KPEA 10-K/A
Kun Peng International Ltd. (KPEA)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT NO. 2
TO
FORM
For
the fiscal year ended
or
For the transition period from ______________ to ______________
Commission
File Number:
| (Exact name of issuer as specified in its charter) |
| (State or other jurisdiction of | (I.R.S. employer | |
| incorporation or organization) | identification number) |
|
||
| (Address of principal executive offices) | (Zip Code) |
Registrant’s
telephone number, including area code +
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| N/A |
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging Growth Company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☐ No ☒
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐
The
aggregate market value of the 112,215,560 shares of common stock held by non-affiliates of the registrant as of March 31, 2022 (the last
business day of the registrant’s most recently completed second fiscal quarter) was $
As of December 20, 2022, the registrant had shares of common stock, par value $0.0001 per share, issued and outstanding.
EXPLANATORY NOTE
As required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), this Amendment also includes new, currently dated certifications from the Company’s principal executive officer and principal financial officer as required by Rule 13a-14(a) under the Exchange Act and Section 302 of the Sarbanes-Oxley Act of 2002. These certifications are filed herewith as Exhibits 31.5, 31.6, 32.5, and 32.6.
Except as described above or as otherwise expressly provided by the terms of this Amendment, no other changes have been made to the Original Filing, as amended by Amendment 1. Except as otherwise indicated herein, this Amendment continues to speak as of the date of the Original Filing, and the Company has not updated the disclosures contained therein to reflect any events that occurred subsequent to the date of the Original Filing.
TABLE OF CONTENTS
TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED SEPTEMBER 30, 2022
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report, including, without limitation, statements under the sections entitled “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). These statements involve known and unknown risks, uncertainties, and other factors which may cause our actual results, performance, or achievements to be materially different from any historical results and future results, performances, or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, the following factors:
| ● | Our independent registered auditors have expressed substantial doubt about our ability to continue as a going concern. | |
| ● | We may continue to incur losses in the future, and may not be able to return to profitability, which may cause the market price of our shares to decline. | |
| ● | Our business plan is based on a relatively new model that may not be successful and we may not successfully implement our business strategies. |
Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our estimates and assumptions only as of the date of this report. You should read this report and the documents that we reference and filed as exhibits to the report completely and with the understanding that our actual future results may be materially different from what we expect. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.
USE OF CERTAIN DEFINED TERMS
Unless the context otherwise requires and, for the purposes of this report only, references to:
| ● | “China” and “the PRC” are to the People’s Republic of China; | |
| ● | “Company” or “KPIL” are to Kun Peng International Ltd., (formerly CX Network Group, Inc.), a Nevada corporation; | |
| ● | “Exchange Act” are to the Securities Exchange Act of 1934, as amended; | |
| ● | “FIE” are to a foreign invested enterprise; | |
| ● | “Guoxin Zhengye” are to Guoxin Zhengye Enterprise Management Co., Ltd., a PRC company; | |
| ● | “Hong Kong” are to the Hong Kong Special Administrative Region of the People’s Republic of China; | |
| ● | “KP International” are to Kun Peng International Holding Limited, a British Virgins Island company and wholly owned subsidiary of Kun Peng International Ltd. and a holding company; | |
| ● | “KP (Hong Kong)” are to Kun Peng (Hong Kong) Industrial Development Limited, a Hong Kong company and wholly owned subsidiary of KP International, and a holding company; | |
| ● | “KP Industrial” are to Kunpeng (China) Industrial Development Company Limited, a Hong Kong company and wholly owned subsidiary of KP International, and a holding company; |
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| ● | “King Eagle (Beijing)” are to King Eagle (Beijing) Technology Co., a PRC company and wholly owned subsidiary of King Eagle VIE; | |
| ● | “King Eagle (China)” and “WFOE” are to King Eagle (China) Co., Ltd., a PRC company and a wholly owned subsidiary of KP Industrial; | |
| ● | “King Eagle VIE” and “King Eagle (Tianjin)” are to King Eagle (Tianjin) Technology Co., Ltd., a PRC company and a variable interest entity; | |
| ● | “Kung Peng Tian Yu” are to Kun Peng Tian Yu Health Technology (Tianjin) Co. Ltd., a PRC company and wholly-owned subsidiary of KP International, which is not conducting any operations; | |
| ● | “member(s)” are to customers who have opened an account with King Eagle VIE so as to make purchases on one of our e-commerce platforms; | |
| ● | “MOFCOM” are to the Ministry of Commerce of the People’s Republic of China; | |
| ● | “NDRC” are to the National Development and Reform Commission of the People’s Republic of China; | |
| ● | “Renminbi” and “RMB” are to the legal currency of China; | |
| ● | “SAFE” are to the State Administration of Foreign Exchange of the People’s Republic of China; | |
| ● | “SEC” are to the U.S. Securities and Exchange Commission; | |
| ● | “Securities Act” are to the Securities Act of 1933, as amended; | |
| ● | “U.S. dollars,” “dollars,” and “$” are to the legal currency of the United States; | |
| ● | “VIE Agreements” are to the agreements entered into by and between King Eagle (China) and King Eagle (Tianjin) to qualify King Eagle (Tianjin) as a variable interest entity, specifically, the Consulting Service Agreement, the Business Operation Agreement, the Proxy Agreement, the Equity Disposal Agreement, and the Equity Pledge Agreement. | |
| ● | “we,” “us,” “our,” “KPIL,” “CXN,” “the Company,” and “our Company” are to the combined business of Kun Peng International Ltd. (formerly CX Network Group, Inc.), a Nevada corporation, and its subsidiaries and other consolidated entities. | |
| ● | “WFOE” are to King Eagle (China), our wholly foreign owned entity. |
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Part I
ITEM 1. BUSINESS
Regulatory Overview – Legal and Operational Risks
Kun Peng International Ltd. (“KPIL” or the “Company”) is not a Chinese operating company but rather a Nevada holding company with no operations of its own. KPIL conducts its operations through its PRC subsidiary, King Eagle (China) Co., Ltd. (“King Eagle (China)” or our “WFOE”), which conducts its operations through contractual agreements with a variable interest entity (“VIE”), King Eagle (Tianjin) Technology Co., Ltd. (“King Eagle (Tianjin)” and its wholly-owned subsidiary, King Eagle (Beijing) Technology Co., Ltd. (“King Eagle (Beijing)”), as discussed in greater detail below. See “—Corporate History and Structure – Contractual Arrangements,” below.
The VIE structure involves unique risks to shareholders and investors. It is used to provide investors with contractual exposure to foreign investment in China-based companies where Chinese law prohibits or restricts direct foreign investment in the operating companies. Due to PRC legal restrictions on foreign ownership in certain businesses, we do not have any equity ownership of the VIE or its subsidiary; instead, we receive the economic benefits of the VIE’s business operations through certain contractual arrangements.
As a result of such series of contractual arrangements, King Eagle (China) is the primary beneficiary of the VIE for accounting purposes and the VIE is a PRC consolidated entity under U.S. GAAP. The Company consolidates the financial results of the VIE and its subsidiary in its consolidated financial statements in accordance with U.S. GAAP. Neither the Company nor its investors own any equity interest in, have direct foreign investment in, or control through any such ownership of or investment in the VIE. As a result, investors in the Company’s common stock are not purchasing an equity interest in the VIE or in its subsidiary, but instead are purchasing an equity interest in KPIL, the Nevada holding company. These contractual arrangements have not been tested in a court of law in the PRC.
Risks Related to our VIE Structure
| ● | PRC laws and regulations prohibit or restrict foreign ownership of companies that operate Internet information and content, value added telecommunications, and certain other businesses in which we are engaged or could be deemed to be engaged. Consequently, our operations and business in the PRC are conducted through contractual arrangements (“VIE Agreements”) with King Eagle VIE . If the Chinese government should disallow or limit the use of the VIE, it could materially and adversely affect our business, which could result in your shares significantly declining in value or becoming worthless. See “Item 1A. Risk Factors – Risks Relating to our Commercial Relationship with our VIE - PRC laws and regulations governing our business and the validity of certain of our contractual arrangements are uncertain. If we are found to be in violation of such PRC laws and regulations, our business may be negatively affected, and we may be forced to relinquish our interests in those operations” on page 35. | |
| ● | Although we have been advised by our PRC counsel that the ownership structures of our PRC subsidiary and the King Eagle VIE in China do not violate any applicable PRC law, regulation, or rule currently in effect and that the VIE Agreements are valid, binding, and enforceable in accordance with their terms and applicable PRC laws and regulations currently in effect, but that such ownership structures have not been tested in court, KPIL faces uncertainty with respect to future actions by the PRC government that could significantly affect the enforceability of the VIE Agreements, King Eagle VIE’s financial performance, and the value of a shareholder’s KPIL shares. See “Item 1A. Risk Factors – Risks Relating to our Commercial Relationship with our VIE - We conduct substantially all of our operations in China through our PRC subsidiary, King Eagle (China) and our VIE, with which King Eagle (China) maintains contractual arrangements. There are risks associated with this structure as the PRC has not yet ruled on its legality” on page 36. | |
| ● | Although the PRC’s Ministry of Commerce and its National Development and Reform Commission have announced new edicts regarding the use of VIEs for new overseas offerings, they have indicated that such new requirements will not affect the foreign ownership of companies already listed overseas. Nonetheless, there can be no assurance that such new rules and regulations will not be applied retroactively which may have a substantial negative impact on KPIL’s business and consequently on the value of KPIL’s securities. See “Item 1A. Risk Factors – Risks Relating to our Commercial Relationship with our VIE- PRC laws and regulations governing our business and the validity of certain of our contractual arrangements are uncertain. If we are found to be in violation of such PRC laws and regulations, our business may be negatively affected, and we may be forced to relinquish our interests in those operations” on page 35. | |
| ● | On March 15, 2019, the National People’s Congress promulgated the Foreign Investment Law, which took effect on January 1, 2020. Since it is relatively new, substantial uncertainties exist in relation to its interpretation and implementation including future laws, administrative regulations, or provisions of the State Council to provide for contractual arrangements as a form of foreign investment. Therefore, it is uncertain whether our contractual arrangements would be deemed to be in violation of the market access requirements for foreign investment in the PRC, and if they are deemed to be in violation, how our contractual arrangements should be dealt with. See “Item 1A. Risks Factors – Risks Related to Our VIE Structure - Our current corporate structure and business operations may be substantially affected by the newly enacted Foreign Investment Law” on page 37. | |
| ● | Neither the Company nor it shareholders have a direct equity ownership interest in King Eagle VIE. The Company’s relationship to the VIE is defined by the VIE Agreements. Therefore, should the Chinese government disallow or limit the use of the VIE, it could result in your shares significantly declining in value or becoming worthless. See “Item 1A. Risk Factors – Risks Relating to our Commercial Relationship with our VIE - We conduct substantially all of our operations in China through our PRC subsidiary, King Eagle (China) and our VIE, with which King Eagle (China) maintains contractual arrangements. There are risks associated with this structure as the PRC has not yet ruled on its legality” on page 36. |
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For additional risks related to our VIE structure, see “Item 1A. Risk Factors – Risks Relating to our Commercial Relationship with our VIE” starting on page 35.
Risks Related to Doing Business in China
| ● | The Chinese government may choose to exercise significant oversight and discretion over the conduct of our business operations in China and may intervene in or influence our operations at any time, which could result in a material change in our and our VIE’s operations and/or the value of your shares. See “Item 1A. Risk Factors – Risks Relating to Doing Business in China - The Chinese government may choose to exercise significant oversight and discretion over the conduct of our and our VIE’s business operations in China” on page 40. | |
| ● | Regulatory authorities in China have recently implemented regulations concerning privacy and data protection and more stringent laws and regulations may be introduced in China. The PRC Cybersecurity Law provides that personal information and important data collected and generated by operators of critical information infrastructure in the course of their operations in the PRC should be stored in the PRC, and the law imposes heightened regulation and additional security obligations on operators of critical information infrastructure. The Measures for Cybersecurity Review (2021) stipulate that operators of critical information infrastructure purchasing network products and services and online platform operators (together with the operators of critical information infrastructure, the “Operators”) carrying out data processing activities that affect or may affect national security shall conduct a cybersecurity review, and any online platform operator who controls more than one million users’ personal information must go through a cybersecurity review by the cybersecurity review office if it seeks to be listed in a foreign country. We do not believe that our Company constitutes an Operator pursuant to the Cybersecurity Review (2021) that became effective in February 2022 nor do we control more than one million users’ personal information. However, the interpretation and application of consumer and data protection laws in China are often uncertain, in flux, and complicated, including differentiated requirements for different groups of people or different types of data, and there can be no assurance that in the future our operations may not be subject to these regulations which could have a significant material impact on our financial performance and the value of our securities. See “Item 1A. Risk Factors - Risks Relating to Doing Business in China - Our business is subject to complex and evolving laws and regulations regarding privacy and data protection” on page 42. | |
| ● | The Company relies on dividends and other distributions on equity paid by our subsidiaries to fund our cash and financing requirements, and any limitation on the ability of our subsidiaries to make payments to us could have a material adverse effect on our financial position. King Eagle (China) and it’s VIE’s ability to distribute dividends is based upon their distributable earnings. Current PRC regulations permit our PRC subsidiaries to pay dividends to their shareholders only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, our 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. This reserve is not distributable as cash dividends. To the extent that cash derived from our VIE’s businesses is in the PRC or Hong Kong, or in a PRC or Hong Kong entity, the funds may not be available to fund operations or for other use outside of the PRC or Hong Kong due to interventions in or the imposition of restrictions and limitations by the PRC government on the ability of our PRC or Hong Kong subsidiaries, or of our VIE, to transfer cash. The inability of our Hong Kong or PRC subsidiaries to pay dividends, for whatever reason, could have a material adverse effect on our financial position and, in turn, on the value of our common stock. See “Item 1A. Risk Factors - Risks Related to our Business in China-Restrictions under PRC law on our subsidiaries’ ability to make dividend payments and other distributions could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise fund and conduct our business” on page 46. | |
| ● | 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 in the subsequent months, 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 our PRC subsidiary’s dividend payments 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, King Eagle (China) and our VIE may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from their profits, if any. Furthermore, if our PRC subsidiaries incur debt on their own in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments. See “Item 1A. Risk Factors – Risks Related to Doing Business in China - Fluctuations in exchange rates could adversely affect our business and the value of our securities” on page 46. | |
| ● | 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 our Hong Kong subsidiary from our PRC subsidiary. This withholding tax will reduce the amount of dividends we may receive from our PRC subsidiary. See “Item 1A. Risk Factors - Risks Related to Doing Business in China - 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 stockholders” on page 47. |
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| ● | A downturn in the Chinese or global economy or a change in economic and political policies of China could materially and adversely affect our VIEs’ businesses and financial condition. Any deterioration in our VIEs’ businesses could have a negative impact on the Company’s financial position and, in turn, on the value of its common stock. See “Item 1A. Risk Factors –Risks Related to Doing Business in China - A downturn in the Chinese or global economy, or a change in economic and political policies of China, could materially and adversely affect our VIE’s business and financial condition” on page 45. | |
| ● | Our business operations are conducted in China through our VIE and its subsidiary. If we should become subject to the recent scrutiny, criticism and negative publicity involving U.S. listed China-based companies, we may have to expend significant resources to investigate and/or defend negative allegations. If such allegations cannot be addressed and resolved favorably, it could result in a material change in the business operations of our PRC subsidiaries, significantly limit our ability to obtain financing through the sale of additional securities, and cause the value of our securities to significantly decline or be worthless. See “Item 1A. Risk Factors – Risks Related to Doing Business in China - Our business is subject to complex and evolving laws and regulations regarding privacy and data protection. These laws and regulations can be complex and stringent, and many are subject to change and uncertain interpretation, which could result in claims, changes to its data and other business practices, regulatory investigations, penalties, increased cost of operations, or declines in user growth or engagement, or otherwise affect its business. Although we believe we currently are not required to obtain clearance from the Cyberspace Administration of China under the recently enacted or proposed regulations or rules, we face uncertainties as to the interpretation or implementation of such regulations or rules, and if required, whether such clearance can be timely obtained, or at all” on page 42. | |
| ● | There are political risks associated with conducting business in Hong Kong and China. See “Item 1A. Risk Factors – Risks Related to Doing Business in China - There are political risks associated with conducting business in China” on page 46. | |
| ● | Although our current independent registered public accounting firm is headquartered in Kuala Lumpur, Malaysia and, therefore, we believe that its work papers are available for inspection by the PCAOB, our common stock could, in the future, be delisted under the Holding Foreign Companies Accountable Act, as amended by the Consolidated Appropriations Act, 2023 and related regulations, if the PCAOB is unable to inspect our auditors in the future. The delisting of our common stock, or the threat of its being delisted, may materially and adversely affect the value of your investment. See “Item 1A Risk Factors – Risks Related to Doing Business in China- To the extent that our independent registered public accounting firm’s audit documentation related to their audit reports for the Company may, in the future, be located in China or in Hong Kong, our securities could be delisted and prohibited from trading on a U.S. exchange” on page 45. |
Implications of Being a Holding Company – Transfers of Cash to and from Our Subsidiaries
As a holding company, we will rely on dividends and other distributions on equity paid by our subsidiaries for our cash and financing requirements. Neither the Company nor any of its subsidiaries maintain cash management policies or procedures that dictate how funds are transferred. The Company is permitted under the laws of the State of Nevada and its articles of incorporation (as amended from time to time) to provide funding to its subsidiaries through loans or capital contributions. Our subsidiaries are permitted under the respective laws of China and Hong Kong to provide funding to us through dividends without restrictions on the amount of the funds, other than as limited by the amount of their distributable earnings. However, to the extent that cash is in our PRC or Hong Kong subsidiaries, there is a possibility that the funds may not be available to fund our operations or for other uses outside of the PRC or Hong Kong due to interventions or the imposition of restrictions and limitations by the PRC or the Hong Kong government on their ability to transfer cash. If any of our subsidiaries incur debt on their own behalf in the future, the instruments governing such debt may restrict their ability to pay dividends to us.
As of the date of this Annual Report, our subsidiaries have not experienced any difficulties or limitations on their ability to transfer cash between each other nor do they maintain cash management policies or procedures dictating the amount of such funding or how funds are transferred. None of our subsidiaries has paid any dividends or other distributions or transferred assets to the Company as of the date of this Annual Report. In the future, cash proceeds raised from overseas financing activities may be transferred by the Company to its subsidiaries via capital contribution or shareholder loans, as the case may be. As of the date of this Annual Report, the Company has not made any transfers, paid any dividends, or made any distributions to U.S. investors. None of the Company, our subsidiaries, or our VIE has any plan to distribute earnings or settle amounts owed under the VIE Agreements in the foreseeable future. We intend to retain all available funds and future earnings, if any, for the operation of our VIE’s business.
See “Item 1A. Risk Factors – Risks Related to Doing Business in China - Restrictions under PRC law on our subsidiaries’ ability to make dividend payments and other distributions could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise fund and conduct our business” on page 46.
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Corporate History and Structure
Kun Peng International Ltd. (formerly known as CX Network Group, Inc.)
The Company was incorporated in the State of Florida on September 3, 2010, under the name of “mLight Tech, Inc.” (“MLGT”). On July 11, 2017, MLGT merged with and into CX Network Group, Inc. (“CXKJ”), a company incorporated in Nevada on July 25, 2005, with CXKJ as the surviving corporation pursuant to an agreement and plan of merger (the “Merger Agreement”) dated July 3, 2017.
Pursuant to the Merger Agreement, immediately after the effective time of the Merger, the Company’s corporate existence is governed by the laws of the State of Nevada and the Articles of Incorporation and bylaws of the Company (the “Domicile Change”), its name was changed to CX Network Group, Inc. (the “Name Change”), and each outstanding share of MLGT’s common stock, par value $0.0001 per share, was converted into 0.0667 outstanding share of common stock of CXKJ, par value $0.0001 per share, at a one-for-fifteen reverse split ratio (the “Reverse Stock Split”) which resulted in reclassification of capital from par value to capital in excess of par value. Immediately prior to the effectiveness of the Reverse Stock Split, we had 217,300,000 shares of common stock of MLGT issued and outstanding. Immediately upon the effectiveness of the Reverse Stock Split, we had 14,486,670 shares of common stock of CXKJ issued and outstanding.
The Name Change, the Domicile Change, and the Reverse Stock Split were effective as of July 12, 2017. Subsequently, the Company’s trading symbol for its common stock was changed to “CXKJ.”
On March 20, 2018, CXKJ, Chuangxiang Holdings Inc., a company incorporated on February 4, 2016 under the laws of the Cayman Islands (“CX Cayman”), Continent Investment Management Limited, a British Virgin Islands company (“Continent”), and Golden Fish Capital Investment Limited, a British Virgin Islands company (“Golden Fish,” and, together with “Continent,” the “CX Cayman Stockholders”) entered into a share exchange agreement (the “Share Exchange Agreement”), pursuant to which CXKJ acquired 100% of the issued and outstanding equity securities of CX Cayman in exchange for 5,350,000 shares of common stock, par value $0.0001 per share, of CXKJ (the “Share Exchange”). As a result of the Share Exchange, CX Cayman became the Company’s wholly owned subsidiary.
Immediately prior to the Share Exchange, we were a shell company with no significant assets or operations. As a result of the Share Exchange, we operated through our PRC affiliated entity, namely Chuangxiang Network Technology (Shenzhen) Limited, located in Shenzhen, China, (“CX Network”). CX Network’s business focused on the development and operation of online dating and mobile gaming products either developed and operated by it, developed by it but co-operated by third parties, or developed by third parties but co-operated by it.
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On March 30, 2021, certain of our shareholders (the “Sellers”) and a certain investor (the “Purchaser”) entered into a Stock Purchase Agreement (the “SPA”), pursuant to which the Purchaser acquired 16,683,334 shares of common stock, par value $0.0001 per share, of the Company for an aggregate purchase price of $255,000, subject to satisfaction or waiver of the closing conditions set forth in the SPA.
In connection with the SPA, on the same day, we entered into a spin-off agreement (the “Spin-Off Agreement”) with CX Cayman (the “Spin-Off Subsidiary”), and Continent Investment Management Limited and Golden Fish Capital Investment Limited, (together, the “Spin-Off Subsidiary Buyers”). Pursuant to the Spin-Off Agreement, the Spin-Off Subsidiary Buyers received all of the issued and outstanding capital stock of the Spin-Off Subsidiary at a purchase price of $1. As a result, the Spin-Off Subsidiary Buyers became the sole equity owners of the Spin-Off Subsidiary and the Company has no further interest in the Spin-Off Subsidiary.
On May 17, 2021, we entered into a Share Cancellation Agreement with a stockholder, Wenhai Xia, to cancel an aggregate of 15,535,309 shares of the Company’s common stock owned by the stockholder.
On May 17, 2021, we entered into a Share Exchange Agreement with Kun Peng International Holding Limited (“KP International Holding”) and the holders of all of the outstanding capital stock of KP International Holding. Pursuant to the Share Exchange Agreement, we acquired 100% of the outstanding capital stock of KP International Holding and, in exchange, we issued to the five former shareholders of KP International Holding an aggregate of 34,158,391 shares of the Company’s common stock. As a result of the share exchange (the “2021 Share Exchange”), on May 17, 2021, KP International Holding became our wholly owned subsidiary and the former shareholders of KP International Holding became the holders of approximately 85% of our issued and outstanding capital stock on a fully diluted basis. For accounting purposes, the transaction with KP International Holding was treated as a reverse acquisition, with KP International Holding as the acquirer and the Company as the acquired party. Unless the context suggests otherwise, when we refer in this report to business and financial information for periods prior to the consummation of the reverse acquisition, we are referring to the business and financial information of KP International Holding and its subsidiaries and consolidated entities. As a result of the reverse acquisition, the Company is engaged in the sale of health care products and services through its online platform in the PRC.
Effective October 12, 2022, we increased our authorized common stock from 200,000,000 shares, par value $0.0001, to 1,000,000,000 shares, par value $0.0001, and on October 18, 2022, we effected a 10:1 forward stock split after which we have 400,000,000 shares of common stock issued and outstanding.
On November 8, 2022, the Company changed its name from CX Network Group, Inc. to Kun Peng International Ltd. and its trading symbol was changed to “KPEA.”
On November 11, 2022, the Company received an electronic notice that OTC Markets had approved its application for uplisting from OTC Pink to the OTCQB Venture Market (OTCQB). The Company’s securities commenced trading on the OTCQB at the market open on November 14, 2022. The Company’s shares trade on the OTCQB under the current ticker symbol, “KPEA.”
Kun Peng International Holding Limited
KP International Holding was incorporated in the British Virgin Islands on April 20, 2021. On May 3, 2021, KP International Holding purchased all of the issued and outstanding equity securities of Kunpeng (China) Industrial Development Company Limited (“KP Industrial”), incorporated in Hong Kong on August 11, 2017, at a cash consideration of $0.129 (HK$1). After the ownership transfer, KP International Holding became the sole shareholder of KP Industrial. KP International Holding is a holding company.
Kunpeng (China) Industrial Development Company Limited
Kunpeng (China) Industrial Development Company Limited (“KP Industrial”) was incorporated as a limited liability company in Hong Kong under the name of Jing Jin Ji Investment Group Co., Limited (“Jing Jin Ji”) on August 11, 2017. The share capital of the company is 10,000 ordinary shares at $1,292 (HKD10,000) and, prior to its acquisition by KP International Holding, it was wholly owned by an individual. On November 9, 2018, Jing Jin Ji changed its name to Kunpeng (China) Industrial Development Company Limited and filed a Certificate of Change of Name with the Hong Kong Company Registry on the same day. Although it was incorporated in 2017, it did not commence operations until July 2020 as it focused on exploring business opportunities in its initial phase and on developing our online mobile application, King Eagle Mall, through its subsidiary, King Eagle (China) Co., Ltd. It became a wholly owned subsidiary of KP International Holding on May 3, 2021.
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King Eagle (China) Co., Ltd.
King Eagle (China) Co., Ltd. (“King Eagle (China)”) was incorporated as a limited liability company in the People’s Republic of China on March 20, 2019, with a registered capital of approximately $15 million (RMB100 million). King Eagle (China) was a wholly owned subsidiary of KP Industrial at the time of establishment. KP Industrial transferred a 15% interest, approximately $2.2 million (RMB 15 million), to Guoxin Ruilian Group Co., Ltd., a limited liability company incorporated in Beijing, PRC, on November 2, 2020.
On March 26, 2021, Guoxin Ruilian Group Co., Ltd. entered into equity transfer agreements with KP Industrial and Guoxin Zhengye. Both Guoxin Ruilian Group Co., Ltd. and Guoxin Zhengye are wholly owned by a common shareholder, Guoxin United Holdings Group Co., Ltd. Under the equity transfer agreements, Guoxin Ruilian Group Co., Ltd. agreed to transfer an 8% ownership interest in King Eagle (China) to Guoxin Zhengye and its remaining 7% ownership in King Eagle (China) to KP Industrial on April 20, 2021. After the transfer, KP Industrial and Guoxin Zhengye became the 92% and 8% shareholders of King Eagle (China), respectively. Guoxin Zhengye agreed to transfer its 8% ownership interest in King Eagle (China) to KP Industrial on August 26, 2022. As a result of the transfer, KP Industrial is the sole shareholder of King Eagle (China).
King Eagle (Tianjin) Technology Co., Ltd.
King Eagle (Tianjin) Technology Co., Ltd. (“King Eagle VIE”) was incorporated as a limited liability company in Tianjin Pilot Free Trade Zone in the People’s Republic of China on September 2, 2020, with a registered capital of approximately $1.5 million (RMB 10 million). We do not own any of the equity of King Eagle VIE. It is owned by multiple individuals: Chengyuan Li (approximately 45.5%), Xiujin Wang (approximately 10.5%), Yuanyuan Zhang (approximately 10%), Jinjing Zhang, Wanfeng Hu, Cuilian Liu, and Zhizhong Wang (each of whom owns approximately 6%), Zhandong Fan and Hui Teng (each of whom owns approximately 5%). Those shareholders also indirectly owned KP International Holding prior to its acquisition by the Company through two British Virgin Islands entities: Kunpeng Tech Limited and Kunpeng TJ Limited. Additionally, Chengyuan Li is a director and Yuanyuan Zhang is Chief Financial Officer of the Company.
