DH Enchantment, Inc. is a Nevada holding company with no operations of its own.
DH Enchantment, Inc. conducts its operations through its Hong Kong subsidiary,
Ho Shun Yi Limited ("HSY"). HSY was organized as a private limited liability
company on July 9, 2018, in Hong Kong and is a wholly owned subsidiary of DH
Investment Group Limited ("DHIG"). We acquired DHIG on July 26, 2021. HSY is
engaged primarily in the sale and distribution of COVID-19 rapid antigen tester
sets produced by third parties. HSY commenced operations in Hong Kong in October
2020 and sell its products primarily in Hong Kong.
Our investors will hold common stock of DH Enchantment, Inc., the Nevada holding
company that has no operations of its own, and not in HSY, the Hong Kong
operating company. This holding company structure presents unique risks as our
investors may never directly hold equity interests in our Hong Kong subsidiary.
Holding indirect equity interests in HSY, our Hong Kong subsidiary, is not as
effective as holding a direct ownership interest as DH Enchantment, Inc. will be
dependent upon contributions from our subsidiaries to finance the cash flow
needs of DH Enchantment, Inc. DH Enchantment, Inc.'s ability to obtain
contributions from its subsidiaries are significantly affected by regulations
promulgated by Hong Kong authorities. Any limitation on the ability of our
subsidiaries to transfer cash or assets to us could have a material adverse
effect on our ability to conduct business. As a result, any change in the
interpretation of existing rules and regulations or the promulgation of new
rules and regulations that adversely affects our ability to transfer cash or
assets may adversely affect our operations and or the value of our securities,
including causing the value of our securities to significantly decline or become
worthless. For a detailed description of the risks facing the Company associated
with our structure, please refer to "Risk Factors- Our Hong Kong subsidiary may
be subject to restrictions on paying dividends or making other payments to us,
which may restrict its ability to satisfy liquidity requirements, conduct
business and pay dividends to holders of DH Enchantment, Inc.'s common stock."
and more generally, "Risk Factors - Risk Relating to Doing Business in Hong
Kong." set forth in the Company's Annual Report on Form 10-K filed with the SEC
on June 29, 2022 (the "Annual Report").
DH Enchantment, Inc. and HSY, our Hong Kong subsidiary, are not required to
obtain permission from Hong Kong or Chinese authorities including the China
Securities Regulatory Commission, or CSRC, or Cybersecurity Administration
Committee, or CAC, to operate or to issue securities to foreign investors. In
making this determination, we relied on the opinion of Ravenscroft & Schmierer,
which is attached as Exhibit 5 to Amendment No. 6 to the Registration Statement
on Form 10 filed with the SEC on June 27, 2022. DH Enchantment, Inc. and HSY are
not subject to permission requirements from any other governmental agencies to
approve HSY's operations. HSY has received all requisite permissions to operate
its business. The business of HSY until now is not subject to cybersecurity
review with the Cyberspace Administration of China, or CAC, given that: (i)
HSY's products and services are offered not directly to individual users but
through institutional customers; (ii) HSY does not possess a large amount of
personal information in its business operations. In addition, we believe that
HSY is not subject to merger control review by China's anti-monopoly enforcement
agency due to the level of our revenues and the fact that we currently do not
expect to propose or implement any acquisition of control of, or decisive
influence over, any company with revenues within China of more than RMB400
million. Currently, these statements and regulatory actions have had no impact
on HSY's daily business operation, our ability to accept foreign investments and
the ability of DH Enchantment, Inc. to list its securities on an U.S. or other
foreign exchange. However, in light of the recent statements and regulatory
actions by the PRC and Hong Kong government, such as those related to Hong
Kong's national security, the promulgation of regulations prohibiting foreign
ownership of Chinese companies operating in certain industries, which are
constantly evolving, and anti-monopoly concerns, we may be subject to the risks
of uncertainty of any future actions of the PRC government in this regard. For
example, if DH Enchantment, Inc. or HSY inadvertently concludes that such
approvals are not required, or if applicable laws, regulations or
interpretations change such that we are required to obtain approvals in the
future, or if the PRC government disallows our holding company structure, these
actions would likely result in a material change in our operations, including
our ability to continue our existing holding company structure, carry on HSY's
current business, accept foreign investments, and offer or continue to offer
securities of DH Enchantment, Inc. to its investors. These adverse actions would
likely cause the value of DH Enchantment, Inc.'s common stock to significantly
decline or become worthless. We may also be subject to penalties and sanctions
imposed by the PRC regulatory agencies, including the Chinese Securities
Regulatory Commission, if we fail to comply with such rules and regulations,
which would likely adversely affect the ability of DH Enchantment, Inc.'s
securities to continue to trade on the Over-the-Counter Bulletin Board, which
would likely cause the value of its securities to significantly decline or
become worthless. For a detailed description of the risks facing the Company and
HSY's operations in Hong Kong, please refer to "Risk Factors - Risk Factors
Relating to Doing Business in Hong Kong." set forth in the Annual Report.
