generally 25%; however, it may be as low as 5% to 10% for small and micro enterprises that meet certain conditions. Our income tax for the year ended December 31, 2020 was $15,187 and for the year ended December 31, 2021 it was $9,024.
Efforts by the Chinese government to increase tax revenues could result in decisions or interpretations of the tax laws by the Chinese tax authorities that are unfavorable to us and which increase our future tax liabilities or deny our expected refunds. Changes in Chinese tax laws or their interpretation or application may subject us to additional Chinese taxation in the future.
Dividends, if any, paid to any United States resident or citizen shareholder are treated as dividend income for United States federal income tax purposes. Such dividends are not eligible for the 50% dividends-received deduction allowed to United States corporations on dividends from a domestic corporation under Section 243 of the United States Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). Various Internal Revenue Code provisions impose special taxes in certain circumstances on non-United States corporations and their shareholders. You are urged to consult your tax advisor with regard to such possibilities and your own tax situation.
In addition to United States federal income taxation, shareholders may be subject to state and local taxes upon their receipt of dividends.
Foreign Currency Exchange Rates
We are not materially affected by foreign currency exchange rates. However, it is difficult to predict how market forces, or PRC or U.S. government policy, might affect our operations. There remains significant international pressure on the PRC government to adopt a substantial liberalization of its currency policy, which could result in a further and more significant change in the value of the RMB against the U.S. dollar. Limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. So far, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we potentially may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedging transactions may be limited, and we may not be able to successfully hedge our exposure at all. Furthermore, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currency.
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OUR BUSINESS
History of the Company
The Company was originally incorporated in Nevada under the name “Duonas Corp.” on September 19, 2014. It maintains its principal executive offices at 13th Floor, Building B1, Wisdom Plaza, Qiaoxiang Road, Nanshan District, Shenzhen, Guangdong Province, China 518000. The Company was formed to produce and sell stylish decorative items made from concrete, such as a variety of sculptures, candleholders, lamps, tabletops, bookcases, vases of various shapes and forms and decorations for the garden.
The Company filed a registration statement on Form S-1 with the SEC on August 25, 2016, which was declared effective on October 12, 2016. In November 2017, subsequent to a change of control, the Company’s name was changed to Huahui Education Group Corporation, its ticker symbol was changed to “HHEG” and management of the Company abandoned its business plan and determined to seek a possible business combination. The business purpose of the Company changed to seeking the acquisition of, or merger with, an existing company.
As a result, the Company became a “shell company” (as such term is defined in Rule 12b-2 under the Exchange Act) with nominal assets and no business operations, and it sought to identify, evaluate and investigate various companies with the intent that, if such investigation warranted, a reverse merger transaction could be negotiated and completed pursuant to which the Company would acquire a target company with an operating business with the intent of continuing the acquired company’s business as a publicly held entity.
Effective February 26, 2019, the Company changed its domicile from Nevada to the Cayman Islands by merging into its wholly owned Cayman Islands subsidiary, Huahui Education Group Limited (the “Redomicile Merger”). As a result of the Redomicile Merger, the Company’s name was changed to Huahui Education Group Limited.
On July 3, 2019 (the “Closing Date”), the Company closed on a share exchange (the “Share Exchange”) with HGSL, a Seychelles company limited by shares, and the HGSL Shareholders, Mr. Junze Zhang, Feier Co., Limited and Meisi Co., Limited. As a result, HGSL is now a wholly owned subsidiary of the Company. Under the Share Exchange Agreement, the HGSL Shareholders exchanged all of the shares that they held in HGSL for 300,000,000 Ordinary Shares of the Company.
For accounting purposes, the Share Exchange was treated as a reverse acquisition with the HGSL Shareholders as the acquirers and the Company as the acquired party. When the Company refers in this prospectus to business and financial information for periods prior to the consummation of the Share Exchange, it is referring to the business and financial information of HGSL unless the context suggests otherwise.
As a result of the closing of the Share Exchange, the HGSL Shareholders own approximately 99.1% of the total outstanding Ordinary Shares of the Company and the former shareholders of the Company own approximately 0.9%. Mr. Zihua Wu, the former sole officer and a former director of the Company, resigned from all positions with the Company immediately after the closing of the Share Exchange and Mr. Junze Zhang was appointed as the Company’s President, Chief Executive Officer, Chief Financial Officer and Secretary, as well as a director. Mr. Zhongpeng Chen remained a director of the Company.
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The Shares issued to the HGSL Shareholders in connection with the Share Exchange were not registered under the Securities Act in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act, which exempts transactions by an issuer not involving any public offering, and/or Regulation S promulgated by the U.S. SEC. These securities may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirement.
As a result of the reverse acquisition described above, management of the Company believes that the Company is no longer a shell company. The Company’s operations now consist of the operations of HGSL and its subsidiaries.
Corporate Structure
The following chart sets forth the Company’s corporate structure:
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Huahui Group Stock Limited (“HGSL”) was incorporated under the laws of the Republic of Seychelles on May 17, 2017. It became a wholly owned subsidiary of the Company in July 2019 as a result of the Share Exchange described above. HGSL has a wholly owned subsidiary, formed under the laws of Hong Kong, Huahui Group (HK) Co., Limited (“HGHK”), which, in turn, has a wholly owned subsidiary corporation formed under the laws of the Peoples Republic of China (the “PRC” or “China”), Huahui (Shenzhen) Education Management Co., Limited (“HEMC”). HEMC owns 100% of Shenzhen Huahui Shangxing Education Consulting Co., Limited (“HSEC”). HSEC owns 100% of Zhongdehui (Shenzhen) Education Development Co., Limited (“ZDSE”), which is currently the Company’s primary operating subsidiary. HSEC also owns 100% of Shenzhen Huahui Media Technology Co., Limited (“HHMT”), which commenced operations in August 2020 and Huahui Jinming (Shenzhen) Education Technology Co., Limited (“JMET”), which has not commenced operations, as well as 80% of Shandong Yuli Big Data Technology Co., Limited (“SDYL”), which also has not commenced operations.
HGSL has a second wholly owned subsidiary formed under the laws of the Republic of Seychelles, Huahui Group Co., Limited (“HGCL”), which owns 100% of Huahui Technology (HK) Co., Limited, a Hong Kong corporation formed in March 2020 (“HTCL”). HTCL, which has not commenced operations, has a wholly-owned subsidiary, Huahui (Shenzhen) Education Technology Co., Limited (“HSET”), formed in July 2020 under the laws of the PRC.
HGSL intends to develop additional businesses through one or more subsidiaries in artificial intelligence technology system development, art training and vocational skills training. There can be no assurance that any of these proposed businesses will ever be developed.
HGHK was incorporated in Hong Kong on January 4, 2017 as an investment holding limited liability company. The original shareholder, Junze Zhang, held 100% of the shares and transferred all of the shares to HGSL on April 20, 2018.
HEMC was established under the laws of the PRC on March 28, 2017 by HGHK with a registered capital of RMB 100,000. HEMC is currently in the business of providing consulting services.
HSEC was incorporated in the PRC on January 5, 2018 as an education consulting limited liability company. The original shareholders, Qixuan Zhang (99%) and Weiqing Xu (1%), each transferred his shares to HEMC on May 4, 2018 for RMB 0.5. HSEC has not yet commenced operations. HSEC has four wholly-owned subsidiaries, HHMT, JMET, ZDSE and SYDL. -.
HHMT was incorporated in the PRC on August 25, 2020 as a wholly owned subsidiary of HSEC. HHMT’s business includes several areas related to business planning and to event planning and production. HHMT has one wholly-owned subsidiary, Shenzhen Jiarui Media Co., Limited (“SJMC”), which was formed on June 4, 2021 under the laws of the PRC. SJMC’s principal business is essentially the same as that of HHMT.
JMET was incorporated in the PRC on July 8, 2020 as a wholly owned subsidiary of HSEC. JEMT started operation in June 2022, holding training courses for individuals and enterprises to improve their professional and management skills.
ZDSE was incorporated in the PRC on January 19, 2016 and commenced operations in April 2016. The original shareholders, Qing Zuo (50%), Mengling Zhang (20%), Henghui Investment Consulting (Shenzhen) Partnership (10%) and Hengqing Investment Consulting (Shenzhen) Partnership (20%), each transferred his/her/its shares to HSEC on June 27, 2018 for RMB 1,000, RMB 400, RMB 200 and RMB 400, respectively. ZDSE is in the business of professional leadership development.
ZDSE has the following wholly-owned subsidiaries: Zhongdehui (Shenyang) Education Consulting Co., Limited (“SYZDH”), established as of December 29, 2020, and Zhongdehui (Guangzhou) Education Consulting Co., Limited (“GZZDH”), established as of December 28, 2020. SYZDH has taken over the business of ZDSE’s Shenyang branch and GZZDH has taken over the business of ZDSE’s Guangzhou branch. On February 26, 2021, ZDSE’s Shenzhen Branch established a wholly-owned subsidiary, Shenzhen Zhengxinhui Education Technology Co., Limited, which was sold to an unrelated third party on June 28, 2021.Zhongdehui (JiNan) Education Consulting Co., Limited (“JNZDH”), which was established as of April 14, 2022, is engaged in researching, developing and applying methods for helping individuals to improve their personal and professional leadership skills and effectiveness. ZDSE’s clients include executive managers from large scale, small and medium-sized enterprises, as well as professionals and employees in various fields.
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SDYL was incorporated in the PRC on December 14, 2021, and is an 80% owned subsidiary of HSEC.Shandong Yuli Big Data Technology Co., Limited (“SDYL”) was incorporated in the PRC on December 14, 2021, and is an 80% owned subsidiary of HSEC. Twenty percent of SDYL’s shares are owned by SYDL’s Legal Representative, Xinwen Yang. SDYL’s business model of “HR Technology + Platform + Service” utilizes human resources (“HR”) technology to build a HR platform that will provide payroll, personnel recruitment, labor dispatch, flexible employment, fiscal and tax planning and legal HR consultation through a mobile app and SDYL’s website. SDYL initiated operations in May 2022.
Management of the Company is considering expanding the Company’s business through the acquisition or formation of additional subsidiaries.
Business of Zhongdehui (Shenzhen) Education Development Co., Limited
ZDSE, the Company’s primary Operating Subsidiary, is a professional management coaching organization engaged in researching, developing and applying methods for helping individuals to improve their personal and professional leadership skills and effectiveness. ZDSE’s clients consist of executive managers from large scale, small and medium-sized enterprises, as well as professionals and employees in various fields.
ZDSE had coached over 5,000 entrepreneurs, as well as personnel from more than 65 corporate training services and large listed companies. The types of companies served include real estate, high technology, medicine, health, schools, government agencies, auto industry, communications, logistics, robotics, property, construction, engineering, manufacturing, textile, rag trade, furniture and other fields.
ZDSE has held charity events contributing to schools in Guangdong, Jiangxi, Sichuan, Hebei, Shandong and other provinces in the PRC. It has also held charity events in Shenzhen and Shandong, for which the theme was “I am the root of everything.” Since its opening, ZDSE has directly or indirectly contributed a total of RMB 128,000 to an orphanage called the Home of Light and has donated RMB 47,000 to support events for the orphans.
Advantages of ZDSE
ZDSE has accumulated a large amount of client data and has performed management coaching services for business leaders, administrative professionals, industry professionals and ordinary employees.
ZDSE believes that the following advantages will be helpful in achieving success and a leading market position in Chinese personal leadership and business management coaching, making ZDSE stand out from its competitors.
ZDSE is a Pioneer in Developing Chinese Leadership Development Coaching Services.
ZDSE’s workshop, experiential learning and practice focus on personal leadership development so that its clients can apply their newly developed leadership concepts and experiences to their work. ZDSE also monitors the performance and the changes and developments of clients returning to work.
Excellent Team of Coaches
ZDSE believes that its team of coaches is crucial to its success, and it has a team of professional and innovative coaches, most of whom have either master’s or doctoral degrees in their various professions as well as experience in the field of leadership development coaching. Since ZDSE’s coaches regularly interact with clients, they play a vital role in maintaining the quality of ZDSE’s services and protecting the brand and reputation of ZDSE. ZDSE intends to continue to attract and retain experienced coaches.
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Brand Perception
Management believes that ZDSE is enhancing its brand recognition and reputation as a result of its clients’ satisfaction. ZDSE believes that its coaching has attained good results for its clients and their post-training performance inspires more people to contact ZDSE. Thus, the brand, reputation and influence of ZDSE is continuously expanding. ZDSE will continue to strive to improve its client service system, including post-training client visits and consulting services, and its clients’ overall experience.
Industry-leading Market Size
ZDSE is headquartered in Shenzhen, and has established offices in Guangzhou, Shandong and Liaoning. Its management intends to establish additional offices in Jiangsu, Beijing, Shanghai, Chongqing and Xiamen within three to six years. ZDSE’s geographic expansion will support its efforts to expand its market scope and brand influence and gain a larger market share.
Innovative Program Development Capabilities
ZDSE’s service content and methods are mostly based on self-developed material. ZDSE’s program development team works with its staff and senior coaches in order to develop, update and improve ZDSE’s services. The team analyzes the latest market trends and demand, and regularly collects feedback from clients through multiple channels to improve the quality of its clients’ coaching experience.
The Strategy of ZDSE
Becoming China’s Best Leadership Development Coaching Service Organization
ZDSE’s goal is to become China’s best leadership development coaching service organization. ZDSE believes that it can accomplish that goal due to its leadership development modules, experiential learning modules and practice integration. By continuing to improve the quality of its coaching services and by supporting its clients with follow-up services, ZDSE believes it can increase the number of clients and the rate of new enrollments, thereby increasing its market share and capturing some larger markets. ZDSE has identified several areas where the Chinese economy is prosperous, and it intends to have regional service centers in several of these crucial locations in order to expand its geographic coverage. ZDSE established offices in Guangzhou in December of 2018 and in Shandong and Liaoning during the first quarter of 2019 and its management expects to further increase the number of branches in the future.
Formulating a Life-long Development System
ZDSE believes that it is extremely important to develop a life-long service system for its clients. Management intends to accomplish this through the Company’s online service program discussed below under “Other Planned Businesses of the Company.” ZDSE anticipates that this life-long service system will be attractive to its clients, thereby increasing enrollment in ZDSE’s offerings and achieving sustainable profitability for both HEMC and ZDSE. It is also expected to give ZDSE a significant competitive edge.
Extensive Strategic Alliances
ZDSE plans to seek strategic alliances on a nationwide scale. In accordance with the goal of many enterprises, institutions and industry associations, management carefully evaluates varied opportunities for cooperative relationships with other companies. Through cooperation and strategic alliances with various institutions and associations, ZDSE believes that it can effectively expand its pool of prospective clients and obtain a steady and predictable revenue source.
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ZDSE’s Coaching Program
ZDSE has developed “The Way of Management” program with ten modules, and intends to develop additional modules in the future. The current ten modules is comprised 60% of scenario exercises, 20% of group interactions and 20% of specified topics.
The Way of Management Program
Unit 1: Exploration Management
This is a four-day module that is comprised 60% of experience exercises, 20% of client interactions and 20% of individual client presentations. Through this module, clients are given the opportunity to recognize their behavioral patterns in corporate management and decision-making, identify their own deficiencies or human frailties, such as selfishness or greed, and discover the gap between themselves and the ideal manager. It also promotes more inclusive treatment of partners and colleagues.
Unit 2: Innovation Management
This five-day module helps clients learn how to build an effective and productive team and is primarily based on the previous management theories of the clients. Through this experience-rich module, the clients examine their old models, generate new insights and establish new, personal management theories.
Unit 3: Practice Management
This module involves a 120-day practical experience. At the beginning, each client will develop a business goal derived from the two previous modules that the client wants to accomplish within this module. This module usually results in major changes and breakthroughs for the clients. During this 120-day period, the coaches track the progress of the clients weekly, and a group meeting is held every week. From time to time, thematic seminars are held for the clients in this module. Technical tools are also provided to assist the clients with their individual problems so that the clients can more effectively work towards and then achieve their goals.
Unit 4: Management Art
Through this four-day experience, clients work on communication skills, including listening and questioning, as well as how to give constructive feedback. By improving their communication skills, clients can increase the level of understanding and cooperation between themselves and their team, thereby becoming more effective managers and leaders.
Unit 5: Personality Management
Through this three-day experience, clients learn about different personality types, how to identify them through the behaviors of others and how to deal most effectively with people who exhibit these various personalities. The goal of this module is to help clients deal with difficult personalities, thereby reducing stress that may result from personality clashes in and outside the workplace.
Unit 6: Foundations of Management
This module is a four-day experience that gives clients the opportunity to discover their core values and how they impact their decisions and their management style. The more clients know about their core values, the more they can create effective communication, which makes it easier for them to reach agreement with their employees.
Unit 7: Relationship Management
The Company believes that the best managers and leaders understand and are happy with themselves. This four-day experience demonstrates to clients how to understand and accept themselves - their strengths and their weaknesses - and helps them understand their own needs. Through this understanding, as well as development of self-love, clients can develop better relationships and more effective communication with others.
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Unit 8: Positivity
Poor communication and negative experiences can both stem from and result in problems in the workplace, which, in turn, create a stressful and negative work atmosphere for all involved. This often results in reduced productivity, higher employee turnover and general dissatisfaction, which frequently carries over and affects all aspects of life. In this module, clients strive toward achieving a positive mindset and approaching work and life with a positive attitude, which can result in better physical and mental health and greater happiness both in and out of the workplace. Greater employee happiness leads to a more positive “can do” atmosphere in the workplace, more effective employees and increased productivity.
Unit 9: Leadership Development for Women
This module, is a unique four-day experience for female clients. As more and more women have entered traditionally male-dominated areas of employment, an opportunity has arisen for helping them succeed within a masculine culture and achieve equilibrium between their traditionally “female” strengths and qualities and the more traditionally “male” qualities required to succeed in business.
Unit 10: Fund Management
In this module, clients learn how to manage capital, how to use capital correctly and how to diversify their investments. And perhaps most importantly, clients come to understand their relationship with money and how to keep the acquisition of money in perspective.
Coaching Staff
The main function of the ZDSE coaches is to provide guidance and support both during completion of the modules and during the provision of post-completion services. The responsibility range of the coaches usually includes:
| ● | Understand and respond to questions and concerns; | |
| ● | Guide clients through the various modules and assist them in their practical experience; | |
| ● | Provide guidance on directions and technical tools; | |
| ● | Afford psychological counseling to help clients cope with challenging issues; and | |
| ● | Maintain contact with the clients and follow the clients after completion of the program. |
ZDSE seeks coaches who have extensive teaching experience and who demonstrate good interpersonal and communication skills. Currently, ZDSE has numerous excellent coaches who are attracted by ZDSE’s progressive concept, advanced technology and corporate culture.
ZDSE provides introductory training for new coaches, periodic on-the-job training and workshops for coaches to help them master the system and improve their coaching. Whenever ZDSE sets up a branch office in a new city, ZDSE will assign outstanding coaches from corporate headquarters to conduct new coach training in order to maintain the company’s program quality, corporate culture and brand reputation.
ZDSE also plans to introduce a technology system, which it is developing, through which ZDSE’s coaches will be able to collect and analyze the results of their clients’ program experiences and make immediate adjustments to improve the quality of the overall program.
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Research and Development
ZDSE engages in continuous research and exploration in an effort to further improve its system and grow its business. Its program development team analyzes the latest market trends and demand and regularly collects feedback from clients to improve the quality of the coaching experience offered by ZDSE.
ZDSE’s research and development team consists of:
| ● | Zuo, Qing. Mr. Zuo is the general manager of ZDSE. | |
| ● | Yin, Shaogang. Mr. Yin is the head of SYZDH and GZZDH. | |
| ● | Tsang, Kin Ling Martin. Mr. Tsang is a senior consultant for GZZDH. |
Marketing of ZDSE
At present, ZDSE acquires new clients primarily through recommendations of past and current clients. ZDSE believes that the biggest promoter for its success is word-of-mouth recommendations from past and current clients who share their program experiences with each other. Management believes that new clients are also attracted by ZDSE’s coaching team and services.
ZDSE also holds free seminars for business executives, during which its representatives explain the company’s services and gather information about the needs of the attendees and their companies. ZDSE representatives then contact the potential clients and attempt to sell them the specific modules that most closely fill their individual needs. To a lesser degree, ZDSE utilizes social media and conventional advertising to attract new clients.
Competition
ZDSE competes with both Chinese executive coaching and foreign executive coaching organizations with branches in China that offer services similar to those that it offers. However, the competition is highly fragmented with very few large competitors. ZDSE believes that its major competitors are Sun Yat-sen University School of Management, the earliest established institution specializing in business management education and research, and Elite Business Doers, which was founded in Shenzhen and describes itself as a “small learning community for SME owners.”
ZDSE believes that the principal competitive factors in the industry in which it competes include:
| ● | Brand awareness and reputation; | |
| ● | Program topics; | |
| ● | Program orientation; | |
| ● | Quality of program and experience; | |
| ● | Type of back-end service and quality; | |
| ● | Customized service; | |
| ● | Skills and capabilities of coaches; and | |
| ● | Price. |
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Management believes that the unique orientation of ZDSE’s program, including its holistic aspect, the quality of its coaches, the personal atmosphere and individualization of the program to each client’s specific needs and the quality of the post-program services distinguish it from its competitors. However, there can be no assurance that its initial competitive advantages will be retained, or that one or more competitors will not develop programs that are equal or superior to ours or are better priced than ZDSE. In the future, ZDSE may face competition from competitors of varying sizes and geographic reach, who structure their program offerings similarly to ZDSE. In addition, some competitors may have a longer operating history and a better ability to support and retain clients. ZDSE’s revenue could be negatively impacted if its competitors were to develop and market programs that are more effective, more convenient or less expensive than its program.
ZDSE’s Future Business Plan
ZDSE’s national development plan, which is contingent on the status of the COVID-19 epidemic, includes opening 10 to 15 new branches in China, including branches in Beijing, Shanghai, Jiangsu, Chongqing and Xiamen, within three to six years. In addition, along with its geographic expansion, ZDSE is continuously improving its module offerings. More modules are being developed and put on the docket for discussion to be added in the future.
In addition, ZDSE is planning to build an online platform for clients’ life-long development programs. This service is intended to complement and increase the business of ZDSE. Using an artificial intelligence system developed by ZDSE, each client’s online program will be customized for that client. We anticipate that ZDSE’s online mobile platform application will quickly build online membership by importing address books. Members will be able to post and share ZDSE’s online services to their social circles, thereby attracting more clients to the Company and to ZDSE. Although management expects to face competition from other institutions with mature online platform services in the same market, these online services should enable the Company to reach a wider range of target clients and achieve greater sales opportunities for ZDSE with existing clients. ZDSE will also be able to promote support of its charitable activities and shape its brand image by publishing information content about those activities. Due to the COVID-19 epidemic, completion of the online service platform has been put on hold and management intends to redefine the service plan in detail over the next year.