Some of the business engaged in by King Eagle VIE is restricted or prohibited for foreign investment under PRC regulations. Therefore, King Eagle (China) entered into the VIE Agreements with King Eagle VIE and its shareholders. We do not own any equity interests in King Eagle VIE, but control and receive the economic benefits of its business operations through the VIE Agreements. The VIE Agreements enable us to provide King Eagle VIE with consulting services on an exclusive basis, in exchange for all of its annual profits, if any. In addition, we are able to appoint its senior executives and approve all matters requiring approval of its shareholders. The VIE Agreements are comprised of a Consulting Service Agreement, Business Operation Agreement, Proxy Agreement, Equity Disposal Agreement, and Equity Pledge Agreement, which are described in further detail under “Contractual Arrangements” below.
Under current Chinese laws and regulations, we believe that the VIE Agreements are not subject to any government approval. The shareholders of King Eagle VIE were required to register with SAFE when they established offshore vehicles to hold KP International Holding, and such SAFE registration was effected on May 14, 2021. These shareholders of King Eagle VIE have registered their equity pledge arrangement as required under the Equity Pledge Agreement with King Eagle (China). The Company faces uncertainty with respect to future actions by the PRC government that could significantly affect King Eagle VIE’s financial performance and the enforceability of the VIE Agreements. See “Contractual Arrangements,” below.
King Eagle (Beijing) Technology Co., Ltd.
King Eagle (Beijing) Technology Co., Ltd. (“King Eagle (Beijing)”) was established on December 1, 2022 as a wholly-owned subsidiary of King Eagle VIE. It currently has no operations; however, commencing in January 2023, King Eagle (Beijing) will operate our new online platform.
Kun Peng (Hong Kong) Industrial Development Limited
Kun Peng (Hong Kong) Industrial Development Limited (“KP (Hong Kong)”) was incorporated as a limited liability company in Hong Kong on June 21, 2021. The share capital of this entity upon formation is $0.13 (HK$1). KP (Hong Kong) is a holding company, is wholly owned by Kun Peng International Holding, and is the sole shareholder of Kun Peng Tian Yu Health Technology (Tianjin) Co., Ltd.
Kun Peng Tian Yu Health Technology (Tianjin) Co., Ltd
Kun Peng Tian Yu Health Technology (Tianjin) Co., Ltd. was established as a wholly owned subsidiary of KP (Hong Kong) on August 10, 2021 under the laws of the PRC. It currently has no operations.
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The following diagram illustrates our corporate structure as of the date of this report:
The contractual arrangements between King Eagle (China) and King Eagle VIE consist of:
| (1) | Consulting Service Agreement | |
| (2) | Business Operation Agreement | |
| (3) | Proxy Agreement | |
| (4) | Equity Disposal Agreement | |
| (5) | Equity Pledge Agreement |
Contractual Arrangements
While we do not have any equity interest in our consolidated affiliated entities, King Eagle VIE and King Eagle (Beijing), we have been and are expected to continue to be dependent on them to operate our business as long as there is limitation or prohibition in the interpretation and application by local governments of regulations concerning foreign investments in companies such as our consolidated affiliated entities. We rely on our consolidated affiliated entities to maintain or renew their respective qualifications, licenses, or permits necessary for our business in China. We believe that under the VIE Agreements, we have substantial control over our consolidated affiliated entities and their respective shareholders to renew, revise, or enter into new contractual arrangements prior to the expiration of the current arrangements on terms that would enable us to continue to operate our business in China after the expiration of the current arrangements, or pursuant to certain amendments and changes of the current applicable PRC laws, regulations, and rules, on terms that would enable us to continue to operate our business in China legally. While we currently do not anticipate any changes to PRC laws in the near future that may impact our ability to carry out our business in China, no assurances can be made in this regard. See “Risk Factors—Risks Related to Doing Business in China—Changes in China’s economic, political, or social conditions or government policies could have a material adverse effect on our business and operations” and “Risk Factors—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could limit the legal protections available to you and us.” For a detailed description of the risks associated with our corporate structure and the contractual arrangements that support our corporate structure, see “Risk Factors—Risks Related to Our Commercial Relationship with our VIE.”
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The Company is the primary beneficiary of a variable interest entity (“VIE’), King Eagle (Tianjin) Technology Co., Ltd. Under U.S. GAAP, the Company is required to consolidate the assets and liabilities of the VIE on its consolidated financial statements. When we obtain a variable interest in another entity, we assess at the inception of the relationship and upon occurrence of certain significant events whether the entity is a VIE and, if so, whether we are the primary beneficiary of the VIE based on our power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and our obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.
To determine whether a variable interest that we hold could potentially be significant to the VIE, we consider both qualitative and quantitative factors regarding the nature, size and form of our involvement with the VIE. To assess whether we have the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, we consider all the facts and circumstances, including our role in establishing the VIE and our ongoing rights and responsibilities. This assessment includes identifying the activities that most significantly impact the VIE’s economic performance and identifying which party, if any, has power over those activities. In general, the parties that make the most significant decisions affecting the VIE (management and representation on the Board of Directors) and have the right to unilaterally remove those decision-makers are deemed to have the power to direct the activities of a VIE. To assess whether we have the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, we consider all of our economic interests that are deemed to be variable interests in the VIE. This assessment requires us to apply judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE.
There are uncertainties associated with the VIE structure as the PRC has not yet ruled on its legality nor has the validity of VIE arrangements been tested in a court of law. Some of these uncertainties are as follows:
| (i) | Our contractual arrangements may not be as effective in providing us with operational control, and shareholders of the VIE may fail to perform their obligations under the contractual arrangements. | |
| (ii) | We may incur substantial costs to enforce the terms of the arrangements with the VIE. | |
| (iii) | The legality and enforceability of the contractual arrangements by and between King Eagle (China) and the VIE have not been tested in a court of law in China. | |
| (iv) | The equity holders, directors and executive officers of the VIE, as well as our employees who execute other strategic initiatives, may have potential conflicts of interest with the Company. | |
| (v) | There are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations, and rules regarding the status of the Company with respect to the contractual arrangements with the VIE. | |
| (vi) | It is uncertain whether any new PRC laws or regulations relating to VIE structures will be adopted or, if adopted, what they would provide. | |
| (vii) | If we or our VIE is found to be in violation of any existing or future PRC laws or regulations, or fails to obtain or maintain any of the required licenses, permits, registrations, or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures. | |
| (viii) | If the PRC government finds that the agreements that establish the VIE structure for operating our business do not comply with PRC laws and regulations, or if these regulations or their interpretations change in the future, we could be subject to severe penalties or be forced to relinquish our interest in those operations. |
On May 15, 2021, King Eagle (China) and the shareholders of King Eagle VIE entered into a series of contractual agreements for King Eagle VIE to qualify as a variable interest entity or VIE (the “VIE Agreements”). The VIE Agreements are summarized as follows:
Consulting Service Agreement
Pursuant to the terms of an Exclusive Consulting Service Agreement dated May 15, 2021 between King Eagle (China) and King Eagle VIE (the “Consulting Service Agreement”), King Eagle (China) is the exclusive consulting service provider to King Eagle VIE to provide business-related software research and development services; design, installation, and testing services; network equipment support, upgrade, maintenance, monitoring, and problem-solving services; employee technical training services; technology development and sublicensing services; public relations services; market investigation, research, and consultation services; short to medium term marketing plan-making services; compliance consultation services; marketing events and membership related activities organizing services; intellectual property permits; equipment and rental services; and business-related management consulting services. Pursuant to the Consulting Service Agreement, the service fee is an amount equal to the excess of King Eagle VIE’s profit before tax in the corresponding year over King Eagle VIE’s losses, if any, in the previous year, necessary costs, expenses, taxes, and fees incurred in the corresponding year, and contributions to the statutory provident fund. King Eagle VIE agreed not to transfer its rights and obligations under the Consulting Service Agreement to any third party without the prior written consent of King Eagle (China). King Eagle (China) may transfer its rights and obligations under the Consulting Service Agreement to King Eagle (China)’s affiliates without King Eagle VIE’s consent, but King Eagle (China) must notify King Eagle VIE of such transfer. The Consulting Service Agreement is valid for a term of 10 years subject to any extension requested by King Eagle (China) unless terminated by King Eagle (China) unilaterally prior to expiration.
The foregoing summary of the Consulting Service Agreement does not purport to be complete and is subject to, and qualified in its entirety by, the Consulting Service Agreement, which was filed as Exhibit 10.1 to our Form 8-K dated May 17, 2021.
Business Operation Agreement
Pursuant to the terms of a Business Operation Agreement dated May 15, 2021 among King Eagle (China), King Eagle VIE and the shareholders of King Eagle VIE (the “Business Operation Agreement”), King Eagle VIE has agreed to subject the operations and management of its business to the control of King Eagle (China). According to the Business Operation Agreement, King Eagle VIE is not allowed to conduct any transaction that has a substantial impact upon its operations, assets, rights, obligations, or personnel without King Eagle (China)’s written approval. The shareholders of King Eagle VIE and King Eagle VIE will take King Eagle (China)’s advice on the appointment or dismissal of directors, employment of King Eagle VIE’s employees, and the regular operation and financial management of King Eagle VIE. The shareholders of King Eagle VIE have agreed to transfer any dividends, distributions, or any other profits that they receive as the shareholders of King Eagle VIE to King Eagle (China) without consideration. The Business Operation Agreement is valid for a term of 10 years or longer upon the request of King Eagle (China) prior to the expiration thereof. The Business Operation Agreement may be terminated earlier by King Eagle (China) with a 30-day written notice.
The foregoing summary of the Business Operation Agreement does not purport to be complete and is subject to, and qualified in its entirety by, the Business Operation Agreement, which was filed as Exhibit 10.2 to our Form 8-K filed dated May 17, 2021.
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Proxy Agreement
Pursuant to the terms of a Proxy Agreement dated May 15, 2021 among King Eagle (China) and the shareholders of King Eagle VIE (the “Proxy Agreement”), the shareholders of King Eagle VIE have entrusted their voting rights as King Eagle VIE’s shareholders to King Eagle (China) for the longest duration permitted by PRC law. The Proxy Agreement can be terminated by mutual consent of the King Eagle VIE shareholders (100% of whom must approve) and King Eagle (China) or upon a 30-day notice of King Eagle (China).
The foregoing summary of the Proxy Agreement does not purport to be complete and is subject to, and qualified in its entirety by, the Proxy Agreement, which was filed as Exhibit 10.3 to our Form 8-K dated May 17, 2021.
Equity Disposal Agreement
Pursuant to the terms of an Equity Disposal Agreement dated May 15, 2021 among King Eagle (China), King Eagle VIE, and the shareholders of King Eagle VIE (the “Equity Disposal Agreement”), the shareholders of King Eagle VIE granted King Eagle (China) or its designees an irrevocable and exclusive purchase option (the “Option”) to purchase all or part of King Eagle VIE’s equity interests and/or assets at the lowest purchase price permitted by PRC laws and regulations. The Option is exercisable at any time at King Eagle (China)’s discretion in full or in part, to the extent permitted by PRC law. The shareholders of King Eagle VIE agreed to give King Eagle (China) the total amount of the exercise price as a gift, or other method, upon King Eagle (China)’s written consent to transfer the exercise price to King Eagle VIE. The Equity Disposal Agreement is valid for a term of 10 years or longer upon the request of King Eagle (China).
The foregoing summary of the Equity Disposal Agreement does not purport to be complete and is subject to, and qualified in its entirety by, the Equity Disposal Agreement, which was filed as Exhibit 10.4 to our Form 8-K dated May 17, 2021.
Equity Pledge Agreement
Pursuant to the terms of an Equity Pledge Agreement dated May 15, 2021 among King Eagle (China) and the shareholders of King Eagle VIE (the “Pledge Agreement”), the shareholders of King Eagle VIE pledged all of their equity interests in King Eagle VIE, including the proceeds thereof, to King Eagle (China) to guarantee King Eagle VIE’s performance of its obligations under the Business Operation Agreement, the Consulting Service Agreement and the Equity Disposal Agreement (each, an “Agreement,” and collectively, the “Agreements”). If King Eagle VIE or its shareholders breach their respective contractual obligations under any Agreement or cause to occur one of the events constituting an event of default under any Agreement, King Eagle (China), as pledgee, will be entitled to certain rights, including the right to dispose of the pledged equity interest in King Eagle VIE. During the term of the Pledge Agreement, the pledged equity interests cannot be transferred without King Eagle (China)’s prior written consent. The Pledge Agreement is valid until all the obligations due under the Agreements have been fulfilled.
The foregoing summary of the Equity Pledge Agreement does not purport to be complete and is subject to, and qualified in its entirety by, the Equity Pledge Agreement, which was filed as Exhibit 10.5 to our Form 8-K dated May 17, 2021.
Cash Flows
Our Company is a holding company, and we will rely on dividends and other distributions on equity paid by our Hong Kong and China subsidiaries for our cash and financing requirements. Any funds we may transfer to King Eagle (China), 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 our PRC subsidiary 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 our PRC subsidiary is required to be registered with SAFE, and such loan is required to be registered with the NDRC. We may not be able to complete such registrations or obtain necessary approvals on a timely basis with respect to future capital contributions or foreign loans by us to our PRC subsidiary. If we fail to complete such registration or other procedures, our ability to maintain our corporate structure while capitalizing our PRC subsidiary’s operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.
Substantially all of our sales are earned by our PRC subsidiary, King Eagle (China), and King Eagle VIE. Neither we nor King Eagle (China) own any equity interest in King Eagle VIE. In accordance with the terms of the Consulting Service Agreement, King Eagle (China) is entitled to receive payments from King Eagle VIE in the form of a service fee which, in turn, may be distributed to us as dividends. As a holding company, we will rely on dividends and other distributions on equity paid by our BVI, Hong Kong, and PRC subsidiaries for our cash and financing requirements. Our Hong Kong and PRC subsidiaries are permitted under the respective laws of China and Hong Kong to provide funding to us through dividends without restrictions on the amount of the funds, other than as limited by the amount of their distributable earnings. However, to the extent that cash is in our Hong Kong or PRC subsidiaries, there is a possibility that the funds may not be available to fund our operations or for other uses outside of the PRC or Hong Kong due to interventions or the imposition of restrictions and limitations by the PRC or the Hong Kong government on the ability to transfer cash. If any of our subsidiaries incurs debt on its own behalf in the future, the instruments governing such debt may restrict their ability to pay dividends to us.
After investors’ funds enter the Company, the funds can be directly transferred to KP International in accordance with the laws of the State of Nevada, which will then directly transfer the funds to KP Industrial and KP (Hong Kong). KP Industrial can then transfer the funds to King Eagle (China), which can subsequently transfer funds to King Eagle VIE. If the Company intends to distribute dividends, King Eagle (China) will transfer funds received from King Eagle VIE as dividends to KP Industrial in accordance with the laws and regulations of China. KP Industrial will then transfer the funds to KP International in accordance with the laws of Hong Kong, and KP International will then transfer the funds to the Company in accordance with the laws of the BVI. The Company will then distribute the dividends to all of its shareholders respectively in proportion to the shares they hold in accordance with the laws and regulations of the State of Nevada, regardless of whether the shareholders are U.S. investors or investors in other countries or regions.
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Under the Companies Ordinance of Hong Kong, dividends may only be paid out of distributable profits (that is, accumulated realized profits less accumulated realized losses) or other distributable reserves. Dividends cannot be paid out of share capital. There are no restrictions or limitation under the laws of Hong Kong imposed on the conversion of HK dollars into foreign currencies and the remittance of currencies out of Hong Kong, nor is there any restriction on foreign exchange to transfer cash between our Company and its subsidiaries, across borders and to U.S investors, nor on distributing earnings from our Hong Kong subsidiaries’ businesses to our Company and U.S. investors and amounts owed. Under the current practice of the Inland Revenue Department of Hong Kong, no tax is payable in Hong Kong in respect of dividends.
Under PRC laws, rules and regulations, our PRC subsidiary and VIE are required to set aside at least 10% of their 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 their registered capital. However, there can be no assurance that the PRC government will not intervene or impose restrictions on their ability to transfer or distribute cash within our 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 our business, financial condition, and results of operations.
As of the date of this Annual Report, our subsidiaries have not experienced any difficulties or limitations on their ability to transfer cash between each other; nor do they maintain cash management policies or procedures dictating the amount of such funding or how funds are transferred. None of our subsidiaries have paid any dividends, other distributions or transferred assets to our holding company as of the date of this Annual Report. In the future, cash proceeds raised from overseas financing activities may be transferred by us to our Hong Kong or PRC subsidiaries via capital contribution or shareholder loans, as the case may be. As of the date of this Annual Report, we have not made any transfers, paid any dividends, or made any distributions to U.S. investors.
Neither the Company nor any of its Hong Kong subsidiaries or its PRC subsidiary has paid dividends or made distributions to U.S. investors. No funds have been transferred by the holding companies to the Hong Kong subsidiaries, the PRC subsidiary, or the VIE for the fiscal years ended December 31, 2022 or 2021 and through the date of this Annual Report, to fund their business operations. In the future, any cash proceeds raised from overseas financing activities may be transferred by us to our Hong Kong or PRC subsidiaries via capital contribution or shareholder loans, and to King Eagle VIE as loans.
See “Condensed Consolidating Schedule,” below and “Item 8. Financial Statements and Supplementary Data – Consolidated Financial Statements and Footnotes” on page 68;
Condensed Consolidating Schedule
Set forth below is the condensed consolidated balance sheet information as of September 30, 2022 and 2021, and condensed consolidated statements of operations and cash flows for the fiscal years ended September 30, 2022 and 2021, showing financial information for the parent company, Kun Peng International Limited, the non-VIE subsidiaries (as defined below) and the VIE (as defined below), eliminating entries and consolidated information (in dollars). In the tables below, the column headings correspond to the following entities in the organizational diagram on page 11.
For the purposes of this section:
“Parent entity” refers to Kun Peng International Limited;
“Non-VIE subsidiaries” refers to the following entities:
| ● | Kun Peng International Holding Limited (“KP International Holding”) | |
| ● | Kunpeng (China) Industrial Development Company Limited (“KP Industrial”) | |
| ● | Kun Peng (Hong Kong) Industrial Development Limited (“KP (Hong Kong)”) | |
| ● | King Eagle (China) Co., Ltd. (“King Eagle (China)”) | |
| ● | Kun Peng Tian Yu Health Technology Co., Ltd. (“KP Tian Yu”). |
“VIE” refers to King Eagle (Tianjin) Technology Co., Ltd. (“King Eagle (Tianjin)”).
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Condensed Consolidated Balance Sheets
As of September 30, 2022
| Parent | Non-VIE Subsidiaries Consolidated | VIE | Elimination Entries and Reclassification Entries | Consolidated | ||||||||||||||||
| Cash and cash equivalent | $ | - | $ | 11,595 | $ | 255,536 | $ | - | $ | 267,131 | ||||||||||
| Intercompany receivables-current | - | 179,211 | 1,684,751 | (1,863,962 | ) | - | ||||||||||||||
| Total Current Assets | - | 250,665 | 2,530,776 | (1,863,962 | ) | 917,479 | ||||||||||||||
| Intercompany receivables-noncurrent | - | 4 | - | (4 | ) | - | ||||||||||||||
| Total Non-current Assets | 34,160 | 755,369 | 107,774 | (34,164 | ) | 863,139 | ||||||||||||||
| Total assets | 34,160 | 1,006,034 | 2,638,550 | (1,898,126 | ) | 1,780,618 | ||||||||||||||
| Intercompany payables | 451,763 | 1,445,393 | - | (1,897,156 | ) | - | ||||||||||||||
| Total current liabilities | 515,763 | 1,941,639 | 4,611,831 | (1,897,156 | ) | 5,127,077 | ||||||||||||||
| Total noncurrent liabilities | - | 242,100 | 22,024 | - | 264,124 | |||||||||||||||
| Total Liabilities | 515,763 | 2,183,739 | 4,633,855 | (1,897,156 | ) | 5,436,201 | ||||||||||||||
| Total Shareholders’ Equity | (481,603 | ) | (1,055,567 | ) | (1,836,489 | ) | (970 | ) | (3,374,629 | ) | ||||||||||
| Non-controlling interest | - | (122,138 | ) | (158,816 | ) | - | (280,954 | ) | ||||||||||||
| Total equity | (481,603 | ) | (1,177,705 | ) | (1,995,305 | ) | (970 | ) | (3,655,583 | ) | ||||||||||
Intercompany receivables from non-VIE entities and intercompany payables to VIE represented the loan to non-VIE entities for working capital purpose.
As of September 30, 2021
| Parent | Non-VIE Subsidiaries Consolidated | VIE | Elimination Entries and Reclassification Entries | Consolidated | ||||||||||||||||
| Cash and cash equivalent | $ | - | $ | 121,043 | $ | 1,938,642 | $ | - | $ | 2,059,685 | ||||||||||
| Intercompany receivables-current | - | 512,565 | 1,307,536 | (1,820,101 | ) | - | ||||||||||||||
| Total Current Assets | - | 852,790 | 3,838,468 | (1,820,101 | ) | 2,871,157 | ||||||||||||||
| Intercompany receivables-noncurrent | - | 4 | - | (4 | ) | - | ||||||||||||||
| Total Non-current Assets | 3,416 | 207,828 | 145,935 | (3,420 | ) | 353,759 | ||||||||||||||
| Total assets | 3,416 | 1,060,618 | 3,984,403 | (1,823,521 | ) | 3,224,916 | ||||||||||||||
| Intercompany payables | 222,520 | 1,595,754 | - | (1,818,274 | ) | - | ||||||||||||||
| Total current liabilities | 298,520 | 2,111,108 | 4,598,587 | (1,818,274 | ) | 5,189,941 | ||||||||||||||
| Total noncurrent liabilities | - | - | 53,129 | - | 53,129 | |||||||||||||||
| Total Liabilities | 298,520 | 2,111,108 | 4,651,716 | (1,818,274 | ) | 5,243,070 | ||||||||||||||
| Total Shareholders’ Equity | (295,104 | ) | (938,033 | ) | (614,737 | ) | (5,247 | ) | (1,853,121 | ) | ||||||||||
| Non-controlling interests | - | (112,457 | ) | (52,576 | ) | - | (165,033 | ) | ||||||||||||
| Total equity | (295,104 | ) | (1,050,490 | ) | (667,313 | ) | (5,247 | ) | (2,018,154 | ) | ||||||||||
Intercompany receivables from non-VIE entities and intercompany payables to VIE represented the loan to non-VIE entities for working capital purpose.
Condensed Consolidated Statements of Operations Data
| For the year ended September 30, 2022 | ||||||||||||||||||||
| Parent Only | Non-VIE Subsidiaries Consolidated | VIE | Eliminating adjustments | Consolidated Totals | ||||||||||||||||
| Revenue | $ | - | $ | - | $ | 7,510,059 | $ | - | $ | 7,510,059 | ||||||||||
| Intercompany revenue | - | 1,463,241 | - | (1,463,241 | ) | - | ||||||||||||||
| Cost of revenue and related tax | - | 6,979 | 1,188,645 | - | 1,195,624 | |||||||||||||||
| Gross profit | - | 1,456,262 | 6,321,414 | (1,463,241 | ) | 6,314,435 | ||||||||||||||
| Total operating expenses | 217,243 | 1,705,987 | 7,862,056 | (1,463,241 | ) | 8,322,045 | ||||||||||||||
| Intercompany operating expenses | - | - | 1,463,241 | (1,463,241 | ) | - | ||||||||||||||
| Loss from operations | (217,243 | ) | (249,725 | ) | (1,540,642 | ) | - | (2,007,610 | ) | |||||||||||
| Other income | - | 5,671 | 29,098 | - | 34,769 | |||||||||||||||
| Loss before income taxed | (217,243 | ) | (244,054 | ) | (1,511,544 | ) | - | (1,972,841 | ) | |||||||||||
| Income tax expense | - | - | - | - | - | |||||||||||||||
| Net loss | (217,243 | ) | (244,054 | ) | (1,511,544 | ) | - | (1,972,841 | ) | |||||||||||
| For the year ended September 30, 2021 | ||||||||||||||||||||
| Parent Only | Non-VIE Subsidiaries Consolidated | VIE | Eliminating adjustments | Consolidated Totals | ||||||||||||||||
| Revenue | $ | - | $ | - | $ | 5,587,446 | $ | - | $ | 5,587,446 | ||||||||||
| Intercompany revenue | - | 1,183,691 | - | (1,183,691 | ) | - | ||||||||||||||
| Cost of revenue and related tax | - | 5,105 | 996,672 | - | 1,001,777 | |||||||||||||||
| Gross profit | - | 1,178,586 | 4,590,774 | (1,183,691 | ) | 4,585,669 | ||||||||||||||
| Total operating expenses | 298,520 | 2,004,570 | 4,057,887 | - | 6,360,977 | |||||||||||||||
| Intercompany operating expenses | - | - | 1,183,691 | (1,183,691 | ) | - | ||||||||||||||
| Loss from operations | (298,520 | ) | (825,984 | ) | (650,804 | ) | - | (1,775,308 | ) | |||||||||||
| Other income (expense) | - | (260 | ) | 834 | - | 574 | ||||||||||||||
| Loss before income taxed | (298,520 | ) | (826,244 | ) | (649,970 | ) | - | (1,774,734 | ) | |||||||||||
| Income tax expense | - | - | - | - | - | |||||||||||||||
| Net loss | (298,520 | ) | (826,244 | ) | (649,970 | ) | - | (1,774,734 | ) | |||||||||||
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Condensed Consolidated Schedule of Cash Flows
| For the year ended September 30, 2022 | ||||||||||||||||||||
| Parent Only | Non-VIE Subsidiaries Consolidated | VIE | Eliminating adjustments | Consolidated | ||||||||||||||||
| Net loss | $ | (217,243 | ) | (244,054 | ) | (1,511,544 | ) | - | (1,972,841 | ) | ||||||||||
| Intercompany receivables | - | (41,980 | ) | (543,646 | ) | 585,626 | - | |||||||||||||
| Intercompany payables | 229,243 | 350,005 | - | (579,248 | ) | - | ||||||||||||||
| Net cash provided by (used in) operating activities | - | 32,578 | (1,631,086 | ) | 6,378 | (1,592,130 | ) | |||||||||||||
| - | ||||||||||||||||||||
| Net cash used in investing activities | - | (139,155 | ) | - | - | (139,155 | ) | |||||||||||||
| Effect of exchange rate fluctuation on cash | - | (2,871 | ) | (52,020 | ) | (6,378 | ) | (61,269 | ) | |||||||||||
| For the year ended September 30, 2021 | ||||||||||||||||||||
| Parent Only | Non-VIE Subsidiaries Consolidated | VIE | Eliminating adjustments | Consolidated | ||||||||||||||||
| Net loss | $ | (298,520 | ) | $ | (826,244 | ) | $ | (649,970 | ) | $ | - | $ | (1,774,734 | ) | ||||||
| Intercompany receivables | - | (500,017 | ) | (1,158,088 | ) | 1,651,105 | - | |||||||||||||
| Intercompany payables | 222,520 | 1,429,057 | - | (1,651,577 | ) | - | ||||||||||||||
| Net cash provided by (used in) operating activities | - | 65,736 | 1,848,595 | (472 | ) | 1,913,859 | ||||||||||||||
| - | ||||||||||||||||||||
| Net cash used in investing activities | - | (21,983 | ) | - | - | (21,983 | ) | |||||||||||||
| Effect of exchange rate fluctuation on cash | - | 4,324 | 21,847 | 472 | 26,643 | |||||||||||||||
Our Business
Overview of Health Food Market
As reported by Gentleman Marketing Agency (“GMA”), a study from Statista states that, between 2020 and 2025, China’s health (functional) foods market is projected to expand by 30%, reaching an estimated RMB244 billion (US$34.3 billion) by 2025. This steady and impressive expansion can only be expected to continue as the demand for health food and dietary supplements is increasing.
The Hong Kong Trade Development Council (“HKTDC”) published an article on China’s Health Food Market in September 2022, which stated that changes in age demographics, domestic child policy and lifestyle has driven the growth of the health food market in the People’s Republic of China.