19
There are prominent legal and operational risks associated with our operations
being based in Hong Kong which could result in a material change in our
operations and the value of DH Enchantment, Inc.'s securities. We are subject to
risks arising from the legal system in China where there are risks and
uncertainties regarding the enforcement of laws including where the Chinese
government can change the rules and regulations in China and Hong Kong,
including the enforcement and interpretation thereof, at any time with little to
no advance notice and can intervene at any time with little to no advance
notice. By way of example, the PRC government initiated a series of regulatory
actions and statements to regulate 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
variable interest entity structure, adopting new measures to extend the scope of
cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement.
While these regulatory actions and statements currently do not impact our
business or our ability to accept foreign investments or list our securities on
a U.S. or foreign exchange, the Chinese government can change its rules and
regulations and the enforcement and interpretation thereof with little to no
advance notice. Such changes in Chinese internal regulatory mandates, such as
the M&A rules, Anti-Monopoly Law, and the Data Security Law, may target the
Company's corporate structure and negatively impact our ability to conduct
business in Hong Kong, accept foreign investments, or list on an U.S. or other
foreign exchange. These risks may significantly limit or completely hinder our
ability to offer or continue to offer securities to investors and cause the
value of such securities to significantly decline or be worthless. Please see
"Risk Factors - Risks Relating to Doing Business in Hong Kong." set forth in the
Annual Report.
The recent joint statement by the SEC and PCAOB, 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. Trading in our securities may be prohibited under the
Holding Foreign Companies Accountable Act and the Accelerating the Holding
Foreign Companies Account Act if the PCAOB determines that it cannot inspect or
investigate completely our auditor, and that as a result an exchange may
determine to delist our securities. On June 22, 2021, the U.S. Senate passed the
Accelerating Holding Foreign Companies Accountable Act which would reduce the
number of consecutive non-inspection years required for triggering the
prohibitions under the HFCAA from three years to two thus reducing the time
before our securities may be prohibited from trading or being delisted. Our
auditor is not subject to the determinations announced by the PCAOB on December
16, 2021. However, in the event the Malaysian authorities subsequently take a
position disallowing the PCAOB to inspect our auditor, then we would need to
change our auditor to avoid having our securities delisted. Please see "Risk
Factors- The Holding Foreign Companies Accountable Act requires the Public
Company Accounting Oversight Board (PCAOB) to be permitted to inspect the
issuer's public accounting firm within three years. This three- year period will
be shortened to two years if the Accelerating Holding Foreign Companies
Accountable Act is enacted. There are uncertainties under the PRC Securities Law
relating to the procedures and requisite timing for the U.S. securities
regulatory agencies to conduct investigations and collect evidence within the
territory of the PRC. If the U.S. securities regulatory agencies are unable to
conduct such investigations, they may suspend or de-register DH Enchantment,
Inc.'s registration with the SEC and delist its securities from applicable
trading market within the US." set forth in the Annual Report.
20
In addition to the foregoing risks, we face various legal and operational risks
and uncertainties arising from doing business in Hong Kong and China as
summarized below and in "Risk Factors - Risks Factors Relating to Doing Business
in Hong Kong." set forth in the Annual Report.
· Adverse changes in economic and political policies of the PRC government
could have a material and adverse effect on overall economic growth in China
and Hong Kong, which could materially and adversely affect our business.
· DH Enchantment, Inc. is a holding company and will rely on dividends paid by
its subsidiaries for its cash needs. Any limitation on the ability of its
subsidiaries to make payments to DH Enchantment, Inc. could have a material
adverse effect on our ability to conduct business. We do not anticipate
paying dividends in the foreseeable future; you should not buy stock of DH
Enchantment, Inc. if you expect dividends.