ZDSE intends to conduct its online business through the use of a variable interest entity structure (“VIE”). It is intended that the business will be conducted by a newly formed company (“Newco”), which will be formed under the laws of the PRC and wholly owned by one or more citizens of the PRC. Management intends that a subsidiary of the Company, which will be a wholly foreign owned entity (the “WFOE”), will acquire effective control of Newco through a series of agreements - the VIE structure. The contractual arrangements between Newco and the WFOE will enable the Company to exercise effective control over Newco and realize substantially all of the economic risks and benefits arising from the activities of Newco. As a result, the Company will include the financial results of Newco in its consolidated financial statements in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, as if Newco were a wholly owned subsidiary. It should be noted, however, that there is currently some uncertainty as to the effect of the Foreign Investment Law of the People’s Republic of China, which was promulgated in March 2019 and became effective on January 1, 2020, on the use of the VIE structure in the PRC.
The Business of Shenzhen Huahui Media Technology Co., Limited
HHMT commenced operations in August, 2020. Its business includes cultural exchange event planning, conference planning, corporate image planning, marketing planning, exhibition planning, stage lighting, audio equipment, display equipment and technology development and sales, leasing, door-to-door integration of multimedia teaching systems installation, on-site maintenance, domestic trade and import and export of goods and technologies. HHMT’s strategy is to empower the entire education industry chain with technology. HHMT’s main customer groups are schools and other government institutions. In 2021, HHMT provided stage, audio and lighting equipment, including setting-up and operating services, for stage activities of various institutions. During the years ended December 31, 2020 and 2021 and the six months ended June 30, 2021 and 2022, HHMT accounted for approximately 8.2%, 20.2%, 18% and 23.4%, respectively $102,720, $345,604,$131,047 and $96,686 of the Company’s total revenues.
HHMT and its subsidiary, SJMC, are also negotiating to provide stage, audio and lighting equipment for artistic performances at Sub-district offices of the SHENZHEN Culture and Sports Bureau and at the Shenzhen prison. In addition, HHMT intends to expand its business into the provision of intelligent systems for campuses and government offices, such as face recognition, attendance, invigilator, remote conference, intelligent home and other types of systems.
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The Business of Huahui (Shenzhen) Education Management Co., Limited
HEMC commenced operations in November 2020. Its business includes consulting services for entrepreneurs, staff training and introduction services for investors and government. The company’s main customer groups are enterprise groups and government. During the fiscal year ended December 31, 2021, HEMC accounted for approximately 6% of the Company’s total revenue.
The future plan is for HEMC to carry out daily management activities and seek new business opportunities for sustainable development.
The Business of Shandong Yuli Big Data Technology Co., Limited
HHEG is exploring entering into the provision of human resource (“HR”) services through SDYL, which was incorporated in the PRC on December 14, 2021. SDYL’s business model of “HR Technology + Platform + Service” utilizes HR technology to build an HR platform that will provide payroll, personnel recruitment, labor dispatch, flexible employment, fiscal and tax planning and legal HR consultation through a mobile app and SDYL’s website. SDYL plans to build a service team of 20 people and 4 regional business groups in China in 2022 and management is hopeful that, if it succeeds, this business may become a significant source of revenue in the future.
Other Planned Businesses of the Company
In addition, the Company plans to establish four major structures in the future: Huahui Education Industry Chain Resources, Huahui Intelligent Education Industry Chain, Huahui Education Supply Chain and Huahui Supply Chain Finance Services.
Huahui Education Industry Chain Resources intends to offer basic education, elite leadership education, vocational education, art education, moral education, quality-oriented education, overseas education, entrepreneurial education and other education segmentation modules.
Huahui Intelligent Education Industry Chain intends to develop an intelligent education curriculum resource platform, an intelligent education equipment platform and an intelligent education software platform, with curriculum resource innovation, intelligent software and hardware supply, online platform construction, online data sharing, online talent incubation and information management and construction functions.
Huahui Education Supply Chain’s platform is intended to integrate planning and promotion, enrollment services, teacher allocation, logistics procurement and talent transfer services, forming an ecosystem of unified management, unified procurement, unified configuration and unified settlement.
Huahui Supply Chain Finance Services intends to sponsor investment funds specializing in certain industries and market sectors, at a lower cost and faster speed than its competitors, updating the way for institutions and enterprises to solve their financing problems and helping enterprises to develop rapidly.
Expansion of the Company’s business may be achieved either through the formation of subsidiaries or through the acquisition of other existing companies.
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Properties
The Company’s, HEMC’s and ZDSE’s headquarters are located at 13th Floor, Building B1, Wisdom Plaza, Qiaoxiang Road, Nanshan District, Shenzhen, China. The lease for the space, which consists of a total of 1,000 square meters shared by multiple lessees, expires on July 31, 2024. The Company’s share of the monthly rental is RMB 50,000 (approximately US$7,142), which is paid by HEMC.
GZZDH currently leases approximately 970.54 square meters for its Guangzhou office. GZZDH leases this space for a monthly rental of RMB 44,159.57 (approximately US$6,592), plus an RMB 23,778.23 (approximately US$3,549) business management fee, until March 30, 2023.
ZDSE’s Shandong office consists of approximately 828 square meters and is leased until August 31, 2023. ZDSE leases this office space for a monthly rental of RMB 16,364 (approximately US$2,326) until August 31, 2022, at which time the rent will be renegotiated in accordance with market conditions.
SYZDH leases approximately 1,200 square meters of office space in Shenyang City until December 25, 2022. The lease provides for a monthly rental of RMB 60,000 (approximately US$8,571).
Management believes that its existing office facilities will be sufficient for operations for the next year.
Employees
As of June 30, 2022, the Company employs a total of 51 full-time employees, of which 33 persons were employed by ZDSE, 8 persons were employed by HHMT and 10 persons were employed by HEMC. As of December 30, 2021, we employed a total of 48 full-time employees, of which 32 persons were employed by ZDSE, 8 persons were employed by HHMT and 8 persons were employed by HEMC. As of December 30, 2020, we employed a total of 62 full-time employees, of which 46 persons were employed by ZDSE, 8 persons were employed by HHMT and 8 persons were employed by HEMC. As of December 30, 2019, we employed a total of 13 full-time employees, , of which 8 persons were employed by ZDSE and 5 persons were employed by HEMC..All employment contracts are in accordance with the laws of the PRC. The Company believes its relationships with its employees are satisfactory.
As of the date of this prospectus, we employ a total of 62 full-time employees, including 52 who are employed by ZDSE. All employment contracts are in accordance with the laws of the PRC. The Company believes its relationships with its employees are satisfactory. Prior to the Share Exchange, the Company did not have any employees.
Intellectual Property
Trademarks.
ZDSE has two trademarks. It filed a trademark application on May 16, 2016 for its “Love the public, love the sailing” logo (registration number 19968013) and was granted exclusive protection until July 6, 2027.
ZDSE also filed a trademark application on May 16, 2016 for its “Zhongdehui” logo (registration number 1996771) and was granted exclusive protection for that logo until July 6, 2027.
China’s Executive Coaching Industry
China’s economy has grown so fast that demand for business leaders now far exceeds supply, and shortages are expected to continue for the rest of the decade. Despite China’s massive population and expanding higher education, Chinese and foreign companies often struggle to recruit enough middle and senior managers to provide the leadership they need to succeed in China’s fast-growing, highly competitive business environment. The leadership gap is compounded by the fact that many experienced Chinese managers who might otherwise fill leadership positions in fast-growing sectors gained much of their experience in traditional industries and in a system where management was based on government regulation that suppressed managerial initiative.
However, today’s China is characterized by progress, forward-thinking and hunger to succeed and improve. In reporting on the 4th China Leadership and Executive Coaching Conference held in Shanghai in 2016, Luis Velasquez noted that talks by industry leaders highlighted national pride and a need to continue improving and making a mark on the world. There is a need to identify and help executives develop the competencies, skills and traits needed to meet the demands of the new China.
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Whereas twenty years ago, the idea of executive coaches was likely to elicit uncomprehending looks or questions about credibility and economic benefits, today, their value in helping nurture leaders has been completely reappraised. A growing number of companies are seeking their help to prepare senior and mid-level managers for more senior roles or to more effectively operate in their current roles.
As in other parts of the world, coaching in China is used to help executives identify and reach more of their potential. Executive coaching in China tends to be currently focused on development needs associated with leadership, often “executive presence” and other forms of communication. Dealing with cultural differences as a result of China’s decision to open itself increasingly to Western economic and cultural forces can be a challenge for both local Chinese and for China-based executives of U.S. multinational corporations. For example, executives in multinational corporations who have been in China awhile, or Chinese executives in Western corporations who have returned to China, often lament that Western headquarters do not understand what it takes to be successful in “our part of the world.” Back at headquarters, seniors and peers can’t understand why their high-potential colleague in China can’t understand (or worse, won’t listen to) their views.
In this situation, coaching has been used to support improvements in the leader’s executive presence. Coaching support has led, for example, to action on “active listening” goals. It has also enabled the executive to present his China market experience in the form of a conversation with (rather than a lecture to) his colleagues at headquarters.
Challenges
Chinese executives may not be as comfortable with coaching as their U.S. or Europe-based colleagues. They may perceive it less as a development vehicle than as a means of remedying their “faults.” Worse, it may be seen as a prelude to dismissal.
In addition, given the value Confucianism places on hierarchy, Chinese executives may find it difficult to “slot” the coach psychologically. For example, as a partner in the executive’s development, the coach is clearly not a subordinate. If the coach is seen as a peer, however, he or she may be perceived as insufficiently capable of providing the support the executive feels is needed. If the coach is seen as a superior, then the executive may expect to be taught, rather than coached.
Market
According to the (ICF) 2020 Global Coaching Study, globally, there were roughly 71,000 coach practitioners in 2019 (including both business and non-business coaches), an increase of 33% over the 2015 estimate. Of those, approximately 4,600 coach practitioners were in Asia (compared to 3,700 in 2015). The estimated global total revenue from coaching in 2019 was US$2.849 billion, representing a 21% increase over the 2015 estimate. As Chinese companies mature as global influencers and seek to internationalize further, the need for executive coaching and strong leadership will be critical. And along with this, management can only predict a huge market opportunity for executive coaches.
REGULATIONS IN CHINA APPLICABLE TO OUR BUSINESS
The Employment Promotion Law of the PRC
The Employment Promotion Law of the PRC was adopted by the National People’s Congress on August 30, 2007 and amended on May 24, 2015. The Law states that the PRC government encourages and supports various types of vocational colleges, vocational skills training institutions and employers to carry out pre-employment training, on-the-job training, reemployment training and entrepreneurship training according to law and encourages laborers to participate in various forms of training. The PRC government and relevant departments encourage and guide enterprises to strengthen vocational education and training based on market demand and industrial development direction.
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Several Opinions on Further Promoting the Development of Small and Medium-sized Enterprises
On September 19, 2009, the State Council issued the Several Opinions on Further Promoting the Development of Small and Medium-sized enterprises (“SME”), which states that the state guides and supports SMEs in strengthening management, supports the development of management consulting agencies for SMEs, conducts management consulting activities, guides SMEs to strengthen basic management, marketing and risk management, improve governance structure, promote management innovation and improve business management, vigorously carry out training for all types of SMEs and implement SMEs Galaxy Training Project, increase financial support, give full play to the role of industry associations (commercial associations) and SME training institutions, extensively adopt network technologies and other means to carry out policies and regulations, corporate management, marketing, professional skills, customer service and other kinds of training. It attaches great importance to the training of business managers and selects one million growing SMEs within three years to provide comprehensive training for their managers.
Promotion Law on Small and Medium-sized Enterprises of the PRC
On June 29, 2002, the National People’s Congress passed the Promotion Law on Small and Medium-sized Enterprises of the PRC, which was revised on September 1, 2017 and implemented on January 1, 2018. The Law states that the state establishes a sound socialized SME public service system to provide services to SMEs. The state supports relevant agencies, colleges and universities in carrying out personnel training for the management of SMEs and production technologies, and improving the marketing, management and technology level of the company. The state supports colleges and universities, vocational education institutions and various vocational skills training institutions to cooperate with SMEs to build a practical practice base to support two-way exchanges between teachers of vocational education institutions and SMEs, and to innovate the talent training model for SMEs.
Regulations Related to Foreign Invested Enterprises
According to the Special Administrative Measures (Negative List) for the Access of Foreign Investment (2019) (the “Negative List”) as promulgated and effective in July 2019, the original Special Administrative Measures (Negative List) for the Access of Foreign Investment (2018) was repealed. Overseas investors are not allowed to invest in any foreign investment prohibited field on the Negative List and shall have an access permit for investing in a non-prohibited investment field on the Negative List. Fields not included in the Negative List for the market entry of foreign investment shall be managed according to the principle of equal treatment of domestic and foreign investment.
The business scope of ZDSE is management coaching and related business and advertisement. According to the Negative List, the business scope of ZDSE does not fall in any field on the Negative List and therefore is not subject to any special management measures for the access of foreign investment.
The Foreign Investment Law of the People’s Republic of China (the “Foreign Investment Law”), which was promulgated in March 2019 and became effective on January 1, 2020, replaced the three legacy laws on foreign invested enterprises including the Wholly Foreign-owned Enterprises Law of the People’s Republic of China (the “Wholly Foreign-owned Enterprises Law”) which was previously applicable to ZDSE. The organizational form, organization structure and activities of a foreign-invested enterprise are now governed by the provisions of the Company Law of the People’s Republic of China, the Partnership Enterprise Law of the People’s Republic of China and other relevant laws. However, the Foreign Investment Law sets up a transitional period of 5 years after the implementation of the Foreign Investment Law, during which foreign-invested enterprises established according to the Wholly Foreign-owned Enterprise Law before the implementation of the Foreign Investment Law may maintain their original organization forms, etc. Specific implementing measures are to be prescribed by State Council.
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Regulations on Trademark Protection
Intellectual property rights, also known as “knowledge ownership rights,” refer to “property rights enjoyed by right holders for the intellectual work created by their intellectual work,” and are generally only valid for a limited time. Various intellectual creations such as inventions, designs, literary and artistic works, as well as signs, names and images used in commerce, can all be considered intellectual property owned by a person or organization. Since the 1980s, while continuously improving the construction of the domestic legal system, China has successively joined some major international conventions, treaties and agreements for the protection of intellectual property rights. In particular, on December 11, 2001, China became a member of the World Trade Organization’s Agreement on Trade-related Intellectual Property Rights.
The Trademark Law of the PRC was passed by the National People’s Congress on August 23, 1982 and last amended in April, 2019, effective in November 2019. The Law states that an applicant for trademark registration should fill in the product category and product name of the used trademark in accordance with the stipulated commodity classification form and file an application for registration. Trademark registration applicants can apply for registration of the same trademark for multiple categories of goods through one application. A registered trademark is valid for a period of ten years from the date of approval of the registration. If the registered trademark has expired and it needs to continue to be used, the trademark registrant must go through the renewal formalities within 12 months before the expiration of the time limit; if it cannot be handled during this period, it may grant a grace period of six months. Each renewal registration is valid for a period of ten years, counting from the date following the expiration of the previous validity period of the mark. If registrants fail to complete the renewal formalities at the expiration of the time limit, their registered trademarks shall be cancelled. In addition, if the registered trademark is a well-known trademark, it shall be managed in accordance with the Regulations on the Recognition and Protection of Well-known Trademarks issued by the State Administration of Industry and Commerce on July 3, 2014. The regulation states that well-known trademarks are trademarks that are well-known to the relevant public in China. The relevant public includes consumers who are related to the use of a certain type of goods or services marked by the trademark, other operators who produce the aforementioned goods or provide services, and the sellers and related personnel involved in the distribution channels. The recognition of well-known trademarks follows the principle of case identification and passive protection. ZDSE has two trademarks.
Foreign Currency Exchange
The Regulations on Foreign Exchange Management of the PRC was promulgated by the State Council of the PRC on January 29, 1996 and revised on January 14, 1997 and August 1, 2008, respectively. The regulations stipulate that foreign exchange income from current accounts of domestic institutions shall be sold to the designated foreign exchange bank in accordance with the provisions of the State Council concerning the management of foreign exchange, sales of foreign exchange and payment of foreign exchange, or be approved to open foreign exchange accounts in designated foreign exchange banks. The remittances used by domestic institutions for the current account shall be paid in accordance with the provisions of the State Council concerning the management of foreign exchange, sales of foreign exchange, and payment of foreign exchange, with valid certificates and commercial documents, to foreign exchange designated banks. Foreign exchange collections and import payments made by domestic institutions shall be subject to verification procedures in accordance with the regulations of the State on the management of the cancellation of foreign exchange receipts for export and the verification of the import payment and foreign exchange cancellation. Foreign exchange earnings from capital accounts of domestic institutions shall be subject to the opening of foreign exchange accounts in designated foreign exchange banks in accordance with the relevant regulations of the State and shall be approved by the foreign exchange administrative authority if they are sold to designated foreign exchange banks.
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On October 21, 2005, the State Administration of Foreign Exchange (“SAFE”) issued a Circular on the Relevant Issues Concerning Domestic Investors Financing through Overseas Special Purpose Vehicles and Foreign Exchange Management of Return Investment, namely Document No. 75, which came into effect on November 1, 2005. The term “special purpose company” as mentioned in the circular refers to an overseas company directly established or indirectly controlled for the purpose of overseas equity financing (including convertible bond financing) by a domestic resident legal person or a domestic resident natural person with the assets or equity of a domestic company held by it. The “return investment” in the circular refers to the direct investment activities carried out by domestic residents through the special purpose company, including but not limited to the following methods: purchasing or replacing the Chinese company’s equity in a domestic company, setting up a foreign-invested enterprise in the country and purchasing or negotiating the control of domestic assets through the company, negotiating the purchase of domestic assets, establishing a foreign-invested enterprise with the investment in the asset and increasing the capital of the domestic enterprise. The “domestic resident legal person” in the circular refers to a legal person and other economic organization legally established in China; “domestic resident natural person” refers to a natural person holding a legal ID card such as an ID card or passport of the PRC, or natural persons habitually residing in China because of economic interests although they do not have legal status in China. The term “control” in this circular refers to the acquisition, trust, holding, voting right, repurchase, convertible bonds, etc. of domestic residents to acquire the operating right, income right or decision-making right of a special purpose company or a domestic company. Before a domestic resident establishes or controls an overseas special purpose company, he must, with relevant materials, apply to the local foreign exchange branch and foreign exchange administration department (hereinafter referred to as the SAFE) to apply for foreign exchange registration procedures for overseas investment. Domestic residents who inject the assets or equity of domestic enterprises owned by them into special purpose companies or conduct overseas equity financing after injecting assets or equity into special purpose companies, must go through the formalities for the change in the foreign exchange registration of overseas investment in relation to their equity in the special purpose company and their changes, and they should provide relevant materials when handling. After injecting a special purpose company or investing in foreign equity financing after injecting assets or equity into a special purpose company, the company shall handle the foreign exchange registration change procedures for overseas investment in relation to the equity of the special purpose company and its changes and shall provide relevant material. After completing procedures for the foreign exchange registration and change of overseas investment in accordance with regulations, the domestic residents may pay special purpose companies for profits, dividends, liquidation, equity conversion, capital reduction, etc. If a special purpose company has any significant capital changes such as capital increase or reduction, equity transfer or replacement, merger or division, long-term equity or debt investment, external guarantee, etc. and does not involve return investment, the domestic residents must apply to SAFE for handling the change of foreign exchange registration of overseas investment or filing procedures within 30 days from the occurrence of major events. If a domestic resident set up or controlled a special purpose company abroad before the implementation of this notice and completed the return investment but failed to register the foreign investment registration of the foreign investment according to the provisions, he was required to go to the local SAFE to renew the foreign investment registration of the foreign investor before March 31, 2006 according to the provisions of this notice. After completing the renewing registration of foreign exchange registration of overseas investment, SAFE may handle foreign exchange registration procedures for foreign investment and foreign debt for the relevant domestic enterprise.
On August 29, 2008, SAFE issued a Circular on the Improvement of the Business Operations Related to Foreign Exchange Capital Payment and Foreign Exchange Capital Management of Foreign-invested Enterprises, that is, Circular No. 142. The circular indicates that the RMB funds received from the foreign exchange enterprise’s capital gains shall be used within the business scope approved by the government approval department. Unless otherwise specified, the RMB funds obtained through settlement shall not be used for domestic equity investment. Excluding commercial real estate investment enterprises, foreign-funded enterprises may not purchase domestic real estate that is not for their own use in the form of RMB funds obtained through capital settlement. The use of RMB funds from foreign exchange-funded enterprises for capital investment in securities shall be implemented in accordance with relevant state regulations.
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On November 9, 2011, SAFE issued a circular on further clarifying and standardizing issues concerning the management of foreign exchange operations for certain capital accounts, namely Circular 45, which clarified the scope of application of Circular 142. The circular pointed out that foreign-invested enterprises must not use the RMB funds derived from the foreign exchange capital settlement for domestic equity investment. Foreign-invested enterprises with equity investment approved by the relevant competent authorities must use their foreign exchange capital and domestic Chinese-funded institutions must use the foreign exchange funds in the asset liquidation account for domestic equity investments, with reference to the principle of foreign exchange capital contribution management of foreign-invested companies. Foreign-funded enterprises must not issue entrusted loans, repay inter-enterprise loans (including third-party advances) or repay bank loans that are re-lending to third parties in the form of RMB funds derived from foreign exchange capital settlement. Foreign-funded enterprises may not, in principle, deliver various types of deposits in the form of RMB funds derived from foreign exchange capitalization. Funds in the dedicated deposit account may not be settled.
On July 4, 2014, SAFE issued a circular on the issues relating to the pilot reform of foreign exchange capital management of foreign-invested enterprises in certain regions (i.e., Circular 36). The circular pointed out that since August 4, 2014, pilot projects for the reform of the management of foreign exchange capital in foreign exchange enterprises will be carried out in some regions. The foreign exchange capital recognized in the capital contribution account of a foreign-invested enterprise through the foreign exchange administration where it is located can be processed at the bank according to the actual business needs of the enterprise. The capital of a foreign-invested enterprise and the RMB funds derived from its settlement of foreign exchange shall not be used for the following purposes:
(i) it shall not be used directly or indirectly for expenditures outside the scope of business operations or prohibited by national laws and regulations;
(ii) unless otherwise provided by laws and regulations, no direct or indirect investment in securities may be used;
(iii) may not directly or indirectly be used to issue RMB entrusted loans (except for business scope permits), repayment of inter-enterprise loans (including third-party advances), and repayment of bank-denominated loans that have been transferred to third parties; and
(iv) except for commercial investment in real estate companies, they may not be used to pay for the purchase of non-self-use real estate.