HKTDC determined that the average age of the population of China is increasing. It cited statistics from the PRC government that the number of people aged 65 or above in mainland China reached 200 million in 2021, or 14.2% of its total population. This age group is expected to increase to 25% of China’s total population by 2030. Currently, the average life expectancy in China is 77.3 years and it is expected to reach 81.9 years by 2040. HKTDC quoted a study from iiMedia Research which found that the main reason seniors purchase health food is to follow their doctor’s advice or to get sufficient essential nutrients to improve their overall health. The study shows that a majority of seniors concentrated on boosting their immunity through health food. Moreover, HKTDC quoted another source that found that nearly 50% of the middle-aged and senior populations in China are willing to spend 40% of their budgets on personal health.
The Center for Strategic and International Studies has pointed out that mainland China replaced its legacy one-child policy with a two-child policy in 2016 and then passed a three-child policy into law in July 2021. HKTDC speculates that the universal implementation of the three-child policy can be expected to increase demand in the maternal and baby health food markets. According to HKTDC, statistics show that 94.7% of pregnant women consume health food products, particularly folic acid, milk power and multi-vitamin tablets, during pregnancy. Further, HKTDC cited a study from iiMedia Research that the maternal and baby health food markets increased by 8.2% between 2020 and 2021 to over RMB70.41 billion (US$9.89 billion) in 2021 and represented 26% of the total market share of health food in mainland China.
According to the above-mentioned article published by Hong Kong Trade Development Council in September 2022, the government of the People’s Republic of China has progressively encouraged its civilians to lead healthy lifestyles and minimize diseases so as to lengthen life expectancy for its people and it introduced the “Healthy China Initiative 2019-2030” in 2019. Intelligence Research Group indicated that sales of health food in mainland China rose by 8.2% in 2021, and that the health food market in mainland China represented 17.8% of global sales in that year and was the second largest health food market in the world. The market of health food in this territory is expected to grow by 6% annually from 2021 through 2025 and is projected to reach RMB328.3 billion (approximately US$46.1 billion) by 2023.
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Since the global health issue and the COVID-19 pandemic, people have increased their health and nutrition consciousness. King Eagle (China) believes preventive care is the most effective investment in health. Based on the statistics compiled by Euromonitor, the market size of health care products in China was as follows:
Monteloeder S.L. analyzed that the demand for healthy food in the PRC has increased since the outbreak of COVID-19. It cited data announced by Suning that shows that 2020 Lunar New Year sales volume of health foods increased by 128% compared to 2019.
E-commerce has developed rapidly in the PRC. Management of the Company believes that we are in a new era of e-commerce and that additional characteristics of sharing economy, offline support and social interaction are evolving. We believe the rise of social e-commerce will positively impact the development of our health care business. GMA has stated “Chinese customers are highly active on social media platforms such as Weibo, Douyin, and WeChat. Creating accounts for [your] own brand and teaming up with influencers can be incredibly helpful in terms of increasing brand awareness among the target audience of health food. Additionally, it also allows companies to interact with their potential customers, build relationships and promote their products. Chinese consumers value personal relationships and often prioritize buying from people or companies that they know and bond with.”
To promote awareness of preventive care among the vast population of the PRC, we serve our customers through our mobile (King Eagle Mall) platform and our new online platform.
King Eagle Mall
We developed and launched a mobile social e-commerce platform, King Eagle Mall, which promotes preventive health care products and services as our core business. It adopts the S2B2C business model and integrates many major health care products and services.
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The three cores and six features that we are developing through the King Eagle Mall are:
Core 1: Integration of resources in the health care industry
| Feature 1 | Closed-loop supply chain | Compared with the traditional B2B and B2C marketing models, our mobile application, King Eagle Mall, has a more efficient marketing layout that does not require stocking of inventory and capital investment. All the goods being offered are supported by upstream suppliers. Customers can buy goods more flexibly, and the distribution of goods is accomplished by way of direct supply by manufacturers, which meets the needs of customers and promotes an increase in product sales. This completely closed-loop supply chain is more conducive to the rapid development of King Eagle (China) and enhanced resource utilization. | ||
| Feature 2 | S2B2C model perfectly provides three-terminal users with the most intuitive service and use value. | S2B2C is an innovative e-commerce model that can drive much greater value innovation than traditional models. This kind of innovation is reflected in S (supplier) and B (platform) working together to provide C (customer) with more thorough services. In other words, S empowers B and supports B to conduct product and service transactions with C, while B and C pass on their needs to S, so that S can better serve B and C, satisfying a wider group and achieving a larger demand channel. |
Core 2: Personal health management
| Feature 3 | Combined with Smart Kiosk to enhance personal care service dimensions | Through our physical platform, Smart Kiosk, we create profiles for each customer to record personal health data and rely on big data analysis to promote all aspects of health-related clothing, food, housing, transportation, and other daily living styles. For example, based on the member’s personal health background and medical history, the kiosk analyzes the health condition of the customer and suggests types of health supplements, food, health-related products, health checking tools, etc. that are suitable for the individual customer. | ||
| Feature 4 | Connecting to health and wellness experience, improving service height. | Ecological + elderly care + healthy lifestyle experience is an indispensable part of the health industry, and it is also a supply and demand gap that will inevitably appear in industrial development and economic development. For middle and high net worth groups, we provide different types of health and elderly lifestyle experience environments. The Smart Kiosk APP provides full-cycle and full-view high-end services, so that there is a connection between health and living. |
Core 3: Wealth value
| Feature 5 | Sharing Wealth | Health itself is wealth. King Eagle Mall is not just a comprehensive consumer docking platform, it is also a new channel to provide wealth for upstream supply chain enterprises and terminal members. Through the integrated platform, King Eagle (China) shares healthy lifestyle information with its members and meets different health needs of different members. | ||
| Feature 6 | Quality of Life | To strengthen the concept of healthiness, King Eagle Mall will go deep into every corner of life in the future, providing members with more healthy choices in five areas: clothing, food, home living, daily necessities, and transportation, and guiding our members to lead a healthier and better quality life. |
The products focus on health-related products and services. King Eagle Mall is designed to enable health-related products to be sold by us and by third parties. King Eagle Mall’s products are divided into two sectors: self-operated products and strictly selected products which promote preventive health care. Our team screens and examines products that are and will be offered both by us and by affiliated merchants. Our major products include health care products such as dietary supplements, nutritional health foods, beauty cosmeceuticals, health foods for supporting the cardiovascular system and bone joint health, and other categories (for instance, powdered milk, dried fruits). We offer collagen peptides, probiotics, and health foods for improving blood circulation and vein health, as well as household products which can promote and improve a healthier lifestyle of our members. We receive customer orders and may arrange fulfillment with our merchants who are responsible for delivery arrangement or fulfill customer orders through our outsourced networks.
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In addition, we operate customer service centers through which our members can communicate directly for any assistance related to product purchases, suggestions for health care products and services, and delivery logistics.
New Online Platform
In October 2022, King Eagle (Tianjin) introduced and implemented a new online platform which focuses on promoting and selling our own brand of preventive health care and health related household products to wholesalers and retailers. In the platform’s initial phase, we also sell other well-known and high-quality health food products to enhance our reputation and market share. This online platform is operated at: http://api.kp-tj.com/roomapp/#/home.
As of December 22, 2022, we had approximately 270 wholesale members. Currently, we focus on promoting and selling our own brand of thermal therapy cabin to wholesalers. Equipped with infrared light and at a high temperature approximately like that of a hot spring, this product helps enhance blood circulation and oxygen inhalation and improves insomnia. In addition to the thermal therapy cabin, we promote and sell other popular brands and our own brand of health food products on this new platform.
Smart Kiosks
We introduced the “Smart Kiosk” concept with the support of Guoxin Star Network Co., Ltd and its subsidiaries or affiliates. The construction of Smart Kiosks will be initiated and originally administered by Guoxin Star Network Co., Ltd and its subsidiaries or affiliates. After the construction of each Smart Kiosk (i.e., “physical store”) is completed, Guoxin Star Network Co., Ltd will cooperate with King Eagle VIE in the operation of the Smart Kiosk and in the planning for additional Smart Kiosks. The Smart Kiosk is a physical store which focuses on developing “small shop economy.” It is integrated with the King Eagle Mall which creates a “social, health, and physical store” to provide people with a professional and comprehensive source for preventive health care products and services. The Smart Kiosk is a principal component of our business.
The smart service kiosk functions as a physical store, customer service center, and community marketing tool for attracting customers, providing customer services, promoting our 500+ preventive health care and health related household products, and introducing concepts of maintaining a healthy lifestyle. 5G internet connection is also available for our customers to connect to our online application, King Eagle Mall, so that our customers can access King Eagle Mall and place orders for our products.
On March 31, 2021, King Eagle VIE entered into an agreement with Guoxin Star Network Co., Ltd. under which King Eagle VIE was granted the right to operate 50 Smart Kiosks for five years. As a result of the construction delay caused by the COVID-19 pandemic, the agreement is being amended to delay the commencement of the five-year term until completion of construction of the Smart Kiosks. King Eagle VIE is also entitled to profit sharing from the operation of the Smart Kiosks. For the status of the construction project of Smart Kiosks, please see “COVID-19” on page 20, below
The operation of the Smart Kiosks can be administered in one of three models:
| ● | Operation by King Eagle VIE: The operation of the Smart Kiosk will be solely administered by King Eagle VIE. Advertising, product promotion, human resources, product display, and sales strategies will be planned, established, and operated by King Eagle VIE. Profit sharing from the operation of the Smart Kiosk will be allocated between King Eagle VIE and the party who will purchase the right-of-use of the Smart Kiosk based on mutually agreed terms. | |
| ● | Cooperative operation of health care and health related product suppliers: King Eagle VIE will grant the right of use of Smart Kiosks to its product suppliers who sell their health care and health related household products on King Eagle Mall. The profit sharing will be allocated between King Eagle VIE and those product suppliers based on mutually agreed terms. | |
| ● | Franchise operation: Members of King Eagle Mall will be granted the right-of-use of Smart Kiosks to run the business with the training, advertising, sales, and marketing strategies provided by King Eagle VIE. Profit sharing will be allocated between King Eagle VIE and the members based on mutually agreed terms. |
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Smart Kiosk
Since 2021, due to the COVID-19 pandemic, the central and local governments of the PRC have imposed quarantines and closures in certain affected areas. The approval process of our applications for construction permits for Smart Kiosks was delayed by the local governmental agencies. Although mainland China relaxed its COVID-19 policies and controls in early December 2022, the number of cases of COVID-19 is expected to rise. We expect that the approval process at the local government agencies will be initiated in early 2023.
COVID-19
The COVID-19 pandemic has resulted in quarantines, travel restrictions, limitations on social or public gatherings and the temporary closure of business venues and facilities around the world. Due to restrictions, quarantines and closures in certain affected areas and government agencies in the PRC, the approval process of our applications for construction permits for Smart Kiosks was delayed by the local governmental agencies and construction projects of Smart Kiosks were therefore postponed.
Businesses and markets in mainland China have reopened and mainland China relaxed its policies and controls relating to COVID-19 in early December 2022. The number of cases of COVID-19 is expected to increase greatly. Construction of our Smart Kiosks may not be immediate, which impacts our plan of enhancing our face-to-face customer services and increasing our market share. The Company continues to focus its business on its online platform, King Eagle Mall, and to promote its own brand of consumer health care and health related household products on its new online platform, which was introduced and implemented in October 2022, to mitigate the adverse impacts of COVID-19. The Company also follows up closely with the local governmental agencies regarding its applications for construction permits for Smart Kiosks. However, as the pandemic increased overall public health consciousness in the PRC, the Company’s average monthly online sale revenue increased by $0.2 million, or 34.4%, from $0.4 million for the year ended September 30, 2021 to $0.6 million for the year ended September 30, 2022.
Therefore, we do not expect that the virus will have a material adverse effect on our business or financial results at this time. However, it is not possible to predict the unanticipated consequence of the pandemic on our future business performance and liquidity due to the severity of the global situation with COVID-19. The Company continues to monitor and assess the evolving situation closely and evaluate its potential exposure.
Strategic Relationships to Provide Comprehensive Health Services
Preventive health care focuses upon the relationship between genetics, environment, physiology, psychology, and lifestyle to assist in addressing health and disease. Physical examinations assist in providing personalized solutions to eliminate the cause of disease and to treat and regulate functional changes, so as to help patients overcome disease and lead healthier lives.
King Eagle (China) is exploring potential strategic relations with health service providers in order to offer its members and customers integrated health conditioning, tracking management, high-level, personalized, and convenient health care, testing, consulting, and other services, based on user testing data in the King Eagle Mall and integrated with global physician resources.
King Eagle (China) intends to develop strategic relationships through which it can create a “social e-commerce + health + physical store” integration platform, using Smart Kiosks (i.e., “the physical stores”) as the conduit to provide people with more professional and comprehensive health services. Functional medicine starts from the relationship between genetics, environment, physiology, psychology, and lifestyle, studying the decline of human function resulting from pathological changes, and finally finding the root cause of the disease. Functional medicine offers comprehensive physical examinations and provides personalized solutions to our members to minimize their health risks and treat and regulate body functions.
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Sales and Marketing
We will and do engage in a variety of marketing activities intended to drive user traffic to our mobile application and our new physical stores and to give us the opportunity to introduce our products and services to prospective members. For our online mobile application, King Eagle Mall, we (i) pay various mobile app channels to broadcast our apps to raise awareness of our products and increase their ranking to attract new users; (ii) engage in self-promoting on social media; (iii) advertise our products via our cooperative public platforms; (iv) organize off-line experience events and activities; (v) enter into business alliances with various well-known regional and global health care product business partners and prestigious health organizations; (vi) intend to provide health education on our official website: kp-china.com; and (vii) engage agents to promote our products. With respect to our King Eagle Mall mobile application which we launched in September 2020, our marketing strategy focuses upon seeking well known network and platform providers to broadcast our products and services, improving the products and services to raise our ranking in app stores, and display advertising to increase our exposure so as to attract new users.
Our Customers
Our customers primarily consist of individual members. As of December 22, 2022 and September 30, 2022, King Eagle Mall had approximately 15,172 and 15,077 members, respectively. Our new online platform focuses on wholesalers. As of December 22, 2022, our new online platform had approximately 270 wholesale members.
Customer Service
Our call center and email support teams monitor our mobile applications as well as mobile applications developed by other companies for fraudulent activity, assist members with billing questions, help members complete personal profiles, and answer technical questions. Customer service representatives receive ongoing training in an effort to better personalize the experience for members and paying subscribers who call or email us and to capitalize on upselling opportunities.
Technology
Our internal product teams are focused on the development and maintenance of our online platforms in addition to building and managing our software and hardware infrastructure. We intend to continue investing in the development of new products, such as mobile applications, and enhancing the efficiency and functionality of our existing products and infrastructure.
Our network infrastructure and operations are designed to deliver high levels of availability, performance, security, and scalability in a cost-effective manner. We operate web and database servers co-located at a third-party data center facility in Beijing, PRC.
Our Competition
We operate in a highly competitive environment with minimal barriers to entry. We believe the primary competitive factors in creating a community on the Internet are functionality, brand recognition, reputation, critical mass of members, member affinity and loyalty, ease-of-use, quality of service, and reliability. We compete with a number of large and small companies, including vertically integrated Internet portals and specialty-focused media companies that provide online and offline products and services to the online market we serve.
According to HKTDC, a 2022 mainland health food sector report indicates that the market shares of e-commerce, direct selling, and pharmacies are 40%, 30%, and 20%, respectively. Accordingly, E-commerce has become a major sales channel in the health food industry in mainland China.
King Eagle (China)’s competitors mainly come from social e-commerce platforms, including Pinduoduo (based on the group buying model), Weimeng (providing services for micro-businesses), Taobao, JD, and others.
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We believe our ability to compete depends upon many factors both within and beyond our control, including the following:
| ● | the size and diversity of our member and paying subscriber bases; | |
| ● | the timing and market acceptance of our apps, including developments and enhancements to those apps, and features relative to those offered by our competitors; | |
| ● | customer service and support efforts; | |
| ● | selling and marketing efforts; and | |
| ● | our brand strength in the marketplace relative to our competitors. |
Competitive advantages
Experienced management
King Eagle (China) acquired talented personnel for developing its online and offline platforms, creating business models, marketing, and management primarily from multi-national corporations, public companies, and prestigious universities.
Support from our stakeholder
King Eagle (China) was incorporated as a limited liability company under the laws of the PRC on March 20, 2019, with a registered capital of approximately $15 million (RMB100 million). King Eagle (China) was a wholly owned subsidiary of KP Industrial at the time of establishment. KP Industrial transferred its approximately $2.2 million (RMB 15 million) or 15% to Guoxin Ruilian Group Co., Ltd., a limited liability company incorporated in Beijing, the PRC, on November 2, 2020.
On March 26, 2021, Guoxin Ruilian Group Co., Ltd entered into equity transfer agreements with KP Industrial and Guoxin Zhengye. Both Guoxin Ruilian Group Co., Ltd and Guoxin Zhengye are wholly owned by a common shareholder, Guoxin United Holdings Group Co., Ltd. Under the agreements, Guoxin Ruilian Group Co., Ltd agreed to transfer its 8% ownership in King Eagle (China) to Guoxin Zhengye and the remaining 7% ownership in King Eagle (China) to KP Industrial on April 20, 2021. After the transfer, KP Industrial and Guoxin Zhengye became the 92% and 8% shareholders of King Eagle (China), respectively. Guoxin Zhengye agreed to transfer its 8% ownership interest in King Eagle (China) to KP Industrial on August 26, 2022. As a result of the transfer, KP Industrial is the sole shareholder of King Eagle (China).
Our Intellectual Property
We rely on a combination of intellectual property rights, including trade secrets, copyrights, trademarks, and domain names, as well as contractual restrictions to protect intellectual property and proprietary technology owned or used by us.
All of our employees have entered into standard employment agreements requiring them to keep confidential all information relating to our customers, methods, business, and trade secrets during their terms of employment with us and thereafter and to assign to us any inventions, technologies, and designs they develop during their term of employment with us.
Copyrights
We own the copyright for our online platform “King Eagle Mall.” Such copyright will expire in July 2031. The software platform was placed in service in September 2020 and offers a variety of preventive health care products and services to our members. The platform provides an upstream supply chain of preventive health care products and downstream health care analysis and advice to our members.
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Trademarks
We also developed our business trademarks. In order to protect our intellectual property rights, we have registered our trademarks in the PRC, including without limitation the following:
| Trademark | ||||||
| Country/Area | Trademark | Number | Classes | |||
| PRC | 金嗨购 | 50368216 | 9 | |||
| PRC | 金嗨购 | 50374979 | 16 | |||
| PRC | 金嗨购 | 50375007 | 37 | |||
| PRC | 金嗨购 | 50377397 | 39 | |||
| PRC | 金嗨购 | 50382061 | 41 | |||
| PRC | 金嗨购 | 50382076 | 42 | |||
| PRC | 金嗨购 | 50392663 | 43 | |||
| PRC | 金嗨购 | 50375312 | 45 | |||
| PRC | 50374965 | 9 | ||||
| PRC | 50371272 | 16 | ||||
| PRC | 50373087 | 37 | ||||
| PRC | 50387468 | 39 | ||||
| PRC | 50369532 | 41 | ||||
| PRC | 50380120 | 42 | ||||
| PRC | 50392663 | 43 | ||||
| PRC | 50387165 | 45 | ||||
| PRC | 50366519 | 43 | ||||
| PRC | 55127695 | 1 | ||||
| PRC | 55146919 | 3 | ||||
| PRC | 55139610 | 9 | ||||
| PRC | 55134787 | 10 | ||||
| PRC | 55132744 | 35 | ||||
| PRC | 55140311 | 41 | ||||
| PRC | 55141993 | 43 | ||||
| PRC | 55132362 | 5 | ||||
| PRC | 55155215 | 30 | ||||
| PRC | 55140329 | 42 | ||||
| PRC | 鲲之味 | 57843237 | 21 | |||
| PRC | 鲲之味 | 63933981 | 29 | |||
| PRC | 鲲之味 | 63920505 | 31 | |||
| PRC | 鲲之味 | 63919828 | 33 | |||
| PRC | 鲲之味 | 63906792 | 35 | |||
| PRC | 鲲之味 | 63919846 | 40 |
We regard our copyrights and our trademarks important to our success and our competitive position.
We purchase the consumer preventive health food and health related household products sold on our platforms from our suppliers; we did not develop, design, or manufacture those products. Moreover, although we have built our online platform and mobile commerce in-house, the compensation costs for our in-house technology team were not significant. Accordingly, instead of presenting the compensation costs of our in-house technology team as research and development expenses, we included these amounts in employee compensation and benefit expenses within general and administrative expenses for the years ended September 30, 2022 and 2021.
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Regulations
Because all of our operating entities are located in the PRC, we are regulated by the national and local laws of the PRC. This section summarizes the major PRC regulations relating to our business. See “Risk Factors – Risks Related to Doing Business in China.”
Other than for business licenses that have been obtained, we do not believe that we are required to obtain any permissions and approvals under the regulations discussed below. However, if we have inadvertently concluded that such permissions or approvals are not required or if applicable laws, regulations, or interpretations change and we are required to obtain such permissions or approvals in the future, the Company or its VIE could be subject to, among other things, administrative penalties, rectification orders, fines, suspension of relevant business, or revocation of business permits or licenses, and the Company’s securities could become ineligible for listing on a US exchange.
As of the date of this Annual Report, neither the Company nor any of its subsidiaries or its VIE has been denied any permissions or approvals.
Regulations Regarding Foreign Investment
The Catalogue of Industries for Encouraged Foreign Investment (2020 Edition) (the “Encouraging Catalogue”) was jointly promulgated by the National Development and Reform Commission (the “NDRC”) and the Ministry of Commerce (“MOFCOM”) on December 27, 2020, and it came into effect on January 27, 2021. The Special Administrative Measures for Access of Foreign Investment (Negative List) (2020 Edition) (the”2020 Negative List”) was jointly promulgated on June 23, 2020 and took effect on July 23, 2020. The Encouraging Catalogue and the 2020 Negative List categorize industries into three categories - “encouraged,” “restricted,” and “prohibited.” All industries that are not listed under one of “encouraged,” “restricted,” or “prohibited” categories are deemed to be “permitted.” The Encouraging Catalogue and the 2020 Negative List are subject to review and update by the Chinese government from time to time. Our business is classified under the category of “encouraged.”
Regulation Regarding Foreign Exchange Registration of Offshore Investment by PRC
The Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment Through Special Purpose Vehicles, or Circular 37, issued by SAFE and effective on July 4, 2014 regulates foreign exchange matters in relation to the use of special purpose vehicles, or SPVs, by PRC residents or entities to seek offshore investment and financing and conduct round trip investment in China.
Circular 37 and other SAFE rules require PRC residents, including both legal and natural persons, to register with local banks before making a capital contribution to any company outside of China (an “offshore SPV”) with onshore or offshore assets and equity interests legally owned by PRC residents. In addition, any PRC individual resident who is a stockholder of an offshore SPV is required to update his or her registration with the local banks with respect to that offshore SPV in connection with a change of basic information of the offshore SPV such as its company name, business term, the shareholding by the individual PRC resident, merger, division, and with respect to the individual PRC resident in case of any increase or decrease of capital in the offshore SPV, transfer of shares, or swap of shares by the individual PRC resident. Failure to comply with the required SAFE registration and updating requirements described above may result in restrictions being imposed on the foreign exchange activities of the PRC subsidiaries of such offshore SPV, including increasing the registered capital or payment of dividends and other distributions to, and receiving capital injections from, the offshore SPV. Failure to comply with Circular 37 may also subject the relevant PRC residents or the PRC subsidiaries of such offshore SPV to penalties under PRC foreign exchange administration regulations for evasion of applicable foreign exchange restrictions.
Regulations Regarding Foreign Exchange
Under the Foreign Currency Administration Rules promulgated in 1996 and revised in 1997 and 2008 and various regulations issued by SAFE and other relevant PRC government authorities, RMB is convertible into other currencies without prior approval from SAFE only to the extent of current account items, such as trade related receipts and payments, interest, and dividends, and after complying with certain procedural requirements. The conversion of RMB into other currencies and remittance of the converted foreign currency outside the PRC for the purpose of capital account items, such as direct equity investments, loans, and repatriation of investment, requires prior approval from SAFE or its local office. Payments for transactions that take place within China must be made in RMB. Unless otherwise approved, PRC companies must repatriate foreign currency payments received from abroad. Foreign-invested enterprises may retain foreign exchange in accounts with designated foreign exchange banks subject to a cap set by SAFE or its local office. Unless otherwise approved, domestic enterprises must convert all of their foreign currency proceeds into RMB.
On August 29, 2008, SAFE promulgated Circular 142 which regulates the conversion by a foreign-funded enterprise of foreign currency into RMB by restricting how the converted RMB may be used. In addition, SAFE promulgated Circular 45 on November 9, 2011 in order to clarify the application of Circular 142. Under Circular 142 and Circular 45, the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable government authority and may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of foreign-invested enterprises. The use of such RMB capital may not be changed without SAFE’s approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. Violations of Circular 142 and Circular 45 could result in severe penalties, such as heavy fines as set out in the relevant foreign exchange control regulations. On July 4, 2014, SAFE promulgated SAFE Circular 36, which launched a pilot reform of the administration of the settlement of the foreign exchange capitals of foreign-invested enterprises in certain designated areas from August 4, 2014. However, SAFE Circular 36 continues to prohibit foreign-invested enterprises from directly or indirectly using the Renminbi converted from their foreign exchange capital for purposes beyond their business scope. On March 30, 2015, SAFE promulgated Circular 19 to expand the reform nationwide. Circular 19 came into force and replaced both Circular 142 and Circular 36 on June 1, 2015. Circular 36 allowed enterprises established within the pilot areas to use their foreign exchange capital to make equity investments and removed certain other restrictions provided under Circular 142 for these enterprises. Circular 19 removed those restrictions for all foreign-invested enterprises established in the PRC. However, both Circular 36 and Circular 19 continue to prohibit foreign-invested enterprises from, among other things, using the Renminbi funds converted from their foreign exchange capital for expenditures beyond their business scope, providing entrusted loans, or repaying loans between non-financial enterprises.
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On June 9, 2016, SAFE promulgated Circular 16, which provides an integrated standard for converting foreign exchange under capital account items (including but not limited to foreign exchange capital and foreign debts) on a discretionary basis which applies to all enterprises registered in the PRC. Circular 16 reiterates the principle that Renminbi converted from foreign currency-denominated capital of a company may not be directly or indirectly used for purposes beyond its business scope or prohibited by PRC laws or regulations, and such converted Renminbi shall not be provided as loans to its non-affiliated entities, except where it is expressly permitted in the company’s business license.
Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies
On February 17, 2023, the China Securities Regulatory Commission (the “CSRC”) released the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies, or the Trial Measures, which came into effect on March 31, 2023. On the same date of the issuance of the Trial Measures, the CSRC circulated No. 1 to No. 5 Supporting Guidance Rules, the Notes on the Trial Measures, the Notice on Administration Arrangements for the Filing of Overseas Listings by Domestic Enterprises and the relevant CSRC Answers to Reporter Questions on the official website of the CSRC, or collectively, the Guidance Rules and Notice. The Trial Measures, together with the Guidance Rules and Notice, reiterate the basic supervision principles as reflected in the Draft Overseas Listing Regulations by providing substantially the same requirements for filings of overseas offering and listing by domestic companies, yet made the following updates compared to the Draft Overseas Listing Regulations: (a) further clarification of the circumstances prohibiting overseas issuance and listing; (b) further clarification of the standard of indirect overseas listing under the principle of substance over form, and (c) adding more details of filing procedures and requirements by setting different filing requirements for different types of overseas offering and listing.
Pursuant to the Trial Measures, the Guidance Rules and Notice, domestic companies that seek to offer or list securities overseas, both directly and indirectly, should fulfill the filing procedure and report relevant information to the CSRC within three working days following their submission of initial public offerings or listing application. Companies that have already been listed on overseas stock exchanges or have obtained the approval from overseas supervision administrations or stock exchanges for their offering and listing and that will complete their overseas offering and listing prior to September 30, 2023 are not required to make immediate filings for their listing yet need to make filings for subsequent offerings in accordance with the Trial Measures. Companies that have already submitted an application for an initial public offering to overseas supervision administrations prior to the effective date of the Trial Measures but have not yet obtained the approval from overseas supervision administrations or stock exchanges for the offering and listing may arrange for the filing within a reasonable time period and should complete the filing procedure before such companies’ overseas issuance and listing.