· There is a possibility that the PRC could prevent our cash maintained in
Hong Kong from leaving or the PRC could restrict the deployment of the cash
into our business or for the payment of dividends. We rely on dividends from
our Hong Kong subsidiary for our cash and financing requirements, such as
the funds necessary to service any debt we may incur. Any such controls or
restrictions may adversely affect our ability to finance our cash
requirements, service debt or make dividend or other distributions to our
shareholders. Please see "Risk Factors - Our Hong Kong subsidiary may be
subject to restrictions on paying dividends or making other payments to us,
which may restrict its ability to satisfy liquidity requirements, conduct
business and pay dividends to holders of DH Enchantment, Inc.'s common
stock."; "Risk Factors - PRC regulation of loans to and direct investment in
PRC entities by offshore holding companies and governmental control of
currency conversion may delay or prevent us from using the proceeds we
receive from offshore financing activities to make loans to or make
additional capital contributions to our Hong Kong subsidiary, which could
materially and adversely affect our liquidity and our ability to fund and
expand business."; "Risk Factors - Because our holding company structure
creates restrictions on the payment of dividends or other cash payments, our
ability to pay dividends or make other payments is limited." and "Transfers
of Cash to and from our Subsidiaries." set forth in the Annual Report.
· PRC regulation of loans to and direct investments in PRC entities by
offshore holding companies may delay or prevent us from using the proceeds
of this offering to make loans or additional capital contributions to DH
Enchantment, Inc.'s operating subsidiary in Hong Kong.
· Substantial uncertainties exist with respect to the interpretation of the
PRC Foreign Investment Law and how it may impact the viability of our
current corporate structure, corporate governance and business operations.
· We are subject to the risks arising from the legal system in China. The
Chinese government can change the rules and regulations in China and Hong
Kong, including the enforcement and interpretation thereof, at any time with
little to no advance notice and can intervene at any time with little to no
advance notice. HSY is currently not required to obtain approval from
Chinese authorities to list on U.S. exchanges. However, if the subsidiaries
of DH Enchantment, Inc. or the holding company were required to obtain
approval in the future, or we erroneously conclude that approvals were not
required, or HSY was denied permission from Chinese authorities to operate
or to list on U.S. exchanges, we will not be able to continue listing on a
U.S. exchange and the value of DH Enchantment, Inc. common stock would
likely significantly decline or become worthless, which would materially
affect the interest of the investors. There is a risk that the Chinese
government may intervene or influence HSY's operations at any time, or may
exert more control over offerings conducted overseas and/or foreign
investment in Hong Kong-based issuers, which could result in a material
change in our operations and/or the value of DH Enchantment, Inc.'s
securities. Further, 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 would likely significantly limit
or completely hinder our ability to offer or continue to offer DH
Enchantment, Inc. securities to investors and cause the value of such
securities to significantly decline or be worthless. Please see "Risk
Factors-We face the risk that changes in the policies of the PRC government
could have a significant impact upon the business we may be able to conduct
in the Hong Kong and the profitability of such business." and "Substantial
uncertainties and restrictions with respect to the political and economic
policies of the PRC government and PRC laws and regulations could have a
significant impact upon the business that we may be able to conduct in Hong
Kong and accordingly on the results of our operations and financial
condition." set forth in the Annual Report.
21
· Governmental control of currency conversion may limit our ability to utilize
our revenues effectively and affect the value of your investment.
· HSY may become subject to a variety of laws and regulations in the PRC
regarding privacy, data security, cybersecurity, and data protection. HSY
may be liable for improper use or appropriation of personal information
provided by our customers.
· Under the Enterprise Income Tax Law, we may be classified as a "Resident
Enterprise" of China. Such classification will likely result in unfavorable
tax consequences to us and our non-PRC shareholders.
· PRC regulation of loans to, and direct investments in, Hong Kong entities by
offshore holding companies may delay or prevent us from using proceeds from
this offering and/or future financing activities to make loans or additional
capital contributions to our Hong Kong operating subsidiary.
· Failure to comply with PRC regulations relating to the establishment of
offshore special purpose companies by PRC residents may subject our PRC
resident Shareholders to personal liability, may limit our ability to
acquire Hong Kong and PRC companies or to inject capital into our Hong Kong
subsidiary, may limit the ability of our Hong Kong subsidiary to distribute
profits to us or may otherwise materially and adversely affect us.