Also, on July 4, 2014, SAFE issued a circular on the related issues concerning the Domestic Residents’ Foreign Investment through Special Purpose Companies and Foreign Exchange Management for Return Investments. This is known as Document No. 37. Compared with Circular 75, Circular 37 further simplified and facilitated the cross-border capital transactions of domestic residents involved in investment and financing activities through special purpose companies. The circular stipulates that SAFE shall exercise registration management for the establishment of special purpose companies for domestic residents. Before a domestic resident can use the legal assets or rights at home and abroad to invest in a special purpose company, he shall apply to SAFE for the foreign exchange registration formalities for overseas investment. If the domestic residents’ profits and bonuses obtained from special purpose companies are transferred back to China, they shall be handled in accordance with the current regulations on foreign exchange management; if the foreign exchange income from capital changes is transferred back to China, they shall be handled in accordance with the foreign exchange management provisions for capital accounts.
On March 30, 2015, SAFE issued a notice on reforming the foreign exchange capital management of foreign-invested enterprises, namely, Circular No. 19, which took effect on June 1, 2015. The circular indicates that SAFE has decided to implement the reform of foreign exchange capital management of foreign-invested enterprises on a nation-wide basis after summarizing the pilot experience in previous regions. At the same time, Circular 142 and Circular 36 were repealed.
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Regulations on Dividend Distribution
The principal regulations governing dividend distributions by wholly foreign owned enterprises include the Company Law, as amended, the Foreign Investment Law and Regulation on the Implementation of the Foreign Investment Law as promulgated and effective in January 2020. Under these laws and regulations, wholly foreign owned enterprises in the PRC may pay dividends only out of their retained earnings, if any, determined in accordance with the PRC accounting standards and regulations. Additionally, a wholly foreign owned enterprise is required, as other enterprises subject to PRC laws, to set aside at least 10% of its after tax profits each year, if any, to fund statutory reserve funds of the enterprise until the cumulative amount of such funds reaches 50% of its registered capital. These reserves are not distributable as cash dividends. Under the relevant PRC law, no net assets other than the accumulated after-tax profits can be distributed in the form of dividends.
Regulations on Labor
According to the Labor Law of the PRC (promulgated in 1994, last amended in 2018), Labor Contract Law of the PRC (promulgated in 2007, amended in 2012) and Implementation Regulations of the Labor Contract Law of the PRC (promulgated in 2008), it is stipulated that employers and laborers should establish labor contracts when they establish labor relations. The labor contract concluded according to law is binding, and employers and laborers shall perform the obligations stipulated in the labor contract. Where a labor relationship has been established and a written labor contract has not been concluded at the same time, a written labor contract shall be concluded within one month from the date of employment. Where an employer and a laborer conclude a labor contract prior to employment, the labor relationship shall be established from the date of employment. The state implements a minimum wage security system. The specific standards for minimum wages are stipulated by the people’s governments of provinces, autonomous regions and municipalities directly under the Central Government and reported to the State Council for the record. The employer’s payment of laborers’ wages must not be less than the local minimum wage standard. The employer must provide laborers with labor safety and hygiene conditions that comply with the state regulations and necessary labor protection supplies. Workers engaged in occupational hazard operations should carry out regular health checks.
The provisions concerning the employment of foreigners in China are mainly based on the Regulations on the Administration of Employment of Foreigners in China jointly issued by the Ministry of Labor, the Ministry of Public Security, the Ministry of Foreign Affairs and the Ministry of Foreign Trade and Economic Cooperation on January 22, 1996, as amended on November 12, 2010 and March 13, 2017. The regulation states that employers employing foreigners must apply for employment permits for the foreigner. Foreigners can only be hired after obtaining permission and obtaining the Employment License for Foreigners of the PRC (hereinafter referred to as “permit”). Foreigners employed in China should enter the country on a Z-visa (if they have a mutual visa exemption agreement, they should be dealt with according to the agreement). After entering China and obtain the Foreigner’s Employment Permit (hereinafter referred to as “employment permit”), they will be able to obtain employment in China. Foreigners who have not obtained a residence permit (namely, those with F, L, C and G visas), foreigners studying in China or performing internships and dependents of foreigners holding a Z visa may not be employed in China. In exceptional circumstances, the employer may apply for a permit in accordance with the approval procedures stipulated in these Regulations. Foreigners employed with a permit to the public security agency change their status and apply for an employment permit or residence permit. Employing units and foreigners hired shall conclude labor contracts according to law. The duration of a labor contract must not exceed five years. When the employment contract signed between the foreigner and the employing unit expires, the employment permit will be invalid.
The provisions concerning the employment of foreigners as teachers mainly refer to the circular concerning the Handling of Work Permits for Foreign Experts Coming to China issued by the State Administration of Foreign Experts Affairs on September 30, 2004. The circular states that foreign experts hired to work in China should obtain the Work Permit for Foreign Experts to Come to China. Foreign experts applying for Work Permits for Foreign Experts to Work in China shall abide by Chinese laws and regulations, be in good health, have no criminal record and meet one of the following conditions:
(i) to implement intergovernmental agreements and agreements between international organizations, and foreign trade contracts, foreign professional skills or management personnel working for employment in China;
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(ii) foreign professionals who are engaged in education, scientific research, journalism, publishing, culture, arts, health, sports, etc. in China;
(iii) appointed as a deputy general manager or above in an enterprise in China, or a foreign professional or technical person enjoying equal treatment;
(iv) foreign experts or human agency agencies accredited by the State Administration of Foreign Experts Affairs Representatives of nationalities; and
(v) applicants for work in the fields of economy, technology, engineering, trade, finance, accounting, taxation, tourism, etc., with special expertise, foreign professional skills or management personnel in short supply in China.
Foreign experts in paragraphs (ii) and (iii) shall have a bachelor’s degree or above and more than 5 years of relevant work experience (except that language teachers must have a bachelor’s degree or above and more than 2 years of relevant work experience). All units intending to hire foreign experts shall be entitled to Accreditation of Foreign Experts Units and obtain the Certificate of Employment of Foreign Expert Units. This certificate is the basic proof of foreign nationals applying for work permits, invitation letters, foreign expert certificates and residence procedures in China. Newly-run schools and other education and training institutions should run for more than one year, only after the basic stability of teachers, students, and teaching institutions, they can apply for qualification approval procedures. However, the formal establishment of Chinese-foreign cooperatively-run schools and schools that specially recruit children from foreign nationals are not subject to this restriction. The Provincial Foreign Experts Bureaus, State Council related ministries and commissions, and the directly-affiliated agencies’ foreign affairs divisions (bureaus) shall be responsible for the annual inspection work of the local or department according to the annual inspection notice issued by the State Administration of Foreign Experts Affairs and submit the regional annual inspection report to the State Administration of Foreign Experts Bureau by the end of December. The National Bureau of Foreign Experts conducts annual inspections of all eligible units from January 1 to January 31 every year. All overseas organizations that intend to send cultural and educational experts to China must obtain the Authorization of the Qualifications of Overseas Organizations that Introduce Foreign Cultural and Educational Experts to Work in China and obtain the Authority Certification for Overseas Organizations that Introduce Foreign Cultural and Educational Experts to Work in China. This certificate is the basic proof of the overseas organization’s intermediary business of cultural and educational experts in China. The State Bureau of Foreign Experts Affairs and the Bureau of Foreign Experts at the provincial level conduct annual inspections of overseas organizations that have obtained the qualifications for introducing foreign cultural and educational experts to China from January 1 to March 31 every year, and organize dispatch teams and personnel to provide training and internships. Training, study and other forms of training for overseas training institutions must all obtain the Organizational Dispatch Group and Personnel Qualifications for Overseas Training Institutions and obtain the Certificate of Organization Qualification for Organizing Delegation Groups and People to Overseas Training. Organizations that organize their own personnel to go abroad for training only shall be excluded.
According to the decision regarding the cancellation of 13 administrative licenses of the State Council issued by the State Council on February 13, 2016, the accreditation of foreign experts by the State Foreign Experts Bureau was cancelled.
On March 28, 2017, the State Administration of Foreign Experts Affairs, the Ministry of Human Resources and Social Security, the Ministry of Foreign Affairs and the Ministry of Public Security jointly issued a notice on the Full Implementation of the Work Permit System for Foreigners to Come to China. The circular states that foreigners allowed to work in China will receive Work Permits for Foreigners to Come to China to replace Foreigner Employment Permits and Foreign Experts to Work Permits in China since April 1, 2017.
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Tax regulations
PRC corporate income tax
On March 6, 2007, the National People’s Congress of the PRC issued the Corporate Income Tax Law of the PRC, which was implemented on January 1, 2008 and last amended in December 2018. The tax law stipulates that foreign-invested enterprises and domestic enterprises have an income tax rate of 25%. Small and low profit enterprises that meet certain conditions will be subject to a 20% income tax rate. Enterprises with high priority which need to be supported by the state are taxed at a reduced rate of 15%. On December 6, 2007, the State Council issued the Regulations on the Implementation of the Enterprise Income Tax Law of the PRC, which took effect on January 1, 2008.
On April 22, 2009, the State Administration of Taxation issued a notice on Relevant Issues of Overseas Registered Chinese-Funded Controlled Enterprises Recognized as Resident Enterprises on the Basis of Actual Management Institutional Standards, which became effective on January 1, 2008. The circular states that overseas Chinese-invested enterprises that meet the following conditions shall determine that they are resident companies of the actual administrative agency in China (hereinafter referred to as non-domestically registered resident enterprises), implement corresponding tax administration and collect corporate income tax on their income from inside and outside China:
| ● | the places where senior management personnel responsible for the implementation of daily production and operation management operations and their senior management departments perform their duties are mainly located in China; | |
| ● | the company’s financial decisions (such as borrowings, lending, financing, financial risk management, etc.) and personnel decisions (such as appointments, dismissals, remunerations, etc.) are determined by institutions or personnel located in China or need to be approved by an organization or person located in China; | |
| ● | the company’s main property, accounting book, company seal, board of directors and minutes of shareholders’ meetings, etc. are located or stored in China; and | |
| ● | 50% or more of the voting directors or senior executives of the corporation often reside in China. |
On July 27, 2011, the State Administration of Taxation issued an announcement on the issuance of the Administrative Measures on the Income Tax of Overseas-registered Chinese-controlled Holding Enterprises (Trial), which took effect on September 1, 2011. The measure points out that non-domestic-registered resident enterprises shall, in accordance with relevant Chinese laws and regulations and regulations of the competent departments of finance and taxation under the State Council, formulate financial and accounting statements, and shall, within 15 days from the date of receipt of tax registration certificates, submit the enterprise’s financial and accounting systems or financial accounting, the handling methods and related information to the competent tax authorities for the record. Non-domiciled registered resident companies that obtain dividends, bonuses and other equity investment income derived from China, income from interest, rent, royalties, transfer of property income and other income, shall issue a copy of the company’s Certificate of Resident Identity of Overseas-registered Chinese-controlled Enterprises issued by the company. According to Article 26 of the Corporate Income Tax Law of the PRC and Articles 17, 18 and 91 of the Implementation Regulations on Enterprise Income Tax Law of the PRC, the following income of enterprises is tax exempt income:
| ● | interest income from government bonds; | |
| ● | dividends, bonuses and other equity investment gains among eligible resident companies; | |
| ● | non-resident enterprises that have established establishments in China obtain dividends, dividends, and other equity investment income from resident enterprises that are actually in contact with the institution or site; and | |
| ● | income of qualified non-profit organizations. |
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The applicable tax rate for income obtained by non-resident enterprises is 20%. Corporate income tax on income earned by non-resident enterprises is levied at the rate of 10%. That is to say, general overseas companies transferring 10% of the corporate income tax shall be subject to the transfer of equity in Chinese enterprises or the dividend distribution of Chinese enterprises. However, if the non-resident enterprise is a resident enterprise belonging to a country or region that has signed a tax treaty or arrangement with China, it may enjoy preferential tax treaty provisions.
Small and micro enterprise income tax preferential policy
According to notice of the Ministry of Finance and the State Administration of Taxation No. 13 of 2019 (Abbreviated as CS (2019) No.13) on Implementing the Inclusive Tax Deduction Policy for Small and Micro Enterprises issued by the Ministry of Finance and State Administration of Taxation, the annual taxable income of small and micro-profit enterprises shall not exceed RMB 1 million, the taxable income shall be included in the taxable income of 25% and the enterprise income tax shall be paid at the rate of 20%. For the portion exceeding RMB 1 million but not exceeding RMB 3 million, the amount of taxable income shall be included in the reduction of 50%, and the enterprise income tax shall be paid at the rate of 20%. These small-scale and low-profit enterprises refer to enterprises engaged in the national non-restricted and prohibited industries, and at the same time complying with the three conditions of annual taxable income of not more than RMB 3 million, the number of employees not exceeding 300 and the total assets not exceeding RMB 50 million. This notice is effective from January 1, 2019 to December 31, 2021.
According to notice of the Ministry of Finance and the State Administration of Taxation No. 12 of 2021 for small and low profit enterprises with annual taxable income not exceeding RMB 1 million, the enterprise income tax shall be halved on the basis of the preferential policies stipulated in Article 2 of the notice of CS (2019) No.13; that is, when the taxable income does not exceed 1 million yuan, the income tax shall be levied at the tax rate of 2.5%. The implementation period of this announcement is from January 1, 2021 to December 31, 2022.
PRC withholding tax
Foreign enterprises have no institutions or places in China, but have obtained profits, interest, rent, royalties and other income from China, or have established institutions or places, but the above-mentioned income has no actual connection with institutions and places. The amount of income is subject to withholding income tax. In accordance with the accrued method, the payer (payer) pays the tax on the proceeds (payments) to the beneficiary (the payee). The withholding income tax belongs to personal income tax or corporate income tax, but it is only a source of income tax control. It is a taxation of a personal income tax or corporate income tax.
In 2008, China began to impose a dividend withholding income tax on foreign-invested enterprises at a tax rate of 20%, generally levied at 10%. Hong Kong, Macao, Singapore, Seychelles and others have signed tax treaties with China or have special taxes. The preferential national tax rate for the countries in the arrangement is as low as 5%. Therefore, when a Hong Kong company affiliated to the group obtains the after-tax profits distributed by the mainland Chinese company it invests, the mainland Chinese company must withhold and pay 5% of the withholding income tax.
In addition, Notice No.88 (2017) on “the Issues Concerning the Direct Investment of Foreign Investors in Distributing the Withholding Income Tax Policy” stipulates that foreign investors who meet the conditions of direct investment shall not be subject to withholding tax.
PRC Business Tax and Value-Added Tax (VAT)
On March 23, 2016, the Ministry of Finance and the State Administration of Taxation issued a circular on the Full Implementation of the Business Tax Levy of VAT Pilots. The circular indicates that since May 1, 2016, pilots for the change of business tax to VAT have been fully promoted throughout the country, and all business tax taxpayers, including ZDSE, were included in the scope of the pilot and were changed from paying business tax to paying VAT. According to notice No.36 (2016) issued by the Ministry of Finance and the State Administration of Taxation, the Comprehensive Project replaces Business Tax with Value-added Tax.
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According to Article 1 of notice CS (2019) No. 13, VAT small-scale taxpayers with monthly sales not exceeding RMB 100,000 are exempt from VAT. The implementation date of this paper is from January 1, 2019 to December 31, 2021. According to the “Notice of the State Administration of Taxation on Issues Concerning the Exemption of Value-Added Tax for Small and Micro Enterprises” (State Administration of Taxation Announcement No. 52 of 2017, now abolished), from January 1, 2018 to December 31, 2020 sales of small-scale VAT taxpayers shall not exceed RMB 100,000 (tax payment of RMB 300,000 per quarter) and enjoy the preferential policy of exemption from VAT.
Announcement of the Ministry of Finance and the State Administration of Taxation No. 11 of 2021 repealed Article 1 of the notice of CS (2019) No. 13 and provides that, from April 1, 2021 to December 31, 2022, small-scale VAT taxpayers with monthly sales not exceeding RMB 150,000 are exempt from VAT.
To support novel coronavirus pneumonia prevention and control and to accelerate the resumption of work, the rate of small-scale VAT was reduced from 3% to 1% (Announcement on the value added tax policy of supporting individual industrial and commercial households to return to work—Announcement No.13, 2020 of the Ministry of Finance and the State Administration of Taxation). This preferential tax rate will be in effect until December 31, 2021 (Announcement No.7, 2021). Further, in accordance with The Announcement of Ministry of Finance and State Taxation Administration on Exemption of VAT for VAT Small-scale Taxpayer (No. 15, 2022), effective from April 1, 2022 to December 31 2022, VAT small-scale taxpayers, regardless of monthly sales, are exempt from VAT but are subject to a 3% tax rate for assessable income.
Currently, of all the Company’s Operating Subsidiaries , with the exception of SDYL, which is a general taxpayer and subject to a VAT rate of 6%, are small-scale taxpayers and subject to a VAT rate of 3% but are exempt from VAT payments.
MANAGEMENT
Directors and Executive Officers
The names, titles and ages of the members of the Company’s and ZDSE’s Boards of Directors and their executive officers as of the date of this prospectus are as set forth in the below tables. The Company’s directors and those of ZDSE are elected annually and serve until their successors take office or until their death, resignation or removal. The executive officers serve at the pleasure of the respective Boards of Directors.
Mr. Junze Zhang’s election as Chairman of the Board of Directors and his appointment to the positions of President, Chief Executive Officer, Chief Financial Officer and Secretary of the Company occurred pursuant to the terms of the Share Exchange Agreement.
Officers and Directors of the Company
| Name | Age | Position | ||
| Junze Zhang | 50 | President, Chief Executive Officer, Secretary and Chairman of the Board | ||
| Liqin Liu | 41 | Chief Financial Officer | ||
| Zhongpeng Chen | 51 | Director |
Mr. Junze Zhang has served as the Company’s President, Chief Executive Officer, Secretary and Chairman of the Board since July 2019. He also served as Chief Financial Officer until May 19, 2020. Since 2016, he has worked as a Chairman of HGSL, and since May 1, 2018 he has been employed as General Manager of HEMC. He led and formulated the long-term development strategy for the company, while orchestrating internal and external changes. He also organized the company’s overall strategy, explored executive coaching market opportunities and led the innovation during the development of the company. From 1998 to 2016, Mr. Zhang worked as a chairman in Puning Fageer Clothing Co., Limited where he was responsible for the overall operation of the factory. Mr. Zhang obtained a Bachelor’s degree in Economics & Management in 1996 from Sun Yat-sen University in Guangzhou.
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Since 2010, Mr. Zhang has been a member of the Shenzhen Chaoshang chamber of commerce. From 2014 to 2018, Mr. Zhang was the VP of Shenzhen Longgang District private enterprise chamber of commerce and the Vice-President of the Shenzhen Longgang District Financial chamber of commerce. From 2018 to the present, Mr. Zhang has been the honorary chairman of the Shenzhen Longgang District private enterprise chamber of commerce. Mr. Zhang has been a member of the Board of Directors of China Huiying United Supply Chain Group Co., Limited since January 2016 and a member of the Board of Directors of China Supply Chain Holdings Limited (FKA Yat Sing Holdings Limited), a Cayman Islands company that trades on the Hong Kong Stock Exchange, since December 2019.
Ms. Liqin Liu has served as the Company’s Chief Financial Officer since December 2021. Prior to joining the Company, Ms. Liu served as Chief Financial Officer for ZTE Group Finance Co., Limited from January 2018 to November 2021. From March 2014 to December 2017, she worked as Financial Director for Zhongxing Telecommunication Equipment Corporation and from October 2006 to March 2014, she served as Financial Director for the Shenzhen Branch of the Bank of Tokyo-Mitsubishi UFJ (China) Co., Ltd. Ms. Liu holds a Bachelor’s degree in Accounting from South China University of Technology and is a Certified Public Accountant.
Mr. Zhongpeng Chen became a director of the Company in November 2017. From 1996 to 2006, Mr. Chen worked as a general manager in Shenzhen Peng Fa Freight Department. As a general manager, he was responsible for the overall operation of the factory. Mr. Chen has worked as a chairman in Shenzhen Hua Peng Fa Logistics Limited since 2006, and in 2017 he was appointed Chief Executive Officer, President, Secretary, Treasurer and Chairman of the Board of Directors of that company. He leads the development of the company’s strategy, adjusting that strategy according to changes in the internal and external environment. Moreover, he oversees the implementation of the company’s overall strategy, explores market opportunities and leads innovation and change within the company. Mr. Chen obtained a Master’s degree in Business Administration in 2013 from the Graduate School of Tsinghua University in Shenzhen.
Officers, Directors and Key Employees of Zhongdehui (Shenzhen) Education Development Co., Limited
| Name | Age | Positions | ||
| Qing Zuo | 46 | General Manager | ||
| Shaogang Yin | 51 | Head of SYZDH and GZZDH, Senior Consultant |
Mr. Qing Zuo has been employed by ZDSE since 2016. Mr Zuo obtained a graduate degree in Coaching Theory at Fudan University in 2016 and the Diploma of Foundation in Psychology from Hong Kong Shue Yan University in January 2019. He is the general manager of ZDSE and has 20 years of experience as a business manager. He is also a promoter of the company’s charitable activities. With his passion for business management, he hopes to improve his clients’ management skills, improve clients’ leadership skills and lead ZDSE in the corporate management industry. ZDSE will continue to carry out charitable activities and Mr. Zuo hopes to help more orphans and poor children including helping them get a better education opportunity.
Mr. Shaogang Yin has been employed by ZDSE since May 2019, originally as head of ZDSE’s Liaoning Branch and since February 1, 2021 as head of SYZDH and GZZDH. From 2001 until 2019, Mr. Yin was employed as general manager for Shenyang Shuangbai Enterprise Management Consulting Co. Ltd. where he was responsible for the full operation and management of the company. Mr. Yin has an undergraduate degree in business administration and the certificate of corporate coach, issued by the China Employment Training Technical Instruction Center. He was invited as the chief specialist by China National Training Network from April 22, 2018 to April 21, 2019.