According to the Notice on Administration Arrangements for the Filing of Overseas Listings by Domestic Enterprises, domestic companies that have already been listed overseas before the effective date of the Trial Measures, March 31, 2023, shall be deemed Existing Issuers, and Existing Issuers are not required to complete the filing procedures immediately, but they will be required to file with the CSRC for any subsequent offerings. If a domestic company fails to complete required filing procedures or conceals any material fact or falsifies any major content in its filing documents, such domestic company may be subject to administrative penalties, such as an order to rectify, warnings, and fines, and its controlling shareholders, actual controllers, the person directly in charge, and other directly liable persons may also be subject to administrative penalties, such as warnings and fines.
On February 24, 2023, the CSRC, together with the Ministry of Finance, the National Administration of State Secrets Protection and National Archives Administration of China, revised the Provisions on Strengthening Confidentiality and Archives Administration for Overseas Securities Offering and Listing, which were issued by the CSRC and National Administration of State Secrets Protection and National Archives Administration of China in 2009, or the Provisions. The revised Provisions were issued under the title the “Provisions on Strengthening Confidentiality and Archives Administration of Overseas Securities Offering and Listing by Domestic Companies,” and came into effect on March 31, 2023, together with the Trial Measures. One of the major revisions to the revised Provisions is expanding their application to cover indirect overseas offerings and listing, as is consistent with the Trial Measures. The revised Provisions require that, among other things, (a) a domestic company that plans to, either directly or indirectly through its overseas listed entity, publicly disclose or provide to relevant individuals or entities, including securities companies, securities service providers, and overseas regulators, any documents and materials that contain state secrets or working secrets of government agencies, shall first obtain approval from competent authorities according to law, and file with the secrecy administrative department at the same level; and (b) a domestic company that plans to, either directly or indirectly through its overseas listed entity, publicly disclose or provide to relevant individuals and entities, including securities companies, securities service providers, and overseas regulators, any other documents and materials that, if leaked, will be detrimental to national security or public interest, shall strictly fulfill relevant procedures stipulated by applicable national regulations. Any failure or perceived failure by the Company and its subsidiaries to comply with the above confidentiality and archives administration requirements under the revised Provisions and other PRC laws and regulations may result in the relevant entities being held legally liable by competent authorities and referred to the judicial organ to be investigated for criminal liability if suspected of committing a crime.
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As an Existing Issuer, the Company is not required to make any filings at this time pursuant to the Trial Measures and the revised Provisions; however, if we should seek to effect an overseas follow-on offering in the future, we would be required to file with the CSRC within three working days following our submission of an initial public offering or listing application. As of the date of this Annual Report, the Company is not considering any overseas public offerings of its securities. However, there are still uncertainties regarding the interpretation and implementation of such regulatory guidance, and we cannot assure you that we have not inadvertently misinterpreted the filing requirements, that the requirements will not change in the future, or that we will be able to comply with all the new regulatory requirements of the Trial Measures, the revised Provisions, or any future implementing rules on a timely basis, or at all. Any failure by us to fully comply with the new regulatory requirements, including but not limited to the failure to complete the filing procedures with the CSRC, if required, may result in our securities being ineligible for listing on a US exchange, which would significantly limit or completely hinder our ability to offer or continue to offer our common stock, cause significant disruption to our business operations, severely damage our reputation, and, in turn, materially and adversely affect our financial condition and results of operations and cause our securities to significantly decline in value or become worthless.
Opinions on Severely Cracking Down on Illegal Securities Activities According to Law
Recently, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the “Opinions on Severely Cracking Down on Illegal Securities Activities According to Law,” or “the Opinions,” which 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.
Based on our understanding of currently applicable PRC laws and regulations, the Company and its PRC subsidiary and VIE: (i) are not currently required to obtain permissions from any PRC authorities to operate or to issue securities to foreign investors; (ii) are 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 their operations; and (iii) have not been denied any permissions by any PRC authorities. In addition,
If we have erroneously concluded that these permission requirements do not apply to us, or if applicable laws, regulations, or interpretations change, and it is determined in the future that the permission requirements become applicable to us, we may be subject to review, may face challenges in addressing these requirements and may incur substantial costs in complying with these requirements, which could result in material adverse changes in our business operations and financial position. In addition, if we are not able to fully comply with the Measures for Cybersecurity Review (2021 version), discussed below, or if the Opinions come into effect and are determined to be applicable to us, our ability to offer or to continue to offer securities to investors may be significantly limited or completely hindered, and our securities may significantly decline in value or become worthless.
Given the current PRC regulatory environment, it is uncertain whether the Company will be required to obtain permission from the PRC government to list on U.S. exchanges in the future, and if such permission is required, whether it will be denied or later rescinded. We have been closely monitoring regulatory developments in China regarding any necessary approvals from the CSRC or other PRC governmental authorities required for overseas listings. As of the date of this Annual Report, we have not received any inquiry, notice, warning, sanctions, or regulatory objection to our prior securities 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.
According to the Administration Provision and the Measures, only new 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 a sufficient transition period to complete their filing procedure, which means that we will certainly go through the filing process in the future, perhaps because of a refinancing, or be given a sufficient transition period to complete the filing procedure as an existent overseas listed Chinese company.
Regulations regarding privacy and data protection
Regulatory authorities in China have implemented and are considering further legislative and regulatory proposals concerning data protection. New laws and regulations that govern new areas of data protection or impose more stringent requirements may be introduced in China. In addition, the interpretation and application of consumer and data protection laws in China are often uncertain, in flux, and complicated, including differentiated requirements for different groups of people or different types of data.
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PRC Cybersecurity Law. The PRC regulatory and enforcement regime with regard to privacy and data security is evolving. The PRC Cybersecurity Law, which took effect in June 2017, created China’s first national-level data protection regime for “network operators,” which may include all organizations in China that provide services over the internet or another information network. It provides that personal information and important data collected and generated by operators of critical information infrastructure in the course of their operations in the PRC should be stored in the PRC, and the law imposes heightened regulation and additional security obligations on operators of critical information infrastructure. It also provides that network operators are required to implement security protection measures to ensure that the network is free from interference, disruption, or unauthorized access, and to prevent network data from being disclosed, stolen, or tampered.
Data Security Law. On June 10, 2021, the Standing Committee of the National People’s Congress of China promulgated the Data Security Law which took effect on September 1, 2021.
The Data Security Law establishes a tiered system for data protection in terms of importance, in which data categorized as “important data,” which will be determined by governmental authorities in the form of catalogs, are required to be treated with a higher level of protection. Specifically, the Data Security Law provides that operators processing “important data” are required to appoint a “data security officer” and a “management department” to take charge of data security. In addition, such operator is required to evaluate the risk of its data activities periodically and file assessment reports with relevant regulatory authorities. In addition, the Data Security Law prohibits entities and individuals in China from providing any foreign judicial or law enforcement authority with any data stored in China without approval from competent PRC authority, and sets forth the legal liabilities of entities and individuals found to be in violation of their data protection obligations, including rectification order, warning, fines of up to RMB10 million, suspension of relevant business, and revocation of business permits or licenses.
There can be no assurance that we would be able to complete the applicable cybersecurity review procedures in a timely manner, or at all, if we are required to follow such procedures. This could have a material adverse effect on our results of operations and business prospects. Moreover, the notion of “important data” is not clearly defined by the Cybersecurity Law or the Data Security Law. In order to comply with the statutory requirements, we will need to determine whether we possess important data, monitor the important data catalogs that are expected to be published by local governments and departments, perform risk assessments, and ensure that we are complying with reporting obligations to applicable regulators, if necessary. Furthermore, if judicial and law enforcement authorities outside China require us to provide data stored in China, and we are not able to pass any required government security review or obtain any required government approval to do so, we may not be able to meet the foreign authorities’ requirements. The potential conflicts in legal obligations could have an adverse impact on our operations in and outside China.
Cybersecurity Review Measures. In January 2022, the CAC and several other administrations jointly promulgated the amended Cybersecurity Review Measures, or the Cybersecurity Review Measures, which became effective on February 15, 2022, and which supersede and replace the cybersecurity review measures that became effective in June 2020. Pursuant to the Cybersecurity Review Measures, a “critical information infrastructure operator,” or a CIIO, that purchases network products and services or conducts data processing activities that affect or may affect national security will be subject to cybersecurity review. The Cybersecurity Review Measures also expands the cybersecurity review to “internet platform operators” in possession of personal information of over one million users if such operators intend to list their securities in a foreign country. Alternatively, relevant governmental authorities in the PRC may initiate cybersecurity review if they determine an operator’s network products or services or data processing activities affect or may affect national security. We do not believe that our Company constitutes a critical information infrastructure operator and we have less than one million registered users on our digital platform.
On November 14, 2021, the Cyberspace Administration of China released the Regulations on Network Data Security (draft for public comments). The draft Regulations on Network Data Security provide that data processors refer to individuals or organizations that autonomously determine the purpose and the manner of processing data. If a data processor that processes personal data of more than one million users intends to list overseas, it shall apply for a cybersecurity review. In addition, data processors that process important data or are listed overseas shall carry out an annual data security assessment on their own or by engaging a data security services institution, and the data security assessment report for the prior year should be submitted to the local cyberspace affairs administration department before January 31 of each year.
Under the Data Security Law and the Cybersecurity Review Measures, as long as we are not deemed to be an operator or a data processor and we do not control more than one million users’ personal information, we would not be required to apply for a cybersecurity review by the CAC. However, if the CSRC, CAC, or other regulatory agency later promulgates new rules or explanations requiring that we obtain their approvals for a follow-on offering, we may be unable to obtain such approvals which could significantly limit or completely hinder our ability to offer additional securities to investors and our securities may substantially decline in value or be worthless.
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We currently have less than one million registered users on our digital platform and only require and obtain user information after users register with it. Given that we sell and service products through our digital platform, we may constitute a “data processor,” but as the number of our online registered users is far less than one million, we do not believe that we are required to apply for a cybersecurity review under the Cybersecurity Review Measures or the Regulations on Network Data Security (draft for public comments). Nevertheless, the Regulations on Network Data Security (draft for public comments) are still being formulated and subject to further changes. Although we believe we currently are not required to obtain clearance from the CAC under the Cybersecurity Review Measures, the Regulations on Network Data Security (draft for public comments), or the Opinions on Strictly Cracking Down on Illegal Securities Activities, we face uncertainties as to the interpretation or implementation of such regulations or rules and we may in the future be required to perform a data security assessment annually either by ourselves or by retaining a third party data security service provider and submitting such data security assessment report to the local agency every year under the draft Regulations on Network Data Security.
Personal Information Protection Law. On August 20, 2021, the Standing Committee of the National People’s Congress of China promulgated the Personal Information Protection Law (the “PIPL”), which took effect on November 1, 2021. In addition to other rules and principles of personal information processing, the Personal Information Protection Law specifically provides rules for processing sensitive personal information. Sensitive personal information refers to personal information that, once leaked or illegally used, could easily lead to the infringement of human dignity or harm to the personal or property safety of an individual, including biometric recognition, religious belief, specific identity, medical and health, financial account, personal whereabouts, and other information of an individual, as well as any personal information of a minor under the age of 14. Only where there is a specific purpose and sufficient necessity, and under circumstances where strict protection measures are taken, may personal information processors process sensitive personal information. A personal information processor shall inform the individual of the necessity of processing such sensitive personal information and the impact thereof on the individual’s rights and interests. As uncertainties remain regarding the interpretation and implementation of the Personal Information Protection Law, we cannot assure you that we will comply with the Personal Information Protection Law in all respects and regulatory authorities may order us to rectify or terminate our current practice of collecting and processing sensitive personal information.
Summary. Compliance with the PRC Cybersecurity Law, the Data Security Law, the Cybersecurity Review Measures, and the Personal Information Protection Law, as well as additional laws and regulations that PRC regulatory bodies may enact in the future, may result in additional expenses to us and subject us to negative publicity, which could harm our reputation among users and negatively affect the trading price of our common stock in the future. PRC regulators, including the Department of Public Security, the Ministry of Industry and Information Technology, the State Administration for Market Regulation, and the CAC, have been increasingly focused on regulation in the areas of data security and data protection, and are enhancing the protection of privacy and data security by rulemaking and enforcement actions at central and local levels. We expect that these areas will receive greater and continued attention and scrutiny from regulators and the public going forward, which could increase our compliance costs and subject us to heightened risks and challenges associated with data security and protection. We cannot assure you that we will be compliant with these new laws and regulations described above in all respects, and we may become subject to penalties, including fines, suspension of business, prohibition against new user registration (even for a short period of time) and revocation of required licenses, and our reputation and results of operations could be materially and adversely affected, all of which could materially and adversely affect our business, financial condition, and results of operations.
The PRC government has broad discretion in determining rectifiable or punitive measures for non-compliance with or violations of PRC laws and regulations. If the PRC government determines that we, our Hong Kong or PRC subsidiaries, or our VIE do not comply with applicable law, it could revoke the VIE’s and our PRC subsidiaries’ business and operating licenses, require the VIE to discontinue or restrict its operations, restrict the VIE’s right to collect revenues, require the VIE to restructure its operations, impose additional conditions or requirements with which the VIE may not be able to comply, impose restrictions on the VIE’s business operations or on its customers, or take other regulatory or enforcement actions against the VIE that could be harmful to its business, which could materially and adversely affect the VIE’s and the Company’s business, financial condition, and results of operations.
In addition, any failure, or perceived failure, by us to comply with the above and other regulatory requirements or privacy protection-related laws, rules, and regulations could result in reputational damage or proceedings or actions against us by governmental entities, consumers, or others. These proceedings or actions could subject us to significant penalties and negative publicity, require us to change our data and other business practices, increase our costs, and severely disrupt our business, all of which could negatively affect the trading price of our common stock.
Laws and Regulations Relating to Intellectual Property Rights
Pursuant to the Trademark Law of the PRC (the “Trademark Law”), the right to exclusive use of a registered trademark shall be limited to trademarks which have been registered and to goods for which the use of trademark has been permitted. The period of validity of a registered trademark shall be ten years, counted from the day the registration is made. According to the Trademark Law, (i) using a trademark that is identical to a registered trademark on the same goods without the authorization of the owner of the registered trademark; (ii) using a trademark that is similar to a registered trademark on the same goods or (iii) using a trademark that is identical with or similar to a registered trademark on similar goods without the authorization of the owner of the registered trademark, which is likely to cause confusion, shall be deemed to constitute an infringement of the exclusive right to use a registered trademark. The infringer shall, in accordance with the regulations, undertake to cease the infringement, take remedial action, and pay damages.
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Taxation
PRC Enterprise Income Tax
The PRC Enterprise Income Tax Law, or EIT Law, and its implementation rules provide that from January 1, 2008, a uniform income tax rate of 25% is applied equally to domestic enterprises as well as foreign investment enterprises.
The EIT Law and its implementation rules provide that a withholding tax at the rate of 10% is applicable to dividends and other distributions payable by a PRC resident enterprise to investors who are “non-resident enterprises” (that do not have an establishment or place of business in the PRC, or that have such establishment or place of business but the relevant dividend or other distribution is not effectively connected with the establishment or place of business). However, pursuant to the Arrangement between the Mainland and Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income effective on December 8, 2006, the withholding tax rate for dividends paid by a PRC resident enterprise is 5% if the Hong Kong enterprise is determined by the competent tax authority in the PRC to have satisfies the relevant conditions and requirements under the applicable laws ; otherwise, the dividend withholding tax rate is 10%. According to the Notice of the PRC State Administration of Taxation on Issues relating to the Administration of the Dividend Provision in Tax Treaties promulgated on February 20, 2009, and effective on the same day, the corporate recipient of dividends distributed by PRC enterprises must satisfy the direct ownership thresholds at all times during the 12 consecutive months preceding the receipt of the dividends. However, if a company is deemed to be a pass-through entity rather than a qualified owner of benefits, it cannot enjoy the favorable tax treatments provided in the tax arrangement. In addition, if transactions or arrangements are deemed by the relevant tax authorities to be entered into mainly for the purpose of enjoying favorable tax treatments under the tax arrangement, such favorable tax treatments may be subject to adjustment by the relevant tax authorities in the future.
Business Tax and Value-added Tax
Pursuant to the Temporary Regulations on Business Tax, which were promulgated by the State Council on December 13, 1993, and effective on January 1, 1994, as amended on November 10, 2008, and effective January 1, 2009, any entity or individual conducting business in a service industry is generally required to pay business tax at the rate of 5% on the revenues generated from providing such services.
In March 2016, the Ministry of Finance and SAT jointly issued the Pilot Program of Replacing Business Tax with Value-Added Tax (“VAT”) in an All-round Manner, or Circular 36, effective from May 2016, according to which PRC tax authorities have started imposing VAT on revenues from various service sectors, including real estate, construction, financial services and insurance, as well as other lifestyle service sectors, replacing the business tax replacing the business tax that co-existed with VAT for over 20 years. According to Provisional Regulations on VAT of the PRC and its detailed rules for the Implementation, organizations and individuals engaging in the sale of goods or processing, repair and assembly services, the sale of services, intangible assets, immovables, and importation of goods in the PRC shall be taxpayers of VAT and shall pay VAT pursuant to these regulations.
Business Licenses
Any company that conducts business in the PRC must have a business license that covers a particular type of work. Other than regular business licenses that we have already obtained, there is no special license or permit required for us to engage in the current businesses under PRC laws and regulations.
Any company that conducts business in the PRC must have a business license that covers the scope of the business in which such company is engaged. Following the 2021 Share Exchange, we conduct our business through our control of KP International Holding. Each of King Eagle (China), King Eagle VIE, and King Eagle (Beijing) holds a business license that covers its present or planned business.
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King Eagle (China)’s business license was issued on April 20, 2021. The scope of King Eagle (China)’s registered business includes, among numerous other things: (i) wholesale sale of daily necessities; (ii) import and export of goods; (iii) Internet sales (except sales of licensed goods); (iv) general merchandise sales; (v) pre-packaged food sales; (vi) pre-packaged health food sales; (vii) health consultation services (excluding diagnosis and treatment services); (viii) sales of agricultural and sideline products; (ix) retail sales of protective equipment for medical personnel; (x) wholesale sales of medical personnel protective equipment; (xi) wholesale sales of medical masks; and (xii) retail sales of medical masks.
King Eagle VIE’s business license was issued on April 16, 2021, and an amendment to the business license was filed on November 5, 2021. The business scope includes, among numerous other things: general items: technical services, technical development, technical consultation, technical exchange, technology transfer, technology promotion; Data processing services; Software development; Conference and exhibition services; Advertising production; Advertising design and agency; Advertising release; Information consulting services (excluding licensed information consulting services); Information technology consulting services; Marketing planning; Etiquette service; Professional design services; Video recording and video production services; Graphic design and production; Commodity sales; Retail of computer hardware, software and ancillary equipment; Stationery retail; Retail of arts and crafts and collectibles (other than ivory and its products); Sales of electronic products; Food sales (pre-packaged food only); The second type of medical device sales; Retail of edible agricultural products; Cosmetics retail; Apparel retail; Needle textile sales; Electric bicycle sales; Sales of household appliances; Jewelry retail; Daily necessities sales; Sales of plastic products; Automobile decoration supplies sales; Daily sales of wood products; Sales of personal hygiene products; Paper product sales; Sales of maternal and infant products; Marketing of sanitary and single-use medical supplies; Sales of hair accessories; General merchandise sales; Rubber products sales; Sales of needle textiles and raw materials; Sales of labor protection articles; Shoe and hat retail; Sanitary ware sales; Retail of kitchenware and household goods; Sales of daily chemical products; Sales of sanitary ceramic products; Sales of clocks and timekeeping instruments; Sales of glasses (excluding contact lenses); Metal tool sales; Sales of arts and crafts and ceremonial articles (except ivory and its products); Food detergent sales; Gift flower sales; Sales of daily masks (non-medical); Sales of household goods; Enamel products sales; Retail of household appliances; Sales of non-electric household appliances; Sales of bamboo products; Food with plastic packaging container tool products sales; Office supplies sales; Hardware retail; Home audio-visual equipment sales; Furniture sales; Sales of sex toys for adults (excluding drugs and medical devices). (Except for the items subject to approval according to law, independently carry out business activities according to law with the business license) Approved items: Category I value-added telecommunications business; The second type of value-added telecommunications services; The third type of medical device business; Pharmaceutical retail. (For projects subject to approval according to law, business activities can only be carried out after the approval of the relevant departments, and the specific business projects shall be subject to the approval documents or license of the relevant departments).
King Eagle (Beijing)’s business license was issued on December 1, 2022. The business scope includes, among numerous other things: general items: technical services, technical development, technical consultation, technical exchange, technology transfer, technology promotion; Organizing cultural and artistic exchange activities; Non-residential real estate lease; Food and beverage management; Conference and exhibition services; Literary and artistic creation; Advertising release; Socio-economic advisory services; Enterprise management consulting; Corporate image planning; Photography expansion service; Etiquette service; Translation services; Professional design services; Graphic design and production; Wholesale of daily necessities; Software sales; Wholesale of computer hardware, software and auxiliary equipment; Stationery wholesale; Arts and crafts and ceremonial articles manufacturing (except ivory and its products); Single-purpose commercial prepaid card agent sales; Import and export of goods; Technology import and export; Art agent; Internet sales (except sales of licensed goods); General merchandise sales; Office supplies sales; Retail of household appliances; Food sales (pre-packaged food only); Health food (pre-packaged) sales; Health consultation services (excluding diagnosis and treatment services); Tourism development project planning and consulting; Marketing planning; Agricultural and sideline product sales. (Except for the items subject to approval according to law, independently carry out business activities according to law with the business license) Approved items: tourism business; Packaging and decoration printing; Art import and export. (For projects subject to approval according to law, business activities can only be carried out after approval by relevant departments, the specific business projects shall be subject to the approval documents or license of relevant departments.)(Business activities of projects prohibited or restricted by national and municipal industrial policies shall not be engaged.)
Dividend Distributions
Under applicable PRC regulations, FIEs in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a FIE in China is required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reach 50% of its registered capital. These reserves are not distributable as cash dividends. The Board of Directors of a FIE has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation.
After-tax profits/losses with respect to the payment of dividends out of accumulated profits and the annual appropriation of after-tax profits as calculated pursuant to PRC accounting standards and regulations do not result in significant differences as compared to after-tax earnings as presented in our financial statements. However, there are certain differences between PRC accounting standards and regulations and U.S. generally accepted accounting principles, arising from different treatment of items such as amortization of intangible assets and change in fair value of contingent consideration rising from business combinations.
In addition, under the EIT Law, the Notice of the State Administration of Taxation on Negotiated Reduction of Dividends and Interest Rates, which was issued on January 29, 2008, the Arrangement between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion, which became effective on December 8, 2006, and the Announcement of the State Administration of Taxation on Issues Relating to “Beneficial Owner” in Tax Treaties, which became effective on April 1, 2018, dividends from our PRC operating subsidiaries paid to us through our Hong Kong subsidiary may be subject to a withholding tax at a rate of 10%, or at a rate of 5% if our Hong Kong subsidiary is considered a “beneficial owner” that is generally engaged in substantial business activities and entitled to treaty benefits under the Arrangement between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion.
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Laws and Regulations Related to Employment and Labor Protection
On June 29, 2007, the National People’s Congress promulgated the Employment Contract Law of PRC (“Employment Contract Law”), which became effective as of January 1, 2008, and amended on December 28, 2012. The Employment Contract Law requires employers to provide written contracts to their employees, restricts the use of temporary workers and aims to give employees long-term job security.
Pursuant to the Employment Contract Law, employment contracts lawfully concluded prior to the implementation of the Employment Contract Law and continuing as of the date of its implementation shall continue to be performed. Where an employment relationship was established prior to the implementation of the Employment Contract Law but no written employment contract was concluded, a contract must be concluded within one month after its implementation.
On September 18, 2008, the State Council promulgated the Implementing Regulations for the PRC Employment Contract Law which came into effect immediately. These regulations interpret and supplement the provisions of the Employment Contract Law.
Our standard employment contract complies with the requirements of the Employment Contract Law and its implementing regulations. We have entered into written employment contracts with all of our employees.
Pursuant to the PRC Labor Law and the PRC Labor Contract Law, employers must execute written labor contracts with full-time employees. All employers must comply with local minimum wage standards. Violations of the PRC Labor Contract Law and the PRC Labor Law may result in the imposition of fines and other administrative and criminal liability in the case of serious violations.
In addition, according to the PRC Social Insurance Law and Administration Measures on Housing Fund, employers like our PRC subsidiaries in China must provide employees with welfare schemes covering pension insurance, unemployment insurance, maternity insurance, work-related injury insurance, medical insurance, and housing funds. The various laws and regulations that govern employers’ obligation to contribute to the social security funds include the Social Insurance Laws of the PRC, the Interim Regulation on the Collection and Payment of Social Insurance Premiums, the Decision of the State Council on Establishing a Unified System of the Basic Pension Insurance for Enterprise Employees, the Circular on Relevant Issues concerning the Improvement of the Basic Pension Insurance Policy for Urban Employees, the Regulation on Work-related Injury Insurance, the Regulation on Unemployment Insurance, the Decision of the State Council on Establishing the Basic Medical Insurance System for Urban Employees, the Circular on the Issuance of Provisions on the Administration of Basic Medical Insurance for Urban Employees, and the Trial Measures on Maternity Insurance for Enterprise Employees.
Employees
Currently, we have a total of 26 full-time employees. The following table sets forth the number of our full-time employees by function.
| Function | Number of Employees | |||
| IT | 6 | |||
| Finance | 3 | |||
| Sales and Marketing | 1 | |||
| General Affairs | 3 | |||
| General Service | 5 | |||
| Listing | 1 | |||
| General and Administrative | 2 | |||
| Total | 26 | |||
None of our employees belong to a union or are a party to any collective bargaining or similar agreement. We consider our relationships with our employees to be good.
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ITEM 1A. RISK FACTORS
As a smaller reporting company, we are not required to include risk factors in this report. However, below is a partial list of material risks, uncertainties and other factors that could have a material effect on the Company and its operations:
Risks Related to Our Business
The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its business plan.
The audited consolidated financial statements of KPIL included in this report include a paragraph that indicates that they were prepared assuming that we would continue as a going concern. As of September 30, 2022, the Company incurred cash outflows from operating activities of $1,592,130, a net loss of $1,972,841, and negative working capital of $4,254,598. These conditions raise substantial doubt about the ability of the Company to continue as a going concern. The ability to continue as a going concern is dependent upon generating profitable operations in the future and/or obtaining the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they become due. In order to continue as a going concern for the next 12 months, the Company continues to focus on increasing its revenue through the sale of consumer health care products on its online platform, King Eagle Mall, and promoting its own brand of preventive health care related products on its new online platform to reduce its costs of goods sold, streamlining its overhead costs, or obtaining financing from its stockholders or directors. Management may seek additional funds, primarily through the issuance of equity securities for cash or loans from our officers and controlling stockholders, to operate our business and estimates that additional capital will be necessary to support our operations and growth.
We may continue to incur losses in the future, and may not be able to return to profitability, which may cause the market price of our shares to decline.
KPIL incurred a net loss of $1,972,841 and $1,774,734, for the years ended September 30, 2022 and 2021, respectively. We have generated very limited revenue. Our current operations are small with a short history. We may be unable to achieve our performance targets, which will impact the Company’s operating results. Our ability to achieve profitability depends on the competitiveness of our products and services as well as our ability to control costs and to provide new products and services to meet the market demands and attract new customers. Due to the numerous risks and uncertainties associated with the development of our business, we cannot guarantee that we will be able to achieve profitability in the short-term or long-term. The Company continues to focus on increasing its revenue through the sale of health care products on its online platform, King Eagle Mall, and promoting its own brand of preventive health care related products on its new online platform to reduce its costs of goods sold, streamlining its overhead costs, or obtaining financing from its stockholders or directors. Management may seek additional funds, primarily through the issuance of equity securities for cash and loans from our officers and controlling stockholders, to operate our business and estimates that additional capital will be necessary to support our operations and growth.
We have a limited operating history and face many of the risks and difficulties frequently encountered by development stage companies.