· The recent joint statement by the SEC and PCAOB, 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. Trading in our securities may be prohibited
under the Holding Foreign Companies Accountable Act if the PCAOB determines
that it cannot inspect or investigate completely our auditor, and that as a
result an exchange may determine to delist our securities. On June 22, 2021,
the U.S. Senate passed the Accelerating Holding Foreign Companies
Accountable Act which would reduce the number of consecutive non-inspection
years required for triggering the prohibitions under the HFCAA from three
years to two thus reducing the time before our securities may be prohibited
from trading or being delisted. On December 2, 2021, the U.S. Securities and
Exchange Commission adopted rules to implement the HFCAA. Pursuant to the
HFCAA, the Public Company Accounting Oversight Board (PCAOB) issued its
report notifying the Commission that it is unable to inspect or investigate
completely accounting firms headquartered in mainland China or Hong Kong due
to positions taken by authorities in mainland China and Hong Kong. Our
auditor is not subject to the determinations announced by the PCAOB on
December 16, 2021. However, in the event the Malaysian authorities
subsequently take a position disallowing the PCAOB to inspect our auditor,
then we would need to change our auditor to avoid having our securities
delisted. Please see "Risk Factors- The Holding Foreign Companies
Accountable Act requires the Public Company Accounting Oversight Board
(PCAOB) to be permitted to inspect the issuer's public accounting firm
within three years. This three-year period will be shortened to two years if
the Accelerating Holding Foreign Companies Accountable Act is enacted. There
are uncertainties under the PRC Securities Law relating to the procedures
and requisite timing for the U.S. securities regulatory agencies to conduct
investigations and collect evidence within the territory of the PRC. If the
U.S. securities regulatory agencies are unable to conduct such
investigations, they may suspend or de-register DH Enchantment, Inc.'s
registration with the SEC and delist its securities from applicable trading
market within the US." set forth in the Annual Report.
· You may be subject to PRC income tax on dividends from us or on any gain
realized on the transfer of shares of our common stock.
· We face uncertainties with respect to indirect transfers of equity interests
in PRC resident enterprises by their non-PRC holding companies.
· DH Enchantment, Inc. is organized under the laws of the State of Nevada as a
holding company that conducts its business through a number of subsidiaries
organized under the laws of foreign jurisdictions such as Hong Kong and the
British Virgin Islands. This may have an adverse impact on the ability of
U.S. investors to enforce a judgment obtained in U.S. Courts against these
entities, bring actions in Hong Kong against us or our management or to
effect service of process on the officers and directors managing the foreign
subsidiaries.
· U.S. regulatory bodies may be limited in their ability to conduct
investigations or inspections of our operations in Hong Kong.
· There are significant uncertainties under the EIT Law relating to the
withholding tax liabilities of PRC subsidiary, and dividends payable by a
PRC subsidiary to offshore subsidiaries may not qualify to enjoy certain
treaty benefits.
22
Transfers of Cash to and from Our Subsidiaries
DH Enchantment, Inc. is a Nevada holding company with no operations of its own.
DH Enchantment, Inc. conducts its operations in Hong Kong primarily through HSY,
DH Enchantment, Inc.'s subsidiary in Hong Kong. DH Enchantment, Inc. may rely on
dividends to be paid by its Hong Kong subsidiary to fund its cash and financing
requirements, including the funds necessary to pay dividends and other cash
distributions to its shareholders, to service any debt it may incur and to pay
its operating expenses. In order for DH Enchantment, Inc. to pay dividends to
its shareholders, it will rely on payments made from it Hong Kong subsidiary to
DH Enchantment, Inc. As of the date of this prospectus, DH Enchantment, Inc.
does not have bank accounts. There has been no dividends, distributions or any
other cash flows or transfers of assets made among the holding company or the
subsidiaries and no dividends, distributions or any other cash flows or
transfers of assets made to U.S. investors. Please see our consolidated
financial statements beginning on page F-1 of this Annual Report.
DH Enchantment, Inc. does not intend to make dividends or distributions to
investors of DH Enchantment, Inc. in the foreseeable future.
We currently intend to retain all available funds and future earnings, if any,
for the operation and expansion of our business and do not anticipate declaring
or paying any dividends in the foreseeable future. Any future determination
related to our dividend policy will be made at the discretion of our board of
directors after considering our financial condition, results of operations,
capital requirements, contractual requirements, business prospects and other
factors the board of directors deems relevant, and subject to the restrictions
contained in any future financing instruments.
DH Enchantment, Inc. (Nevada corporation)
Subject to the Nevada Revised Statutes and our bylaws, the board of directors of
DH Enchantment, Inc. may authorize and declare a dividend to shareholders at
such time and of such an amount as they think fit if they are satisfied, on
reasonable grounds, that immediately following the dividend the value of the
assets of DH Enchantment, Inc. will exceed its liabilities and it will be able
to pay its debts as they become due. There is no further Nevada statutory
restriction on the amount of funds which may be distributed by DH Enchantment,
Inc.by dividend to its U.S. investors. DH Enchantment, Inc. is permitted under
the Nevada laws to provide funding to its subsidiary in Hong Kong and the
British Virgin Islands through loans or capital contributions without
restrictions on the amount of the funds.