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Officers, Directors and Key Employees of Shandong Yuli Big Data Technology Co., Limited
| Name | Age | Positions | ||
| Xingwen Yang | 45 | General Manager of SDYL |
Mr.Xingwen Yang has served as General Manager of Shandong Yuli Big Data Technology Co., Limited since December, 2021. From November 2016 to December 2021, he worked as General Manager for Shangdong Chongjie Human Resource Management Co.,Ltd.
Family Relationships
There are no family relationships among the directors or executive officers of either the Company or its subsidiaries.
Committees of the Board of Directors
The Company’s Board of Directors has not established any committees. The functions of the audit committee are currently performed by the Board of Directors, with assistance by expert independent accounting personnel. The Company is not currently subject to any law, rule or regulation requiring that it establish or maintain an audit committee. The Company believes that while its Board of Directors is capable of analyzing and evaluating financial statements and understanding internal controls and procedures for financial reporting, the Company would be well served to retain an independent director who would qualify as an “audit committee financial expert.” The Company’s Board of Directors intends at some point in the future to establish audit, nominating and compensation committees. The audit committee will be primarily responsible for reviewing the services performed by our independent auditors and evaluating our accounting policies and our system of internal controls. The nominating committee will be primarily responsible for nominating directors, setting policies and procedures for the nomination of directors and overseeing the creation and implementation of our corporate governance policies and procedures. The compensation committee will be primarily responsible for reviewing and approving salary and benefit policies (including stock options), including compensation of the Company’s executive officers.
States.
Compensation Of Executive Officers And Directors
The following table summarizes all compensation received by the Company’s directors and Chief Executive Officer, President, Secretary and Chief Financial Officer and by the directors, executive officers and key employees of ZDSE in the years ended December 31, 2019, 2020 and 2021.
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Summary Compensation Table
| Compensation Paid | ||||||||||||
| Name and Principal Position | Year | Salary(1) ($) | Bonus ($) | Other Compensation2) ($) | ||||||||
| Zihua Wu,(3) Former President, CEO, CFO, Secretary | 2019 | Nil | Nil | N/A | ||||||||
| and Director | 2020 | Nil | Nil | N/A | ||||||||
| 2019 | 14,253 | Nil | 772 | |||||||||
| Junze Zhang,(4) President, CEO, Secretary and Director; | 2020 | 14,227 | Nil | 1,817 | ||||||||
| 2021 | 19,535 | Nil | 3,358 | |||||||||
| 2019 | 2,807 | Nil | Nil | |||||||||
Shijie Yu,(5) Former COO | 2020 | 24,383 | Nil | 414 | ||||||||
| 2021 | 11,383 | Nil | 2,245 | |||||||||
| 2019 | 12,787 | Nil | Nil | |||||||||
Xiaoyan Xia,(6) Former CFO | 2020 | 19,918 | Nil | 2,922 | ||||||||
| 2021 | 23,366 | Nil | 6,109 | |||||||||
| 2019 | Nil | Nil | Nil | |||||||||
Liqin Liu, CFO(7) | 2020 | Nil | Nil | Nil | ||||||||
| 2021 | 863 | Nil | Nil | |||||||||
| (1) | Expressed in U.S. Dollars based on the applicable average exchange rate as reported by xrates.com |
| (2) | Consists of contribution to social insurance and housing funds |
| (3) | Zihua Wu resigned from the position of President, CEO, Secretary, CFO and director on July 3, 2019. |
| (4) | Junze Zhang has been employed as General Manager of HEMC from May 1, 2018 and also has served as President, CEO, Secretary and director of the Company since July 3, 2019. Amounts shown were paid by HEMC. |
| (5) | Shijie Yu was employed as CEO of HEMC as of November 22, 2019 and as COO of the Company as of May 19, 2020. Mr. Yu resigned from both positions as of June 1, 2021. Amounts shown were paid by HEMC. |
| (6) | Xiaoyan Xia was employed as CFO of HEMC since January 2, 2020 and as CFO of the Company since May 19, 2020. Ms. Xia resigned from both positions on December 22, 2021. Amounts paid to Ms. Xia in 2019 and 2020 were paid by HEMC. |
| (7) | Liqin Lui was employed as CFO of the Company on December 22, 2021. |
| (8) | Mengling Zhang resigned from the position of Senior Coach of the Company on July 31, 2021 |
| (9) | Kin Ling Martin Tsang was employed as the head of ZDSE’s Guangzhou Branch from February 1, 2019 to October 22, 2021, when the Guangzhou Branch was officially closed. |
| (10) | Shaogang Yin was employed by ZDSE as head of its Liaoning Branch from May 1, 2019 to February 1, 2021, when he was made head of SYZDH and GZZDH. |
The Company did not set aside or accrue any amounts to provide pension, retirement or similar benefits for directors and officers for the fiscal year ended December 31, 2020, other than contributions to its Provident Fund Plan as social insurances and Housing Provident Fund, which aggregated $11,415 for officers and directors.
Stock Option Grants and Exercises
The Company has not issued any options or stock appreciation rights to any officers, employees or directors. The Company’s directors and executive officers may receive share options at the discretion of its Board of Directors in the future.
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Compensation of Directors
The Company does not have any agreements for compensating its directors for their services in their capacity as directors.
Employment Contracts
The Company has formal employment agreements with its key employees and executive officers. The employment agreements are summarized below, and qualified by reference to the summaries of those employment agreements filed as Exhibits 10.7 through 10.10 to the Company’s Report on Form 6-K filed with the SEC on July 5, 2019, as Exhibits 10.11 through 10.13 to the Registration Statement on Form F-1 filed with the SEC on November 26, 2019 and as Exhibits 10.15 and 10.16 to the Company’s Annual Report on Form 20-F filed with the SEC on April 29, 2020.
Junze Zhang. Junze Zhang and the Company have entered into an Employment Agreement for an indefinite term commencing May 1, 2018. Under the Agreement, Mr. Zhang is paid a monthly salary of RMB 4,950, and additional monthly payments of RMB 5,050 for an aggregate monthly amount of RMB 10,000. Social insurance premiums and housing provident fund are paid by both the Company and Mr. Zhang. The Agreement may be terminated by mutual consent of the parties.
Liqin Liu. Liqin Liu’s Employment Agreement is for a fixed term that commenced December 22, 2021 and terminates on December 21, 2024. Under the Agreement, Ms. Liu is paid a monthly salary of RMB 14,000 and she is eligible for a performance bonus of RMB 6,000 and a perfect attendance award of RMB 100. Social insurance premiums and housing provident fund are paid by both the Company and Ms. Liu.
Qing Zuo. Qing Zuo’s Employment Agreement is for a term that commenced February 1, 2021 and terminates on January 31, 2026, unless renewed by mutual agreement or terminated by either party under certain specified conditions. Mr. Zuo’s compensation is set forth in the company payroll, but may not be less than minimum wage, and he is entitled to overtime compensation for hours worked in excess of 40 hours per week.
Limitation on Liability and Other Indemnification Matters
The Companies Law does not limit the extent to which a company’s memorandum and articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. The Company’s Memorandum and Articles permit indemnification of officers and directors for actions, proceedings, claims, losses, damages, costs, liabilities and expenses (“Indemnified Losses”) incurred in their capacities as such unless such Indemnified Losses arise from dishonesty of such directors or officers.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to the Company’s directors, officers or persons controlling us under the foregoing provisions, the Company has been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
TRANSACTIONS WITH RELATED PERSONS
The following discussion is a brief summary of certain material arrangements, agreements and transactions the Company has had with related parties since January 1, 2019, other than the compensation arrangements described in “Compensation of Executive Officers and Directors.”
Pursuant to a Share Exchange Agreement dated July 2, 2019, the Company issued 300 million of its Ordinary Shares to the HGSL Shareholders, constituting 99.1% of our issued and outstanding Ordinary Shares after the Share Exchange. The Ordinary Shares were issued in exchange for 100% of the outstanding shares of common stock of HGSL. Prior to the Share Exchange, Mr. Junze Zhang, a director of the Company, was the record and beneficial owner of 10% of the outstanding Shares of HGSL and, accordingly, he received 30,000,000 Ordinary Shares of the Company pursuant to the Share Exchange.
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From time to time, the majority shareholder and general manager of the Company advanced funds to the Company for working capital purpose. The balances above represent cash advances from such related parties. The balances with related parties are unsecured, non-interest bearing and repayable on demand. During fiscal years ended December 31, 2021 and 2020, the Company had the following balances due to related parties:
| Relationship | Dec 31, 2021 | Dec 31, 2020 | ||||||||
| Junze Zhang | Shareholder and director of the Company | 667,787 | 388,839 | |||||||
| Qing Zuo | Chairman of the Board of ZDSE since December 20, 2018 | 6,750 | ||||||||
| Total | $ | 674,537 | $ | 388,839 | ||||||
During the fiscal years ended December 31, 2021 and 2020 and the six months ended June 30, 2022, the Company had the following transactions with related parties:
| For the six months ended June 30, | For the years ended December 31, | ||||||||||
| 2022 | 2021 | 2020 | |||||||||
| Repayment to related parties | |||||||||||
| Hengqing Investment Consultation(SZ) Partnership Business (LP) | - | - | |||||||||
| Henghui Investment Consultation(SZ) Partnership Business (LP) | - | - | |||||||||
| Qing Zuo | - | $ | 8,850 | - | |||||||
| Junze Zhang | - | - | $ | 172,306- | |||||||
| Mengling Zhang | - | - | - | ||||||||
| Zihua Wu | - | - | |||||||||
| - | $ | 8,850 | $ | 172,306 | |||||||
| Cash advance from related parties | |||||||||||
| Hengqing Investment Consultation (SZ) Partnership Business (LP) | - | $ | - | $ | - | ||||||
| Qing Zuo | - | $ | 15,499 | - | |||||||
| Junze Zhang | $ | 180,151 | $ | 276,375 | $ | 116,343 | |||||
| Xinwen Yang | $ | 4,968 | - | - | |||||||
| Zihua Wu | - | - | |||||||||
| $ | 185,119 | $ | 291,874 | $ | 116,343 | ||||||
During the year ended December 31, 2019, Mr. Zuo and his affiliates made advances to ZDSE aggregating $147,673 and were repaid $268,748 of the total amounts advanced. Mr. Zuo did not make any advances during the year ended December 31, 2020. During fiscal year ended December 31, 2021, Mr. Zuo advanced $15,499 to ZDSE. The amounts owed to Mr. Zuo and his affiliates as of December 31, 2017, 2018, 2019, 2020 , 2021 and as of June 30,2022 were as follows:
| December 31, 2017 | $ | 83,409 | ||
| December 31, 2018 | $ | 121,533 | ||
| December 31, 2019 | $ | 0 | ||
| December 31, 2020 | $ | 0 | ||
| December 31, 2021 | $ | 6,750 | ||
| June 30, 2022 | $ | 6,555 |
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Ms. Mengling Zhang, a former General Manager of ZDSE, made advances to ZDSE during the fiscal year ended December 31, 2017 in the amount of $213,867. Ms. Zhang made further advances to ZDSE during the fiscal years ended December 31, 2019 and 2020, 2021 and as of June 30,2022. The amounts owed to Ms. Zhang as of December 31, 2017, 2018, 2019, 2020 ,2021 and as of June 30, 2022 were as follows:
| December 31, 2017 | $ | 537,137 | ||
| December 31, 2018 | $ | 36,519 | ||
| December 31, 2019 | $ | 0 | ||
| December 31, 2020 | $ | 0 | ||
| December 31, 2021 | $ | 0 | ||
| June 30, 2022 | $ | 0 |
During the fiscal year ended December 31, 2018, Ms. Zhang advanced $56,612 to ZDSE, was repaid $400,222 and agreed to waive repayment and to make an additional capital contribution to ZDSE of $147,239. During the year ended December 31, 2019, Ms. Zhang advanced $13,840 to ZDSE and was repaid the amount owed to her of $50,221. During the year ended December 31, 2020, Ms. Zhang advanced $5,956 and was repaid that same amount. Ms. Zhang did not make any advances to the Company during the six months ended June 30, 2022.
As of December 31, 2018, Mr. Junze Zhang, HGSL’s President, was owed $182,093 for advances to that company. During the year ended December 31, 2019, he made advances to HGSL in the aggregate amount of $264,836 and during the year ended December 31, 2020, he advanced an additional $116,343 and was repaid an aggregate of $172,306. As of December 31, 2021, and after adjusting for differences in exchange rates, Mr. Zhang advanced an additional $95,608 to HGSL. As of December 31, 2021, and after adjusting for differences in exchange rates, Mr. Zhang was owed $667,787 by the Company. During the six months ended June 30, 2022, Mr. Zhang advanced an additional $180,151 to HGSL. As of June 30, 2022, and after adjusting for differences in exchange rates, Mr. Zhang was owed $840,246 by the Company. All of the above advances are interest-free, unsecured and have no fixed repayment term.
During the year ended December 31, 2019, Mr. Zihua Wu, a former director of the Company, made advances of $3,500 to the Company. The advances were interest-free, unsecured and had no fixed repayment term. The Company repaid the balance owed to Mr. Wu of $35,940 in September 2019.
Effective September 1, 2018, Weifang Dijinli Jinde Investment Development Co., Ltd., the owner of the property where ZDSE’s Shandong branch is located (the “Lessor”), leased the property to an entity with which Mr. Qing Zuo was affiliated. That entity subleased the property to ZDSE’s Shandong Branch from March 1, 2019 to August 31, 2019, for the same rental payment. As of June 17, 2019, Mr. Zuo is no longer an affiliate of that entity, and as of September 1, 2019, the lease runs directly from the Lessor to ZDSE’s Shandong Branch.
PRINCIPAL AND SELLING SHAREHOLDERS
The Company is not directly or indirectly owned or controlled by any foreign government or by another corporation, other than as indicated in the table below. The following table sets forth, as of June 30, 2022 and as of the date of this prospectus, beneficial ownership of the Company’s Ordinary Shares by all executive officers and directors, all officers and directors as a group and each person, to the best of management’s knowledge, known to own beneficially 5% or more of the Company’s Ordinary Shares outstanding as of such date. Except as otherwise indicated, all Ordinary Shares are owned directly and hold equal voting rights.
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| Name of Beneficial Owner | Ordinary Shares Beneficially Owned | Percent of Class(1) | ||||||
| Junze Zhang | 30,000,000 | 9.91 | % | |||||
| Zhongpeng Chen | 1,700,000 | 0.56 | % | |||||
| Liqin Liu- | -- | - | ||||||
| -Feier Co. Limited(2) | 153,000,000 | 50.54 | % | |||||
| Meisi Co. Limited(3) | 87,133,000 | 28.78 | % | |||||
| All executive officers and directors as a group (3 persons) | 31,700,000 | 10 | % | |||||
| (1) | Based on 302,734,900 Ordinary Shares outstanding | |
| (2) | Feier Co., Limited is a Seychelles company, which is wholly owned by Mr. Guiting Rao. All of the Shares beneficially owned by Feier Co. Limited were acquired on July 3, 2019 pursuant to the Share Exchange. Feier Co., Limited’s address is Oliaji Trade Centre, 1st Floor, Victoria, Mahe, Republic of Seychelles. | |
| (3) | Meisi Co., Limited is a Seychelles company, which is wholly owned by Mr. Yuze Zhong. All of the Shares beneficially owned by Meisi Co. Limited were acquired on July 3, 2019 pursuant to the Share Exchange. Meisi Co., Limited’s address is Oliaji Trade Centre, 1st Floor, Victoria, Mahe, Republic of Seychelles. |
There are no arrangements known to the Company that may at a subsequent date result in a change in control of the Company.
Selling Shareholders
The Company is registering for resale certain of the Ordinary Shares issued in the Redomicile Merger or the Share Exchange. The securities being offered hereby were issued in accordance with the exemption from the registration provisions of the Securities Act provided by Section 4(a)(2) of such Act for issuances not involving any public offering and Rule 506 of Regulation D and/or Regulation S promulgated thereunder. The Company is registering the Shares to permit the Selling Shareholders and their pledgees, donees, transferees and other successors-in-interest that receive their Shares from a Selling Shareholder as a gift, partnership distribution or other non-sale related transfer after the date of this prospectus to resell the Shares when and as they deem appropriate in the manner described in the “Plan of Distribution.” As of the date hereof, there are 302,734,900 Shares issued and outstanding.
The following table sets forth:
| ● | the names of the Selling Shareholders; | |
| ● | the number of the Company’s Ordinary Shares that the Selling Shareholders beneficially owned prior to the Offering for resale of the Shares under this prospectus; | |
| ● | the maximum number of the Company’s Ordinary Shares that may be offered for resale for the account of the Selling Shareholders under this prospectus; and | |
| ● | the number and percentage of the Company’s Ordinary Shares beneficially owned by the Selling Shareholders after the Offering of the Shares (assuming all of the offered Shares are sold by the Selling Shareholders), which percentage is based on 302,734,900 Ordinary Shares outstanding as of the date hereof. |
None of the Selling Shareholders is a broker dealer or an affiliate of a broker dealer. None of the Selling Shareholders has any agreement or understanding to distribute any of the Shares being registered.
Each Selling Shareholder may offer for sale all or part of the Shares from time to time. The table below assumes that the Selling Shareholders will sell all of the Shares offered for resale. A Selling Shareholder is under no obligation, however, to sell any Shares pursuant to this Prospectus.
Unless otherwise noted, the address for all Selling Shareholders is 13th Floor, Building B1, Wisdom Plaza, Qiaoxiang Road, Nanshan District, Shenzhen, China.
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| Name of Selling Shareholder | Ordinary Shares Beneficially Owned Prior to Offering | Percentage Ownership Prior to Offering(1) | Maximum Number of Ordinary Shares to be Sold | Number of Ordinary Shares Owned After Offering | Percentage Ownership After Offering(2)(3) | |||||||||||||||
| Feier Co. Limited(4) | 153,000,000 | 50.54 | % | 300,000 | 152,700,000 | 50.44 | % | |||||||||||||
| Meisi Co. Limited(5) | 87,133,000 | 28.78 | % | 300,000 | 86,833,000 | 28.68 | % | |||||||||||||
| Junze Zhang(6) | 30,000,000 | 9.91 | % | 300,000 | 29,700,000 | 9.81 | % | |||||||||||||
| Zhongpeng Chen(7) | 1,700,000 | 0.56 | % | 100,000 | 1,600,000 | 0.53 | % | |||||||||||||
| Meisheng Yang | 4,400,000 | 1.45 | % | 4,400,000 | 0 | 0 | % | |||||||||||||
| Run Cai | 4,000,000 | 1.32 | % | 4,000,000 | 0 | 0 | % | |||||||||||||
| Meichun Luo | 3,600,000 | 1.19 | % | 3,600,000 | 0 | 0 | % | |||||||||||||
| Xijuan Huang | 3,200,000 | 1.06 | % | 3,200,000 | 0 | 0 | ||||||||||||||
| Changshuang Huang | 2,877,000 | * | 2,877,000 | 0 | 0 | % | ||||||||||||||
| Chunqing Huang | 2,810,000 | * | 2,810,000 | 0 | 0 | % | ||||||||||||||
| YunshengYang | 2,731,500 | * | 2,731,500 | 0 | 0 | % | ||||||||||||||
| Chuli Hong | 2,571,000 | * | 2,571,000 | 0 | 0 | % | ||||||||||||||
| Woshen Hong | 2,090,000 | * | 2,090,000 | 0 | 0 | % | ||||||||||||||
| Qiongju Ou | 2,000,000 | * | 2,000,000 | 0 | 0 | % | ||||||||||||||
| Jinzhan Chen | 80,000 | * | 80,000 | 0 | 0 | % | ||||||||||||||
| Weihong Yang | 70,500 | * | 70,500 | 0 | 0 | % | ||||||||||||||
| Xunquan Yang | 69,400 | * | 69,400 | 0 | 0 | % | ||||||||||||||
| Weiqing Xu | 15,000 | * | 15,000 | 0 | 0 | % | ||||||||||||||
| Qixuan Zhang | 15,000 | * | 15,000 | 0 | 0 | % | ||||||||||||||
| Junsheng Zhang | 13,000 | * | 13,000 | 0 | 0 | % | ||||||||||||||
| Junsheng Zhong | 13,000 | * | 13,000 | 0 | 0 | % | ||||||||||||||
| Jiahao Zhang | 13,000 | * | 13,000 | 0 | 0 | % | ||||||||||||||
| Junqiang Zhong | 13,000 | * | 13,000 | 0 | 0 | % | ||||||||||||||
| Zhihao Zhang | 13,000 | * | 13,000 | 0 | 0 | % | ||||||||||||||
| Zhilong You | 13,000 | * | 13,000 | 0 | 0 | % | ||||||||||||||
| Changlin Huang | 13,000 | * | 13,000 | 0 | 0 | % | ||||||||||||||
| Meiyun Wang | 10,000 | * | 10,000 | 0 | 0 | % | ||||||||||||||
| Changli Huang | 10,000 | * | 10,000 | 0 | 0 | % | ||||||||||||||
| Yihao Chen | 10,000 | * | 10,000 | 0 | 0 | % | ||||||||||||||
| Chuhong Huang | 10,000 | * | 10,000 | 0 | 0 | % | ||||||||||||||
| Lizhen Huang | 10,000 | * | 10,000 | 0 | 0 | % | ||||||||||||||
| Peina Huang | 10,000 | * | 10,000 | 0 | 0 | % | ||||||||||||||
| Xiaodong Du | 10,000 | * | 10,000 | 0 | 0 | % | ||||||||||||||
| Yanru He | 10,000 | * | 10,000 | 0 | 0 | % | ||||||||||||||
| Qiaohong Xie | 10,000 | * | 10,000 | 0 | 0 | % | ||||||||||||||
| Wu Lin | 10,000 | * | 10,000 | 0 | 0 | % | ||||||||||||||
| Meina Xie | 10,000 | * | 10,000 | 0 | 0 | % | ||||||||||||||
| Huilin Chen | 10,000 | * | 10,000 | 0 | 0 | % | ||||||||||||||
| Zhanpeng Fang | 10,000 | * | 10,000 | 0 | 0 | % | ||||||||||||||
| Shuiyu Zhong | 10,000 | * | 10,000 | 0 | 0 | % | ||||||||||||||
| Lirong Zhang | 10,000 | * | 10,000 | 0 | 0 | % | ||||||||||||||
| Yixiong Chen | 10,000 | * | 10,000 | 0 | 0 | % | ||||||||||||||
| Baoquan Huang | 10,000 | * | 10,000 | 0 | 0 | % | ||||||||||||||
| Yin Ao | 10,000 | * | 10,000 | 0 | 0 | % | ||||||||||||||
| Xihan Huang | 10,000 | * | 10,000 | 0 | 0 | % | ||||||||||||||
| Liming Huang | 10,000 | * | 10,000 | 0 | 0 | % | ||||||||||||||
| Chuhua Chen | 10,000 | * | 10,000 | 0 | 0 | % | ||||||||||||||
| Chan Li | 10,000 | * | 10,000 | 0 | 0 | % | ||||||||||||||
| Meihua Zhuang | 10,000 | * | 10,000 | 0 | 0 | % | ||||||||||||||
| Yulan Chen | 10,000 | * | 10,000 | 0 | 0 | % | ||||||||||||||
| Ning Xie | 10,000 | * | 10,000 | 0 | 0 | % | ||||||||||||||
| Qixia Yao | 10,000 | * | 10,000 | 0 | 0 | % | ||||||||||||||
| Wei Xiong | 10,000 | * | 10,000 | 0 | 0 | % | ||||||||||||||
| Liyu Zhang | 10,000 | * | 10,000 | 0 | 0 | % | ||||||||||||||
| Cede & Co | 1,500 | * | 1,500 | 0 | 0 | % | ||||||||||||||
| * | Represents less than 1.0% |
| (1) | Based on 302,734,900 Ordinary Shares outstanding. All percentages have been rounded to the nearest one-hundredth of one percent. |
| (2) | Since the Company does not have the ability to control how many, if any, of its Shares each of the Selling Shareholders will sell, the Company has assumed that the Selling Shareholders will sell all of the Shares offered herein for purposes of determining how many Shares they will own after the Offering and their percentage of ownership following the Offering. |
| (3) | All percentages have been rounded up to the nearest one hundredth of one percent. |
| (4) | The person having voting, dispositive or investment powers over Feier Co. Limited is Mr. Guiting Rao. The registered address for Feier Co. Limited is Oliaji Trade Centre, 1st Floor, Victoria, Mahe, Republic of Seychelles. |
| (5) | The person having voting, dispositive or investment powers over Meisi Co. Limited is Mr. Yuze Zhong. The registered address for Meisi Co. Limited is Oliaji Trade Centre, 1st Floor, Victoria, Mahe, Republic of Seychelles. |
| (6) | Mr. Zhang is the President, Chief Executive Officer, Secretary and Chairman of the Board of the Company. |
| (7) | Mr. Chen is a director of the Company. |
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PLAN OF DISTRIBUTION
The Selling Shareholders and any of their pledgees, donees, transferees, assignees and successors in interest may, from time to time, sell any or all of their Shares at a fixed price of $0.08 per share until our Ordinary Shares are quoted on the OTCQB or a higher market, and thereafter at prevailing market prices or privately negotiated prices. The Company intends to file to obtain a quotation on the OTCQB. In order to be quoted on the OTCQB, a market maker must file an application and other necessary documents with the Financial Industry Regulatory Authority (“FINRA”) on the Company’s behalf in order to make a market for its Shares. FINRA must approve the application, and there can be no assurance that FINRA will do so.