Our operating entity and our VIE, King Eagle (China) and King Eagle VIE, commenced their operations in June 2020 and September 2020, respectively. As a result of our limited operating history, our ability to accurately forecast our future operating results is limited and subject to a number of uncertainties. We have encountered, and will continue to encounter, risks and uncertainties frequently experienced by growing companies in rapidly changing industries, such as the risks and uncertainties described herein. If our assumptions regarding these risks and uncertainties (which we use to plan our business) are incorrect or changed due to changes in our markets, or if we do not address these risks and uncertainties successfully, our operating and financial results could differ materially from our expectations, and our business could suffer.
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The market in which we participate is intensely competitive, and if we do not compete effectively, our operating results could be harmed.
The market for health care and household products and services is fragmented, rapidly evolving and highly competitive, with relatively low barriers to entry for certain applications and services. Some of our competitors may enjoy better competitive positions in certain geographic regions or user demographics that we currently serve or may serve in the future. We expect competition in the online personal products business to continue to increase because there are no substantial barriers to entry. We believe our ability to compete depends upon many factors both within and beyond our control, including the following:
| ● | the size and diversity of our member and paying subscriber bases; | |
| ● | the timing and market acceptance of our apps, including the developments and enhancements to those apps and features relative to those offered by our competitors; | |
| ● | customer service and support efforts; | |
| ● | selling and marketing efforts; and | |
| ● | our brand strength in the marketplace relative to our competitors. |
We compete with traditional health care and household product retailers. We also compete with a number of large and small companies, including internet portals and specialty-focused media companies, that provide online and offline products and services to the markets we serve. Our principal mobile-based social e-commerce competitors include Pinduoduo (based on the group buying model), Weimeng (providing services for micro-businesses), Taobao, and JD. Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, marketing, and other resources, and larger customer bases than we do. These factors may allow our competitors to respond more quickly than we can to new or emerging technologies and changes in customer preferences. These competitors may engage in more extensive research and development efforts, undertake more far-reaching marketing campaigns, and adopt more aggressive pricing policies that may allow them to build larger member and paying subscriber bases than ours. Our competitors may develop products or services that are equal or superior to our products and services or that achieve greater market acceptance than our products and services. These activities could attract members and paying subscribers away from our websites and reduce our market share.
In addition, current and potential competitors are making, and are expected to continue to make, strategic acquisitions or are establishing cooperatives and, in some cases, establishing exclusive relationships with significant companies or competitors to expand their businesses or to offer more comprehensive products and services. To the extent that these competitors or potential competitors establish exclusive relationships with major portals, search engines, and Internet Service Providers, or ISPs, our ability to reach potential members through online advertising may be restricted. Any of these competitors could cause us difficulty in attracting and retaining members and in converting members into paying subscribers and could jeopardize our existing affiliate program and relationships with portals, search engines, ISPs, and other online properties.
If we fail to stay current with new technologies and trends in social e-commerce platforms and preventive health care and household products and services, our applications could become obsolete.
We incur compensation costs for our internal technology support team not only for the creation of new applications, but also for ensuring that our current applications will be compatible with new technologies. If our technology support team fails to upgrade our applications to stay current with new technologies or to add new features that are popular for preventative healthcare and household uses, our applications could become obsolete, which could result in a material adverse impact on our business and results of operations.
We depend heavily on key personnel, and turnover of key employees and senior management could harm our business.
Our future business and results of operations depend in significant part upon the continued contributions of our management, marketing, and technical personnel. They also depend in significant part upon our ability to attract and retain additional qualified management, technical, marketing, and sales and support personnel for our operations. As China is building its powerful technology industry and enhancing its market-oriented economic system, competition for talent becomes increasingly fierce. Many of our potential competitors have greater financial, personnel, technical, manufacturing, marketing, sales, and other resources than we do. If we lose a key employee or if a key employee fails to perform in his or her current position, or if we are not able to attract and retain skilled employees as needed, our business could suffer. We depend on the skills and abilities of these key employees in managing the technical, marketing, and sales aspects of our business, any part of which could be harmed by significant turnover.
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We may not be able to manage the expansion of our operations effectively.
We are in the process of developing our business in order to meet the potentially increasing demand for our products, as well as to capture new market opportunities. Our current business operations are small with a short history. We may be unable to achieve our performance targets, which will impact our operating results. As we continue to grow, we must continue to improve our operational and financial systems, procedures, and controls, increase service capacity and output, and expand, train, and manage our growing employee base. In order to fund our ongoing operations and our future growth, we need to have sufficient internal sources of liquidity or access to additional financing from external sources. Furthermore, our management will be required to maintain and strengthen our relationships with our customers and other third parties. Currently, we only have 26 full time employees. As a result, our continued expansion has placed, and will continue to place, significant strains on our management personnel, systems, and resources. We also will need to further strengthen our internal control and compliance functions to ensure that we will be able to comply with our legal and contractual obligations and minimize our operational and compliance risks. Our current and planned operations, personnel, systems, internal procedures, and controls may not be adequate to support our future growth. If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities, execute our business strategies, or respond to competitive pressures.
A recurrence of COVID-19 may cause delays or limit our ability to expand our business.
The COVID-19 pandemic resulted in quarantines, travel restrictions, limitations on social or public gatherings, and the temporary closure of business venues and facilities around the world. Due to restrictions, quarantines, and closures in certain affected areas and government agencies in the PRC, the approval process of our applications for construction permits for Smart Kiosks was delayed by the local governmental agencies and construction projects of Smart Kiosks were therefore postponed.
Businesses and markets in mainland China have reopened and mainland China relaxed its policies and controls relating to COVID-19 in early December 2022. The number of cases of COVID-19 is expected to increase greatly which may cause restrictions on our service agents to travel or launch face-to-face marketing activities. Construction of our Smart Kiosks may not be immediate, which impacts our plan of enhancing our face-to-face customer services and increasing our market share. The Company continues to focus its business on its online platform, King Eagle Mall, and to promote its own brand of consumer health care and health related household products on its new online platform, which was introduced and implemented in October 2022, to mitigate the adverse impacts of COVID-19. The Company also follows up closely with the local governmental agencies regarding its applications for construction permits for Smart Kiosks. However, as the pandemic increased overall public health consciousness in the PRC, the Company’s average monthly online sale revenue increased by $0.2 million, or 34.4%, from $0.4 million for the year ended September 30, 2021 to $0.6 million for the year ended September 30, 2022.
Therefore, we do not expect that the virus will have a material adverse effect on our business or financial results at this time. However, it is not possible to predict the unanticipated consequence of the pandemic on our future business performance and liquidity due to the severity of global situation of COVID-19. The Company continues to monitor and assess the evolving situation closely and evaluate its potential exposure.
We will rely on dividends and other distributions on equity paid by our subsidiaries to fund our cash and financing requirements, and any limitation on the ability of our subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business.
Our Company is a holding company, and we will rely on dividends and other distributions on equity paid by our subsidiaries for our cash and financing requirements. Within our direct holding structure, the cross-border transfer of funds within our corporate group is legal and compliant with the laws and regulations of the BVI, the PRC, Hong Kong, and the State of Nevada. Our subsidiaries in the PRC and Hong Kong are permitted under the respective laws of China and Hong Kong to provide funding to us through dividends without restrictions on the amount of the funds, other than as limited by the amount of their distributable earnings. However, to the extent cash is in our Hong Kong or China subsidiaries, there is a possibility that the funds may not be available to fund our operations or for other uses outside of either Hong Kong or China due to interventions or the imposition of restrictions and limitations by the Hong Kong or the PRC government on the ability to transfer cash. In addition, if any of our subsidiaries incur debt on their own behalf in the future, the instruments governing such debt may restrict their ability to pay dividends to their parent companies.
Moreover, to the extent that cash is in our PRC or Hong Kong subsidiaries, there is a possibility that the funds may not be available to fund our operations or for other uses outside of the PRC or Hong Kong due to interventions or the imposition of restrictions and limitations by the PRC or Hong Kong government on the ability to transfer cash. Any limitation on the ability of our PRC or Hong Kong subsidiaries or our VIE to pay dividends or make other distributions to us could materially and adversely affect our financial position and the value of our Ordinary Shares.
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Risks Relating to our Commercial Relationship with our VIE
PRC laws and regulations governing our business and the validity of certain of our contractual arrangements are uncertain. If we are found to be in violation of such PRC laws and regulations, our business may be negatively affected, and we may be forced to relinquish our interests in those operations.
PRC laws and regulations prohibit or restrict foreign ownership of companies that operate Internet information and content, value added telecommunications, and certain other businesses in which we are engaged or could be deemed to be engaged. Consequently, we conduct certain of our operations and businesses in the PRC through our VIE. Our VIE Agreements give us effective control over King Eagle VIE and enable us to obtain substantially all of the economic benefits arising from it as well as consolidate its financial results in our results of operations. Although the structure we have adopted is commonly adopted by comparable companies in China, the PRC government may not agree that these arrangements comply with PRC licensing, registration, or other regulatory requirements, with existing policies, or with requirements or policies that may be adopted in the future.
KPIL, KP International Holding, and KP Industrial are considered foreign investors or foreign invested enterprises under PRC law. As a result, KPIL, KP International Holding, and KP Industrial are subject to certain limitations under PRC law on foreign ownership of Chinese companies. These laws and regulations are relatively new and may be subject to change, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly enacted laws, regulations, or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.
We have been advised by our PRC counsel that the ownership structures of our PRC subsidiary and our VIE in China do not violate any applicable PRC law, regulation, or rule currently in effect; and that the contractual arrangements between King Eagle (China), King Eagle VIE, and its equity holders governed by PRC law are valid, binding, and enforceable in accordance with their terms and applicable PRC laws and regulations currently in effect. However, our PRC counsel has also advised us that there are substantial uncertainties regarding the interpretation and application of current PRC laws, rules, and regulations. Accordingly, the PRC regulatory authorities and PRC courts may in the future take a view that is contrary to the opinion of our PRC legal counsel.
The PRC government has broad discretion in dealing with violations of laws and regulations, including levying fines, revoking business and other licenses, and requiring actions necessary for compliance. In particular, licenses and permits issued or granted to us by relevant governmental bodies may be revoked at a later time by higher regulatory bodies. We cannot predict the effect of the interpretation of existing or new PRC laws or regulations on our business. We cannot assure you that our current ownership and operating structure would not be found in violation of any current or future PRC laws or regulations. As a result, we may be subject to sanctions, including fines, and could be required to restructure our operations or cease to provide certain services. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. If the imposition of any of these government actions causes us to lose our right to direct the activities of our VIE or to otherwise separate from them and if we are not able to restructure our ownership structure and operations in a satisfactory manner, we would no longer be able to consolidate the financial results of our VIE in our consolidated financial statements. Any of these or similar actions could significantly disrupt our business operations or restrict us from conducting a substantial portion of our business operations, which could materially and adversely affect our business, financial condition, and results of operations.
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We conduct substantially all of our operations in China through our PRC subsidiary, King Eagle (China) and our VIE, with which King Eagle (China) maintains contractual arrangements. There are risks associated with this structure as the PRC has not yet ruled on its legality.
We are not a Chinese operating company but rather a Nevada holding company with substantially all of our operations in the PRC conducted by our PRC subsidiary, King Eagle (China), through contractual agreements with King Eagle (Tianjin), our VIE. Investors have not purchased an equity interest in the VIE but have purchased equity interests in a holding company incorporated in the State of Nevada, and will never directly hold equity interests in any of our subsidiaries or in our VIE in China.
A series of contractual agreements, including the Consulting Service Agreement, the Business Operation Agreement, the Proxy Agreement, the Equity Disposal Agreement, and the Equity Pledge Agreement, have been entered into with our VIE. We have been advised by our PRC counsel that the ownership structure of our VIE in China does not violate any applicable and explicit PRC laws and regulations currently in effect, and each of the contractual agreements governed by PRC law is valid, binding, and enforceable in accordance with its terms, subject to enforceability to applicable laws and the discretion of relevant government authorities in exercising their authority in connection with the interpretation and implementation thereof. As a result of the contractual agreements, the Company is the primary beneficiary of the VIE for accounting purposes, and the Company has consolidated the results of operations, financial position, and cash flows of the VIE in its consolidated financial statements under U.S. GAAP. The contractual arrangements with the VIE provide us with a “controlling financial interest” in the VIE by granting us: (i) the power to direct activities of the VIE that most significantly affect its economic performance; and (ii) the right to receive economic benefits from the VIE.
However, there are risks associated with this structure as the PRC has not yet ruled on its legality. As such, the VIE structure involves unique risks to our investors in the Nevada holding company, including:
(i) Our contractual arrangements may not be as effective in providing us with operational control, and shareholders of the VIE may fail to perform their obligations under the contractual arrangements.
(ii) We may incur substantial costs to enforce the terms of the arrangements with the VIE.
(iii) The legality and enforceability of the contractual arrangements by and among our PRC subsidiaries and the VIE have not been tested in a court of law in China.
(iv) The equity holders, directors and executive officers of the VIE as well as our employees who execute other strategic initiatives may have potential conflicts of interest with our company
(v) There are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules regarding the status of our Nevada holding company with respect to the contractual arrangements with the VIE.
(vi) It is uncertain whether any new PRC laws or regulations relating to VIE structures will be adopted or, if adopted, what they would provide.
(vii) If we or our VIE is found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required licenses, permits, registrations, or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures.
(viii) If the PRC government finds that the agreements that establish the VIE structure for operating our business do not comply with PRC laws and regulations, or if these regulations or their interpretations change in the future, we would be subject to severe penalties or be forced to relinquish our interest in those operations.
(ix) If the PRC government deems that our contractual arrangements with the VIE do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change or any interpreted differently in the future, we could be subject to severe penalties or be forced to relinquish our interests in these operations.
(x) The Company, King Eagle (China), King Eagle VIE, and our investors face uncertainty with respect to potential future actions by the PRC government that could affect the enforceability of the contractual arrangements with the VIE and consequently significantly affect the financial performance of the VIE and our Company as a whole.
(xi) The PRC regulatory authorities could disallow the VIE structure, which would likely result in a material change in our operations and cause the value of our securities, including those we have or may in the future register for sale, to significantly decline or become worthless.
If the PRC government determines that our agreements with King Eagle (Tianjin) VIE or our VIE structure do not comply with PRC regulations, or if these regulations change or are interpreted differently in the future, our securities may decline in value or become worthless if the determinations, changes, or interpretations result in our inability to assert contractual control over the assets of King Eagle VIE, as King Eagle VIE and its subsidiary conduct all or substantially all of our operations.
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Our arrangements with our VIE and its shareholders may be subject to scrutiny by the PRC tax authorities. Any adjustment of related party transaction pricing could lead to additional taxes, and therefore could have an adverse effect on our income and expenses.
The tax regime in China is rapidly evolving and there is significant uncertainty for taxpayers in China as PRC tax laws may be interpreted in significantly different ways. The PRC tax authorities may assert that we or our subsidiaries or VIE, or its equity holders, owe and/or are required to pay additional taxes on previous or future revenue or income. In particular, under applicable PRC laws, rules, and regulations, arrangements and transactions among related parties, such as the contractual arrangements with our VIE, may be subject to audit or challenge by the PRC tax authorities. We could face material and adverse tax consequences if the PRC tax authorities determine that our agreements with our VIE and its shareholders were not entered into based on arm’s length negotiations. As a result, they may adjust our income and expenses for PRC tax purposes in the form of a transfer pricing adjustment. Such an adjustment may require that we pay additional PRC taxes plus applicable penalties and interest, if any.
Our current corporate structure and business operations may be substantially affected by the newly enacted Foreign Investment Law.
On March 15, 2019, the National People’s Congress promulgated the Foreign Investment Law, which took effect on January 1, 2020. Since it is relatively new, substantial uncertainties exist in relation to its interpretation and implementation. The Foreign Investment Law does not explicitly classify variable interest entities that are controlled through contractual arrangements as foreign invested enterprises even if they are ultimately “controlled” by foreign investors. However, it has a catch-all provision under the definition of “foreign investment” that includes investments made by foreign investors in China through other means as provided by laws, administrative regulations, or the State Council. Therefore, it still leaves leeway for future laws, administrative regulations, or provisions of the State Council to provide for contractual arrangements as a form of foreign investment, at which time it will be uncertain whether our contractual arrangements will be deemed to be in violation of the market access requirements for foreign investment in the PRC, and if they are deemed to be in violation, how our contractual arrangements should be dealt with.
The Foreign Investment Law grants national treatment to foreign-invested entities, except for those foreign-invested entities that operate in industries specified as either “restricted” or “prohibited” from foreign investment in the Special Administrative Measures (Negative List) for Foreign Investment Access jointly promulgated by MOFCOM and the NDRC that took effect in July 2020. The Foreign Investment Law provides that foreign-invested entities operating in “restricted” or “prohibited” industries will require market entry clearance and other approvals from relevant PRC government authorities. If our control over our VIE through contractual arrangements is deemed to be foreign investment in the future, and if any business of our VIE is “restricted” or “prohibited” from foreign investment under the “negative list” effective at the time, we may be deemed to be in violation of the Foreign Investment Law, the contractual arrangements that allow us to have control over our VIE may be deemed to be invalid and illegal, and we may be required to unwind such contractual arrangements and/or restructure our business operations, any of which may have a material adverse effect on our business operations.
Furthermore, if future laws, administrative regulations, or provisions mandate further actions to be taken by companies with respect to existing contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure and business operations.
Our contractual arrangements may not be as effective in providing control over our variable interest entity as direct ownership.
We rely on contractual arrangements with our VIE to operate our electronic platform in China and other businesses in which foreign investment is restricted or prohibited. These contractual arrangements may not be as effective as direct ownership in providing us with control over our VIE.
If we had direct ownership of the VIE, we would be able to exercise our rights as an equity holder directly to effect changes in the Board of Directors of the entity, which could effect changes at the management and operational level. Under our contractual arrangements, we would be able to change the members of the Board of Directors of the entity exclusively by influencing the equity holders’ votes, and we would have to rely on the variable interest entity and the variable interest entity equity holders to perform their obligations under the contractual arrangements in order to exercise our control over the variable interest entity. The variable interest entity equity holders may have conflicts of interest with us or our shareholders, and they may not act in the best interests of our Company or may not perform their obligations under these contracts. For example, our VIE and its equity holders could breach their contractual arrangements with us by, among other things, failing to conduct their operations, including maintaining our website and using our domain names and trademarks, which the variable interest entity has the exclusive right to use, in an acceptable manner, or taking other actions that are detrimental to our interests. Pursuant to the call option, we may replace the equity holders of the VIE at any time pursuant to the contractual arrangements. However, if any equity holder is uncooperative and any dispute relating to these contracts or to the replacement of the equity holder were to remain unresolved, we would have to enforce our rights under the contractual arrangements through the operation of PRC law and arbitral or judicial agencies, which may be costly and time-consuming and would be subject to uncertainties in the PRC legal system. Consequently, the contractual arrangements may not be as effective as direct ownership in ensuring our control over the relevant portion of our business operations.
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Any failure by our VIE or its equity holders to perform their obligations under the contractual arrangements would have a material adverse effect on our business, financial condition, and results of operations.
If our VIE or its equity holders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. Although we have entered into an option agreement in relation to our variable interest entity, which provides that we may exercise an option to acquire, or nominate a person to acquire, ownership of the equity in that entity or, in some cases, its assets, to the extent permitted by applicable PRC laws, rules, and regulations, the exercise of the option is subject to the review and approval of the relevant PRC governmental authorities. We have also entered into an equity interest pledge agreement with respect to the variable interest entity to secure certain obligations of such VIE or its equity holders to us under the contractual arrangements. However, the enforcement of such agreement through arbitral or judicial agencies may be costly and time-consuming and would be subject to uncertainties in the PRC legal system. Moreover, our remedies under the equity pledge agreement are primarily intended to help us collect debts owed to us by the variable interest entity equity holders under the contractual arrangements and may not help us in acquiring the assets or equity of the variable interest entity.
The contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration or court proceedings in China. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. Moreover, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a variable interest entity should be interpreted or enforced under PRC law, and as a result it may be difficult to predict how an arbitration panel or court would view such contractual arrangements. As a result, uncertainties in the PRC legal system could limit our ability to enforce the contractual arrangements. Under PRC law, if the losing parties fail to carry out the arbitration awards or court judgments within a prescribed time limit, the prevailing parties may only enforce the arbitration awards or court judgments in PRC courts, which would require additional expense and delay. In the event we are unable to enforce the contractual arrangements, we may not be able to exert effective control over our variable interest entity, and our ability to conduct our business, as well as our financial condition and results of operations, may be materially and adversely affected.
Risks Related to Doing Business in China
Changes in international trade or investment policies and barriers to trade or investment and the ongoing geopolitical conflict may have an adverse effect on our business and expansion plans and could lead to the delisting of our securities from U.S. exchanges and/or other restrictions or prohibitions on investing in our securities.
In recent years, international market conditions and the international regulatory environment have been increasingly affected by competition among countries and geopolitical frictions. In particular, the U.S. administration has advocated for and taken steps toward restricting trade in certain goods, particularly from China. From 2018 to late 2019, the United States announced several tariff increases that applied to products imported from China, totaling over US$550 billion. By the end of 2019, the two countries had reached a phase one trade deal to roll back tariffs and suspend certain tariff increases by the United States that were scheduled to take effect from December 2019, and in January 2020, the two sides entered into a formal phase one agreement on trade. The progress of trade talks between China and the United States is subject to uncertainties, and there can be no assurance as to whether the United States will maintain or reduce tariffs or impose additional tariffs on Chinese products in the near future. Furthermore, in August 2019, the U.S. Treasury Department labelled China as a currency manipulator, which label was officially dropped by the U.S. Treasury Department in January 2020. However, it is uncertain whether the U.S. government may issue any similar announcements in the future. As a result of such announcement, the United States may take further actions to eliminate perceived unfair competitive advantages created by alleged manipulating actions. Changes to national trade or investment policies, treaties and tariffs, fluctuations in exchange rates, or the perception that these changes could occur could adversely affect the financial and economic conditions in China, as well as our future international and cross-border operations, our financial condition, and our results of operations.
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In addition, the United States is considering ways to limit U.S. investment portfolio flows into China. For example, in May 2020, under pressure from U.S. administration officials, the independent Federal Retirement Thrift Investment Board suspended its implementation of plans to change the benchmark of one of its retirement asset funds to an international index that includes companies in emerging markets, including China. China-based companies, including us, may become subject to executive orders or other regulatory actions that may, among other things, prohibit U.S. investors from investing in these companies and delist the securities of these companies from U.S. exchanges. As a result, U.S. and certain other persons may be prohibited from investing in the securities of our Company, whether or not they are listed on U.S. exchanges. For example, in November 2020, the U.S. administration issued U.S. Executive Order 13959, prohibiting investments by any U.S. person in publicly traded securities of certain Chinese companies that are deemed owned or controlled by the Chinese military. In May 2021, the American depositary shares of China Telecom, China Mobile, and China Unicom were delisted from the NYSE to comply with this executive order. In June 2021, the U.S. administration expanded the scope of the executive order to Chinese defense and surveillance technology companies. Geopolitical tensions between China and the United States may intensify and the United States may adopt even more drastic measures in the future.
China and other countries have retaliated and may further retaliate in response to new trade policies, treaties and tariffs implemented by the United States. For instance, in response to the tariffs announced by the United States, in 2018 and 2019, China announced it would stop buying U.S. agricultural products and imposed tariffs on over US$185 billion worth of U.S. goods. Although China subsequently granted tariff exemptions for certain U.S. products as a result of trade talks and the phase one trade deal with the United States, it is uncertain whether there will be any further material changes to China’s tariff policies. Any further actions to increase existing tariffs or impose additional tariffs could result in an escalation of the trade conflict, which would have an adverse effect on manufacturing, trade, and a wide range of industries that rely on trade, including logistics, retail sales, and other businesses and services, which could adversely affect our business operations and financial results.
Additionally, China has issued regulations to give itself the ability to unilaterally nullify the effects of certain foreign restrictions that are deemed to be unjustified to Chinese individuals and entities. The Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures promulgated by the Ministry of Commerce (“MOFCOM”) on January 9, 2021 with immediate effect, provide that, among other things, Chinese individuals or entities are required to report to the MOFCOM within 30 days if they are prohibited or restricted from engaging in normal business activities with third-party countries or their nationals or entities due to non-Chinese laws or measures; and the MOFCOM, following the decision of the relevant Chinese authorities, may issue prohibition orders contravening such non-Chinese laws or measures. Furthermore, on June 10, 2021, the Standing Committee of the National People’s Congress of China promulgated the Anti-foreign Sanctions Law, which came into effect on the same day. The Anti-foreign Sanctions Law prohibits any organization or individual from implementing or providing assistance in implementation of discriminatory restrictive measures taken by any foreign state against the citizens or organizations of China. In addition, all organizations and individuals in China are required to implement the retaliatory measures taken by relevant departments of the State Council. Since the aforesaid laws and rules were newly promulgated, there exist high uncertainties as to how such regulations will be interpreted and implemented and how they would affect our business and results of operations or the trading prices of our Shares.
The institution of trade tariffs both globally and between the U.S. and China specifically carries the risk of negatively affecting China’s overall economic condition, which could have a negative impact on us.
Trade tensions and policy changes have also led to measures that could have adverse effects on China-based issuers, including proposed legislation in the United States that would require listed companies whose audit reports and/or auditors who are subject to review by PCAOB to be subject to enhanced disclosure obligations and be subject to delisting if they do not comply with the requirements.
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The enactment of the Law of the PRC on Safeguarding National Security in the Hong Kong Special Administrative Region (the “Hong Kong National Security Law”) could impact our Hong Kong subsidiaries, and the market price for our shares could be adversely affected by increased tensions between the United States and China.
Recently there have been heightened tensions in the economic and political relations between the United States and China. On June 30, 2020, the Standing Committee of the PRC National People’s Congress issued the Law of the People’s Republic of China on Safeguarding National Security in the Hong Kong Special Administrative Region (HKSAR). This law defines the duties and government bodies of the HKSAR for safeguarding national security and four categories of offences—secession, subversion, terrorist activities, and collusion with a foreign country or external elements to endanger national security—and their corresponding penalties. On July 14, 2020, U.S. President Donald Trump signed the Hong Kong Autonomy Act, or HKAA, into law, authorizing the U.S. administration to impose blocking sanctions against individuals and entities who are determined to have materially contributed to the erosion of Hong Kong’s autonomy. On August 7, 2020, the U.S. government imposed HKAA-authorized sanctions on eleven individuals, including HKSAR chief executive Carrie Lam. On October 14, 2020, the U.S. State Department submitted to relevant committees of Congress the report required under the HKAA, identifying persons materially contributing to “the failure of the Government of China to meet its obligations under the Joint Declaration or the Basic Law.” The HKAA further authorizes secondary sanctions, including the imposition of blocking sanctions, against foreign financial institutions that knowingly conduct a significant transaction with foreign persons sanctioned under this authority. The imposition of sanctions such as those provided in the HKAA is in practice discretionary and highly political, especially in a relationship as extensive and complex as that between the United States and China. It is difficult to predict the full impact of the Hong Kong National Security Law and HKAA on Hong Kong and companies located in Hong Kong like our Hong Kong subsidiaries. If we or our Hong Kong or PRC subsidiaries are determined to be in violation of the Hong Kong National Security Law or the HKAA by competent authorities, our business operations, financial position, and results of operations could be materially and adversely affected. Furthermore, legislative or administrative actions in respect of Sino-U.S. relations could cause investor uncertainty for affected issuers, including us, and the market price of our shares could be adversely affected.
The Chinese government may choose to exercise significant oversight and discretion over the conduct of our and our VIE’s business operations in China.
The Chinese government may choose to exercise significant oversight and discretion over the conduct of our and our VIE’s business operations in China. Such governmental actions:
| ● | could result in a material change in our VIE’s operations; | |
| ● | could significantly limit or completely hinder our and our VIE’s ability to continue our operations in China; | |
| ● | could significantly limit or completely hinder our ability to offer or continue to offer our shares to investors; and | |
| ● | may cause the value of our shares to significantly decline or be worthless. |
Recently, the PRC government initiated a series of regulatory actions and new policies 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 VIE structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement. 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 of any such modified or new laws and regulations will be on our daily business operations, our ability to accept foreign investments, and the continued listing of our shares in the U.S. markets. These actions could result in a material change in our operations and/could cause the value of our shares to significantly decline or become worthless.