DH Investment Group Limited (British Virgin Islands)
DH Investment Group Limited is permitted under the laws of BVI to provide
funding to and receive funding from DH Enchantment, Inc. and Ho Shun Yi Limited
through dividend distributions or other payments of cash without restrictions on
the amount of the funds. There are no BVI law restrictions on DH Investment
Group's ability to receive and provide funding from DH Enchantment Inc. and Ho
Shun Yi Limited.
Ho Shun Yi Limited (Hong Kong)
Ho Shun Yi Limited is permitted under the laws of Hong Kong to provide funding
to and receive funding from DH Enchantment, Inc. and DH Investment Group Limited
through dividend distributions or other payments of cash without restrictions on
the amount of the funds. If DH Enchantment, Inc.'s Hong Kong subsidiary incurs
debt on its own behalf in the future, the instruments governing the debt may
restrict its ability to pay dividends or make other distributions to us. There
are no HK law restrictions on HSY's ability to transfer cash to or receive cash
from the BVI or Nevada entity in the event HSY incurs debt.
Under the current practice of the Inland Revenue Department of Hong Kong, no tax
is payable in Hong Kong in respect of dividends paid by Ho Shun Yi. The laws and
regulations of the PRC do not currently have any material impact on transfer of
cash from DH Enchantment, Inc. to Ho Shun Yi Limited or from Ho Shun Yi Limited
to DH Enchantment, Inc. There are no restrictions or limitation under the laws
of Hong Kong imposed on the conversion of HK dollar into foreign currencies and
the remittance of currencies out of Hong Kong or across borders and to U.S
investors.
23
PRC Laws
There is a possibility that the PRC could prevent our cash maintained in Hong
Kong from leaving or the PRC could restrict the deployment of the cash into our
business or for the payment of dividends. Any such controls or restrictions may
adversely affect our ability to finance our cash requirements, service debt or
make dividend or other distributions to our shareholders. Please see "Risk
Factors - Our Hong Kong subsidiary may be subject to restrictions on paying
dividends or making other payments to us, which may restrict its ability to
satisfy liquidity requirements, conduct business and pay dividends to holders of
DH Enchantment, Inc.'s common stock."; "Risk Factors - PRC regulation of loans
to and direct investment in PRC entities by offshore holding companies and
governmental control of currency conversion may delay or prevent us from using
the proceeds we receive from offshore financing activities to make loans to or
make additional capital contributions to our Hong Kong subsidiary, which could
materially and adversely affect our liquidity and our ability to fund and expand
business."; "Risk Factors - Because our holding company structure creates
restrictions on the payment of dividends or other cash payments, our ability to
pay dividends or make other payments is limited."
Current PRC regulations permit PRC subsidiaries to pay dividends to Hong Kong
subsidiaries only out of their accumulated profits, if any, determined in
accordance with Chinese accounting standards and regulations. In addition, each
of our subsidiaries in China is required to set aside at least 10% of its
after-tax profits each year, if any, to fund a statutory reserve until such
reserve reaches 50% of its registered capital. Each of such entity in China is
also required to further set aside a portion of its after-tax profits to fund
the employee welfare fund, although the amount to be set aside, if any, is
determined at the discretion of its board of directors. Although the statutory
reserves can be used, among other ways, to increase the registered capital and
eliminate future losses in excess of retained earnings of the respective
companies, the reserve funds are not distributable as cash dividends except in
the event of liquidation. As of the date of this prospectus, we do not have any
PRC subsidiaries.
The PRC government also imposes controls on the conversion of RMB into foreign
currencies and the remittance of currencies out of the PRC. Therefore, we may
experience difficulties in completing the administrative procedures necessary to
obtain and remit foreign currency for the payment of dividends from our profits,
if any. Furthermore, if our 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. If we or our subsidiaries are unable to
receive all of the revenues from our operations, we may be unable to pay
dividends on our common stock.
Cash dividends, if any, on our common stock will be paid in U.S. dollars. If we
are considered a PRC tax resident enterprise for tax purposes, any dividends we
pay to our overseas shareholders may be regarded as China-sourced income and as
a result may be subject to PRC withholding tax at a rate of up to 10.0%.