The Selling Shareholders may use any one or more of the following methods when selling Shares:
| ● | ordinary brokerage transactions and transactions in which the broker-dealer solicits investors; | |
| ● | block trades in which the broker-dealer will attempt to sell the Shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; | |
| ● | purchases by a broker-dealer as principal and resale by the broker-dealer for its account; | |
| ● | an exchange distribution in accordance with the rules of the applicable exchange; | |
| ● | privately negotiated transactions; | |
| ● | to cover short sales made after the date that this registration statement is declared effective by the SEC; | |
| ● | broker-dealers may agree with the Selling Shareholders to sell a specified number of such Shares at a stipulated price per share; | |
| ● | through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise; | |
| ● | a combination of any such methods of sale; and | |
| ● | any other method permitted pursuant to applicable law. |
The Selling Shareholders may also sell the Shares under Rule 144 under the Securities Act, if all of the conditions in Rule 144are satisfied at the time of the proposed sale, rather than under this prospectus.
In connection with the sale of the Shares or interests therein, the Selling Shareholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the Shares in the course of hedging the positions they assume. The Selling Shareholders may also sell the Shares short and deliver these securities to close out their short positions, or loan or pledge the Shares to broker-dealers that in turn may sell these securities. The Selling Shareholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of Shares offered by this prospectus, which Shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).
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Broker-dealers engaged by the Selling Shareholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Shareholders (or, if any broker-dealer acts as agent for the purchaser of Shares, from the purchaser) in amounts to be negotiated. The Selling Shareholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved.
The Selling Shareholders may from time to time pledge or grant a security interest in some or all of the Shares owned by them and, if they default in the performance of their secured obligations, the amendment or supplement to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act will be filed amending the list of Selling Shareholders to include the pledgee, transferee or other successors in interest as Selling Shareholders under this prospectus and the pledgees or secured parties may offer and sell Shares from time to time under the supplement or amendment to this prospectus.
The Selling Shareholders also may transfer the Shares in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.
The Selling Shareholders and any broker-dealers or agents that are involved in selling the Shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the Shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Discounts, concessions, commissions and similar selling expenses, if any, that can be attributed to the sale of Shares will be paid by the Selling Shareholder and/or the purchasers.
FINRA Rule 5110 requires FINRA member firms (unless an exemption applies) to satisfy the filing requirements of Rule 5110 in connection with the resale, on behalf of Selling Shareholders, of the securities on a principal or agency basis. NASD Notice to Members 88-101 states that in the event a Selling Shareholder intends to sell any of the Shares registered for resale in this prospectus through a member of FINRA participating in a distribution of our securities, such member is responsible for insuring that a timely filing, if required, is first made with the Corporate Finance Department of FINRA and disclosing to FINRA the following:
| ● | it intends to take possession of the registered securities or to facilitate the transfer of such certificates; | |
| ● | the complete details of how the Selling Shareholders’ Shares are and will be held, including location of the particular accounts; | |
| ● | whether the member firm or any direct or indirect affiliates thereof have entered into, will facilitate or otherwise participate in any type of payment transaction with the Selling Shareholders, including details regarding any such transactions; and | |
| ● | in the event any of the securities offered by the Selling Shareholders are sold, transferred, assigned or hypothecated by any Selling Shareholder in a transaction that directly or indirectly involves a member firm of FINRA or any affiliates thereof, that prior to or at the time of said transaction the member firm will timely file all relevant documents with respect to such transaction(s) with the Corporate Finance Department of FINRA for review. |
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If a Selling Shareholder uses this prospectus for any sale of the Shares, it will be subject to the prospectus delivery requirements of the Securities Act. The Selling Shareholders will be responsible to comply with the applicable provisions of the Securities Act and Exchange Act, and the rules and regulations thereunder promulgated, including, without limitation, Regulation M, as applicable to such Selling Shareholders in connection with resales of their respective Shares under this registration statement.
The Company is required to pay all fees and expenses incident to the registration of the Shares, but the Company will not receive any proceeds from the sale of the Shares. The Company has agreed to indemnify the Selling Shareholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.
Regulation M
The anti-manipulation rules of Regulation M under the Exchange Act may apply to sales of the Company’s Shares and activities of the Selling Shareholders.
Management has advised the Selling Shareholders that, while they are engaged in a distribution of the Shares included in this prospectus, they are required to comply with Regulation M promulgated under the Exchange Act. With certain exceptions, Regulation M precludes the Selling Shareholders, any affiliated purchasers and any broker-dealer or other person who participates in the distribution from bidding, purchasing or attempting to induce any person to bid for or purchase any security which is the subject of the distribution until the entire distribution is complete. Regulation M also prohibits any bids or purchases made in order to stabilize the price of a security in connection with the distribution of that security. All of the foregoing may affect the marketability of the Shares offered by this prospectus.
DESCRIPTION OF SHARE CAPITAL
The Company is a Cayman Islands exempted company with limited liability and the Company’s affairs are governed by its Memorandum and Articles of Association, the Companies Law (Revised) and the common law of the Cayman Islands, our corporate governance documents and rules and regulations of the stock exchange on which its Ordinary Shares are traded.
The Company’s authorized capital is $50,000, consisting of 500,000,000 Ordinary Shares, $0.0001 par value per Ordinary Share. The Board of Directors has the right, in its absolute discretion and without approval of the existing shareholders, to issue Ordinary Shares, grant rights over existing Ordinary Shares or issue other securities in one or more series as it deems necessary and appropriate and to determine designations, powers, preferences, privileges and other rights, including dividend rights, conversion rights, terms of redemption and liquidation preferences, any or all of which may be greater than the powers and rights associated with the Shares held by existing shareholders, at such times and on such other terms as it deems proper. No preferred shares have been issued.
As of the date of this prospectus, there are 302,734,900 of the Company’s Ordinary Shares issued and outstanding, 300,000,000 of which were issued in July 2019 in consideration for 100% of the outstanding shares of HGSL pursuant to the Share Exchange. All outstanding Ordinary Shares are fully paid. The Company does not have any options to purchase Ordinary Shares or any preferred shares outstanding.
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Memorandum and Articles of Association
The Company is registered in the Cayman Islands and has been assigned company number 346267 in the register of companies. It’s registered office is Harneys Fiduciary, 3rd Floor Harbour Place, 103 South Church Street, Grand Cayman, Cayman Islands, KY1-1002. The objects for which the Company was established are unrestricted and the Company has full power and authority to carry out any object that is not prohibited under Cayman Islands law as set forth in Paragraph 4 of our Memorandum of Association. As a Cayman Islands exempted company, the Company is (subject to certain qualifications) prohibited from trading in the Cayman Islands with any person, firm or corporation except in furtherance of its business carried on outside the Cayman Islands, owning land in the Cayman Islands and making any invitation to the public in the Cayman Islands to subscribe for any of its Ordinary Shares or debentures. The Company does not believe that these restrictions materially affect its operations.
Objects of the Company
Under the Company’s Memorandum and Articles of Association, the objects of the Company are unrestricted and the Company has the full power and authority to carry out any object not prohibited by the law of the Cayman Islands.
Powers of Directors
Paragraph 107 of the Company’s Articles of Association (the “Articles”) provides that a director who is in any way, whether directly or indirectly, interested in a contract or a proposed contract with the Company shall declare the nature of his interest at a meeting of the directors or by general notice to the directors. The director may vote in respect of the contract or arrangement notwithstanding his interest therein and his vote shall be counted, and he may be counted in the quorum at any meeting at which the contract or arrangement is considered. Paragraph 86 of the Articles allows the directors to vote compensation to themselves in respect of services rendered to the Company. Paragraph 98 of the Articles provides that the directors may exercise all the powers of the Company to borrow money and to mortgage or charge its undertakings and property or any part thereof, to issue debentures, debenture stock and other securities whenever money is borrowed or as security for any debt, liability or obligation of the Company or of any third party. Such borrowing powers can be altered by an amendment to the Articles. There is no provision in the Articles for the mandatory retirement of directors. Paragraph 85 of the Articles provides that directors are not required to own Ordinary Shares of the Company in order to serve as directors.
The Company’s Ordinary Shares
The Company’s authorized share capital is $50,000, divided into 500,000,000 Ordinary Shares, $0.0001 par value. Holders of the Company’s Ordinary Shares are entitled to one vote for each whole share on all matters to be voted upon by shareholders, including the election of directors. Holders of the Company’s Ordinary Shares do not have cumulative voting rights in the election of directors. All of the Company’s fully paid Ordinary Shares are equal to each other with respect to dividend rights. Holders of the Company’s Ordinary Shares are entitled to receive dividends if and when declared by its Board of Directors out of funds legally available therefor under Cayman Islands law. In the event of the Company’s liquidation, the liquidator will, after having discharged the debts, if any, of the Company, divide among the shareholders on a pari passu basis, in specie or in kind, the whole or any part of the assets of the Company (whether they shall consist of property of the same kind or not) and may for such purpose set such value as he deems fair upon any property to be divided as aforesaid. Holders of the Company’s Ordinary Shares have no preemptive rights to purchase any additional unissued Ordinary Shares. No preferred shares have been issued; however, the Board of Directors has the ability to determine the rights, preferences and restrictions of preferred shares at their discretion.
Paragraph 8 of the Articles provides that the powers, preferences and relative, participating, optional and other special rights of each series of preferred shares, and the qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding.
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Amendment
Paragraph 153 of the Articles provides that the Company’s Memorandum and Articles of Association may be amended by a special resolution of members. A special resolution requires passage by a majority of not less than two-thirds of the shareholders entitled to vote on the matter, in person or, where proxies are allowed, by proxy at a general meeting of the Company or in writing by all of the shareholders entitled to vote.
General Meetings
Provisions in respect of the holding of annual general meetings and extraordinary general meetings are set out in Paragraphs 55 through 69 of the Articles and under the Companies Law (Revised) of the Cayman Islands. The directors may convene meetings of the members at such times and in such manner and places as the directors consider necessary or desirable, and they shall convene such a meeting upon the written request of members holding not less than one-third of the share capital of the Company as at that date carries the right to vote at general meetings of the Company.
Limitations on Right to Own Ordinary Shares
Cayman Islands law and the Company’s Memorandum and Articles of Association impose no limitations on the right of nonresident or foreign owners to hold or vote its securities. There are no provisions in the Memorandum and Articles of Association governing the ownership threshold above which shareholder ownership must be disclosed.
Anti-Takeover Provisions
Some provisions of the Company’s Articles may discourage, delay or prevent a change of control of the Company or management that shareholders may consider favorable, including provisions that:
| ● | authorize the Company’s Board of Directors to issue preferred shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preferred shares without any further vote or action by our shareholders (subject to variation of rights of shares provisions in our Memorandum and Articles of Association); and | |
| ● | limit the ability of shareholders to requisition and convene general meetings of shareholders. The Company’s Memorandum and Articles of Association allow its shareholders holding Ordinary Shares representing in aggregate not less than one-third of its share capital as carries the right to vote to requisition an extraordinary general meeting of the Company’s shareholders, in which case its directors are obliged to call such meeting and to put the resolutions so requisitioned to a vote at such meeting. |
However, under Cayman Islands law, the Company’s directors may only exercise the rights and powers granted to them under its Memorandum and Articles of Association for a proper purpose and for what they believe in good faith to be in the best interests of the Company.
Issuance of Additional Ordinary Shares
Paragraph 6 of the Company’s Articles authorize its Board of Directors to issue additional Ordinary Shares from time to time as our Board of Directors shall determine, to the extent there are available authorized but unissued Ordinary Shares.
Paragraph 7 of the Company’s Articles also authorizes its Board of Directors to establish from time to time one or more series of preferred shares and to determine, subject to compliance with the variation of rights of Shares provision in the Articles, with respect to any series of preferred shares, the terms and rights of that series, including:
| ● | the designation of the series; | |
| ● | the number of shares of the series; | |
| ● | the dividend rights, dividend rates, conversion rights and voting rights; and | |
| ● | the rights and terms of redemption and liquidation preferences. |
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The Company’s Board of Directors may issue preferred shares without action by its shareholders to the extent there are authorized but unissued Ordinary Shares available. Issuance of additional Ordinary Shares may dilute the voting power of holders of the Company’s Ordinary Shares. However, no Ordinary Shares may be issued in excess of the authorized share capital specified in the Company’s Memorandum of Association and to the extent the rights attached to any class may be varied, the Company must comply with the provisions in its Articles relating to variations in rights of Ordinary Shares.
A copy of the Company’s Memorandum and Articles of Association was filed as Exhibit 3.1 to the Company’s Report on Form 6-K filed with the SEC on July 5, 2019.
Material Contracts
Summaries of the Company’s employment contracts with executive officers and key employees are disclosed under “Compensation of Executive Officers and Directors - Employment Contracts” and were filed as Exhibits 10.7 through 10.10 to its Report on Form 6-K filed with the SEC on July 5, 2019, Exhibits 10.15 and 10.16 to our Annual Report on Form 20-F filed with the SEC on April 29, 2019, Exhibits 10.11 through 10.13 to the registration statement on Form F-1 filed with the SEC on November 26, 2019 and Exhibits 10.7, 10.8 and 10.13 to the post-effective amendment to registration statement on Form F-1 of which this prospectus is a part.
Summaries of the Company’s leases are disclosed under “Our Business - Properties” and were filed as Exhibits 10.1 through 10.6 to our Report on Form 6-K filed with the SEC on July 5, 2019 and Exhibit 10.14 to the registration statement on Form F-1 filed with the SEC on November 26, 2019.
Exchange Controls
The government of the PRC imposes restrictions on the convertibility of the RMB and the collection and use of foreign currencies by Chinese entities. Under the current regulations, the RMB can be freely exchanged in current account transactions, including dividend distribution, interest payments and import and export of goods and services. However, the conversion of RMB into foreign currency and the conversion of foreign currency into RMB for capital account transactions, such as direct investment, securities investment and loans, generally require prior approval from the SAFE.
According to the current PRC regulations, foreign-invested enterprises, such as the Company’s subsidiaries in China, must apply for a Foreign Exchange Registration Certificate for Foreign-Invested Enterprise. With such a certificate, a foreign-invested enterprise may open foreign exchange bank accounts with banks authorized by SAFE to conduct foreign exchange business and may purchase, sell and remit foreign exchange through such banks, subject to documentation and approval requirements. Foreign-invested enterprises are required to open and maintain separate foreign exchange accounts for capital account transactions and current accounts. In addition, there are restrictions on the amount of foreign currency that foreign-invested enterprises can retain in such accounts.
There are no exchange control regulations or currency restrictions in the Cayman Islands.
Taxation
No reciprocal tax treaty regarding withholding exists between the United States and the Cayman Islands. Under current Cayman Islands law, dividends, interest or royalties paid by the Company to individuals are not subject to tax. If the Company was to pay a dividend, the Company would not be liable to withhold any tax, but shareholders would receive gross dividends, if any, irrespective of their residential or national status.
Dividends, if any, paid to any United States resident or citizen shareholder are treated as dividend income for United States federal income tax purposes. Such dividends are not eligible for the 50% dividends-received deduction allowed to United States corporations on dividends from a domestic corporation under Section 243 of the Internal Revenue Code. Various Internal Revenue Code provisions impose special taxes in certain circumstances on non-United States corporations and their shareholders. You are urged to consult your tax advisor with regard to such possibilities and your own tax situation.
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A foreign corporation will be treated as a passive foreign investment company (“PFIC”) for United States federal income tax purposes if, after applying relevant look-through rules with respect to the income and assets of subsidiaries, 75% or more of its gross income consists of certain types of passive income or 50% or more of the gross value of its assets is attributable to assets that produce passive income or are held for the production of passive income. For this purpose, passive income generally includes dividends, interest, royalties, rents (other than rents and royalties derived in the active conduct of a trade or business), annuities and gains from assets that produce passive income. Management presently believes that the Company is not a PFIC and does not anticipate becoming a PFIC. This is, however, a factual determination made on an annual basis and is subject to change. If the Company were to be classified as a PFIC in any taxable year, (i) United States holders would generally be required to treat any gain on sales of our Ordinary Shares held by them as ordinary income and to pay an interest charge on the value of the deferral of their United States federal income tax attributable to such gain; and (ii) distributions paid by the Company to its United States holders could also be subject to an interest charge. In addition, the Company would not provide information to its United States holders that would enable them to make a “qualified electing fund” election under which, generally, in lieu of the foregoing treatment, the Company’s earnings would be currently included in their United States federal income.
In addition to United States federal income taxation, shareholders may be subject to state and local taxes upon their receipt of dividends. Further, non-U.S. shareholders may be subject to taxation upon their receipt of dividends in their tax jurisdiction.
Documents on Display
You may read and copy documents referred to in this prospectus that have been filed with the SEC at the SEC’s Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You can also obtain copies of our SEC filings by going to the SEC’s website at http://www.sec.gov.
The SEC allows us to “incorporate by reference” the information the Company files with the SEC. This means that the Company can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be part of this prospectus.
EXPENSES OF THIS OFFERING
Set forth below is an itemization of our total expenses, which are expected to be incurred in connection with the offer and sale of the Ordinary Shares by the Company. With the exception of the SEC registration fee, all amounts are estimates.
| Securities and Exchange Commission registration fee | $ | 331.27 | ||
| Legal fees and expenses | $ | 140,717.17 | ||
| Other professional fees | $ | 98,799.00 | ||
| Total | $ | 239,847.44 |
LEGAL MATTERS
The validity of the Shares being offered by this prospectus and other legal matters concerning the Resale Shares relating to Cayman Islands law will be passed upon for the Company by Harney Westwood & Riegels.
EXPERTS
The financial statements included in this prospectus for the years ended December 31, 2021, and 2020 have been included in reliance on the report of Pan-China-Singapore, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
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ENFORCEMENT OF CIVIL LIABILITIES
The Company is incorporated under the laws of the Cayman Islands as an exempted company with limited liability. The Company changed its domicile to the Cayman Islands because of certain benefits associated with being a Cayman Islands corporation, such as political and economic stability, an effective judicial system, a favorable tax system, the absence of foreign exchange control or currency restrictions and the availability of professional and support services. However, the Cayman Islands have a less developed body of securities laws that provide significantly less protection to investors as compared to the securities laws of the United States. In addition, Cayman Islands companies may not have standing to sue before the federal courts of the United States.
All of the Company’s assets are located in the PRC. In addition, both of the Company’s directors and officers are residents of the PRC and all or a substantial portion of their assets are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon the Company or its directors and officers, or to enforce against the Company or its directors and officers judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.
According to the Company’s local Cayman Islands counsel, there is uncertainty as to whether the courts of the Cayman Islands would (1) recognize or enforce judgments of U.S. courts obtained against the Company or its directors or officers, predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States, or (2) entertain original actions brought in the Cayman Islands against the Company or its directors or officers, predicated upon the securities laws of the United States or any state in the United States.
Cayman Islands counsel further advised that, although there is no statutory enforcement in the Cayman Islands of final and conclusive monetary judgments obtained in a competent federal or state court of the United States for a definite sum (and the Cayman Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments), such a judgment obtained in such jurisdiction can be expected to be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment (a) is given by a foreign court of competent jurisdiction, (b) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given, (c) is final, (d) is not in respect of taxes, a fine or a penalty, (e) is not inconsistent with a Cayman Islands judgment of the same matter; (f) was not obtained on grounds of fraud, and (g) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands. However, the Cayman Islands courts are unlikely to enforce a judgment obtained from the U.S. courts under civil liability provisions of the U.S. federal securities law if such judgment is determined by the courts of the Cayman Islands to give rise to obligations to make payments that are penal or punitive in nature.
