VIE Structure and Regulatory Risks - The company operates through variable interest entities (VIEs) in China, specifically Junzhang Digital Technology (Beijing) Co., Ltd. and Junzhang Digital Technology (Shanghai) Co., Ltd., which poses unique risks to investors due to the lack of direct ownership[51]. - As of the date of the report, the VIE agreements have not been tested in court, raising concerns about their enforceability and the company's control over the VIEs[53]. - The company has consolidated the financial results of the VIEs in its financial statements, treating them as affiliated entities under U.S. GAAP[51]. - Recent regulatory actions in China have increased uncertainty regarding the overseas listing of Chinese companies, which could materially affect the company's financial performance[55]. - The company is closely monitoring regulatory developments in China that may affect its ability to list on U.S. exchanges in the future[57]. - The company does not anticipate needing additional approvals from PRC authorities for its current operations, but future changes in regulations could impose new requirements[56]. - The revised Provisions on Strengthening Confidentiality and Archives Administration for Overseas Securities Offering and Listing came into effect on March 31, 2023, expanding their application to indirect overseas offerings and listings[63]. - There are uncertainties regarding the interpretation and implementation of the Trial Measures, which may subject the company to additional procedural requirements in future financial activities[65]. - The company is not currently required to obtain approval from Chinese authorities to list on U.S. exchanges, but future requirements could materially affect investor interests[67]. - The legal environment in the PRC presents uncertainties that could limit the company's ability to enforce contractual arrangements[201]. - The company may incur substantial costs to enforce contractual arrangements if the VIEs or their shareholders fail to perform their obligations[203]. - The VIE contributed almost 100% of the company's consolidated results of operations and cash flows for the years ended March 31, 2025, and 2024[196]. - The company relies on contractual arrangements with its VIEs, which may not provide the same level of control as direct ownership[197]. - If the PRC authorities invalidate the contractual arrangements, the company's operations in China could be materially and adversely affected[198]. - The company relies on dividends from its PRC subsidiary to meet cash needs, and any limitations on these payments could restrict its financial flexibility[217]. - The contractual arrangements with the VIEs may not provide the same level of operational control as direct ownership, leading to potential enforcement challenges[213]. - The Special Administrative Measures for Foreign Investment restrict foreign ownership in telecommunications services, complicating potential equity acquisitions of the VIE[210]. - The legal system in the PRC presents uncertainties that could limit the company's ability to enforce its contractual arrangements effectively[216]. - The PRC subsidiary generates primarily all of its revenue in Renminbi, which is not freely convertible into other currencies, potentially limiting the ability to pay dividends[220]. - A withholding tax rate of up to 10% applies to dividends payable by Chinese companies to non-PRC-resident enterprises, which could adversely affect growth and investment capabilities[221]. - Contractual arrangements with VIEs may be scrutinized by PRC tax authorities, potentially leading to additional tax liabilities and penalties[224]. Financial Performance and Position - Total revenues for the year ended March 31, 2025, were $13,472,112, a decrease from $16,963,957 in the previous year, representing a decline of approximately 20%[77]. - Net loss attributable to Eshallgo Inc for the year ended March 31, 2025, was $10,798,318, compared to a net income of $8,652 in the previous year, indicating a significant downturn[77]. - Total assets as of March 31, 2025, amounted to $24,809,293, a decrease from $19,686,668 as of March 31, 2024, reflecting a decline of approximately 26%[79]. - Total liabilities as of March 31, 2025, were $8,252,176, compared to $2,578,802 in the previous year, showing an increase of approximately 220%[79]. - Total shareholders' equity remained unchanged at $10,470,098 as of March 31, 2025, compared to the previous year[79]. - Cash balance as of March 31, 2025, was $7,600,300, a decrease from $5,362,101 as of March 31, 2024, indicating a decline of approximately 41%[79]. - Comprehensive loss attributable to Eshallgo Inc for the year ended March 31, 2025, was $10,851,497, compared to a comprehensive loss of $517,937 in the previous year, marking a substantial increase in losses[77]. - The company reported equity in earnings of subsidiaries and VIEs as a loss of $1,310,001 for the year ended March 31, 2025, compared to a loss of $17,304 in the previous year[77]. - The service fee receivable due from VIE and VIE's subsidiaries was $1,099,457 as of March 31, 2025, remaining unchanged from the previous year[79]. - For the year ended March 31, 2025, the net cash used in operating activities was $(1,283,432) and net cash used in investing activities was $(5,163,214)[82]. - The net cash provided by financing activities for the year ended March 31, 2025, was $8,678,984, indicating a significant reliance on financing to support operations[82]. - The company recorded a net operating cash flow of $(1,283,432) for the year ended March 31, 2025, compared to $2,220,418 for the year ended March 