If in the future we have PRC subsidiaries, certain payments from such PRC
subsidiaries to Hong Kong subsidiaries will be subject to PRC taxes, including
business taxes and VAT. As of the date of this prospectus, we do not have any
PRC subsidiaries, and our Hong Kong subsidiary has not made any transfers,
dividends or distributions to date. We do not expect our Hong Kong subsidiaries
to make any such transfers, dividends or distributions in the foreseeable
future.
Pursuant to the Arrangement between Mainland China and the Hong Kong Special
Administrative Region for the Avoidance of Double Taxation and Tax Evasion on
Income, or the Double Tax Avoidance Arrangement, the 10% withholding tax rate
may be lowered to 5% if a Hong Kong resident enterprise owns no less than 25% of
a PRC entity. However, the 5% withholding tax rate does not automatically apply
and certain requirements must be satisfied, including, without limitation, that
(a) the Hong Kong entity must be the beneficial owner of the relevant dividends;
and (b) the Hong Kong entity must directly hold no less than 25% share ownership
in the PRC entity during the 12 consecutive months preceding its receipt of the
dividends. In current practice, a Hong Kong entity must obtain a tax resident
certificate from the Hong Kong tax authority to apply for the 5% lower PRC
withholding tax rate. As the Hong Kong tax authority will issue such a tax
resident certificate on a case-by-case basis, we cannot assure you that we will
be able to obtain the tax resident certificate from the relevant Hong Kong tax
authority and enjoy the preferential withholding tax rate of 5% under the Double
Taxation Arrangement with respect to dividends to be paid by a PRC subsidiary to
its immediate holding company. As of the date of this prospectus, we do not have
a PRC subsidiary. In the event that we acquire or form a PRC subsidiary in the
future and such PRC subsidiary desires to declare and pay dividends to our Hong
Kong subsidiary, our Hong Kong subsidiary will be required to apply for the tax
resident certificate from the relevant Hong Kong tax authority. In such event,
we plan to inform the investors through SEC filings, such as a current report on
Form 8-K, prior to such actions. See "Risk Factors - Risk Factors Relating to
Doing Business in Hong Kong." set forth in the Annual Report.
24
PRC Laws
There is a possibility that the PRC could prevent our cash maintained in Hong
Kong from leaving or the PRC could restrict the deployment of the cash into our
business or for the payment of dividends. Any such controls or restrictions may
adversely affect our ability to finance our cash requirements, service debt or
make dividend or other distributions to our shareholders. Please see "Risk
Factors - Our Hong Kong subsidiary may be subject to restrictions on paying
dividends or making other payments to us, which may restrict its ability to
satisfy liquidity requirements, conduct business and pay dividends to holders of
DH Enchantment, Inc.'s common stock."; "Risk Factors - PRC regulation of loans
to and direct investment in PRC entities by offshore holding companies and
governmental control of currency conversion may delay or prevent us from using
the proceeds we receive from offshore financing activities to make loans to or
make additional capital contributions to our Hong Kong subsidiary, which could
materially and adversely affect our liquidity and our ability to fund and expand
business."; "Risk Factors - Because our holding company structure creates
restrictions on the payment of dividends or other cash payments, our ability to
pay dividends or make other payments is limited."
Current PRC regulations permit PRC subsidiaries to pay dividends to Hong Kong
subsidiaries only out of their accumulated profits, if any, determined in
accordance with Chinese accounting standards and regulations. In addition, each
of our subsidiaries in China is required to set aside at least 10% of its
after-tax profits each year, if any, to fund a statutory reserve until such
reserve reaches 50% of its registered capital. Each of such entity in China is
also required to further set aside a portion of its after-tax profits to fund
the employee welfare fund, although the amount to be set aside, if any, is
determined at the discretion of its board of directors. Although the statutory
reserves can be used, among other ways, to increase the registered capital and
eliminate future losses in excess of retained earnings of the respective
companies, the reserve funds are not distributable as cash dividends except in
the event of liquidation. As of the date of this prospectus, we do not have any
PRC subsidiaries.
The PRC government also imposes controls on the conversion of RMB into foreign
currencies and the remittance of currencies out of the PRC. Therefore, we may
experience difficulties in completing the administrative procedures necessary to
obtain and remit foreign currency for the payment of dividends from our profits,
if any. Furthermore, if our 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. If we or our subsidiaries are unable to
receive all of the revenues from our operations, we may be unable to pay
dividends on our common stock.