The recognition and enforcement of foreign judgments are provided for under PRC Civil Procedure Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of PRC Civil Procedure Law based either on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the United States or the Cayman Islands that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedure Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States or in the Cayman Islands.
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WHERE YOU CAN FIND MORE INFORMATION
The Company has filed with the SEC a registration statement on Form F-1 under the Securities Act relating to this Offering of its Ordinary Shares. This prospectus does not contain all of the information contained in the registration statement. The rules and regulations of the SEC allow us to omit certain information from this prospectus that is included in the registration statement. Statements made in this prospectus concerning the contents of any contract, agreement or other document are summaries of all material information about the documents summarized, but are not complete descriptions of all terms of these documents. If the Company filed any of these documents as an exhibit to the registration statement, you may read the document itself for a complete description of its terms.
You may read and copy the registration statement, including the related exhibits and schedules, and any document the Company filed with the SEC without charge at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The SEC also maintains an Internet website that contains reports and other information regarding issuers that file electronically with the SEC. The Company’s filings with the SEC are also available to the public through the SEC’s website at http://www.sec.gov.
The Company is subject to the information reporting requirements of the Exchange Act that are applicable to foreign private issuers, and under those requirements file reports with the SEC. Those other reports or other information may be inspected without charge at the locations described above. As a foreign private issuer, the Company will be exempt from the rules under the Exchange Act related to the furnishing and content of proxy statements, and its officers, directors and principal shareholders will be exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, the Company will not be required under the Exchange Act to file annual, quarterly and current reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. However, the Company will file with the SEC, within 120 days after the end of each fiscal year, or such applicable time as required by the SEC, an annual report on Form 20-F containing financial statements audited by an independent registered public accounting firm.
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HUAHUI EDUCATION GROUP LIMITED
TABLE OF CONTENTS
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Huahui Education Group Limited:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Huahui Education Group Limited together with its subsidiaries (“the Company”) as of December 31, 2020 and 2019, and the related consolidated statements of Income (loss) and comprehensive Income (loss), stockholders’ equity, and cash flows for the years then ended, 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 December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.
Going concern uncertainty
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company incurred losses from operations, has net current liabilities, accumulated deficits and net cash used in operating activities that raise substantial 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 financial statements do not include any adjustments that might result from the outcome of this uncertainty.
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 Public Company Accounting Oversight Board (United States) (“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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
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.
Emphasis of Matter
The Company has significant transactions with related parties, which are described in Note 10 to the financial statements. Transactions involving related parties cannot be presumed to be carried out on an arm’s length basis, as the requisite conditions of competitive, free market dealings may not exist.
/s/ Pan-China Singapore PAC
We have served as the Company’s auditor since 2018.
Singapore
April 30, 2021
| F-2 |
HUAHUI EDUCATION GROUP LIMITED
CONSOLIDATED BALANCE SHEETS
(In U.S. Dollars, except share data or otherwise stated)
AS OF DECEMBER 31, 2020 AND 2019
| DEC 31, 2020 | DEC 31, 2019 | |||||||
| USD | USD | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | ||||||||
| Accounts receivable | ||||||||
| Other receivables | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Non-current assets: | ||||||||
| Leasehold improvements and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Total non-current assets | ||||||||
| Total assets | ||||||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities: | ||||||||
| Deferred revenue | ||||||||
| Accounts payable, other payables and accruals | ||||||||
| Current operating lease liabilities | ||||||||
| Income tax payable | ||||||||
| Amount due to related parties | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities: | ||||||||
| Non-current operating lease liabilities | ||||||||
| Total non-current liabilities | ||||||||
| Total liabilities | ||||||||
| Equity (deficit) | ||||||||
| Share capital ($ par value, shares issued and outstanding for the year ended December 31, 2020 and2019) | ||||||||
| Additional paid-in capital | ( | ) | ( | ) | ||||
| Foreign currency translation reserve | ||||||||
| (Accumulated loss) Retained earnings | ( | ) | ||||||
| Total equity | ( | ) | ||||||
| Total liabilities and equity | ||||||||
The accompanying notes are an integral part of the financial statements.
| F-3 |
HUAHUI EDUCATION GROUP LIMITED
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE
INCOME (LOSS)
(In U.S. Dollars, except share data or otherwise stated)
FOR THE YEAR ENDED DECEMBER 31,2020 AND 2019
| For The Year Ended DEC 31 | ||||||||
| 2020 | 2019 (Restated) | |||||||
| USD | USD | |||||||
| Revenue | ||||||||
| Cost of Revenue | ( | ) | ( | ) | ||||
| Gross profit | ||||||||
| Selling and marketing expenses | ( | ) | ( | ) | ||||
| General and administrative expenses | ( | ) | ( | ) | ||||
| Operating (loss) income | ( | ) | ||||||
| Other income (expenses), net | ||||||||
| (Loss) Income before income taxes | ( | ) | ||||||
| Income tax expenses | ( | ) | ( | ) | ||||
| Net (loss) income | ( | ) | ||||||
| Foreign currency translation differences | ( | ) | ||||||
| Total comprehensive (loss) income for the years | ( | ) | ||||||
| Basic and diluted (loss) earnings per ordinary share | ( | ) | ||||||
| Weighted average number of shares outstanding-Basic and diluted | ||||||||
The accompanying notes are an integral part of the financial statements.
| F-4 |
HUAHUI EDUCATION GROUP LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31,2020 AND 2019
| Share Capital | Capital Reserve | Foreign Currency Translation Reserve | Retained Earnings (Accumulated Loss) | Total Equity (Deficit) | ||||||||||||||||
| USD | USD | USD | USD | USD | ||||||||||||||||
| Balance at January 1, 2019 (Audited) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Income for the year | ||||||||||||||||||||
| Foreign currency translation loss | ( | ) | ( | ) | ||||||||||||||||
| Balance at December 31, 2019(Audited) | ( | ) | ||||||||||||||||||
| Balance at January 1, 2020(audited) | ( | ) | ||||||||||||||||||
| Loss for the year | ( | ) | ( | ) | ||||||||||||||||
| Foreign currency translation gain | ||||||||||||||||||||
| Balance at December 31, 2020(Audited) | ( | ) | ( | ) | ( | ) | ||||||||||||||
The accompanying notes are an integral part of the financial statements.
| F-5 |
HUAHUI EDUCATION GROUP LIMITED
AUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2020 AND 2019
| For The Year Ended Dec 31, | ||||||||
| 2020 | 2019 | |||||||
| USD | USD | |||||||
| Cash flows from operating activities: | ||||||||
| Net (loss) income | ( | ) | ||||||
| Adjustments for: | ||||||||
| Depreciation expense | ||||||||
| Loss from disposal of furniture and equipment | ( | ) | ||||||
| Deferred taxes | ||||||||
| Changes in: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Other receivables | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Other payables and accruals | ( | ) | ||||||
| Deferred revenue | ( | ) | ||||||
| Income tax payble | ( | ) | ||||||
| Net cash (used in) provided by operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Short term loan to a third party | ( | ) | ||||||
| Additions to leasehold improvements and equipment | ( | ) | ( | ) | ||||
| Proceeds from sale of furniture and equipment | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from advances from related parties | ||||||||
| Repayment of advances to related parties | ( | ) | ||||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ) | ||||||
| Net (decrease) increase in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents at the beginning of period | ||||||||
| Cash and cash equivalents at the end of period | ||||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Income tax paid | ||||||||
| Right-of-use assets obtained in exchange for operating lease obligations | ||||||||
The accompanying notes are an integral part of the financial statements.
| F-6 |
HUAHUI EDUCATION GROUP LIMITED
CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019
| 1. | DESCRIPTION OF BUSINESS |
HUAHUI EDUCATION GROUP CORPORATION, formerly DUONAS CORP. (“HHEG Nevada” or “Nevada Company”) was incorporated in the State of Nevada on September 19, 2014 to start business operations concerned with production of stylish decorative items made from concrete, such as: different sculptures, candleholders, lamps, tabletops, bookcases, vases of different shapes and forms, decorations for the garden; and subsequent selling thereof.
A change of control took place on November 2, 2017 from Vladyslav Beinars. Control was obtained by the sale of shares of Nevada Company common stock from Vladyslav Beinars to Zhongpeng Chen, Shuiyu Zhong, Xihan Huang, Meihua Zhuang, Peina Huang, Yanru He, Yin Ao, Zhanpeng Fang, Liming Huang, Chuhong Huang, Xiaodong Du, Qiaohong Xie, Lizhen Huang, Liyu Zhang, Chuhua Chen, Meina Xie, Meiyun Wang, Ning Xie, Lirong Zhang, Chan Li, Qiongju Ou, Xijuan Huang, Yihao Chen, Huilin Chen, Yulan Chen, Yixiong Chen, Qixia Yao, Baoquan Huang, Wei Xiong, Changli Huang and Wu Lin. In connection with the transaction, Vladyslav Beinars released the Company from all debts owed.
Through October 22, 2017, Nevada Company’s primary business activity was production of stylish decorative items made from concrete, such as: different sculptures, candleholders, lamps, tabletops, bookcases, vases of different shapes and forms, decorations for the garden; and subsequent selling thereof. Subsequently, Nevada Company’s operations were determined and structured by the new investor group. As such, at December 31, 2018, Nevada Company accounted for the related assets, liabilities and results of operations up to October 22, 2017 as discontinued operations.
On February 22, 2019, Nevada Company completed the process of redomiciling from Nevada to the Cayman Islands. The Board of Directors had established a wholly owned subsidiary in the Cayman Islands named HUAHUI EDUCATION GROUP LIMITED (“HHEG Cayman” or “Company”), and merged Nevada Company into HHEG Cayman. HHEG Cayman is the surviving company. There was no change in the number of outstanding shares of Nevada Company’s Common Stock and that each share of HHEG Nevada Common Stock was converted into one ordinary share of HHEG Cayman.
On July 2, 2019, the Company’s board of directors unanimously approved modifying the Company’s accounting fiscal year end from June 30 to December 31.
On
July 3, 2019 (the “Closing Date”), HHEG Cayman, an exempted company limited by shares under the laws of the Cayman
Islands, closed on a share exchange (the “Share Exchange”) with HUAHUI GROUP STOCK LTD, (“HGSL”), a Seychelles
company limited by shares, and HUAHUI GROUP (HK) CO., LTD (“HGHK”), a company with limited liability formed under
the laws of Hong Kong and a wholly owned subsidiary of HGSL. As a result, HGHK is now a wholly owned subsidiary of the Company.
Under the Share Exchange Agreement, on the Closing Date, the Company issued a total of of its ordinary shares to the
HGSL Shareholders in exchange for
| F-7 |
ZDSE was incorporated as a limited company in the Peoples’ Republic of China (the “PRC”) on January 19, 2016. ZDSE is a professional management coaching organization engaged in researching, developing and applying methods for helping individuals to improve their personal and professional leadership skills and effectiveness. ZDSE’s clients consist of executive managers from large scale, small and medium-sized enterprises, as well as professionals and employees in various fields. The Company conducts business in one segment which is the provision of educational services in the PRC.
Shenzhen Huahui Media Technology Co., Ltd. (“HHMT”), established in August 25,2020. HHMT’s business projects include: cultural exchange event planning; conference planning; corporate image planning; marketing planning; exhibition planning; stage lighting, audio equipment, display equipment, and technology development and sales, leasing, and door-to-door integration of multimedia teaching systems Installation, on-site maintenance, etc.
As of December 31, 2020, the Company’s subsidiaries are as follows:
| Entity | Date of incorporation | Date of acquisition | Place of incorporation | Percentage
of legal ownership by the Company | Principal activities | |||||||
| Huahui Group Stock Limited (“HGSL”) | N/A | % | ||||||||||
| Huahui Group Co., Limited (“HGCL”) | N/A | % | ||||||||||
| Huahui Group (HK) Co., Limited (“HGHK”) | % | |||||||||||
| Huahui (Shenzhen) Education Management Co., Limited (“HEMC”) | % | |||||||||||
| Shenzhen Huahui Shangxing Education Consulting Co., Limited (“HSEC”) | % | |||||||||||
| Zhongdehui (Shenzhen) Education Development Co., Limited (“ZDSE”) | % | |||||||||||
| Huahui Technology (HK) Co., Limited (“HTHK”) | N/A | % | ||||||||||
| Huahui (Shenzhen) Education Technology Co., Ltd (“HETC”) | N/A | % | ||||||||||
| Huahui Jinming (Shenzhen) Education Technology Co., Limited (“JMET”) | N/A | % | ||||||||||
| Shenzhen Huahui Media Technology Co., Ltd.(“HHMT”) | N/A | % | ||||||||||
| Zhongdehui (Guangzhou) Education Consulting Co., Limited (“GZZDH”) | N/A | % | ||||||||||
| Zhongdehui (Shenyang) Education Consulting Co., Limited (“SYZDH”) | N/A | % | ||||||||||
| F-8 |
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The accompanying financial statements include the balances and results of operations of the Company have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchanges Commission (“SEC”) and in conformity with generally accepted accounting principles in the U.S. (“US GAAP”).
The
Company incurred net loss of $
The ability to continue as a going concern is dependent upon the Company’s profit generating operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they become due. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company expects to finance operations primarily through cash flow from revenue and capital contributions from the CEO. During the year, the CEO has provided financial support for the operations of the Company. In the event that the Company requires additional funding to finance the growth of the Company’s current and expected future operations as well as to achieve our strategic objectives, the CEO has indicated the intent and ability to provide additional equity financing.
These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s continuation as a going concern is dependent on the Company’s ability to meet obligations as they become due and to obtain additional equity or alternative financing required to fund operations until sufficient sources of recurring revenues can be generated. There can be no assurance that the Company will be successful in its plans described above or in attracting equity or alternative financing on acceptable terms, or if at all. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| (b) | Basis of Consolidation |
The consolidated financial statements include the financial statements of the Company and its subsidiaries. Subsidiaries are all entities over which the Company has control. Control exists when the Company has the power over the entity, exposure, or rights to variable returns from involvement in the entity, and the ability to use power over the entity to affect returns through its power over the entity. In assessing control, potential voting rights that presently are exercisable are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
| (c) | Use of estimates |
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, related disclosures of contingent liabilities at the balance sheet date, and revenue and expenses in the financial statements and accompanying notes. Significant accounting estimates reflected in the Company’s financial statements include the valuation allowance for deferred tax assets, economic lives and impairment of leasehold improvements and equipment, allowance for doubtful accounts and etc. Actual results could differ from those estimates and such differences could affect the results of operations reported in future periods.
| (d) | Business combinations |
Business combinations are recorded using the acquisition method of accounting. The purchase price of the acquisition is allocated to the tangible assets, liabilities, identifiable intangible assets acquired and non-controlling interest, if any, based on their estimated fair values as of the acquisition date. The excess of the purchase price over those fair values is recorded as goodwill. Acquisition-related expenses and restructuring costs are expensed as incurred.
| F-9 |
| (e) | Cash and Cash Equivalents |
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. All cash and cash equivalents relate to cash on hand and cash at bank at December 31, 2020 and 2019.
The Renminbi is not freely convertible into foreign currencies. Under the PRC Foreign Exchange Control Regulations and Administration of Settlement, Sales and Payment of Foreign Exchange Regulations, the Company is permitted to exchange Renminbi for foreign currencies through banks that are authorized to conduct foreign exchange business.
| (f) | Leasehold Improvement and Equipment |
An item of leasehold improvement and equipment is stated at cost less any accumulated depreciation and any accumulated allowance for decrease in value (if any).
The cost of an item of leasehold improvement and equipment comprises its purchase price, import duties and non-refundable purchase taxes (after deducting trade discounts and rebates) and any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. These can include the initial estimate of costs of dismantling and removing the item, and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period.
The cost of replacing part of leasehold improvement and equipment is included in the carrying amount of the asset when it is probable that future economic benefits will flow to the Company and the carrying amount of those replaced parts is derecognized. Repairs and maintenance are charged to the statement of income during the financial period in which they are incurred.
Depreciation is calculated on the straight-line basis to write off the cost of each asset to its residual value over the estimated useful life as follows:
| Leasehold improvement | |
| Furniture and education equipment | |
| Computer equipment and software |
The assets’ residual value, useful lives, and depreciation method are regularly reviewed.
| (g) | Impairment of long-lived assets |
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. Whenever there is an indication showing a permanent decrease in the amount of leasehold improvement and equipment; such as an evidence of obsolescence or physical damage of an asset, significant changes in the manner in which an asset is used or is expected to be used, the Company shall recognize loss on decrease in value of leasehold improvement and equipment in the statement of income where the carrying amount of asset is higher than the recoverable amount. The Company measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, the Company would recognize an impairment loss based on the fair value of the assets. The Company did not record any impairment losses on long-lived assets during the years ended December 31, 2020 and 2019.
| F-10 |
| (h) | Value added tax (“VAT”) |
On March 23, 2016, the Ministry of Finance and the State Administration of Taxation issued a circular on the Full Implementation of the Business Tax Levy of VAT Pilots. The circular indicates that since May 1, 2016, pilots for the change of business tax to VAT have been fully promoted throughout the country, and all business tax taxpayers, including ZDSE, were included in the scope of the pilot and were changed from paying business tax to paying VAT. According to notice No.36 (2016) issued by the Ministry of Finance and the State Administration of Taxation, the Comprehensive Project replaces Business Tax with Value-added Tax.
According
to notice No. 13 (2019), the VAT small-scale taxpayers with monthly sales of less than RMB
To
support the novel coronavirus pneumonia prevention and control, and accelerate the resumption of work,
| (i) | Income Recognition |
Recognition of Revenue
The primary sources of our revenues are as follows:
| (a) | Coach course service revenue derived from ZDSE |
Revenue
is reported net of business taxes and VAT. The educational services consist of training programs and courses. Tuition is generally
paid in advance and is initially recorded as deferred revenue. The Company had $
| (b) | Conference
and exhibition planning service revenue was derived from HHMT which was established on August 25, 2020. Conference
and exhibition planning service revenue in 2020 was $ |
Revenue is generated through delivery services. Revenue is recognized when a customer receives services and is recognized in an amount that reflects the consideration that the Company expects to receive in exchange for those services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amount of revenue that is recorded reflects the consideration that the Company expects to receive in exchange for those services. The Company applies the following five-step model in order to determine this amount:
| (i) | identification of the services in the contract; | |
| (ii) | determination of whether the services are performance obligations, including whether they are distinct in the context of the contract; | |
| (iii) | measurement of the transaction price, including the constraint on variable consideration; | |
| (iv) | allocation of the transaction price to the performance obligations; and | |
| (v) | recognition of revenue when (or as) the Company satisfies each performance obligation. |
| F-11 |
The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. Once a contract is determined to be within the scope of ASC 606 at contract inception, the Company reviews the contract to determine which performance obligations the Company must deliver and which of these performance obligations are distinct. The Company recognizes as revenues the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied. Generally, the Company’s performance obligations are transferred to customers as services are performed over the remaining contractual terms.
For all reporting periods, the Company has not disclosed the value of unsatisfied performance obligations for all service revenue contracts with an original expected length of one year or less, which is an optional exemption that is permitted under the adopted rules.
Other Income and other expenses
Other income, and other expenses are recognized on an accrual basis in accordance with the substance of the relevant agreements.
| (j) | Operating leases |
The Company determines if an arrangement contains a lease at inception. The Company elected the practical expedient, for all asset classes, to account for each lease component of a contract and its associated non-lease components as a single lease component, rather than allocating a standalone value to each component of a lease. For purposes of calculating operating lease obligations under the standard, the Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such option. The Company’s leases do not contain material residual value guarantees or material restrictive covenants. Operating lease expense is recognized on a straight-line basis over the lease terms. The discount rate used to measure a lease obligation is usually the rate implicit in the lease; however, the Company’s operating leases generally do not provide an implicit rate. Accordingly, the Company uses its incremental borrowing rate at lease commencement to determine the present value of lease payments. The incremental borrowing rate is an entity-specific rate which represents the rate of interest a lessee would pay to borrow on a collateralized basis over a similar term with similar payments.
| (k) | Earnings Per Share |
The Company reports earnings per share in accordance with ASC 260 “Earnings Per Share”, which requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average common shares outstanding during the reporting period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Further, if the number of common shares outstanding increases as a result of a stock dividend or stock split or decreases as a result of a reverse stock split, the computations of a basic and diluted earnings per share shall be adjusted retrospectively for all periods presented to reflect that change in capital structure.
The Company’s basic earnings per share is computed by dividing the net income available to holders by the weighted average number of the Company’s ordinary shares outstanding. Diluted earnings per share reflects the amount of net income available to each ordinary share outstanding during the period plus the number of additional shares that would have been outstanding if potentially dilutive securities had been issued. The Company had no potentially dilutive ordinary shares as of December 31, 2020.
| F-12 |
| (l) | Foreign Currency Translation |
The Company’s reporting currency is the U.S. dollar and the functional currency is the Chinese Renminbi (“RMB”). All assets and liabilities are translated at exchange rates at the balance sheet date and revenue and expenses are translated at the average yearly exchange rates and equity is translated at historical exchange rates. Any translation adjustments resulting are not included in determining net income but are included in foreign exchange adjustment to other comprehensive income, a component of equity.
Transactions in currencies other than the functional currencies during the year are converted into the applicable functional currencies at the applicable rates of exchange prevailing at the dates of the transactions. Exchange gains and losses are recognized in the statements of operations.
The exchange rates utilized are as follows:
| 2020 | 2019 | |||||||
| Year-end RMB exchange rate | ||||||||
| Average annual RMB exchange rate | ||||||||
No representation is made that the RMB amounts could have been, or could be, converted into U.S. dollars at the rates used in translation.
| (m) | Foreign Currency Risk |
The
RMB is not a freely convertible currency. The State Administration for Foreign Exchange, under the authority of the People’s
Bank of China, controls the conversion of the RMB into other currencies. The value of the RMB is subject to changes in central
government policies and to international economic and political developments affecting supply and demand in the China Foreign
Exchange Trading System market. Over
| (n) | Fair Value |
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when valuing the asset or liability. Authoritative literature provides a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The level in the hierarchy within which the fair value measurement in its entirety falls is based upon the lowest level of input that is significant to the fair value measurement as follows:
Level 1
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
| F-13 |
| (o) | Fair Value of financial instruments |
The Company’s financial instruments consist primarily of cash and cash equivalents and accounts payable. The carrying amounts of cash and cash equivalents, accounts payable and amount due to related parties approximate their fair values due to the short-term maturities of these instruments.
| (p) | Income Taxes |
Income tax expense comprises current and deferred taxation and is recognized in profit or loss except to the extent that it relates to items recognized directly in other comprehensive income or equity, in which case it is recognized directly in other comprehensive income or equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable with respect to previous periods.