The Chinese government has also exercised, and continues to exercise, substantial control over virtually every sector of the Chinese economy through regulation and state ownership, including those relating to regulation of the health product industry, taxation, import and export tariffs, environmental regulations, land use rights, property ownership and other matters. We believe that our VIE’s business 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 it operates may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our VIE’s part to ensure its compliance with such regulations or interpretations. Accordingly, government actions in the future could have a significant effect on our VIE and its business which, in turn, could have a negative effect on the value of our shares.
The new Overseas Listing Rules and other relevant rules promulgated by the CSRC may subject us to additional compliance requirements in the future.
On February 17, 2023, the China Securities Regulatory Commission (the “CSRC”) released the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies, or the Trial Measures, which came into effect on March 31, 2023. On the same date as the issuance of the Trial Measures, the CSRC circulated No. 1 to No. 5 Supporting Guidance Rules, the Notes on the Trial Measures, the Notice on Administration Arrangements for the Filing of Overseas Listings by Domestic Enterprises, and the relevant CSRC Answers to Reporter Questions on the official website of the CSRC, or collectively, the Guidance Rules and Notice. The Trial Measures, together with the Guidance Rules and Notice, reiterate the basic supervision principles as reflected in the Overseas Listing Regulations by providing substantially the same requirements for filings of overseas offering and listing by domestic companies, yet made the following updates compared to the Overseas Listing Regulations: (a) further clarification of the circumstances prohibiting overseas issuance and listing; (b) further clarification of the standard of indirect overseas listing under the principle of substance over form, and (c) adding more details on filing procedures and requirements by setting different filing requirements for different types of overseas offering and listing.
Pursuant to the Trial Measures and the Guidance Rules and Notice, a domestic company that seeks to offer or list securities overseas, either directly or indirectly, should fulfill the filing procedure and report relevant information to the CSRC within three working days following its submission of an initial public offering or listing application. Companies that have already been listed on overseas stock exchanges or that have obtained approval from overseas securities regulators or stock exchanges for their offering and listing and that complete their overseas offering and listing prior to September 30, 2023 are not required to make immediate filings for their listing, yet need to make filings for subsequent offerings in accordance with the Trial Measures. Companies that have already submitted an application for an initial public offering to overseas securities regulators prior to the effective date of the Trial Measures but have not yet obtained approval from overseas securities regulators or stock exchanges for the offering and listing may arrange for the filing within a reasonable time period and should complete the filing procedure before such companies’ overseas issuance and listing.
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According to the Notice on Administration Arrangements for the Filing of Overseas Listings by Domestic Enterprises, domestic companies that have already been listed overseas before the effective date of the Trial Measures, March 31, 2023, shall be deemed Existing Issuers, and Existing Issuers are not required to complete the filing procedures immediately, but they will be required to file with the CSRC for any subsequent offerings. If a domestic company fails to complete required filing procedures or conceals any material fact or falsifies any major content in its filing documents, such domestic company may be subject to administrative penalties, such as an order to rectify, warnings, and fines, and its controlling shareholders, actual controllers, the person directly in charge, and other directly liable persons may also be subject to administrative penalties, such as warnings and fines.
On February 24, 2023, the CSRC, together with the Ministry of Finance, the National Administration of State Secrets Protection and National Archives Administration of China, revised the Provisions on Strengthening Confidentiality and Archives Administration for Overseas Securities Offering and Listing, which were issued by the CSRC and National Administration of State Secrets Protection and National Archives Administration of China in 2009, or the Provisions. The revised Provisions were issued under the title the “Provisions on Strengthening Confidentiality and Archives Administration of Overseas Securities Offering and Listing by Domestic Companies,” and came into effect on March 31, 2023, together with the Trial Measures. One of the major revisions to the revised Provisions is expanding their application to cover indirect overseas offerings and listing, as is consistent with the Trial Measures. The revised Provisions require that, among other things, (a) a domestic company that plans to, either directly or indirectly through its overseas listed entity, publicly disclose or provide to relevant individuals or entities, including securities companies, securities service providers, and overseas regulators, any documents and materials that contain state secrets or working secrets of government agencies, shall first obtain approval from competent authorities according to law, and file with the secrecy administrative department at the same level; and (b) a domestic company that plans to, either directly or indirectly through its overseas listed entity, publicly disclose or provide to relevant individuals and entities, including securities companies, securities service providers, and overseas regulators, any other documents and materials that, if leaked, will be detrimental to national security or public interest, shall strictly fulfill relevant procedures stipulated by applicable national regulations. Any failure or perceived failure by the Company and its subsidiaries to comply with the above confidentiality and archives administration requirements under the revised Provisions and other PRC laws and regulations may result in the relevant entities being held legally liable by competent authorities and referred to the judicial organ to be investigated for criminal liability if suspected of committing a crime.
Although, as of the date of this Annual Report, the Company is not considering any offerings of its securities, if we should seek to effect an overseas follow-on offering in the future, we may be required to comply with the Trial Measures and the revised Provisions, which would subject us to additional compliance requirements in the future. There are still uncertainties regarding the interpretation and implementation of such regulatory guidance, and we cannot assure you that we will be able to comply with all the new regulatory requirements of the Trial Measures, the revised Provisions, or any future implementing rules on a timely basis, or at all. Any failure by us to fully comply with the new regulatory requirements, including but not limited to the failure to complete the filing procedures with the CSRC, if required, may significantly limit or completely hinder our ability to offer or continue to offer our common stock on a US exchange, cause significant disruption to our business operations, and severely damage our reputation, which would materially and adversely affect our financial condition and results of operations and cause our securities to significantly decline in value or become worthless.
Changes in the policies, regulations and rules, and the enforcement of laws of the PRC government may be implemented quickly with little advance notice and could have a significant impact upon our VIE’s ability to operate profitably in the PRC. The PRC legal system also embodies uncertainties, which could limit law enforcement availability. Therefore, our assertions and beliefs of the risk imposed by the PRC legal and regulatory system cannot be certain.
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, its VIE, and its VIE’s subsidiary are subject to PRC laws and regulations. However, these laws and regulations change frequently, and the interpretation and enforcement thereof involve uncertainties. For instance, we may have to resort to administrative and court proceedings to enforce the legal protections to which we are 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 we would receive in more developed legal systems. Such uncertainties, including the inability of our PRC subsidiaries to enforce their contracts, could affect our business and operation. In addition, confidentiality protections in China may not be as effective as in the United States or other countries. Accordingly, we cannot predict the effect of future developments in the PRC legal system, particularly with regard to our 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.
The legal system in China, it laws and regulation changing frequently and the uncertainty in interpretation and enforcement of those laws could result in a material change in our operations, and further 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.
Changes in China’s economic, political, or social conditions or government policies could have a material adverse effect on our business and results of operations and could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless.
Substantially all of our operations are conducted in the PRC. Accordingly, our financial condition and results of operations are affected to a significant extent by economic, political, and legal developments in the PRC or changes in government relations between China and the United States or other governments. There is significant uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, government regulations and tariffs.
The PRC economy differs from the economies of most developed countries in many respects, including the extent of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the PRC 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 China is still owned by the government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies.
The PRC government also exercises significant control over China’s economic growth by allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, regulating financial services and institutions, and providing preferential treatment to particular industries or companies.
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While the PRC economy has experienced significant growth in the past four decades, growth has been uneven, both geographically and among various sectors of the economy. Since 2020 due to the global pandemic, growth of the Chinese economy has slowed down. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall PRC economy but may also have a negative effect on us. Our financial condition and results of operation could be materially and adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. In addition, the PRC government has implemented in the past certain measures, including interest rate increases, to control the pace of economic growth. These measures may cause decreased economic activity.
We cannot assure you that the PRC’s economy will continue to grow, or that if there is growth, such growth will be steady and uniform, or that if there is a slowdown, such slowdown will not have a negative effect on its business and results of operations.
In July 2021, the Chinese government provided new guidance on China-based companies raising capital outside of China, including through VIE arrangements. In light of such developments, the SEC has imposed enhanced disclosure requirements on China-based companies seeking to register securities with the SEC. As substantially all of our operations are based in China, any future Chinese, U.S., or other rules and regulations that place restrictions on capital raising or other activities by China based companies could adversely affect our business and results of operations. If the business environment in China deteriorates from the perspective of domestic or international investment, or if relations between China and the United States or other governments deteriorate, the Chinese government may intervene with our operations and our business in China and in the United States.
Uncertainties with respect to the PRC legal system could limit the legal protections available to you and us.
We conduct substantially all of business through our operating subsidiary in the PRC. Our PRC subsidiary, the VIE, and the VIE’s subsidiary are subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to FIEs as well as various PRC laws and regulations generally applicable to companies incorporated in China. The PRC legal system is based on written statutes, and prior court decisions may be cited for reference but have limited precedential value. Since 1979, a series of new PRC laws and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since these laws and regulations are relatively new and the PRC legal system continues to evolve rapidly, the interpretations of many laws, regulations, and rules are not always uniform, and enforcement of these laws, regulations, and rules involve uncertainties, which may limit legal protections available to you and us.
From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. Any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory provisions and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into and could materially and adversely affect our business and results of operations.
Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all and may have retroactive effect. As a result, we may not be aware of our violation of any of these policies and rules until sometime after the violation. Such unpredictability towards our contractual, property (including intellectual property) and procedural rights could adversely affect our business and impede our ability to continue our operations.
We 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 in the Company.
We 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. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. As a result of these factors, we 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.
Our business is subject to complex and evolving laws and regulations regarding privacy and data protection. These laws and regulations can be complex and stringent, and many are subject to change and uncertain interpretation, which could result in claims, changes to our data and other business practices, regulatory investigations, penalties, increased cost of operations, or declines in user growth or engagement, or otherwise affect our business. Although we believe we currently are not required to obtain clearance from the Cyberspace Administration of China under the recently enacted or proposed regulations or rules, we face uncertainties as to the interpretation or implementation of such regulations or rules, and if required, whether such clearance can be timely obtained, or at all.
Regulatory authorities in China have implemented and are considering further legislative and regulatory proposals concerning data protection. New laws and regulations that govern new areas of data protection or impose more stringent requirements may be introduced in China. In addition, the interpretation and application of consumer and data protection laws in China are often uncertain, in flux, and complicated, including differentiated requirements for different groups of people or different types of data.
The PRC regulatory and enforcement regime with regard to privacy and data security is evolving. The PRC government is increasingly focused on data security, recently launching cybersecurity review against a number of mobile apps operated by several US-listed Chinese companies and prohibiting these apps from registering new users during the review period. Although we believe that we are compliant with the regulations and policies that have been issued to date and we do not believe that we are required to obtain any permissions and approvals under the regulations discussed below, if we have inadvertently concluded that such permissions or approvals are not required or if applicable laws, regulations, or interpretations change and we are required to obtain such permissions or approvals in the future, the Company or its VIE could be subject to increased compliance costs, as well as, among other things, administrative penalties, rectification orders, fines, suspension of relevant business, or revocation of business permits or licenses, and the Company’s securities could become ineligible for listing on a US exchange.
The PRC Cybersecurity Law, which took effect in June 2017, provides that personal information and important data collected and generated by operators of critical information infrastructure in the course of their operations in the PRC should be stored in the PRC, and the law imposes heightened regulation and additional security obligations on operators of critical information infrastructure.
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In January 2022, the Cyberspace Administration of China and several other administrations jointly promulgated amended Cybersecurity Review Measures, which became effective on February 15, 2022. Pursuant to the Cybersecurity Review Measures, a “critical information infrastructure operator,” or a CIIO, that purchases network products and services or conducts data processing activities that affect or may affect national security will be subject to cybersecurity review. The Cybersecurity Review Measures also expands the cybersecurity review to “internet platform operators” in possession of personal information of over one million users if such operators intend to list their securities in a foreign country. Alternatively, relevant governmental authorities in the PRC may initiate cybersecurity review if they determine an operator’s network products or services or data processing activities affect or may affect national security. We do not believe that our Company constitutes a critical information infrastructure operator and we have less than one million registered users on our digital platform. The PRC National Security Law defines various types of national security, including technology security and information security.
On November 14, 2021, the Cyberspace Administration of China released the Regulations on Network Data Security. The Regulations on Network Data Security provide that data processors refers to individuals or organizations that autonomously determine the purpose and the manner of processing data. If a data processor that processes personal data of more than one million users intends to list overseas, it shall apply for a cybersecurity review. In addition, data processors that process important data or are listed overseas shall carry out an annual data security assessment on their own or by engaging a data security services institution, and the data security assessment report for the prior year should be submitted to the local cyberspace affairs administration department before January 31 of each year.
We currently have less than one million registered users on our digital platform and only require and obtain user information after users register with it. Given that we sell and service products through our digital platform, we may constitute a “data processor,” but the number of our online registered users is far less than one million. As a result, we would not be required to apply for a cybersecurity review under the Measures for Cybersecurity Review or the Regulations on Network Data Security. Nevertheless, the Measures for Cybersecurity Review or the Regulations on Network Data Security may be subject to further changes Although we believe we currently are not required to obtain clearance from the Cyberspace Administration of China under the Measures for Cybersecurity Review, the Regulations on Network Data Security, or the Opinions on Strictly Cracking Down on Illegal Securities Activities, we face uncertainties as to the interpretation or implementation of such regulations or rules and we may in the future be required to perform a data security assessment annually either by ourselves or by retaining a third party data security service provider and submitting such data security assessment report to the local agency every year under the draft Regulations on Network Data Security
On June 10, 2021, the Standing Committee of the National People’s Congress of China promulgated the Data Security Law which took effect on September 1, 2021. The Data Security Law provides for data security and privacy obligations of entities and individuals carrying out data activities, prohibits entities and individuals in China from providing any foreign judicial or law enforcement authority with any data stored in China without approval from a competent PRC authority, and sets forth the legal liabilities of entities and individuals found to be in violation of their data protection obligations, including rectification order, warning, fines of up to RMB10 million, suspension of relevant business, and revocation of business permits or licenses.
On August 20, 2021, the Standing Committee of the National People’s Congress of China promulgated the Personal Information Protection Law which took effect on November 1, 2021. In addition to other rules and principles of personal information processing, the Personal Information Protection Law specifically provides rules for processing sensitive personal information. Sensitive personal information refers to personal information that, once leaked or illegally used, could easily lead to the infringement of human dignity or harm to the personal or property safety of an individual, including biometric recognition, religious belief, specific identity, medical and health, financial account, personal whereabouts, and other information of an individual, as well as any personal information of a minor under the age of 14. Only where there is a specific purpose and sufficient necessity, and under circumstances where strict protection measures are taken, may personal information processors process sensitive personal information. A personal information processor shall inform the individual of the necessity of processing such sensitive personal information and the impact thereof on the individual’s rights and interests. As uncertainties remain regarding the interpretation and implementation of the Personal Information Protection Law, we cannot assure you that we will comply with the Personal Information Protection Law in all respects and regulatory authorities may order us to rectify or terminate our current practice of collecting and processing sensitive personal information.
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Compliance with the PRC Cybersecurity Law, the PRC National Security Law, the Data Security Law, the Cybersecurity Review Measures, and the Personal Information Protection Law, as well as additional laws and regulations that PRC regulatory bodies may enact in the future, may result in additional expenses to us and subject us to negative publicity, which could harm our reputation among users and negatively affect the trading price of our common stock in the future. PRC regulators, including the Department of Public Security, the Ministry of Industry and Information Technology, the State Administration for Market Regulation, and the CAC, have been increasingly focused on regulation in the areas of data security and data protection, and are enhancing the protection of privacy and data security by rulemaking and enforcement actions at central and local levels. We expect that these areas will receive greater and continued attention and scrutiny from regulators and the public going forward, which could increase our compliance costs and subject us to heightened risks and challenges associated with data security and protection. If we are unable to manage these risks, we could become subject to penalties, including fines, suspension of business, prohibition against new user registration (even for a short period of time) and revocation of required licenses, and our reputation and results of operations could be materially and adversely affected.
Any failure, or perceived failure, by us to comply with the above and other regulatory requirements or privacy protection-related laws, rules and regulations could result in reputational damages or proceedings or actions against us by governmental entities, consumers, or others. These proceedings or actions could subject us to significant penalties and negative publicity, require us to change our data and other business practices, increase our costs and severely disrupt our business, or negatively affect the trading price of our common stock.
You may have difficulty enforcing judgments against us.
Most of our assets are located outside of the United States and most of our current operations are conducted in the PRC. In addition, all of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons is located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce in U.S. courts judgments on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, most of whom are not residents in the United States and the substantial majority of whose assets are located outside of the United States. In addition, there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts. Our counsel as to PRC law has advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. Courts in China may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based 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 arrangements that provide for the reciprocal recognition and enforcement of foreign judgments with the United States. In addition, according to the PRC Civil Procedures 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 basic principles of PRC law or national sovereignty, security, or the public interest. So, it is uncertain whether a PRC court would enforce a judgment rendered by a court in the United States.
The PRC government exerts substantial influence over the manner in which we must conduct our business activities.
The PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property, and other matters. We believe that our 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 we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.
Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.
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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. Our PRC operating subsidiary and affiliate is subject to PRC laws and regulations. However, these laws and regulations change frequently, and the interpretation and enforcement involve uncertainties. For instance, we may have to resort to administrative and court proceedings to enforce the legal protection that we are 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 we would receive in more developed legal systems. Such uncertainties, including the inability to enforce our contracts, could affect our business and operations. In addition, confidentiality protections in China may not be as effective as in the United States or other countries. Accordingly, we cannot predict the effect of future developments in the PRC legal system, particularly with regard to our 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 our ability to enforce our agreements.
To the extent that our independent registered public accounting firm’s audit documentation related to their audit reports for the Company may, in the future, be located in China or in Hong Kong, our securities could be delisted and prohibited from trading on a U.S. exchange.
The Holding Foreign Companies Accountable Act (the “HFCAA”), as originally passed, prohibited foreign companies from listing their securities on U.S. exchanges if the company’s auditor has been unavailable for PCAOB inspection or investigation for three consecutive years beginning in 2021. On December 29, 2022, as part of the Consolidated Appropriations Act, 2023, the time period for the delisting of foreign companies under the HFCAA was reduced from three consecutive years to two consecutive years.
On December 16, 2021, the PCAOB issued the Determination Report, which found that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in (i) mainland China of the People’s Republic of China because of a position taken by one or more authorities in mainland China; and (ii) 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 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 PRC (the “SOP”). Pursuant to the SOP, the PCAOB has independent discretion to select any issuer audits for inspection or investigation and has the unfettered ability to transfer information to the SEC. The determinations as to mainland China and Hong Kong were vacated by the PCAOB as of December 15, 2022 as a result of the PCAOB’s having been able to conduct extensive and thorough inspections and investigations of mainland China and Hong Kong firms in 2022 under the SOP; however, if the PCAOB encounters any impediment, in the future, to conducting an inspection or investigation of auditors in mainland China or Hong Kong as a result of a position taken by an authority in either jurisdiction, it may issue new determinations consistent with the HFCAA.
Because our independent registered public accounting firm, J&S Associate PLT (F.K.A: J&S Associate) (“J&S”), is headquartered in Kuala Lumpur, Malaysia, it would not be subject to any determinations that may be announced by the PCAOB in the future with respect to auditors located in China or Hong Kong. We believe that the PCAOB’s inspectors and investigators have consistent access to the audit work performed by J&S for us. Therefore, we do not expect to be affected by the HFCAA at this time.
However, to the extent that our auditor’s work papers may, in the future, become located in mainland China or in Hong Kong, such work papers may not be available for inspection by the PCAOB if authorities in the PRC or Hong Kong were to take a position at that time that would prevent the PCAOB from continuing to inspect or investigate completely registered public accounting firms headquartered in mainland China or Hong Kong. If such lack of inspection were to extend for the requisite period of time under the HFCAA, and if the PCAOB were then to issue new determinations based on its inability to inspect or investigate completely registered public accounting firms headquartered in mainland China or Hong Kong because of a position taken by an authority in those jurisdictions, our shares could be delisted and prohibited from trading on a U.S. exchange. In addition, if our auditor’s work papers were to become located in China or Hong Kong in the future, and thereby not be available for PCAOB inspection, our investors would be deprived of the benefits of the PCAOB’s oversight of our auditor through such inspections, and they may lose confidence in our reported financial information and procedures and the quality of our financial statements. Also, we cannot assure you that U.S. regulatory authorities will not apply additional or more stringent criteria to us. Such uncertainty could cause the market price of our shares to be materially and adversely affected.
The enforcement of the PRC labor contract law may materially increase our costs and decrease our net income.
China adopted a new Labor Contract Law, effective on January 1, 2008, and issued its implementation rules, effective on September 18, 2008. The Labor Contract Law and related rules and regulations impose more stringent requirements on employers with regard to, among others, minimum wages, severance payment and non-fixed-term employment contracts, time limits for probation periods, as well as the duration and the times that an employee can be placed on a fixed-term employment contract. Due to the limited period of effectiveness of the Labor Contract Law and its implementation rules and regulations, and the lack of clarity with respect to their implementation and potential penalties and fines, it is uncertain how they will impact our current employment policies and practices. In particular, compliance with the Labor Contract Law and its implementation rules and regulations may increase our operating expenses. In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the Labor Contract Law and its implementation rules and regulations may also limit our ability to effect those changes in a manner that we believe to be cost-effective or desirable and could result in a material decrease in our profitability.
A downturn in the Chinese or global economy, or a change in economic and political policies of China, could materially and adversely affect our VIE’s business and financial condition.
Our VIE’s business, prospects, financial condition, and results of operations may be influenced to a significant degree by political, economic, and social conditions in China generally. The Chinese economy differs from the economies of most developed countries in many respects, including the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy. 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 our VIE.
Economic conditions in China are sensitive to global economic conditions. Any prolonged slowdown in the global or Chinese economy may affect our current customers’ and potential customers’ businesses and have a negative impact on our VIE’s business, results of operations, and financial condition. Additionally, continued turbulence in the international markets may adversely affect our ability to access the capital markets to meet liquidity needs.
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There are political risks associated with conducting business in China.
Any adverse economic, social, and/or political conditions, material social unrest, strike, riot, civil disturbance, or disobedience, as well as significant natural disasters, may affect the market and adversely affect our business operations as our VIE’s operations are based in China. Any negative event may pose an immediate threat to the stability of the economy in China, thereby directly and adversely affecting our VIE’s results of operations and financial position. Furthermore, legislative or administrative actions in respect of China-U.S. relations could cause investor uncertainty for affected issuers, including us, and the market price of our shares could be adversely affected.
Future inflation in China may inhibit our ability to conduct business in China.
In recent years, the Chinese economy has experienced periods of rapid expansion and highly fluctuating rates of inflation. During the past ten years, the rate of inflation in China has been as high as 5.9% and as low as -0.8%. These factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products and our company.
Restrictions on currency exchange may limit our ability to receive and use our sales effectively.
Currently, all of our revenues are settled in RMB, and any future restrictions on currency exchanges may limit our ability to use revenue generated in RMB to fund any future business activities outside China or to make dividend or other payments in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the RMB for current account transactions, significant restrictions still remain, including primarily the restriction that FIEs may only buy, sell or remit foreign currencies after providing valid commercial documents, at those banks in China authorized to conduct foreign exchange business. In addition, conversion of RMB for capital account items, including direct investment and loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items. We cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB.
Fluctuations in exchange rates could adversely affect our business and the value of our securities.
The value of our shares will be indirectly affected by the foreign exchange rate between the U.S. dollar and RMB and between those currencies and other currencies in which our sales may be denominated. Appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend we issue that will be exchanged into U.S. dollars, as well as earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.
Since July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.
Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.
Restrictions under PRC law on our subsidiaries’ ability to make dividend payments and other distributions could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise fund and conduct our business.
Substantially all of our sales are earned by our VIE and its subsidiary, which make payments to King Eagle (China), one of our PRC subsidiaries, pursuant to the Consulting Service Agreement. As a holding company, we rely on dividends and other distributions on equity paid by our subsidiaries for our cash and financing requirements. However, to the extent that cash is in our Hong Kong or PRC subsidiaries, there is a possibility that the funds may not be available to fund our operations or for other uses outside of the PRC or Hong Kong due to interventions or the imposition of restrictions and limitations by the PRC or the Hong Kong government on the ability to transfer cash. In addition, if any of our subsidiaries incurs debt on its own behalf in the future, the instruments governing such debt may restrict its ability to pay dividends to us. As of the date of this Annual Report, our subsidiaries have not experienced any difficulties or limitations on their ability to transfer cash between each other; nor do they maintain cash management policies or procedures dictating the amount of such funding or how funds are transferred. None of our subsidiaries has paid any dividends, other distributions or transferred assets to the Company as of the date of this Annual Report. In the future, cash proceeds raised from overseas financing activities may be transferred by us to our subsidiaries via capital contribution or shareholder loans, as the case may be. As of the date of this Annual Report, we have not made any transfers, paid any dividends, or made any distributions to U.S. investors.
Moreover, PRC legal restrictions permit payments of dividends by our PRC subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries are also required under PRC laws and regulations to allocate at least 10% of their annual after-tax profits determined in accordance with PRC generally accepted accounting principles to a statutory general reserve fund until the amount in said fund reaches 50% of their registered capital. Allocations to these statutory reserve funds can only be used for specific purposes and are not transferable to us in the form of loans, advances, or cash dividends. Any limitations on the ability of our PRC subsidiaries to transfer funds to their parent companies in Hong Kong could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, and otherwise fund and conduct our business.
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The PRC government may issue further restrictive measures in the future.
We cannot assure you that the PRC’s government will not issue further restrictive measures in the future. The PRC government’s restrictive regulations and measures could increase our operating costs in adapting to these regulations and measures, limit our access to capital resources or even restrict our business operations, which could further adversely affect our business and prospects.
If our PRC subsidiary or consolidated affiliated entity are found incompliant with the employment and social security, taxation, marketing, tele-communication, or other rules of China, they may face penalties imposed by the PRC government.
Our PRC subsidiary and consolidated affiliated entity failed to strictly comply with PRC laws and regulations to contribute towards social insurance premium and housing fund on behalf of their employees, as required by the applicable laws and regulations. We may be required by relevant authorities to make up the shortfall of social insurance premium and housing fund. Although we have made efforts to settle tax payables and take compliance measures, if any PRC government authority takes the position that there is non-compliance with the taxation, marketing, tele-communication, or other rules by our PRC subsidiary or consolidated affiliated entity, they may be exposed to penalties from PRC government authorities, in which case the operation and financial conditions of our PRC subsidiary or consolidated affiliated entity may be adversely affected.
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 stockholders.
On March 16, 2007, the National People’s Congress of China passed the EIT Law, and on November 28, 2007, the State Council of China passed its implementing rules, which took effect on January 1, 2008. Under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise.
On April 22, 2009, the State Administration of Taxation issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the Notice, further interpreting the application of the EIT Law and its implementation non-Chinese enterprise or group controlled offshore entities. Pursuant to the Notice, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or group will be classified as a “non-domestically incorporated resident enterprise” if (i) its senior management in charge of daily operations reside or perform their duties mainly in China; (ii) its financial or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial assets and properties, accounting books, corporate chops, board and shareholder minutes are kept in China; and (iv) at least half of its directors with voting rights or senior management often resident in China. A resident enterprise would be subject to an enterprise income tax rate of 25% on its worldwide income and must pay a withholding tax at a rate of 10% when paying dividends to its non-PRC shareholders. However, it remains unclear as to whether the Notice is applicable to an offshore enterprise incorporated by a Chinese natural person. Nor are detailed measures on imposition of tax from non-domestically incorporated resident enterprises are available. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case.
We may be deemed to be a resident enterprise by Chinese tax authorities. If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest on financing proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC stockholders and with respect to gains derived by our non-PRC stockholders from transferring our shares.
If we were treated as a “resident enterprise” by PRC tax authorities, we would be subject to taxation in both the U.S. and China, and our PRC tax may not be creditable against our U.S. tax.
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We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.
On February 3, 2015, the SAT issued the Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises, or SAT Bulletin 7, which came into effect on the same day, revised in October 2017 and December 2017. SAT Bulletin 7 extends its tax jurisdiction to transactions involving the transfer of taxable assets through offshore transfer of a foreign intermediate holding company. In addition, SAT Bulletin 7 has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. SAT Bulletin 7 also brings challenges to both foreign transferor and transferee (or other person who is obligated to pay for the transfer) of taxable assets, as such persons need to determine whether their transactions are subject to these rules and whether any withholding obligation applies.