Cash dividends, if any, on our common stock will be paid in U.S. dollars. If we
are considered a PRC tax resident enterprise for tax purposes, any dividends we
pay to our overseas shareholders may be regarded as China-sourced income and as
a result may be subject to PRC withholding tax at a rate of up to 10.0%.
If in the future we have PRC subsidiaries, certain payments from such PRC
subsidiaries to Hong Kong subsidiaries will be subject to PRC taxes, including
business taxes and VAT. As of the date of this prospectus, we do not have any
PRC subsidiaries, and our Hong Kong subsidiary has not made any transfers,
dividends or distributions to date. We do not expect our Hong Kong subsidiaries
to make any such transfers, dividends or distributions in the foreseeable
future.
Pursuant to the Arrangement between Mainland China and the Hong Kong Special
Administrative Region for the Avoidance of Double Taxation and Tax Evasion on
Income, or the Double Tax Avoidance Arrangement, the 10% withholding tax rate
may be lowered to 5% if a Hong Kong resident enterprise owns no less than 25% of
a PRC entity. However, the 5% withholding tax rate does not automatically apply
and certain requirements must be satisfied, including, without limitation, that
(a) the Hong Kong entity must be the beneficial owner of the relevant dividends;
and (b) the Hong Kong entity must directly hold no less than 25% share ownership
in the PRC entity during the 12 consecutive months preceding its receipt of the
dividends. In current practice, a Hong Kong entity must obtain a tax resident
certificate from the Hong Kong tax authority to apply for the 5% lower PRC
withholding tax rate. As the Hong Kong tax authority will issue such a tax
resident certificate on a case-by-case basis, we cannot assure you that we will
be able to obtain the tax resident certificate from the relevant Hong Kong tax
authority and enjoy the preferential withholding tax rate of 5% under the Double
Taxation Arrangement with respect to dividends to be paid by a PRC subsidiary to
its immediate holding company. As of the date of this prospectus, we do not have
a PRC subsidiary. In the event that we acquire or form a PRC subsidiary in the
future and such PRC subsidiary desires to declare and pay dividends to our Hong
Kong subsidiary, our Hong Kong subsidiary will be required to apply for the tax
resident certificate from the relevant Hong Kong tax authority. In such event,
we plan to inform the investors through SEC filings, such as a current report on
Form 8-K, prior to such actions. See "Risk Factors - Risk Factors Relating to
Doing Business in Hong Kong." set forth in the Annual Report.
25
We are at a development stage company and reported a net loss of $264,983 and a
net loss of $90,708 for the three months ended June 30, 2022 and 2021,
respectively. We had current assets of $119,510 and current liabilities of
$818,769 as of June 30, 2022. As of March 31, 2022, we had current assets of
$121,433 and current liabilities of $479,067. We have prepared our unaudited
condensed financial statements for the three months ended June 30, 2022 and 2021
assuming that we will continue as a going concern. Our continuation as a going
concern is dependent upon improving our profitability and the continuing
financial support from our stockholders. Our sources of capital in the past have
included the sale of equity securities, which include common stock sold in
private transactions and short-term and long-term debts.
Results of Operations.
Three Months Ended June 30, 2022 Compared to the Three Months Ended June 30,
2021
The following table sets forth selected financial information from our
statements of comprehensive loss for the three months ended June 30, 2022 and
2021:
For the Three Months Ended
June 30,
2022 2021
Revenue $ 3,263 $ 99,812
Cost of Revenue (2,746 ) (88,229 )
Total Operating Expenses (276,522 ) (101,670 )
Other Income (Expenses), net 11,022 (621 )
Net Loss $ (264,983 ) $ (90,708 )
Revenues
The Company generates revenues of $3,263 and $99,812 for the three months ended
June 30, 2022 and 2021, respectively.
Cost of Revenues
Cost of revenues for the three months ended June 30, 2022 and 2021 was $2,746
and $88,229, respectively.
Sales and marketing expenses
We incurred sales and marketing expenses of $226,366 and $0 for the three months
ended June 30, 2022 and 2021, respectively. During the year ended March 31,
2022, we engaged with two consultants for expanding sale channels and developing
marketing strategies, analyzing and evaluating consumer data services for a term
of six months, with a compensation of 19,684,019 shares to be issued upon the
completion of the service contracts. The fair value of these shares was
$452,732, based on the current market price at the effective date of the
agreement and is being amortized over the service period.
General and Administrative Expenses ("G&A")
G&A for the three months ended June 30, 2022 and 2021, were $50,156 and
$101,670, respectively. Operating expenses for the three months ended June 30,
2022 and 2021 consisted primarily of G&A of $214 and $38,348 and professional
fee of $49,942 and $63,322, respectively.