The Company accounts for income taxes using the asset and liability approach. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax basis of assets and liabilities, net of operating loss carry forwards and credits, by applying enacted tax rates that will be in effect for the period in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in the statements of operations in the period of change.
The Company accounts for uncertain tax positions by reporting a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. Tax benefits are recognized from uncertain tax positions when the Company believes that it is more likely than not that the tax position will be sustained on examination by the tax authorities based on the technical merits of the position. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expenses. The Company did not record uncertain tax positions as of December 31, 2020 and 2019 as the amounts were immaterial.
| (q) | Comprehensive income |
Comprehensive income includes net income and foreign currency translation adjustments. Comprehensive income is reported in the statements of comprehensive income.
| (r) | Concentration of credit risk |
Financial instruments that potentially expose the Company to significant concentration of credit risk consist primarily of cash and cash equivalents, accounts receivables and other receivables.
As of December 31, 2020, substantially all of the Company’s cash and cash equivalents were deposited with financial institutions with high-credit ratings and quality.
Accounts Receivable represent tuition fees due from company customers, typically are collected within a short period of time. Other receivables mainly represent short-term loans to other companies with interest charged, rental and utilities deposit. Management believes it has no significant risk related to its concentration within its accounts receivable.
The
Company did not have any customers constituting
| (s) | Impact of Covid-19 |
| Novel
coronavirus (“COVID-19”) has spread rapidly to many parts of China and other parts of the world in the first quarter
of calendar year 2020. The epidemic has resulted in quarantines, travel restrictions, and the temporary closure of stores
and facilities in China and elsewhere. Substantially all of the Group’s revenue and workforce are concentrated in China.
Affected by the epidemic, all branches of ZDSE (a subsidiary engaged in career management guidance business) gradually reopened
as of June 1, 2020. As a result, revenue of 2020 decreased by |
| F-14 |
| (t) | Share Capital |
Incremental costs directly attributable to the issue of ordinary shares are recognized as a deduction from equity.
| (u) | Recent accounting pronouncements |
Recent accounting pronouncements adopted
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance supersedes existing guidance on accounting for leases
with the main difference being that operating leases are to be recorded in the statement of financial position as right-of-use
assets and lease liabilities, initially measured at the present value of the lease payments. For operating leases with a term
of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and liabilities.
For public business entities, the guidance is effective for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. Early application of the guidance is permitted. In transition, entities are required to recognize
and measure leases at the beginning of the earliest period presented using a modified retrospective approach. Effective
January 1, 2019, the Company adopted this standard resulted in the recognition of right-of-use assets of $
Recently issued accounting pronouncements not yet adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements. This ASU requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. This Accounting Standards Update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual rights to receive cash. For public business entities, the amendments in this Update are effective for fiscal years beginning after January 1, 2023, including interim periods within those fiscal years. All entities may adopt the amendments in this Update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). The Company is in the process of evaluating the impact of the adoption of this pronouncement on its consolidated financial statements.
The Company reviews new accounting standards as issued. Management has not identified any other new standards that it believes will have a significant impact on the Company’s financial statements.
| 3. | LEASEHOLD IMPROVEMENT AND EQUIPMENT, NET |
| 2020 | 2019 | |||||||
| Furniture and education equipment | $ | $ | ||||||
| Computer equipment and software | ||||||||
| Leasehold improvements | ||||||||
| $ | $ | |||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| $ | $ | |||||||
Depreciation
expense for the years ended December 31, 2020 and 2019 was $
| F-15 |
| 4. | ACCOUNTS RECEIVABLE |
The Accounts receivable and allowance balances at December 31, 2020 and 2019 are as follows:
| 2020 | 2019 | |||||||
| Accounts receivable | $ | $ | ||||||
| Less: allowance for doubtful accounts | ||||||||
| Accounts receivable, net | $ | $ | ||||||
No allowance for doubtful accounts was made for the years ended December 31, 2020 and 2019.
| 5. | OTHER RECEIVABLES |
Other
receivables mainly comprise short-term loan to a third party, Dongguan Anxiang Technology Co., Ltd. and rental and utilities deposits
paid for the Guangzhou and Liaoning office which are fully refundable. Short term loan amounting to RMB
| 6. | PREPAID EXPENSES AND OTHER CURRENT ASSETS |
Prepaid expenses and other current assets mainly represent prepaid consultancy fees for professional advice on business expansion plan.
| 7. | ACCOUNTS PAYABLE, OTHER PAYABLES AND ACCRUALS |
| 2020 | 2019 | |||||||
| Accounts payable (a) | $ | $ | ||||||
| Accrued payroll and welfare payable | ||||||||
| VAT and other taxes payable | ||||||||
| Others (b) | ||||||||
| $ | $ | |||||||
| (a) | ||
| (b) |
8. INCOME TAXES
Cayman Islands
The Company’s parent entity, In February 2019, HHEG Nevada was redomiciled from Nevada to the Cayman Islands. HHEG Cayman is a tax-exempted company incorporated in Cayman Islands. Under the current laws of Cayman Islands, the Company is not subject to income, corporate or capital gains tax, and Cayman Islands currently have no form of estate duty, inheritance tax or gift tax. In addition, payments of dividends and capital in respect of their shares are not subject to taxation and no withholding will be required in the Cayman Islands on the payment of any dividend or capital to any holder of their shares, nor will gains derived from the disposal of their shares be subject to Cayman Islands income or corporation tax. No provision for income taxes in Cayman Islands has been made as the Company had no taxable income for the year ended December 31, 2020 and 2019.
Seychelles
HGSL and HGCL are tax-exempted companies incorporated in Seychelles. Under the current laws of Seychelles, HGSL and HGCL are not subject to income, corporate or capital gains tax, and Seychelles currently have no form of estate duty, inheritance tax or gift tax. In addition, payments of dividends and capital in respect of their shares are not subject to taxation and no withholding will be required in the Seychelles on the payment of any dividend or capital to any holder of their shares, nor will gains derived from the disposal of their shares be subject to Seychelles income or corporation tax. No provision for income taxes in Seychelles has been made as HGSL and HGCL had no taxable income for the years ended December 31, 2020 and 2019.
| F-16 |
Hong Kong
HGHK
is incorporated in Hong Kong and is subject to an income tax rate of
PRC
The
Company’s PRC subsidiaries are subject to
ZDSE
enjoys a preferential tax rate of
No provision for income taxes has been made on the others company in the PRC.
Income tax expense (benefits)
| 2020 | 2019 | |||||||
| Current tax expense | $ | $ | ||||||
| Deferred tax expense (benefits) | ||||||||
| $ | $ | |||||||
The
effective tax rates was -
| 2020 | 2019 | |||||||
| Income (loss) before tax | $ | ( | ) | $ | ||||
| Tax (credit)/expense calculated at statutory tax rate | ( | ) | ||||||
| Income tax exemptions and reliefs | ( | ) | ( | ) | ||||
| Income tax difference under difference tax jurisdictions | ||||||||
| Others (Note 1) | ||||||||
| $ | $ | |||||||
Note
1 Others mainly comprise of valuation allowance of $
9. LEASES
The adoption of the new lease guidance did not have a material impact on the Company’s results of operations or liquidity but resulted in the recognition of operating lease liabilities and operating lease right-of-use assets on its balance sheets. Right-of-use (“ROU”) assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.
The
Company leased various training centers in the PRC, rent expense for the year ended December 31, 2020 was $
| F-17 |
Significant assumptions and judgments made as part of the adoption of this new lease standard include determining (i) whether a contract contains a lease, (ii) whether a contract involves an identified asset, and (iii) which party to the contract directs the use of the asset. The discount rates used to calculate the present value of lease payments were determined based on hypothetical borrowing rates available to the Company over terms similar to the lease terms.
The Company’s future minimum payments under long-term non-cancelable operating leases are as follows:
| As
of Dec 31, 2020 | As
of Dec 31, 2019 | |||||||
| Within 1 year | ||||||||
| After 1 year but within 5 years | ||||||||
| Total lease payments | ||||||||
| Less: imputed interest | ( | ) | ( | ) | ||||
| Total lease obligations | ||||||||
| Less: current obligations | ( | ) | ( | ) | ||||
| Long-term lease obligations | ||||||||
Other information:
| For year ended | ||||||||
| Dec 31, 2020 | Dec 31, 2019 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flow from operating lease | ||||||||
| Right-of-use assets obtained in exchange for operating lease liabilities | ||||||||
| Remaining lease term for operating lease (years) | ||||||||
| Weighted average discount rate for operating lease | % | % | ||||||
10. RELATED PARTIES TRANSACTIONS
| (a) | The Company had the following balances due to related parties: |
| Relationship | 2020 | 2019 | ||||||||
| Junze Zhang | $ | $ | ||||||||
The balances represent cash advances from related parties.
The balances with related parties are unsecured, non-interest bearing and repayable on demand.
From time to time, majority shareholder and general manager of the Company advanced funds to the Company for working capital purpose.
| F-18 |
| (b) | Transactions |
| For the years ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Repayment to related parties | ||||||||
| Hengqing Investment Consultation(SZ) Partnership Business (LP) | ||||||||
| Henghui Investment Consultation(SZ) Partnership Business (LP) | ||||||||
| Qing Zuo | ||||||||
| Junze Zhang | ||||||||
| Mengling Zhang | ||||||||
| Zihua Wu | ||||||||
| $ | $ | |||||||
| Cash advance from related parties | ||||||||
| Hengqing Investment Consultation (SZ) Partnership Business (LP) | $ | $ | ||||||
| Qing Zuo | ||||||||
| Junze Zhang | ||||||||
| Mengling Zhang | ||||||||
| Zihua Wu | ||||||||
| $ | $ | |||||||
11. RESERVES
(a) Statutory reserve
| (b) | Currency translation reserve |
The currency translation reserve represents translation differences arising from translation of foreign currency financial statements into the Company’s reporting currency.
| 12. | PRIOR YEAR ADJUSTMENT |
In order to match the cost of revenue more accurately, the salaries of coaching-related staff of ZDSE were included in cost of revenue account since January 1, 2020. Prior year adjustments have been passed and the impact of such adjustments summarized below:
| For the year ended December 2019 | ||||||||||||
| As previously stated | Prior year adjustment | As restated | ||||||||||
| Cost of Revenue | $ | |||||||||||
| General and administrative expenses | $ | ( | ) | |||||||||
13. SUBSEQUENT EVENTS
On February 26, 2021, ZDH established a new subsidiary, Shenzhen Zhengxinhui Education Technology Co., Ltd., which will mainly engage in the coach management training market in Shenzhen.
There is no other subsequent events have occurred that would require recognition or disclosure in the financial statements.
| F-19 |
HUAHUI EDUCATION GROUP LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2022 AND 2021
HUAHUI EDUCATION GROUP LIMITED
CONDENSED INTERIM CONSOLIDATED BALANCE SHEETS
(In U.S. Dollars, except share data or otherwise stated)
| June 30, 2022 | December 31, 2021 | |||||||
| Unaudited | Audited | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | ||||||||
| Accounts receivable | ||||||||
| Other receivables | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Non-current assets: | ||||||||
| Leasehold improvements and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Total non-current assets | ||||||||
| Total assets | ||||||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities: | ||||||||
| Deferred revenue | ||||||||
| Accounts payable, other payables and accruals | ||||||||
| Current operating lease liabilities | ||||||||
| Income tax payable | ||||||||
| Amount due to related parties | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities: | ||||||||
| Non-current operating lease liabilities | ||||||||
| Total non-current liabilities | ||||||||
| Total liabilities | ||||||||
| Shareholders’ equity (deficit) | ||||||||
| Share capital ($ par value, shares issued and outstanding for the six months ended June 30, 2022 and the year ended December 31, 2021) | ||||||||
| Additional paid-in capital | ( | ) | ( | ) | ||||
| Foreign currency translation reserve | ||||||||
| Retained earnings (loss) | ( | ) | ( | ) | ||||
| Non-controlling interest | ( | ) | ||||||
| Total shareholders’ equity (deficit) | ( | ) | ( | ) | ||||
| Total liabilities and equity | ||||||||
The accompanying notes are an integral part of the financial statements.
| F-21 |
HUAHUI EDUCATION GROUP LIMITED
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF INCOME (LOSS) (Unaudited)
(In U.S. Dollars, except share data or otherwise stated)
| For the six months ended | ||||||||
| June 30, 2022 | June 30, 2021 | |||||||
| Revenue | ||||||||
| Cost of revenue | ( | ) | ( | ) | ||||
| Gross profit | ||||||||
| Selling and marketing expenses | ( | ) | ( | ) | ||||
| General and administrative expenses | ( | ) | ( | ) | ||||
| Loss on disposal of a subsidiary | ( | ) | ||||||
| Operating loss | ( | ) | ( | ) | ||||
| Other income(expenses), net | ( | ) | ||||||
| Loss before income taxes | ( | ) | ( | ) | ||||
| Income tax (expenses) benefit | ( | ) | ( | ) | ||||
| Net loss | ( | ) | ( | ) | ||||
| Foreign currency translation differences | ( | ) | ||||||
| Total comprehensive loss for the period | ( | ) | ( | ) | ||||
| Owners of the Company | ( | ) | ( | ) | ||||
| Non-controlling interest | ( | ) | ||||||
| Basic and diluted loss per ordinary share | ( | ) | ( | ) | ||||
| Weighted average number of shares outstanding-Basic and diluted | ||||||||
The accompanying notes are an integral part of the financial statements.
| F-22 |
HUAHUI EDUCATION GROUP LIMITED
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT) (Unaudited)
(In U.S. Dollars)
Share Capital | Capital Reserve | Foreign Currency Translation Reserve | Retained Earnings (Loss) | Non- controlling interest | Total Equity (Deficit) | |||||||||||||||||||
| Balance at January 1, 2021 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Income for the year | ( | ) | ( | ) | ||||||||||||||||||||
| Foreign currency translation gain | ||||||||||||||||||||||||
| Balance at June 30, 2021 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Balance at January 1, 2022 (audited) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Income (loss)for the period | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Foreign currency translation gain (loss) | ( | ) | ( | ) | ||||||||||||||||||||
| Balance at June 30, 2022 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
The accompanying notes are an integral part of the financial statements.
| F-23 |
HUAHUI EDUCATION GROUP LIMITED
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In U.S. Dollars)
| For the six months ended | ||||||||
| June 30, 2022 | June 30, 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | ( | ) | ( | ) | ||||
| Adjustments for: | ||||||||
| Depreciation expense | ||||||||
| Loss on disposal of a subsidiary | ||||||||
| Deferred taxes | ||||||||
| Changes in: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Other receivables | ( | ) | ||||||
| Prepaid expenses and other current assets | ||||||||
| Other payables and accruals | ( | ) | ||||||
| Deferred revenue | ||||||||
| Net cash (used in) operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Additions to leasehold improvements and equipment | ( | ) | ||||||
| Proceeds from disposal of a subsidiary | ||||||||
| Net cash used in investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from advances from related parties | ||||||||
| Repayment of advances to related parties | ||||||||
| Net cash provided by financing activities | ||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ) | ||||||
| Net (decrease) in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents at the beginning of period | ||||||||
| Cash and cash equivalents at the end of period | ||||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Right-of-use assets obtained in exchange for operating lease obligations | ||||||||
The accompanying notes are an integral part of the financial statements.
| F-24 |
HUAHUI EDUCATION GROUP LIMITED
CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021
| 1. | DESCRIPTION OF BUSINESS |
HUAHUI EDUCATION GROUP LIMITED, formerly DUONAS CORP. (“HHEG Nevada” or “Nevada Company”) was incorporated in the State of Nevada on September 19, 2014 to start business operations concerned with production of stylish decorative items made from concrete, such as: different sculptures, candleholders, lamps, tabletops, bookcases, vases of different shapes and forms, decorations for the garden; and subsequent selling thereof.
A change of control took place on November 2, 2017 from Vladyslav Beinars. Control was obtained by the sale of shares of Nevada Company common stock from Vladyslav Beinars to Zhongpeng Chen, Shuiyu Zhong, Xihan Huang, Meihua Zhuang, Peina Huang, Yanru He, Yin Ao, Zhanpeng Fang, Liming Huang, Chuhong Huang, Xiaodong Du, Qiaohong Xie, Lizhen Huang, Liyu Zhang, Chuhua Chen, Meina Xie, Meiyun Wang, Ning Xie, Lirong Zhang, Chan Li, Qiongju Ou, Xijuan Huang, Yihao Chen, Huilin Chen, Yulan Chen, Yixiong Chen, Qixia Yao, Baoquan Huang, Wei Xiong, Changli Huang and Wu Lin. In connection with the transaction, Vladyslav Beinars released the Company from all debts owed.
Through October 22, 2017, Nevada Company’s primary business activity was production of stylish decorative items made from concrete, such as: different sculptures, candleholders, lamps, tabletops, bookcases, vases of different shapes and forms, decorations for the garden; and subsequent selling thereof. Subsequently, Nevada Company’s operations were determined and structured by the new investor group. As such, at December 31, 2018, Nevada Company accounted for the related assets, liabilities and results of operations up to October 22, 2017 as discontinued operations.
On February 22, 2019, Nevada Company completed the process of redomiciling from Nevada to the Cayman Islands. The Board of Directors had established a wholly owned subsidiary in the Cayman Islands named HUAHUI EDUCATION GROUP LIMITED (“HHEG Cayman” or “Company”), and merged Nevada Company into HHEG Cayman. HHEG Cayman is the surviving company. There was no change in the number of outstanding shares of Nevada Company’s Common Stock and that each share of HHEG Nevada Common Stock was converted into one ordinary share of HHEG Cayman.
On July 2, 2019, the Company’s board of directors unanimously approved modifying the Company’s accounting fiscal year end from June 30 to December 31.
On
July 3, 2019 (the “Closing Date”), HHEG Cayman, an exempted company limited by shares under the laws of the Cayman
Islands, closed on a share exchange (the “Share Exchange”) with HUAHUI GROUP STOCK LTD, (“HGSL”), a
Seychelles company limited by shares, and HUAHUI GROUP (HK) CO., LTD (“HGHK”), a company with limited liability formed
under the laws of Hong Kong and a wholly owned subsidiary of HGSL. As a result, HGHK is now a wholly owned subsidiary of the
Company. Under the Share Exchange Agreement, on the Closing Date, the Company issued a total of
of its shares to the HGSL Shareholders in exchange for
ZDSE was incorporated as a limited company in the Peoples’ Republic of China (the “PRC”) on January 19, 2016. ZDSE is a professional management coaching organization engaged in researching, developing and applying methods for helping individuals to improve their personal and professional leadership skills and effectiveness. ZDSE’s clients consist of executive managers from large scale, small and medium-sized enterprises, as well as professionals and employees in various fields.
Zhongdehui (Shenyang) Education Consulting Co., Limited (“SYZDH”) was established on December 29, 2020 and Zhongdehui (Guangzhou) Education Consulting Co., Limited (“GZZDH”) was established on December 28, 2020. SYZDH has taken over the business of ZDSE’s Shenyang branch and GZZDH has taken over the business of ZDSE’s Guangzhou branch. On February 26, 2021, ZDSE’s Shenzhen Branch established a wholly-owned subsidiary, Shenzhen Zhengxinhui Education Technology Co., Limited, which was sold to an unrelated third party on June 28, 2021. Zhongdehui (JiNan) Education Consulting Co., Limited (“JNZDH”) was established as of April 14, 2022, engaged in researching, developing and applying methods for helping individuals to improve their personal and professional leadership skills and effectiveness. ZDSE’s clients include executive managers from large scale, small and medium-sized enterprises, as well as professionals and employees in various fields.
| F-25 |
Shenzhen Huahui Media Technology Co., Ltd. (“HHMT”) was established in August 25,2020. HHMT’s business includes cultural exchange event planning; conference planning; corporate image planning; marketing planning; exhibition planning; stage lighting, audio equipment, display equipment, and technology development and sales, leasing, and door-to-door integration of multimedia teaching systems installation, and on-site maintenance. HHMT has one wholly-owned subsidiary, Shenzhen Jiarui Media Co., Limited (“SJMC”), which was formed on June 4, 2021 under the laws of the PRC. SJMC’s principal business is essentially the same as that of HHMT, including cultural exchange event planning; conference planning; corporate image planning; marketing planning; exhibition planning; stage lighting, audio equipment, display equipment, and technology development and sales, leasing, and door-to-door integration of multimedia teaching systems installation, and on-site maintenance. In addition, Huahui (Shenzhen) Education Management Co., Limited (“HEMC”), which was established on March 28, 2017 and previously conducted only minor operations providing administrative services for the Company, commenced providing consulting services on November 1, 2020.
Huahui Jinming (Shenzhen) Education Technology Co., Limited (“JMET”) was incorporated in the PRC on July 8, 2020 as a wholly owned subsidiary of HSEC. JEMT started operation in June 2022, holding training courses for individuals and enterprises to improve their professional and management skills
Shandong Yuli Big Data Technology Co., Limited (“SDYL”) was incorporated in the PRC on December 14, 2021, and is an % owned subsidiary of HSEC. Twenty percent of SDYL’s shares are owned by SYDL’s Legal Representative, Xinwen Yang. SDYL’s business model of “HR Technology + Platform + Service” utilizes human resources (“HR”) technology to build a HR platform that will provide payroll, personnel recruitment, labor dispatch, flexible employment, fiscal and tax planning and legal HR consultation through a mobile app and SDYL’s website. SDYL started operation in May 2022.