On October 17, 2017, the SAT issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Non-Resident Enterprise Income Tax at Source, or SAT Bulletin 37, which came into effect on December 1, 2017, and revised in June 2018. The SAT Bulletin 37 further clarifies the practice and procedure of the withholding of non-resident enterprise income tax.
Where a non-resident enterprise transfers taxable assets indirectly by disposing of the equity interests of an overseas holding company, which is an Indirect Transfer, the non-resident enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may report such Indirect Transfer to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding, or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC enterprise income tax, and the transferee or other person who pays for the transfer is obligated to withhold the applicable taxes currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.
We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries and investments. Our company may be subject to filing obligations or may be taxed if our company is transferor in such transactions and may be subject to withholding obligations if our company is transferee in such transactions, under SAT Bulletin 7 and/or SAT Bulletin 37. For transfers of shares of our company by investors who are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing under SAT Bulletin 7 and/or SAT Bulletin 37. As a result, we may be required to expend valuable resources to comply with SAT Bulletin 7 and/or SAT Bulletin 37 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our company should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.
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PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to penalties and limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us, or otherwise adversely affect us.
The SAFE promulgated the notice on relevant issues relating to domestic resident’s investment and financing and roundtrip investment through special purpose vehicles (“SPV(s)”), or Notice 37, in July 2014 that requires PRC residents or entities to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations when the offshore SPV undergoes material events relating to material change of capitalization or structure of the PRC resident itself (such as capital increase, capital reduction, share transfer or exchange, merger or spin off).On February 28, 2015, SAFE issued a notice according to which the aforesaid PRC residents or entities are no longer required to register with SAFE or its local branch, instead the aforesaid PRC residents or entities need to register with local banks. We have notified substantial beneficial owners of our ordinary shares who we know are PRC residents of their filing obligation, and to the best of our knowledge, most of those shareholders whom we know are PRC residents have completed the registration. However, we may not be aware of the identities of all our beneficial owners who are PRC residents. In addition, we do not have control over our beneficial owners and cannot assure you that all of our PRC resident beneficial owners will comply with SAFE Circular 37. Failure by an individual to comply with the required SAFE registration and updating requirements described above may result in penalties up to RMB50, 000 imposed on such individual and restrictions being imposed on the foreign exchange activities of the PRC subsidiaries of such offshore SPV, including increasing the registered capital of payment of dividends and other distributions to, and receiving capital injections for the offshore SPV. Failure to comply with Notice 37 may also subject relevant PRC resident beneficial owners or the PRC subsidiaries of such offshore SPV to penalties under PRC foreign exchange administration regulations for evasion of applicable foreign exchange restrictions.
Failure to comply with the individual foreign exchange rules relating to the overseas direct investment or the engagement in the issuance or trading of securities overseas by our PRC resident stockholders may subject such stockholders to fines or other liabilities.
Other than Notice 37, our ability to conduct foreign exchange activities in the PRC may be subject to the interpretation and enforcement of the implementation rules of the administrative measures for individual foreign exchange promulgated by SAFE in January 2007 (as amended and supplemented, the “Individual Foreign Exchange Rules”). Under the individual foreign exchange rules, any PRC individual seeking to make a direct investment overseas or engage in the issuance or trading of negotiable securities or derivatives overseas must make the appropriate registrations in accordance with SAFE provisions. PRC individuals who fail to make such registrations may be subject to warnings, fines or other liabilities.
We may not be fully informed of the identities of all our beneficial owners who are PRC residents. For example, because the investment in or trading of our shares will happen in an overseas public or secondary market where shares are often held with brokers in brokerage accounts, it is unlikely that we will know the identity of all of our beneficial owners who are PRC residents. Furthermore, we have no control over any of our future beneficial owners and we cannot assure you that such PRC residents will be able to complete the necessary approval and registration procedures required by the individual foreign exchange rules.
It is uncertain how the individual foreign exchange rules will be interpreted or enforced and whether such interpretation or enforcement will affect our ability to conduct foreign exchange transactions. Because of this uncertainty, we cannot be sure whether the failure by any of our PRC resident stockholders to make the required registration will subject our PRC subsidiaries to fines or legal sanctions on their operations, delay or restriction on repatriation of proceeds of this offering into the PRC, restriction on remittance of dividends or other punitive actions that would have a material adverse effect on our business, results of operations and financial condition.
We may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination that we violated these laws could have a material adverse effect on our business.
We are subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business. We have operations, agreements with third parties, and make most of our sales in China. The PRC also strictly prohibits bribery of government officials. Our activities in China create the risk of unauthorized payments or offers of payments by the employees, consultants, sales agents, or distributors of our Company, even though they may not always be subject to our control. It is our policy to implement safeguards to discourage these practices by our employees. However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants, sales agents, or distributors of our Company may engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results, and financial condition. In addition, the U.S. government may seek to hold our Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
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If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations, stock price and reputation and could result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.
Recently, U.S. public companies that have substantially all of their operations in China, particularly companies like us which have completed so-called reverse merger transactions, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on our Company, our business and our stock price. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our company. This situation will be costly and time consuming and distract our management from growing our company.
The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the PRC. Accordingly, our public disclosure should be reviewed in light of the fact that no governmental agency that is located in China where substantially all of our operations and business are located have conducted any due diligence on our operations or reviewed or cleared any of our disclosure.
We are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under the Securities Act and the Exchange Act. Unlike public reporting companies whose operations are located primarily in the United States, however, substantially all of our operations are located in China. Since substantially all of our operations and business takes place in China, it may be more difficult for the staff of the SEC to overcome the geographic and cultural obstacles that are present when reviewing our disclosure. These same obstacles are not present for similar companies whose operations or business take place entirely or primarily in the United States. Furthermore, our SEC reports and other disclosure and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review of the China Securities Regulatory Commission, a PRC regulator that is tasked with oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has done any due diligence on our company and with the understanding that none of our SEC reports, other filings or any of our other public pronouncements has been reviewed or otherwise been scrutinized by any local regulator.
Risks Related to the Market for Our Securities
Our common stock is quoted on the OTC market, which may have an unfavorable impact on our stock price and liquidity.
Our common stock is quoted on the OTC market. The OTC market is a significantly more limited market than the New York Stock Exchange or NASDAQ. The quotation of our shares on the OTC market may result in a less liquid market available for existing and potential stockholders to trade shares of our common stock, could depress the trading price of our common stock and could have a long-term adverse impact on our ability to raise capital in the future. We plan to list our common stock as soon as practicable. However, we cannot assure you that we will be able to meet the initial listing standards of any stock exchange, or that we will be able to maintain any such listing.
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We are subject to penny stock regulations and restrictions, and you may have difficulty selling shares of our common stock.
The SEC has adopted regulations which generally define so-called “penny stocks” to be an equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. Our common stock is a “penny stock” and is subject to Rule 15g-9 under the Exchange Act, or the Penny Stock Rule. This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our securities in the secondary market, thus possibly making it more difficult for us to raise additional capital.
For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in penny stock, of a disclosure schedule prepared by the SEC relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.
There can be no assurance that our common stock will qualify for exemption from the Penny Stock Rule. In any event, even if our common stock were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of penny stock, if the SEC finds that such a restriction would be in the public interest.
We are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to “emerging growth companies” will make our common shares less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an “emerging growth company,” we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an “emerging growth company” until September 30, 2024, although circumstances could cause us to lose that status earlier, including if we become a large accelerated filer or if we have issued an aggregate of $1 billion in non-convertible debt during the preceding 3 years. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and the price of our common stock may be more volatile.
We do not intend to pay dividends for the foreseeable future.
For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends on our common stock. Accordingly, investors must be prepared to rely on sales of their common stock after price appreciation to earn an investment return, which may never occur. Investors seeking cash dividends should not purchase our common stock. Any determination to pay dividends in the future will be made at the discretion of our Board of Directors and will depend on our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board deems relevant.
Fulfilling our obligations incident to being a public company, including with respect to the requirements of and related rules under the Sarbanes-Oxley Act of 2002, is expensive and time-consuming, and any delays or difficulties in satisfying these obligations could have a material adverse effect on our future results of operations and our stock price.
As a public company, the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC require us to implement various corporate governance practices and adhere to a variety of reporting requirements and complex accounting rules. Compliance with these public company obligations requires us to devote significant time and resources and places significant additional demands on our finance and accounting staff and on our financial accounting and information systems. Other expenses associated with being a public company include increased auditing, accounting and legal fees and expenses, investor relations expenses, increased directors’ fees and director and officer liability insurance costs, registrar and transfer agent fees and listing fees, as well as other expenses.
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We are required under the Sarbanes-Oxley Act of 2002 to document and test the effectiveness of our internal control over financial reporting. In addition, we are required under the Exchange Act to maintain disclosure controls and procedures and internal control over financial reporting. Any failure to maintain effective controls or implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results, or cause us to fail to meet our reporting obligations. If we are unable to conclude that we have effective internal control over financial reporting, investors could lose confidence in the reliability of our financial statements. This could result in a decrease in the value of our common stock. Failure to comply with the Sarbanes-Oxley Act of 2002 could potentially subject us to sanctions or investigations by the SEC or other regulatory authorities.
Compliance with changing regulation of corporate governance and public disclosure will result in additional expenses.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC regulations, have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the public markets and public reporting. Our management team will need to invest significant management time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities.
Provisions in our charter documents and under Nevada law could discourage a takeover that stockholders may consider favorable.
Provisions in our articles of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our Board of Directors has the right to determine the authorized number of directors and to elect directors to fill a vacancy created by the expansion of the Board of Directors or the resignation, death, or removal of a director, which prevents stockholders from being able to control the size of or fill vacancies on our Board of Directors. In addition, we are authorized to issue up to 1,000,000,000 shares of common stock, in one or more classes or series as may be determined by our Board of Directors. The issuance of shares of common stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of our outstanding voting stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
The Company is not required to provide the information required by this Item because the Company is a smaller reporting company.
ITEM 2. PROPERTIES
All land in China is owned by the State. Individuals and companies are permitted to acquire rights to use land or land use rights for specific purposes. In the case of land used for industrial purposes, the land use rights are granted for a certain period of no more than 50 years. This period may be renewed at the expiration of the initial and any subsequent term. Granted land use rights are transferable and may be used as security for borrowings and other obligations. We do not own or have not been granted land use rights to any property in China or any other countries.
Owned Real Property
Neither our Company nor the VIE owns any real property.
Leased Real Property
King Eagle (China), King Eagle VIE, and King Eagle (Beijing) entered into multiple lease arrangements in Beijing and Tianjin, the PRC, for their office spaces which they believe are adequate and suitable for their current operations:
| Entity | Description of Use | Leased
Square Meters |
Location | |||||
| King Eagle (China) | Office space | 970.0 | Chaoyang District, Beijing, PRC | |||||
| King Eagle VIE | Office space | 178.5 | Tianjin Airport Economic Zone, Tianjin, PRC. | |||||
| King Eagle (Beijing) | Office space | 146.0 | Chaoyang District, Beijing, PRC | |||||
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ITEM 3. LEGAL PROCEEDINGS
Other than ordinary routine litigation (in which we are not currently involved), we know of no material, existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending litigation, and there are no proceedings in which any of our directors, officers, or affiliates, or any registered or beneficial stockholder, is an adverse party or has a material interest adverse to our Company.
ITEM 4. MINE SAFETY DISCLOSURES
The information required by Item 4 is not applicable to us, as we have no mining operations in the United States.
Part II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock was quoted on the OTCBB from November 3, 2017 under the designation “CXKJ” until November 8, 2021 when the OTCBB was discontinued and our stock commenced trading on the OTC Pink Sheets. On November 9, 2022, our trading symbol was changed to “KPEA” and on November 14, 2022, our common stock commenced trading on the OTCQB. However, our common stock has not been traded on the OTC market except on a limited and sporadic basis and there is no assurance that a regular public trading market will ever develop. OTC market securities are not listed and traded on the floor of an organized national or regional stock exchange. Instead, OTC market securities transactions are conducted through a telephone and computer network connecting dealers. OTC market issuers are traditionally smaller companies that do not meet the financial and other listing requirements of a regional or national stock exchange.
Price Range of Common Stock
The following table shows, for the periods indicated, the high and low bid prices per share of our post-split common stock as reported by the OTC Markets, Inc. These bid prices represent prices quoted by broker-dealers on the OTCBB quotation service. The quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commissions, and may not represent actual transactions.
| High | Low | |||||||
| Fiscal Year 2021 | ||||||||
| First quarter ended December 31, 2020 | $ | 0.059 | $ | 0.048 | ||||
| Second quarter ended March 31, 2021 | $ | 0.225 | $ | 0.190 | ||||
| Third quarter ended June 30, 2021 | $ | 0.415 | $ | 0.401 | ||||
| Fourth quarter ended September 30, 2021 | $ | 0.600 | $ | 0.360 | ||||
| Fiscal Year 2022(1) | ||||||||
| First quarter ended December 31, 2021 | $ | 0.0700 | $ | 0.0265 | ||||
| Second quarter ended March 31, 2022 | $ | 0.1460 | $ | 0.0272 | ||||
| Third quarter ended June 30, 2022 | $ | 0.2510 | $ | 0.1000 | ||||
| Fourth quarter ended September 30, 2022 | $ | 0.2000 | $ | 0.1400 | ||||
(1) Data for fiscal year 2022 is derived from https://finance.yahoo.com.
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Holders
As of December 22, 2022, there were 23 registered holders of record of our common stock.
Dividends
We have not paid dividends on our common stock and do not anticipate paying such dividends in the foreseeable future. We will rely on dividends from our PRC operating entity for our funds and PRC regulations may limit the amount of funds distributed to us from our PRC operating entity, which will affect our ability to declare any dividends.
Stock Option and Warrant Grants
We have no stock options or warrants granted to our executives, employees, vendors, consultants, or any other parties as of the reporting date.
Registration Rights
We have not granted anyone any registration rights.
Securities Authorized for Issuance under Equity Compensation Plans
As of September 30, 2022, the Company has not adopted any equity compensation plan.
Penny Stock Regulations
Our shares of common stock are subject to the “penny stock” rules of the Securities Exchange Act of 1934 and various rules under that Act. In general terms, “penny stock” is defined as any equity security that has a market price less than $5.00 per share, subject to certain exceptions. The rules provide that any equity security is considered to be a penny stock unless that security is registered and traded on a national securities exchange meeting specified criteria set by the SEC, issued by a registered investment company, and excluded from the definition on the basis of price (at least $5.00 per share), or based on the issuer’s net tangible assets or revenues. In the last case, the issuer’s net tangible assets must exceed $3,000,000 if in continuous operation for at least three years or $5,000,000 if in operation for less than three years, or if the issuer’s average revenues for each of the past three years exceeds $6,000,000.
Trading in shares of penny stock is subject to additional sales practice requirements for broker-dealers who sell penny stocks to persons other than established customers and accredited investors. Accredited investors, in general, include individuals with assets in excess of $1,000,000 or annual income exceeding $200,000 (or $300,000 together with their spouse), and certain institutional investors. For transactions covered by these rules, broker-dealers must make a special suitability determination for the purchase of the security and must have received the purchaser’s written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, the rules require the delivery, prior to the first transaction, of a risk disclosure document relating to the penny stock. A broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, and current quotations for the security. Finally, monthly statements must be sent disclosing recent price information for the penny stocks. These rules may restrict the ability of broker-dealers to trade or maintain a market in our common stock to the extent that it is penny stock, and may affect the ability of shareholders to sell their shares.
Rule 144
In general, under Rule 144 a person, or persons whose shares are aggregated, who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale and who has beneficially owned shares of our common stock for at least six months, including the holding period of any prior owner except if the prior owner was one of our affiliates, would be entitled to sell all of their shares, provided that current public information about our company is available.
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Sales under Rule 144 also may be subject to manner of sale provisions and notice requirements and to the availability of current public information about our Company. Any substantial sale of common stock pursuant to any resale registration statement or Rule 144 may have an adverse effect on the market price of our common stock by creating an excessive supply.
Because we were a shell company with no operations prior to the close of the 2018 Share Exchange, sales of our shares were required to be compliant with Rule 144(i). Pursuant to Rule 144(i), none of our shares of common stock could be sold under Rule 144 until March 2019, which was 12 months after we filed the current report on Form 8-K reporting the closing of the 2018 Share Exchange. Additionally, stockholders could not sell our shares pursuant to Rule 144 unless, at the time of the sale, we had filed with the SEC all reports, other than reports on Form 8-K, required under the Exchange Act for the preceding 12 months.
Recent Sales of Unregistered Securities
Information regarding any equity securities we have sold within the past three years that were not registered under the Securities Act of 1933, as amended (the “Securities Act”), is set forth below. Each such transaction was exempt from the registration requirements of the Securities Act by virtue of the provisions of Regulation S (“Regulation S”), which was adopted by the Securities and Exchange Commission (the “SEC”) under the Securities Act. Unless stated otherwise: (i) the securities were offered and sold only to non-US Persons, as defined in Regulation S.
On May 17, 2021, we entered into a share exchange agreement (“Share Exchange Agreement”) with (i) KP International, a limited liability company incorporated in the British Virgin Islands on April 20, 2021; and (ii) the five members of KP International to acquire all the issued and outstanding capital stock of KP International in exchange for the issuance to those members of an aggregate of 34,158,391 shares of our common stock (“Reverse Acquisition”). Pursuant to the terms of the Exchange Agreement, and as a condition to the completion of the transactions contemplated by the Share Exchange Agreement, the Company also agreed to enter into an agreement with Wenhai Xia (“the Stockholder”), to cancel an aggregate of 15,535,309 shares of the Company’s common stock owned by the Stockholder. The Reverse Acquisition was closed on May 17, 2021. None of the KP International’s stockholders is a U.S. Person (as that term is defined in Regulation S of the Securities Act of 1933) and KP International acquired our shares in the Reverse Merger outside of the United States.
In issuing these securities to KP International’s stockholders, we relied upon the exemption from the registration requirements of the Securities Act 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 SEC. Among other things, the offer or sale was made in an offshore transaction and no directed selling efforts were made in the United States by the issuer, a distributor, any of their respective affiliates, or any person acting on behalf of any of the foregoing. In addition, each of the recipients of the shares certified that he/she/it is not a U.S. Person, as defined in Regulation S, and is not acquiring the securities for the account or benefit of any U.S. Person and agreed to resell such securities only in accordance with the provisions of Regulation S, pursuant to registration under the Securities Act, or pursuant to an available exemption from registration, and agreed not to engage in hedging transactions with regard to such securities unless in compliance with the Securities Act.
ITEM 6. RESERVED
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview of the Business
Due to global health issues and the pandemic, people have increased their health and nutrition consciousness. We believe preventive care is the most effective investment in health.
To promote awareness of preventive care among the people in the PRC, we have developed and launched our mobile platform (King Eagle Mall). We have also started planning the development of physical (Smart Kiosk) platforms, with the cooperation of Guoxin Star Network Co., Ltd. Guoxin Star Network Co., Ltd was formerly our related party due to its being wholly owned by Guoxin Ruilian which also owns Guoxin Zhengye. Guoxin Zhengye was the 8% shareholder of King Eagle (China) but transferred its entire ownership interest in King Eagle (China) to KP Industrial on August 26, 2022.
King Eagle Mall
King Eagle Mall is a mobile social e-commerce platform which was launched in July 2020 and promotes preventive health care products and services as our core business. It adopts the S2B2C business model and integrates many major health care products and services. We focus on health-related products and services. King Eagle Mall is designed to enable health-related products to be sold by us and by third parties. King Eagle Mall’s products are divided into two sectors: self-operated products and selected products which promote preventive health care. Our team screens and examines products that are and will be offered both by us and by affiliated merchants. Our major products include health care products such as dietary supplements, nutritional health foods, beauty cosmeceuticals, and other categories of health foods (for instance, milk powder, dried fruits) for supporting the cardiovascular system and bone joint health. We also offer collagen peptides, probiotics, and health foods for improving blood circulation and vein health, as well as household products that can promote and improve a healthier lifestyle for our members. We receive customer orders and may arrange fulfillment through our merchants who are responsible for delivery or we may fulfill customer orders through our outsourced networks. As of December 22, 2022 and September 30, 2022, King Eagle Mall had approximately 15,172 and 15,077 members, respectively.
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We also operate customer service centers with whom our members can communicate directly for any assistance related to product purchases, suggestions for health care products and services, and delivery logistics.
Smart Kiosks
We introduced the Smart Kiosk concept with support from our related party, Guoxin Star Network Co., Ltd, which is wholly owned by Guoxin Ruilian Group Co., Ltd. Guoxin Ruilian Group Co. Ltd. wholly owns Guoxin Zhengye, the former 8% shareholder of King Eagle (China). The smart service kiosk functions as a physical customer service center and as community marketing for attracting customers, providing customer service, promoting our 500+ preventive health care and health related household products, and introducing concepts of maintaining a healthy life. 5G Internet connection is also available for our customers to connect to our online application, King Eagle Mall, so that our customers can access King Eagle Mall and place orders for our products.
The construction of Smart Kiosks will be initiated and originally administered by Guoxin Star Network Co., Ltd. However, the central and local governments of the PRC have imposed quarantines and closures in certain affected areas since 2021. The approval process for our applications for construction permits of Smart Kiosks was delayed by the local governmental agencies. Although mainland China relaxed its COVID-19 policies and controls in early December 2022, the number of cases of COVID-19 is expected to rise. We expect the approval process at the local government agencies will be initiated in early 2023.
Recent Developments
A new online platform
In October 2022, we introduced and implemented a new online platform where we focus on promoting and selling our own brand of preventive health care related products, such as the thermal therapy cabin, to wholesalers and retailers. As of late December 2022, our new online platform had approximately 270 wholesaler members.
COVID-19
The COVID-19 pandemic has resulted in quarantines, travel restrictions, limitations on social or public gatherings, and the temporary closure of business venues and facilities around the world. Due to restrictions, quarantines, and closures in certain affected areas and government agencies in the PRC, the approval process for our applications for construction permits of Smart Kiosks was delayed by the local governmental agencies and the construction projects for Smart Kiosks were therefore postponed.
Businesses and markets in mainland China have reopened and mainland China relaxed its policies and controls relating to COVID-19 in early December 2022. As a result, the number of cases of COVID-19 increased greatly which caused restrictions on our service agents to travel or launch face-to-face marketing activities. Construction of our Smart Kiosks may not be immediate, which impacts our plan of enhancing our face-to-face customer services and increasing our market share. The Company continues to focus its business on its online platform, King Eagle Mall, and to promote its own brand of consumer health care and health related household products on its new online platform, which was introduced and implemented in October 2022, to mitigate the adverse impacts of COVID-19. The Company also follows up closely with the local governmental agencies regarding its applications for construction permits for Smart Kiosks. However, as the pandemic increased overall public health consciousness in the PRC, the Company’s average monthly online sale revenue increased by $0.2 million, or 34.4%, from $0.4 million for the year ended September 30, 2021 to $0.6 million for the year ended September 30, 2022.
In early May 2023, the World Health Organization (“WHO”) International Health Regulations Emergency Committee announced that the Public Health Emergency of International Concern (the “PHEIC”) should end because of declining Covid-19 related hospitalizations and deaths and high levels of immunity in the population. The Committee “advised that it is time to transition to long-term management of the Covid-19 pandemic” and the WHO Director-General concurred. We plan to continue to monitor the level of Covid-19 cases, which may still be considered a threat in the long term because the virus continues to evolve and spread.
Therefore, we do not expect that the virus will have a material adverse effect on our business or financial results at this time. However, it is not possible to predict the unanticipated consequence of the pandemic on our future business performance and liquidity due to the severity of the global situation with COVID-19. The Company continues to monitor and assess the evolving situation closely and evaluate its potential exposure.
Recent Regulatory Developments in China
Under current Chinese laws and regulations, the Company believes that the VIE Agreements are not subject to any government approval. The shareholders of King Eagle (Tianjin) were required to register with SAFE when they established offshore vehicles to hold KP International. Such SAFE registration was effected on May 14, 2021. These shareholders of King Eagle (Tianjin) were also required to register their equity pledge arrangement by the Equity Pledge Agreement with King Eagle (China). However, the Company faces uncertainty with respect to future actions by the PRC government that could significantly affect King Eagle (Tianjin)’s financial performance and the enforceability of the VIE Agreements.
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On July 6, 2021, the PRC government issued the Opinions on Strictly Cracking Down on Illegal Securities Activities, calling for: (i) tightening oversight of data security, cross-border data flow and administration of classified information, as well as amendments to relevant regulations to specify responsibilities of overseas listed Chinese companies with respect to data security and information security; (ii) enhanced oversight of overseas listed companies as well as overseas equity fundraising and listing by Chinese companies; and (iii) extraterritorial application of China’s securities laws. As the Opinions on Strictly Cracking Down on Illegal Securities Activities were recently issued, there is great uncertainty with respect to the interpretation and implementation thereof. We will closely monitor further developments.
In addition, on July 10, 2021, the Cyberspace Administration of China (the “CAC”) issued the Measures for Cybersecurity Review, or the Measures, which proposed to authorize the relevant government authorities to conduct cybersecurity review on a range of activities that affect or may affect national security, including listings in foreign countries by companies that possess the personal data of more than one million users. On January 4, 2022, the CAC issued the New Measures for Cybersecurity Review (the “New Measures”), which amended the Measures for Cybersecurity Review (Draft Revisions) released on July 10, 2021. As our VIE has less than one million customers, we believe that the Measures are not applicable to us in current form. The PRC government is increasingly focused on data security, recently launching cybersecurity review against a number of mobile apps operated by several US-listed Chinese companies and prohibiting these apps from registering new users during the review period. There are great uncertainties regarding the interpretation and enforcement of PRC laws, rules, and regulations regarding data and privacy security. We may be required to change our data and other business practices and be subject to regulatory investigations, penalties, increased cost of operations, or declines in issuer growth or engagement as a result of these laws and policies.
Cash Transfers Within our Organization
As between the Company and its subsidiaries, cash will generally be transferred by means of capital contributions and/or interest-free intercompany loans. Cash to be transferred or settled between the Company and its subsidiaries, on the one hand, and the consolidated VIE, on the other hand, will typically be transferred through payments for fees under our contractual arrangements with the VIE, expense reimbursements, or intercompany borrowings between the Company or one of its subsidiaries and the consolidated VIE. Any such loans will be interest-free, unsecured and payable on demand. For more information regarding these contractual arrangements, see “Item 1. Business – Corporate History and Structure - Contractual Arrangements.” The enforceability and treatment of the intercompany agreements within our organization, including intercompany borrowings and the contractual arrangements with our VIE, have not been tested in court. To the extent cash and/or assets in the business are in the PRC and/or Hong Kong or our PRC and/or Hong Kong entities, such funds and/or assets may not be available to fund operations or for other use outside of the PRC and/or Hong Kong due to interventions in or the imposition of restrictions and limitations imposed by the PRC government on the ability of the Company or its subsidiaries to transfer cash and/or assets. There are no tax consequences for intercompany borrowings or the payment for intercompany services, except for the standard value added taxes and/or income taxes for the revenues and/or profits generated from such services.
The proceeds of any transactions within our organization, including with the VIE, are eliminated in our consolidated financial statements. For more details, please refer to the principles of consolidation set forth in the notes to our Consolidated Financial Statements for the fiscal year ended September 30, 2022 included in this Annual Report.
As of the date of this Annual Report, there have been no distributions or dividends by any of our direct or indirect subsidiaries to the Company. The Company has not declared any dividends or made any distributions to its shareholders, and we do not anticipate declaring a dividend in the foreseeable future. No assets other than cash are transferred within our organization. For more details, please see our “Consolidated Financial Statements” and the “Condensed Consolidating Schedule” on page 14.