Other Income (Expenses)
Other income (expenses) for the three months ended June 30, 2022 and 2021, were
$11,022 and ($621), respectively. Other income for the three months ended June
30, 2022 consisted primarily of other income of $12,597, net off by an interest
expenses of $1,575. Other expenses for the three months ended June 30, 2021
consisted primarily of interest expenses of $621.
Net Loss
As a result of the above factors, the Company incurred a net loss of $264,983
and $90,708 for the three months ended June 30, 2022 and 2021, respectively.
Foreign Currency Translation (Loss) Gain
The Company had $58 in foreign currency translation loss during the three months
ended June 30, 2022 as compared to $7 in foreign currency translation gain
during the three months ended June 30, 2021, reflecting a change of $65. Such
increase in foreign currency translation loss was primarily caused by the
currency exchange rate fluctuation.
26
Liquidity and Capital Resources
The following summarizes the key component of our cash flows for the three
months ended June 30, 2022 and 2021.
For the Three Months Ended
June 30,
2022 2021
Net cash provided by (used in) operating activities $ 2,227 $ (38,329 )
Net cash used in investing activities
- -
Net cash provided by financing activities 1,526 81,091
Net increase in cash and cash equivalents $ 3,695 $ 42,769
Net cash provided by operating activities was $2,227 for the three months ended
June 30, 2022, compared to the net cash used in operating activities of $38,329
for the three months ended June 30, 2021. The decrease of $40,556 or 106% of net
cash used in operating activities was primarily due to the decreased prepayments
and other receivable and increased accrual and other payables during the three
months ended June 30, 2022., offset by the increase in net loss. For the three
months ended June 30, 2021, net cash used in operating activities consisted
primarily of a net loss of $90,708, an increase in prepayments and other
receivable of $2,090 and offset by decrease in accrual and other payables of
$54,469.
Net cash provided by financing activities was $1,526 and $81,091 for the three
months ended June 30, 2022 and 2021, respectively, representing a decrease of
$79,565 or 98%. The decrease in net cash provided by financing activities was
primarily due to decrease in advance from a director, and cash proceeds from
issuing promissory notes in the three months ended June 30, 2022. For the three
months ended June 30, 2021, net cash provided by financing activities consisted
primarily of a cash proceeds from issuing promissory notes of $77,266 and
advance from a director of $3,825.
Working Capital:
As of June 30, 2022 and March 31, 2022, we had cash and cash equivalent of
$115,091 and $111,396, respectively. As of June 30, 2022 and March 31, 2021, we
have incurred accumulated operating losses of $1,536,915 and $1,271,932,
respectively. As of June 30, 2022 and March 31, 2022, we had working capital
deficit of $699,259 and $357,634, respectively.
Going Concern
We require additional funding to meet the Company's ongoing obligations and to
fund anticipated operating losses. Our ability to continue as a going concern is
dependent on raising capital to fund its initial business plan and ultimately to
attain profitable operations. These consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts, or amounts and classification of liabilities that might
result from this uncertainty.
We expect to incur marketing and professional and administrative expenses as
well expenses associated with maintaining our filings with the Commission. We
will require additional funds during this time and will seek to raise the
necessary additional capital. If we are unable to obtain additional financing,
we may be required to reduce the scope of our business development activities,
which could harm our business plans, financial condition and operating results.
Additional funding may not be available on favorable terms, if at all. We intend
to continue to fund its business by way of equity or debt financing and advances
from related parties. Any inability to raise capital as needed would have a
material adverse effect on our business, financial condition and results of
operations.
If we cannot raise additional funds, we will have to cease business operations.
As a result, our common stock investors would lose all of their investment.
27
Basis of preparation
Our financial statements and accompanying notes have been prepared in accordance
with United States generally accepted accounting principles applied on a
consistent basis. The preparation of financial statements in conformity with
United States generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods.
Use of estimates
The preparation of the financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting periods. Management makes
these estimates using the best information available at the time the estimates
are made; however actual results could differ materially from those estimates.
Income Taxes
We account for income taxes as outlined in ASC 740, "Income Taxes". Under the
asset and liability method of ASC 740, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates in effect for the year in which those
temporary differences are expected to be recovered or settled.
Off-balance Sheet Arrangements
As of June 30, 2022, there were no off-balance sheet arrangements.
© Edgar Online, source Glimpses