As of June 30, 2022, the Company’s subsidiaries are as follows:
| Entity | Date of incorporation | Date of acquisition | Place of incorporation | Percentage of legal ownership by the Company | Principal activities | |||||||||
| Huahui Group Stock Limited (“HGSL”) | N/A | % | ||||||||||||
| Huahui Group Co., Limited (“HGCL”) | N/A | % | ||||||||||||
| Huahui Group (HK) Co., Limited (“HGHK”) | % | |||||||||||||
| Huahui (Shenzhen) Education Management Co., Limited (“HEMC”) | % | |||||||||||||
| Shenzhen Huahui Shangxing Education Consulting Co., Limited (“HSEC”) | % | |||||||||||||
| Zhongdehui (Shenzhen) Education Development Co., Limited (“ZDSE”) | % | |||||||||||||
| Huahui Technology (HK) Co., Limited (“HTHK”) | N/A | % | ||||||||||||
| Huahui (Shenzhen) Education Technology Co., Ltd (“HETC”) | N/A | % | ||||||||||||
| Huahui Jinming (Shenzhen) Education Technology Co., Limited (“JMET”) | N/A | % | ||||||||||||
| Shenzhen Huahui Media Technology Co., Ltd.(“HHMT”) | N/A | % | ||||||||||||
| Zhongdehui (Guangzhou) Education Consulting Co., Limited (“GZZDH”) | N/A | % | ||||||||||||
| Zhongdehui (Shenyang) Education Consulting Co., Limited (“SYZDH”) | N/A | % | ||||||||||||
| Shenzhen Jiarui Media Co., Limited(SJMC) | N/A | % | ||||||||||||
| Shangdong Yuli Big Data Technology Co., Limited (SDYL) | N/A | % | ||||||||||||
| Zhongdehui (JiNan) Education Consulting Co., Limited (“JNZDH”) | N/A | % | ||||||||||||
| F-26 |
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
| (a) | Basis of Presentation |
The accompanying financial statements include the balances and results of operations of the Company have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchanges Commission (“SEC”) and in conformity with generally accepted accounting principles in the U.S. (“US GAAP”).
| (b) | Going Concern |
The
Company incurred a net loss of $
The ability to continue as a going concern is dependent upon the Company generating profits in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they become due. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s continuation as a going concern is dependent on the Company’s ability to meet obligations as they become due and to obtain additional equity or alternative financing required to fund operations until sufficient sources of recurring revenues can be generated. There can be no assurance that the Company will be successful in its plans described above or in attracting equity or alternative financing on acceptable terms, if at all. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The
Company expects to finance operations primarily through cash flows from revenues and capital contributions from its CEO. During the first
six months of 2022, the CEO has provided $
| F-27 |
| (c) | Basis of Consolidation |
The consolidated financial statements include the financial statements of the Company and its subsidiaries. Subsidiaries are all entities over which the Company has control. Control exists when the Company has the power over the entity, exposure, or rights to variable returns from involvement in the entity, and the ability to use power over the entity to affect returns through its power over the entity. In assessing control, potential voting rights that presently are exercisable are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
| (d) | Use of estimates |
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, related disclosures of contingent liabilities at the balance sheet date, and revenue and expenses in the financial statements and accompanying notes. Significant accounting estimates reflected in the Company’s financial statements include the valuation allowance for deferred tax assets, economic lives and impairment of leasehold improvements and equipment, allowance for doubtful accounts and etc. Actual results could differ from those estimates and such differences could affect the results of operations reported in future periods.
| (e) | Business combinations |
Business combinations are recorded using the acquisition method of accounting. The purchase price of the acquisition is allocated to the tangible assets, liabilities, identifiable intangible assets acquired and non-controlling interest, if any, based on their estimated fair values as of the acquisition date. The excess of the purchase price over those fair values is recorded as goodwill. Acquisition-related expenses and restructuring costs are expensed as incurred.
| (f) | Cash and Cash Equivalents |
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. All cash and cash equivalents relate to cash on hand and cash at bank at June 30, 2022 and 2021.
The Renminbi is not freely convertible into foreign currencies. Under the PRC Foreign Exchange Control Regulations and Administration of Settlement, Sales and Payment of Foreign Exchange Regulations, the Company is permitted to exchange Renminbi for foreign currencies through banks that are authorized to conduct foreign exchange business.
| (g) | Leasehold Improvement and Equipment |
An item of leasehold improvement and equipment is stated at cost less any accumulated depreciation and any accumulated allowance for decrease in value (if any).
The cost of an item of leasehold improvement and equipment comprises its purchase price, import duties and non-refundable purchase taxes (after deducting trade discounts and rebates) and any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. These can include the initial estimate of costs of dismantling and removing the item, and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period.
The cost of replacing part of leasehold improvement and equipment is included in the carrying amount of the asset when it is probable that future economic benefits will flow to the Company and the carrying amount of those replaced parts is derecognized. Repairs and maintenance are charged to the statement of income during the financial period in which they are incurred.
Depreciation is calculated on the straight-line basis to write off the cost of each asset to its residual value over the estimated useful life as follows:
| Leasehold improvement | |
| Furniture and education equipment | |
| Computer equipment and software |
The assets’ residual value, useful lives, and depreciation method are regularly reviewed.
| F-28 |
| (h) | Impairment of long-lived assets |
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. Whenever there is an indication showing a permanent decrease in the amount of leasehold improvement and equipment, such as an evidence of obsolescence or physical damage of an asset or significant changes in the manner in which an asset is used or is expected to be used, the Company shall recognize loss on decrease in value of leasehold improvement and equipment in the statement of income where the carrying amount of the asset is higher than the recoverable amount. The Company measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, the Company would recognize an impairment loss based on the fair value of the assets. The Company did not record any impairment losses on long-lived assets during the six months ended June 30, 2022 and 2021.
| (i) | Value added tax (“VAT”) |
Since May 1, 2016,
all taxpayers, including ZDSE, are subject to value-added tax (“VAT”) instead of business tax.
To support the
novel coronavirus pneumonia prevention and control and accelerate the resumption of work, the VAT rate for small-scale taxpayers having
monthly sales of in excess of RMB
Currently, of
all the operating subsidiaries of the Company, with the exception of SDYL, which is a general taxpayer and subject to a VAT rate of
| (j) | Income Recognition |
Recognition of Revenue
Revenue is reported net of business taxes and VAT. The Company’s educational services consist of training programs and courses. Tuition is generally paid in advance and is initially recorded as deferred revenue. Revenue is recognized proportionately as the instruction is delivered over the period of the course for the course fees collected.
| F-29 |
Revenue is generated through delivery of services. Revenue is recognized when a customer receives services and is recognized in an amount that reflects the consideration that the Company expects to receive in exchange for those services. In addition, the standard requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The amount of revenue that is recorded reflects the consideration that the Company expects to receive in exchange for those services. The Company applies the following five-step model in order to determine this amount:
| ● | identification of the services in the contract; | |
| ● | determination of whether the services are performance obligations, including whether they are distinct in the context of the contract; | |
| ● | measurement of the transaction price, including the constraint on variable consideration; | |
| ● | allocation of the transaction price to the performance obligations; and | |
| ● | recognition of revenue when (or as) the Company satisfies each performance obligation. |
The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. Once a contract is determined to be within the scope of ASC 606 at contract inception, the Company reviews the contract to determine which performance obligations the Company must deliver and which of these performance obligations are distinct. The Company recognizes as revenues the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied. Generally, the Company’s performance obligations are transferred to customers as services are performed over the remaining contractual terms.
For all reporting periods, the Company has not disclosed the value of unsatisfied performance obligations for all service revenue contracts with an original expected length of one year or less, which is an optional exemption that is permitted under the adopted rules.
Other Income and other expenses
Other income and other expenses are recognized on an accrual basis in accordance with the substance of the relevant agreements.
| (k) | Operating leases |
The Company determines if an arrangement contains a lease at inception. The Company elected the practical expedient, for all asset classes, to account for each lease component of a contract and its associated non-lease components as a single lease component, rather than allocating a standalone value to each component of a lease. For purposes of calculating operating lease obligations under the standard, the Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such option. The Company’s leases do not contain material residual value guarantees or material restrictive covenants. Operating lease expense is recognized on a straight-line basis over the lease terms. The discount rate used to measure a lease obligation is usually the rate implicit in the lease; however, the Company’s operating leases generally do not provide an implicit rate. Accordingly, the Company uses its incremental borrowing rate at lease commencement to determine the present value of lease payments. The incremental borrowing rate is an entity-specific rate which represents the rate of interest a lessee would pay to borrow on a collateralized basis over a similar term with similar payments.
| (l) | Earnings Per Share |
The Company reports earnings per share in accordance with ASC 260 “Earnings Per Share”, which requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to holders of Ordinary Shares by the weighted average Ordinary Shares outstanding during the reporting period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Further, if the number of common shares outstanding increases as a result of a stock dividend or stock split or decreases as a result of a reverse stock split, the computations of a basic and diluted earnings per share shall be adjusted retrospectively for all periods presented to reflect that change in capital structure.
The Company’s basic earnings per share is computed by dividing the net income available to holders by the weighted average number of the Company’s Ordinary Shares outstanding. Diluted earnings per share reflects the amount of net income available to each Ordinary Share outstanding during the period plus the number of additional shares that would have been outstanding if potentially dilutive securities had been issued. The Company had no potentially dilutive ordinary shares as of June 30, 2021 and 2022.
| F-30 |
| (m) | Foreign Currency Translation |
The Company’s reporting currency is the U.S. dollar and the functional currency is the Chinese Renminbi (“RMB”). All assets and liabilities are translated at exchange rates at the balance sheet date and revenue and expenses are translated at the average yearly exchange rates and equity is translated at historical exchange rates. Any translation adjustments resulting are not included in determining net income but are included in foreign exchange adjustment to other comprehensive income, a component of equity.
Transactions in currencies other than the functional currencies during the year are converted into the applicable functional currencies at the applicable rates of exchange prevailing at the dates of the transactions. Exchange gains and losses are recognized in the statements of operations.
The exchange rates utilized are as follows:
| H1 2022 | H12021 | |||||||
| Year-end RMB exchange rate | ||||||||
| Average annual RMB exchange rate | ||||||||
No representation is made that the RMB amounts could have been, or could be, converted into U.S. dollars at the rates used in translation.
| (n) | Foreign Currency Risk |
The
RMB is not a freely convertible currency. The State Administration for Foreign Exchange, under the authority of the People’s Bank
of China, controls the conversion of the RMB into other currencies. The value of the RMB is subject to changes in central government
policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System
market.
| (o) | Fair Value |
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when valuing the asset or liability. Authoritative literature provides a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The level in the hierarchy within which the fair value measurement in its entirety falls is based upon the lowest level of input that is significant to the fair value measurement as follows:
Level 1
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
| F-31 |
| (p) | Fair Value of financial instruments |
The Company’s financial instruments consist primarily of cash and cash equivalents and accounts payable. The carrying amounts of cash and cash equivalents, accounts payable and amount due to related parties approximate their fair values due to the short-term maturities of these instruments.
| (q) | Income Taxes |
Income tax expense comprises current and deferred taxation and is recognized in profit or loss except to the extent that it relates to items recognized directly in other comprehensive income or equity, in which case it is recognized directly in other comprehensive income or equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable with respect to previous periods.
The Company accounts for income taxes using the asset and liability approach. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax basis of assets and liabilities, net of operating loss carry forwards and credits, by applying enacted tax rates that will be in effect for the period in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in the statements of operations in the period of change.
The Company accounts for uncertain tax positions by reporting a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. Tax benefits are recognized from uncertain tax positions when the Company believes that it is more likely than not that the tax position will be sustained on examination by the tax authorities based on the technical merits of the position. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expenses. The Company did not record uncertain tax positions as of June 30, 2022 and December 31, 2021 as the amounts were immaterial.
| (r) | Comprehensive income |
Comprehensive income includes net income and foreign currency translation adjustments. Comprehensive income is reported in the statements of comprehensive income.
| (s) | Concentration of credit risk |
Financial instruments that potentially expose the Company to significant concentration of credit risk consist primarily of cash and cash equivalents, accounts receivables and other receivables.
As of June 30, 2022, substantially all of the Company’s cash and cash equivalents were deposited with financial institutions with high-credit ratings and quality.
Accounts Receivable represent tuition fees of ZDH and the planning service fees of HHMT and SJMC due from customers that typically are collected within a short period of time. Other receivables mainly represent short-term loans to other companies with interest charged, rental and utilities deposit. Management believes it has no significant risk related to its concentration within its accounts receivable.
The
Company did not have any customers that accounted for
| F-32 |
| (t) | Impact of Covid-19 |
Due
to recurrences of coronavirus in China in 2022,
| (u) | Share Capital |
Incremental costs directly attributable to the issue of ordinary shares are recognized as a deduction from equity.
| (v) | Recent accounting pronouncements |
Recently issued accounting pronouncements not yet adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements. This ASU requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. This Accounting Standards Update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables and any other financial assets not excluded from the scope that have the contractual rights to receive cash. For public business entities, the amendments in this Update are effective for fiscal years beginning after January 1, 2023, including interim periods within those fiscal years. All entities may adopt the amendments in this Accounting Standards Update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). The Company is in the process of evaluating the impact of the adoption of this pronouncement on its consolidated financial statements.
The Company reviews new accounting standards as issued. Management has not identified any other new standards that it believes will have a significant impact on the Company’s financial statements.
| 3. | LEASEHOLD IMPROVEMENT AND EQUIPMENT, NET |
| June 30, 2022 | December 31,2021 | |||||||
| Furniture and education equipment | $ | $ | ||||||
| Computer equipment and software | ||||||||
| Leasehold improvements | ||||||||
| $ | $ | |||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| $ | $ | |||||||
Depreciation
expense for the six months ended June 30, 2022 and 2021 was $
| 4. | ACCOUNTS RECEIVABLE |
The accounts receivable and allowance balances at June 30, 2022 and December 31, 2021 are as follows:
| June 30, 2022 | December 31, 2021 | |||||||
| Accounts receivable | $ | $ | ||||||
| Less: allowance for doubtful accounts | ||||||||
| Accounts receivable, net | $ | $ | ||||||
No allowance for doubtful accounts was made during the six months ended June 30, 2022 and the year ended December 31, 2021.
| F-33 |
| 5. | OTHER RECEIVABLES |
Other receivables mainly comprise short-term loan to a third party, Dongguan Anxiang Technology Co., Ltd. and rental and utilities deposits paid for the Guangzhou and Liaoning office which are fully refundable.
| 6. | ACCOUNTS PAYABLE, OTHER PAYABLES AND ACCRUALS |
| June 30, 2022 | December 31, 2021 | |||||||
| Accounts payable (a) | $ | $ | ||||||
| Accrued payroll and welfare payable | ||||||||
| VAT and other taxes payable | ||||||||
| Others (b) | ||||||||
| $ | $ | |||||||
| (a) | ||
| (b) |
| 7. | INCOME TAXES |
Cayman Islands
Under the current laws of the Cayman Islands, the Company is not subject to income, corporate or capital gains tax, and the Cayman Islands currently have no form of estate duty, inheritance tax or gift tax. In addition, payments of dividends and capital in respect of its shares are not subject to taxation and no withholding will be required in the Cayman Islands on the payment of any dividend or capital to any holder of its shares, nor will gains derived from the disposal of its shares be subject to Cayman Islands income or corporation tax. No provision for income taxes in the Cayman Islands has been made as the Company had no taxable income for the six months ended June 30, 2022 and 2021.
Seychelles
HGSL and HGCL are tax-exempted companies incorporated in Seychelles. Under the current laws of Seychelles, the Company and HGCL are not subject to income, corporate or capital gains tax, and Seychelles currently have no form of estate duty, inheritance tax or gift tax. In addition, payments of dividends and capital in respect of their shares are not subject to taxation and no withholding will be required in the Seychelles on the payment of any dividend or capital to any holder of their shares, nor will gains derived from the disposal of their shares be subject to Seychelles income or corporation tax. No provision for income taxes in Seychelles has been made as the Company and HGCL had no taxable income for the six months ended June 30, 2022 and 2021.
Hong Kong
HGHK
is incorporated in Hong Kong and is subject to an income tax rate of
PRC
The
Company’s PRC subsidiaries are subject to a
| F-34 |
ZDSE,
HHMT and SJMC enjoyed a preferential tax rate of
No provision for income taxes has been made for our other subsidiaries in the PRC.
Income tax expense (benefits)
| For the six months ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Current tax expense (benefit) | $ | $ | ||||||
| Deferred tax (benefit) expense | ||||||||
| $ | $ | |||||||
Income
taxes of ZDSE, HHMT, SJMC and JEMT are accrued at the tax rate of
| For the six months ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Loss before tax | $ | ( | ) | $ | ( | ) | ||
| Tax (credit) calculated at statutory tax rate ( | ( | ) | ( | ) | ||||
| Valuation allowance | ||||||||
| $ | $ | |||||||
The Company’s other subsidiaries have not recognized deferred income tax assets as of June 30, 2022 and December 31, 2021.
| 8. | Loss on disposal of a subsidiary |
In
June 2021, ZDSE sold
| Financial position of Zhengxinhui | June 28, 2021, date of disposal | |||
| Current assets | $ | |||
| Non Current assets | $ | |||
| Net Assets | $ | |||
| Cash Consideration | $ | |||
| Loss on disposal | $ | |||
| F-35 |
| 9. | LEASES |
The adoption of the new lease guidance did not have a material impact on the Company’s results of operations or liquidity but resulted in the recognition of operating lease liabilities and operating lease right-of-use assets on its balance sheets. Right-of-use (“ROU”) assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.
The
Company leases various training centers in the PRC. Rent expense for the six months ended June 30, 2022 was $
Significant assumptions and judgments made as part of the adoption of this new lease standard include determining: (i) whether a contract contains a lease, (ii) whether a contract involves an identified asset, and (iii) which party to the contract directs the use of the asset. The discount rates used to calculate the present value of lease payments were determined based on hypothetical borrowing rates available to the Company over terms similar to the lease terms.
The Company’s future minimum payments under long-term non-cancelable operating leases are as follows:
| As of June 30, 2022 | As of December 31, 2021 | |||||||
| Within 1 year | ||||||||
| After 1 year but within 5 years | ||||||||
| Total lease payments | ||||||||
| Less: imputed interest | ( | ) | ( | ) | ||||
| Total lease obligations | ||||||||
| Less: current obligations | ( | ) | ( | ) | ||||
| Long-term lease obligations | ||||||||
Other information:
| For the six months ended | ||||||||
| June 30, 2022 | June 30, 2021 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flow from operating lease | ||||||||
| Right-of-use assets obtained in exchange for operating lease liabilities | ||||||||
| Remaining lease term for operating leases (years) | ||||||||
| Weighted average discounted rate for operating leases | % | % | ||||||
| 10. | RELATED PARTY TRANSACTIONS |
(a) The Company had the following balances due to related parties:
| Relationship | June 30, 2022 | December 31, 2021 | ||||||||
| Junze Zhang | $ | $ | ||||||||
| Xinwen Yang | ||||||||||
| Qing Zuo | ||||||||||
| Total | $ | $ | ||||||||
The balances represent cash advances from related parties.
The balances with related parties are unsecured, non-interest bearing and repayable on demand.
| F-36 |
| (b) | Transactions |
| For the six months ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash advance from related parties | ||||||||
| Qing Zuo | $ | $ | ||||||
| Junze Zhang | ||||||||
| Xinwen Yang | ||||||||
| $ | $ | |||||||
| 11. | RESERVES |
| (a) | Legal reserve |
| (b) | Currency translation reserve |
The currency translation reserve represents translation differences arising from translation of foreign currency financial statements into the Company’s reporting currency
| F-37 |
HUAHUI EDUCATION GROUP LIMITED
PRELIMINARY PROSPECTUS
, 2022
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 6. Indemnification of Directors, Officers and Employees.
Cayman Islands law does not limit the extent to which a company’s memorandum and articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our Memorandum and Articles permit indemnification of officers and directors against all actions, proceedings, costs, charges, expenses, losses, damages or liabilities incurred in connection with the execution of their duties, powers, authorities or discretions as a director or officer of the Company, unless such losses or damages arise through the willful neglect or default of such directors or officers.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, or the Securities Act, may be permitted to our directors, officers or persons controlling us under the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission, or the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Item 7. Recent Sales of Unregistered Securities.
During the past three years, we have issued the following securities. We believe that each of the following issuances was exempt from registration under Section 4(a)(2) of the Securities Act regarding transactions not involving a public offering and/or Regulation S promulgated thereunder regarding offshore offers and sales.
Effective February 26, 2019, the Company (the “Nevada Company”) was redomiciled from Nevada to the Cayman Islands by merging into its wholly owned Cayman Islands subsidiary, Huahui Education Group Limited (the “Cayman Company”). Pursuant to the merger, the Cayman Company issued 2,734,900 of its Ordinary Shares to the shareholders of the Nevada Company in exchange for all of their shares in the Nevada Company.
On July 3, 2019, the Company closed on the Share Exchange. Pursuant to the Share Exchange, the Company issued 300,000,000 Shares in exchange for all of the outstanding shares of Huahui Group Stock Limited.
Item 8. Exhibits and Financial Statement Schedules.
(a) Exhibits
The exhibits of the registration statement are listed in the Exhibit Index to this registration statement and are incorporated herein by reference.
(b) Financial Statement Schedules
Schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or consolidated financial statements or the notes thereto.
Item 9. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
| II-1 |
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(a) To include any prospectus required by section 10(a)(3) of the Securities Act;
(b) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) (§230.424(b) of this chapter) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and
(c) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) To file a post-effective amendment to the registration statement to include any financial statements required by “Item 8.A. of Form 20-F (17 CFR 249.220f)” at the start of any delayed offering or throughout a continuous offering. Financial statements and information otherwise required by Section 10(a)(3) of the Securities Act need not be furnished, provided that the registrant includes in the prospectus, by means of a post-effective amendment, financial statements required pursuant to this paragraph (a)(4) and other information necessary to ensure that all other information in the prospectus is at least as current as the date of those financial statements.
(5) That for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4), or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(6) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
| II-2 |
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 and has duly caused this amendment no. 3 to registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Shenzhen, Guangdong Province, China, on November 8, 2022.
| HUAHUI EDUCATION GROUP LIMITED | ||
| By: | /s/ Junze Zhang | |
| Name: | Junze Zhang | |
| Title: | Chairman of the Board, President, Chief Executive Officer and Secretary | |
| (Principal Executive Officer) | ||
| By: | /s/ Liqin Liu | |
| Name: | Liqin Liu | |
| Title: | Chief Financial Officer | |
| (Principal Financial and Accounting Officer) | ||
| By: | /s/ Zhongpeng Chen | |
| Name: | Zhongpeng Chen | |
| Title: | Director | |
SIGNATURE OF AUTHORIZED REPRESENTATIVE IN THE UNITED STATES
Pursuant to the requirements of the Securities Act of 1933, the Registrant’s duly authorized representative has signed this amendment no. 3 to registration statement on Form F-1 on November 8, 2022.
| GIL Corporate Services Limited | ||
| /s/ Henry Wang | ||
| Name: | Henry Wang | |
| Title: | Director | |
| II-3 |
EXHIBIT INDEX
(a) Exhibits. The following exhibits are included herein or incorporated herein by reference:
The following documents are filed as part of this registration statement:
| II-4 |
*Filed herewith
| II-5 |