31, 2024[142]. - The company reported a net loss of $(2,648,393) for the year ended March 31, 2025, reflecting ongoing challenges in achieving profitability[85]. - The company has a substantial allowance for credit loss of $668,195 and $133,449 as of March 31, 2025, and 2024, respectively, indicating potential risks in accounts receivable management[116]. - The average accounts receivable turnover period was approximately 128 days and 125 days for the fiscal years ended March 31, 2025, and 2024, respectively, highlighting delays in customer payments[116]. Operational and Market Challenges - The company faces significant competitive pressures in the fragmented market, which could adversely affect sales and profitability[95]. - The company faces unforeseen difficulties in extending internal control over financial reporting and assessing the newly acquired business, which could adversely affect operating results[110]. - The company anticipates that interruptions in supply chains could lead to increased costs or delivery delays, adversely impacting net sales and profitability[111]. - The company expects labor costs, including wages and employee benefits, to continue increasing due to rising average wage levels in China[150]. - The company has identified material weaknesses in its internal control over financial reporting, which remain unremediated as of March 31, 2025[145]. - The company plans to invest approximately $160,000 to strengthen its internal control over financial reporting during the remediation period[146]. - The company may face challenges in identifying and integrating new products into its distribution network, impacting its competitive ability[141]. - The company does not have business insurance coverage, which could significantly impact its financial results in the event of disruptions or litigation[140]. - The company is subject to stricter regulatory requirements regarding labor contracts and employee benefits, which could adversely affect its operations[151]. - The company anticipates that increases in labor costs may not be fully passed on to customers, potentially affecting profitability[150]. - The company faces risks related to network interruptions and security breaches that could adversely affect its business operations[153]. - The company has made significant investments in technology initiatives, which may disrupt operations in the near term and may not provide the anticipated benefits[121]. - The company is currently operating in a period of economic uncertainty influenced by geopolitical instability, which could materially affect its financial condition and results of operations[127]. - Market conditions in China, including economic downturns and reduced consumer spending, may adversely affect demand for the company's products and services[177]. - The company acknowledges the potential impact of public health epidemics, such as COVID-19, on its business operations and financial performance[179]. - The company is exposed to risks from natural disasters and extreme weather conditions, which could disrupt operations and affect financial results[178]. - The COVID-19 outbreak led to significant business disruptions, with major operations in Shanghai suspended from April 1, 2022, to mid-June 2022, affecting revenue from equipment sales[181]. - The company experienced decreased occupancy rates due to customers' inability to make timely payments or renew leases amid the pandemic[182]. - Although recovery began in the second and third quarters of 2020, the long-term impact of COVID-19 on financial conditions remains uncertain[183]. Internal Control and Compliance - The company has undertaken steps to enhance its internal control functions, including hiring qualified accounting staff and providing ongoing training[148]. - The company emphasizes the importance of robust information security measures to protect against cyber-attacks, which have increased in sophistication and frequency[155]. - The company is subject to evolving PRC laws regarding privacy, data security, and cybersecurity, which may lead to liabilities for improper use of personal information[156]. - The company maintains critical data integrity and protection, as customer and employee data security is essential for business operations[157]. - The company faces risks related to the potential loss of High-Tech status due to stringent government regulations and inspections, which could negatively impact operations and revenues[174]. - The company successfully obtained High-Tech Enterprise status in November 2019, which provides tax incentives such as a reduced 15% corporate income tax[172]. - The company faces significant challenges in managing business expansion, including compliance with laws and maintaining control over service delays and cost overruns[131]. - The company faces substantial uncertainties regarding the interpretation and application of current and future PRC laws, which may affect its ability to consolidate financial results of the VIEs[204]. - Changes in Chinese laws and regulations may occur quickly with little advance notice, creating operational risks[245]. - The interpretation and enforcement of existing and new PRC laws may involve substantial uncertainty, affecting business arrangements[245]. - New laws and regulations could be applied retroactively, impacting current and future business operations[245]. - The effectiveness of newly enacted laws may be delayed, leading to reliance on potentially outdated interpretations[245]. - The company cannot predict the effects of existing or new PRC laws on its business operations[245].
Eshallgo Inc.(EHGO) - 2025 Q4 - Annual Report