Financial Operations Overview
Results of Operations for the years ended September 30, 2022 and 2021
| September 30, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| Amount | % of revenue | Amount | % of revenue | |||||||||||||
| Revenues | $ | 7,510,059 | 100.0 | % | $ | 5,587,446 | 100.0 | % | ||||||||
| Cost of revenues | 1,195,624 | 15.9 | 1,001,777 | 17.9 | ||||||||||||
| Gross profit | 6,314,435 | 84.1 | 4,585,669 | 82.1 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative expenses | 1,680,560 | 22.4 | 2,619,588 | 46.9 | ||||||||||||
| Selling expense | 6,641,485 | 88.4 | 3,741,389 | 67.0 | ||||||||||||
| Total operating expenses | 8,322,045 | 110.8 | 6,360,977 | 113.9 | ||||||||||||
| Loss from operations | (2,007,610 | ) | (26.7 | ) | (1,775,308 | ) | (31.8 | ) | ||||||||
| Other income | 34,769 | 0.5 | 574 | (0.0 | ) | |||||||||||
| Loss before income taxes | (1,972,841 | ) | (26.2 | ) | (1,774,734 | ) | (31.8 | ) | ||||||||
| Income tax expense | - | - | - | - | ||||||||||||
| Net loss | $ | (1,972,841 | ) | (26.2 | )% | $ | (1,774,734 | ) | (31.8 | )% | ||||||
Revenues
For the years ended September 30, 2022 and 2021, revenues amounted to $7,510,059 and $5,587,446, respectively. Our revenue primarily included the sale of consumer health care and health related household products to our customers via our mobile application, King Eagle Mall, which was launched in July 2020. We recognized our revenue on a gross basis, net of sub-charges and value-added tax (“VAT”) of gross sales. Compared to the same period in 2021, we generated a higher revenue amount during the year ended September 30, 2022 as our service agents initiated more marketing and promotional activities for our online platform and products during the year ended September 30, 2022.
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Cost of revenue
Our cost of revenue for the years ended September 30, 2022 and 2021 was $1,195,624 and $1,001,777, respectively. This primarily included the purchase of consumer health care and health related household products from our suppliers. We incurred a higher cost of revenue for the year ended September 30, 2022 compared to that in the same period of 2021 because we generated a higher revenue amount during the year ended September 30, 2022 as discussed above.
Gross profit
For the years ended September 30, 2022 and 2021, our gross profit amounted to $6,314,435, or 84.1%, and $4,585,669, or 82.1%, respectively. Our gross profit margin for the year ended September 30, 2022 was slightly higher than for the year ended September 30, 2021 because our customers tended to purchase fewer selected products during the year ended September 30, 2022. Our selected products mainly consist of agricultural products, which have a higher cost of revenue than the self-operated products such as dietary and nutritional supplements. As such, we generated a higher profit margin during the year ended September 30, 2022.
Operating Expenses
Our operating expenses consist of general and administrative expenses and selling expenses. For the years ended September 30, 2022 and 2021, our total operating expenses were $8,322,045 and $6,360,977, respectively. The higher operating expenses for the year ended September 30, 2022 compared to the year ended September 30, 2021 was primarily due to a significant rise in selling expenses.
General and administrative expenses
General and administrative expenses for the years ended September 30, 2022 and 2021 were $1,680,560 and $2,619,588, respectively.
Our general and administrative expenses for the years ended September 30, 2022 and 2021 were comprised of the following:
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Employee compensation and benefit | $ | 586,266 | $ | 729,377 | ||||
| Office rent and building management | 451,695 | 425,660 | ||||||
| Office supplies and meeting | 59,450 | 66,289 | ||||||
| Professional services fee | 408,477 | 990,889 | ||||||
| Business registration | 12,794 | 3,496 | ||||||
| Travel, transportation and gasoline | 26,170 | 63,252 | ||||||
| Meals and entertainment | 41,004 | 35,911 | ||||||
| Depreciation and amortization | 50,919 | 19,546 | ||||||
| Repair and maintenance | 15,637 | 257,881 | ||||||
| Others | 28,148 | 27,287 | ||||||
| Total | $ | 1,680,560 | $ | 2,619,588 | ||||
The decline in general and administrative expenses by $939,028 was triggered by a decline in employee compensation and benefits by $143,111, office supplies and meeting expenses by $6,839, professional fees by $582,412, travel, transportation and gasoline by $37,082, and repair and maintenance by $242,244, offset by increases in office rent and building management expenses of $26,035, business registration of $9,298, meals and entertainment of $5,093, depreciation and amortization of $31,373, and other increases aggregating $861.
The former CEO of the Company resigned on December 1, 2021. Thereafter, we reduced the compensation of our new CEO and existing executives to trim down our administrative costs. Our office supplies and meeting expenses for the year ended September 30, 2022 also decreased compared to the year ended September 30, 2021 due to the fact that we did not incur additional office supplies and decoration expense related to the opening of a new business during the year ended September 30, 2022 as we did in the year ended September 30, 2021. Compared to the same period in 2022, we incurred higher professional fees in the year ended September 30, 2021 as we recruited more consultants to assist with our reverse acquisition that was completed in May 2021. Our travel, transportation, and gasoline expense for year ended September 30, 2022 was reduced as we minimized the travel of our executives in order to reduce overhead costs. Our repair and maintenance expense decreased significantly in the year ended September 30, 2022 compared to the same period in 2021 because such repair and maintenance expense during the year ended September 30, 2021 related to our former office location.
On the contrary, during the year ended September 30, 2022, our lease, building management, and associated moving and relocation expenses were higher as we moved to a new office location and incurred an additional rent payment for the new office. Our business registration increased due to an increase in U.S. and BVI business registration fees. We incurred additional meal and entertainment expense for our executives, staff, and business partners for appreciating their efforts to increase sales volume. We recognized an additional depreciation amount, $16,184, for the leasehold improvements of the former office location as the estimated useful life of the relative leasehold improvements was adjusted.
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Selling expenses
Our selling expenses, which were primarily incurred by our sales and marketing department, for the years ended September 30, 2022 and 2021 were $6,641,485 and $3,741,389, respectively. Compared to the year ended September 30, 2021, our selling expenses for the year ended September 30, 2022 surged by $2,900,096, or 77.5%.
Our selling expenses included the following:
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Service agents | $ | 5,844,846 | $ | 2,929,080 | ||||
| Employee compensation and benefit | 489,363 | 484,825 | ||||||
| Office supplies and meeting | 63,106 | 206,940 | ||||||
| Customer services | 13,296 | 14,905 | ||||||
| Travel, transportation and gasoline | 84,360 | 36,469 | ||||||
| Meals and entertainment | 87,270 | 14,877 | ||||||
| Depreciation and amortization | 5,013 | 4,982 | ||||||
| Advertising | 54,231 | 3,123 | ||||||
| Others | - | 46,188 | ||||||
| Total | $ | 6,641,485 | $ | 3,741,389 | ||||
The significant increase in selling expenses was primarily driven by an increase in marketing and promotional service to our service agent by $2,915,766 as our service agents initiated more marketing and promotional activities for our online platform and products, which resulted in our average monthly revenue from our online sales increasing by approximately $0.2 million, from approximately $0.4 million for the year ended September 30, 2021 to approximately $0.6 million for the year ended September 30, 2022. Marketing and promotional service fees to our service agents for the year ended September 30, 2022 was twice as much as that in the same period in 2021. As preventive health care product and health related household product market is highly competitive in the mainland China, management believed that in order to boost the Company’s sales and increase its market share in the mainland China, it paid more incentives to the service agents to launch more marketing activities and promotions.
The increase in selling expense also included an increase in employee compensation and benefits of $4,538, travel and transportation of $47,891, meals and entertainment of $72,393, and advertising of $51,108. During the year ended September 30, 2022, as we aimed to increase our sales revenue and expand our market share, we increased the number of employees in our sales and marketing department during the first quarter of 2022, and our sales and marketing department launched marketing activities in various cities which resulted in higher travel and transportation, meals and entertainment, and advertising expenses.
Other income
Other income primarily included bank interest income and foreign exchange gain or loss. Our other income for the years ended September 30, 2022 and 2021 was $34,769 and $574, respectively. Since the first quarter of 2022, we have derived $36,685 from an additional source of income related to online technical support services for our supplement products provided to a corporate customer. During the year ended September 30, 2022, we also recognized $1,836 bank interest income, offset by a loss on disposal of furniture and fixtures of $3,752. Other income for the same period in 2021 included bank interest income of $1,062 and other expenses of $488.
Income tax expense
For the years ended September 30, 2022 and 2021, the income tax expense of the Company was nil. Due to the net loss before income tax, the Company recognized a full valuation recognition against its deferred tax assets, which included net operating loss carryforwards, as management believes it is more likely than not that the Company will not realize its net operating loss carryforwards in the near future or before they expire.
Net Loss
As a result of the factors discussed above, for the years ended September 30, 2022 and 2021 our net loss amounted to $1,972,841 and $1,774,734, respectively.
Foreign currency translation adjustment
The functional currency of our operations in the PRC is Chinese Yuan or Renminbi (“RMB”), while the functional currency of our operation in Hong Kong is Hong Kong Dollars (“HKD”). The financial statements are translated to U.S. dollars using the period end rates of exchange for assets and liabilities; equity is translated at historical exchange rates; and average rates of exchange (for the period) are used for revenues and expenses and cash flows. Transaction gains and/or losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. As a result of foreign currency translation, which is a noncash adjustment, we reported a foreign currency translation gain (loss) of $335,412 and $27,761 for the years ended September 30, 2022 and 2021, respectively. This non-cash gain (loss) had an effect of decreasing or increasing our reported comprehensive loss.
Comprehensive loss
As a result of our net loss after income taxes, we had a comprehensive loss for the years ended September 30, 2022 and 2021 of $1,637,429 and $1,802,495, respectively.
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Liquidity and Capital Resources
As of September 30, 2022 and 2021, we had a cash balance of $267,131 and $2,059,685, respectively.
For the year ended September 30, 2022, net cash used in operating activities totaled $1,592,130. Operating cash outflow was mainly attributable to net loss, $1,972,841, deposit payments to our lessors, $46,802, salary payment, $45,723, and VAT and indirect taxes payment, $206,303, offset by a decrease in prepayments to our vendors, $32,770, an increase in payable to our vendors, $257,078, an increase in customer advances, $142,789, and additional payment from a related party, $251,175.
Net cash used in investing activities totaled $139,155, and was primarily related to the purchase of office and computer equipment of $796 and a payment for the renovation of our new office in Beijing of $138,359.
There was no financing activity for the year ended September 30, 2022.
The effect of exchange rate change on cash totaled $(61,269) for the year ended September 30, 2022. The resulting change in cash for the period was a decrease of $1,792,554.
For the year ended September 30, 2021, net cash provided by operating activities totaled $1,913,858. Operating cash inflow was primarily attributable to an increase in trade and other payables of $1,404,380, an increase in provision for taxes of $212,862, and deferred revenue of $2,879,891, offset by the net loss of $1,774,734, prepayments to vendors and lessors of $556,585, and operating lease obligation payments of $294,658.
Net cash used in investing activities totaled $21,983 and was primarily related to the purchase of office and computer equipment totaling $19,306 and intangible assets totaling $2,677.
There was no financing activity for the year ended September 30, 2021.
The effect of exchange rate change on cash totaled $26,644. The resulting change in cash for the period was an increase of $1,918,519.
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Net cash (used in) provided by operating activities | $ | (1,592,130 | ) | $ | 1,913,858 | |||
| Net cash used in investing activities | (139,155 | ) | (21,983 | ) | ||||
| Effect of exchange rate change on cash | (61,269 | ) | 26,644 | |||||
| Total net change in cash and cash equivalents | $ | (1,792,554 | ) | $ | 1,918,519 | |||
The following table sets forth a summary of changes in our working capital as of September 30, 2022 and 2021:
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Current Assets | $ | 917,479 | $ | 2,871,157 | ||||
| Current Liabilities | 5,172,077 | 5,189,941 | ||||||
| $ | (4,254,598 | ) | $ | (2,318,784 | ) | |||
We require cash of approximately $2.2 million within the next twelve months, primarily related to third party vendor payables. As of September 30, 2022, we received customer advances in an amount of approximately $3.0 million. We anticipated the majority of the revenue will be recognized in the fiscal year 2023. Management agreed that the amount received is non-refundable. However, this term is not bound by any agreement. Thus, the customers may have the rights to challenge and demand the advances to be refunded under relevant Commercial Laws or regulations. Additionally, we had approximately $0.8 million commitment related to purchase and service agreements and cooperation agreement of Smart Kiosk as of September 30, 2022. See our “Contractual Obligations and Other Commitments” on page 61.
In an effort to support and maintain our financial position and operations, to fulfill our contractual commitments and to meet the demands from our customers for refund of their advanced payments, the Company focused on increasing its revenue through its online platform. In October 2022, we introduced and implemented another online platform which is focused on promoting and selling our own brand health care related products, particularly the thermal therapy cabin, to wholesalers and retailers. We continued to engage service agents to promote our products and to reduce our administrative overhead costs such as executive travel and executive and administrative compensation. Simultaneously, our directors and stakeholders continue to support our operation financially. We believe that such measures will improve our liquidity in the next twelve months. If we are not able to increase revenue or obtain any financing, we may be unable to continue as a going concern.
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Going Concern Consideration
The financial statements included in this Annual Report have been prepared in conformity with accounting principles generally accepted in the United States of America which contemplate continuation of the Company as a going concern. The going-concern basis assumes that assets are realized and liabilities are extinguished in the ordinary course of business at amounts disclosed on the financial statements. The Company’s ability to continue as a going concern depends on the liquidation of its current assets. As of September 30, 2022, the Company experienced cash outflows from operating activities of $1,592,130, the Company incurred a net loss of $1,972,841, and the Company had negative working capital of $4,254,598. These conditions raise substantial doubt about the ability of the Company to continue as a going concern.
In order to continue as a going concern for the next 12 months, the Company continues to focus on increasing its revenue through the sale of health care products on its online platform, King Eagle Mall, and promoting its own brand of preventive consumer health care related products on its new online platform to reduce the costs of goods sold, streamlining its overhead costs, or obtaining financing from its stockholders or directors. However, the Company cannot provide any assurance that it will be able to increase revenue, that it will be able to successfully implement its business plan, or that financing will be available to it on commercially acceptable terms, if at all. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern. The directors will continue to support the group by providing adequate financial assistance to enable the group to continue its business operations for the foreseeable future.
Contractual Obligations and Other Commitments
We had the following contractual obligations and commercial commitments as of September 30, 2022:
| Payments Due by Period | ||||||||||||||||||||
| Less Than 1 Year | 1 to 3 Years | 3 to 5 Years | More Than 5 Years | Total | ||||||||||||||||
| Contractual Obligations: | ||||||||||||||||||||
| Operating lease obligations | $ | 334,514 | $ | 273,520 | $ | - | $ | - | $ | 608,034 | ||||||||||
| Purchase and service agreements | 35,183 | 18,727 | - | - | 53,910 | |||||||||||||||
| Cooperation agreement of Smart Kiosk | - | 442,668 | 295,112 | - | 737,780 | |||||||||||||||
| Total contractual obligations | $ | 369,697 | $ | 734,915 | $ | 295,112 | $ | - | $ | 1,399,724 | ||||||||||
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements, including arrangements that would affect our liquidity, capital resources, market risk support, and credit risk support or other benefits.
Future Financings
We will continue to rely on equity sales of our common shares in order to continue to fund our business operations. Issuances of additional shares will result in dilution to existing stockholders. There is no assurance that we will achieve any additional sales of equity securities or arrange for debt or other financing to fund our operations and other activities, or if we are able, there is no guarantee that existing shareholders will not be substantially diluted.
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Critical Accounting Policies
Basis of Presentation
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America. This basis of accounting involves the application of accrual accounting and, consequently, revenues and gains are recognized when earned and expenses and losses are recognized when incurred. The consolidated financial statements are expressed in U.S. dollars.
Principles of Consolidation
The consolidated financial statements include the financial statements of the Company, its subsidiaries, and its variable interest entity (“VIE”). All significant intercompany transactions and balances within the Company have been eliminated upon consolidation.
Use of Estimates and Assumptions
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimate and assumptions that impact the presented amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the presented amounts of revenues and expenses during the period. Actual results may differ from those estimates. Significant estimates during the year ended September 30, 2022 and 2021 include the collectability of receivables, the useful lives of long-lived assets and intangibles, assumptions used in assessing impairment of long-lived assets, valuation of accruals for expenses, and tax due.
Reclassification
Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation.
Going Concern
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America which contemplate continuation of the Company as a going concern. The going-concern basis assures that assets are realized and liabilities are extinguished in the ordinary course of business at amounts disclosed on the financial statements. The Company’s ability to continue as a going concern depends on the liquidation of its current assets and business developments. In assessing the Company’s liquidity, the Company monitors and analyzes its cash and cash equivalents and its operating and capital expenditure commitments. The Company’s liquidity needs are to meet its working capital requirements, operating expenses, and capital expenditure obligations. For the year ended September 30, 2022, the Company incurred cash outflows from operating activities of $1,592,130, a net loss of $1,972,841, and negative working capital of $4,254,598. Moreover, there was a delay in the progress of the planning of Smart Kiosks due to the lockdown of the affected areas in the PRC. Although the business and markets in mainland China have reopened as mainland China relaxed its policies and controls relating to COVID-19 in early December 2022, the number of cases of COVID-19 is expected to increase greatly which may cause restrictions on our service agents to travel and launch face-to-face marketing activities. These conditions raise substantial doubt about the ability of the Company to continue as a going concern.
The Company continues to monitor its operations to help refine its financial liquidity. The financial liquidity of the Company has declined to a very unhealthy level in this year due to the decline in the balance of cash and cash equivalents. Options under consideration in the review process include, but are not limited to, increase of sales through the Company’s online business, reduction of overhead costs, fund advance from the Company’s stockholders and directors, or financing through the issuance of shares. Our new online platform, which focuses on promoting and selling our own brand preventive health care products to wholesalers and retailers, was placed in service in October 2022. Since the first quarter of 2022, the Company has been focusing on increasing its revenue through its online platform and slimming its administrative overhead costs. For example, we reduced the compensation and benefits of our executives, decreased office supplies expense, and trimmed staff meeting expense. Additionally, the Company obtained a fund advance of approximately $0.3 million from one of the shareholders of King Eagle (Tianjin) to meet its working capital requirements.
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In order to continue as a going concern for the next 12 months, the Company continues to focus on increasing its revenue through the sale of health care products on its online platform, King Eagle Mall, and promoting and selling its own brand health care products on its new online platform, streamlining its overhead costs, or obtaining financing from its stockholders or directors. However, the Company cannot provide any assurance that it will be able to increase revenue, that it will be able to successfully implement its business plan, or that financing will be available to it on commercially acceptable terms, if at all. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern. The directors will continue to support the group by providing adequate financial assistance to enable the group to continue its business operations for the foreseeable future.
COVID-19 Outbreak
The COVID-19 pandemic has resulted in quarantines, travel restrictions, limitations on social or public gatherings, and the temporary closure of business venues and facilities around the world. Due to restrictions, quarantines and closures in certain affected areas and government agencies in the PRC, the approval process of our applications for construction permits for Smart Kiosks was delayed by the local governmental agencies and construction projects of Smart Kiosks were therefore postponed.
Businesses and markets in mainland China have reopened and mainland China relaxed its policies and controls relating to COVID-19 in early December 2022. The number of cases of COVID-19 is expected to increase greatly which may cause restrictions on our service agents to travel and launch face-to-face marketing activities. Construction of our Smart Kiosks may not be immediate, which impacts our plan of enhancing our face-to-face customer services and increasing our market share. The Company continues to focus its business on its online platform, King Eagle Mall, and to promote its own brand of consumer health care and health related household products on its new online platform, which was introduced and implemented in October 2022, to mitigate the adverse impacts of COVID-19. The Company also follows up closely with the local governmental agencies regarding its applications for construction permits for Smart Kiosks. However, as the pandemic increased overall public health consciousness in the PRC, the Company’s average monthly online sale revenue increased by $0.2 million, or 34.4%, from $0.4 million for the year ended September 30, 2021 to $0.6 million for the year ended September 30, 2022.
Therefore, we do not expect that the virus will have a material adverse effect on our business or financial results at this time. However, it is not possible to predict the unanticipated consequence of the pandemic on our future business performance and liquidity due to the severity of global situation of COVID-19. The Company continues to monitor and assess the evolving situation closely and evaluate its potential exposure.
Earnings (Loss) Per Share
Basic income (loss) per share is computed by dividing net income (loss) attributable to the holders of ordinary shares by the weighted average number of ordinary shares outstanding during the year. Diluted income (loss) per share is calculated by dividing net income (loss) attributable to the holders of ordinary shares as adjusted for the effect of dilutive ordinary share equivalents, if any, by the weighted average number of ordinary shares and dilutive ordinary share equivalents outstanding during the period. However, ordinary share equivalents are not included in the denominator of the diluted earnings per share calculation when inclusion of such shares would be anti-dilutive, such as in a period in which a net loss is recorded.
Foreign Currency Translation
The reporting currency of the Company is the U.S. Dollar. Our entity in the British Virgin Islands uses the U.S. dollar. Our entities in the PRC and Hong Kong use the local currencies, Renminbi (RMB) and Hong Kong Dollar (HKD), as their functional currencies as determined based on the criteria of ASC 830, “Foreign Currency Translation.” Assets and liabilities are translated at the unified exchange rate as quoted by www.xe.com at the end of the period. Income and expense accounts are translated at the average translation rates and the equity accounts are translated at historical rates. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. Translation adjustments included in accumulated other comprehensive gain (loss) amounted to $279,367 and $(32,016) for the years ended September 30, 2022 and 2021, respectively.
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Below is a table with foreign exchange rates used for translation:
For the year ended September 30, 2022 (Average Rate) | Hong Kong Dollar (HKD) | Chinese Renminbi (RMB) | ||||||
| United States dollar ($1) | 7.8221 | 6.5473 | ||||||
| As of September 30, 2022 (Closing Rate) | ||||||||
| United States dollar ($1) | 7.8500 | 7.1159 | ||||||
For the year ended September 30, 2021 (Average Rate) | Hong Kong Dollar (HKD) | Chinese Renminbi (RMB) | ||||||
| United States dollar ($1) | 7.7631 | 6.5101 | ||||||
| As of September 30, 2021 (Closing Rate) | ||||||||
| United States dollar ($1) | 7.7851 | 6.4466 | ||||||
Cash and Cash Equivalents
Cash and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions, and a certain amount of cash kept in electronic wallets, “e-wallets”.
We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. We maintain accounts with various financial institutions in the PRC, and also e-wallets. As of September 30, 2022 and 2021, cash balances held in PRC banks are uninsured. Monies that are held in e-wallets are deemed equivalent to cash, are highly liquid, and are relatively unsafe compared to cash in banks. We have not experienced any losses in bank accounts or e-wallets and believe we are not exposed to significant risks with respect to our cash in bank accounts and low risk with respect to our cash kept in e-wallets.
Financial Instrument
The carrying amount reported on the balance sheet for cash, other receivables, accrued liabilities, and other payables approximate fair value because of the immediate or short-term maturity of these financial instruments.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and impairment losses. Gains and losses on dispositions of property and equipment are included in operating income (loss). Major additions, renewals, and improvements are capitalized, while maintenance and repairs are recognized as expense as incurred.
Depreciation is provided over the estimated useful life of each class of depreciable assets and is computed using the straight-line method over the useful lives of the assets as follows:
| Classification | Estimated useful life |
|||
| Leasehold improvements | 5 years | |||
| Office equipment | 3 years | |||
| Computer equipment | 3 years | |||
| Computer software | 5 years |
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Intangible Assets
Intangible assets represent the licensing cost for trademark registrations. For intangible assets with indefinite lives, the Company evaluates intangible assets for impairment at least annually and more often whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value. Intangible assets with definite lives are amortized over estimated useful lives, and are reviewed annually for impairment. The Company has not recorded impairment of intangible assets as of September 30, 2022 and 2021.
Impairment of Long-lived Assets
Long-lived assets, including buildings and intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying value of an asset may not be recoverable. We assess the recoverability of the assets based on the undiscounted future cash flows the assets are expected to generate and recognize an impairment loss when estimated discounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When we identify an impairment, reduce the carrying amount of the asset to the estimated fair value based on a discounted cash flows approach or, when available and appropriate, to comparable market values. As of September 30, 2022 and 2021, management determined that there was no impairment.
Fair Value Measurements
The Company applies the provisions of ASC Subtopic 820-10, “Fair Value Measurements”, for fair value measurements of financial assets and financial liabilities and for fair value measurements of non-financial items that are recognized or disclosed at fair value in the financial statements. ASC 820 also establishes a framework for measuring fair value and expands disclosures about fair value measurements.
Fair value is defined as the price that would be received to sell 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 pricing the asset or liability.
ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes three levels of inputs that may be used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
| ● | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. | |
| ● | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments. | |
| ● | Level 3 inputs to the valuation methodology are unobservable and significant to the fair value. |
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The Company’s financial assets and liabilities include cash, receivables, accounts payable, and accrued expenses.
Related Party Transactions
The Company follows the ASC 850-10 “Related Party Disclosures” for the identification of related parties and disclosure of related party transactions.
Pursuant to section 850-10-20, related parties include (i) affiliates of the Company; (ii) entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of section 825–10–15, to be accounted for by the equity method by the investing entity; (iii) trusts for the benefit of employees, such as pension and income-sharing trusts that are managed by or under the trusteeship of management; (iv) principal owners of the Company; (v) management of the Company; (vi) other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to the extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and (vii) other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to the extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
The consolidated financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall include: (i) the nature of the relationship(s) involved; (ii) a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented; and (iii) such other information deemed necessary to an understanding of the nature of the related party transactions.
Comprehensive Income (Loss)
Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but are excluded from net income (loss) as these amounts are recorded directly as an adjustment to stockholders’ equity. Our other comprehensive loss for the years ended September 30, 2022 and 2021 was comprised of foreign currency translation adjustments.
Revenue Recognition
Revenue is comprised of sales of goods and represents the amount of consideration the Company is entitled to upon the transfer of goods. Revenue was recorded on a gross basis, net of surcharges and value added tax (“VAT”) of gross sales. Pursuant to FASB ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), the Company recorded revenue on a gross basis because the Company is the primary obligor of the sales arrangements has latitude in establishing prices, has discretion in suppliers’ selection and assumes credit risks on receivables on gross sales from customers.
The Company adopted Accounting Standards Update (“ASU”) No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”) using the full retrospective transition method. The Company’s adoption of ASU 2014-09 did not have a material impact on the amount and timing of revenue recognized in its consolidated financial statements.
The Company applies the following five steps in order to determine the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements:
● identify the contract with a customer;
● identify the performance obligations in the contract;
● determine the transaction price;
● allocate the transaction price to performance obligations in the contract; and
● recognize revenue as the performance obligation is satisfied.
Consistent with the criteria of ASC 606 “Revenue from Contracts with Customers,” we recognize revenue when performance obligations are satisfied by transferring control of a promised good or service to a customer. For performance obligations that are satisfied at a point in time, we also consider the following indicators to assess whether control of a promised good or service is transferred to the customer: (i) right to payment; (ii) legal title; (iii) physical possession; (iv) significant risks and rewards of ownership; and (v) acceptance of the good or service. For performance obligations satisfied over time, we recognize revenue over time by measuring the progress toward complete satisfaction of a performance obligation.
Deferred Revenue
Deferred revenue results from transactions where the Company has received the payments from the customers but revenue recognition criteria under the five-step model of ASC Topic 606 have yet to be met. Once all revenue recognition criteria have been satisfied, the revenues will be recognized upon the transfer of risk and rewards to the customers in the consolidated statement of operations. We anticipate the majority of the revenue will be recognized in fiscal year 2023. Management agreed that the amount received is non-refundable. However, this term is not bound by any agreement. Thus, the customers may have the rights to challenge and demand the advances to be refunded under relevant Commercial Laws or regulations.
Accrued Product Liability
The Company records accruals for product liability when deemed probable and estimable based on facts and circumstances, and prior claims experience. Accruals for product credit are valued based upon the Company’s prior claims experience, including defect goods, goods lost in transit. We have experienced insignificant amount of goods returned and claims from goods lost in transit from the past, our product liability is insignificant; therefore, Management believes product liability accrual as at September, 30 2022 and 2021 is not required.
Discount allowed - Accrued Store-Credit
We provide store-credit, “Golden Beans” to our customers after sales of goods to them. The Golden Beans can be utilized against their future purchases with restrictions and expiry date. The amount utilized will be recognized as direct discount as and when the sales arise, and the price net of this discount has been controlled and set by the management, to ensure that the sales will always result in a gross profit. As such, we do not accrue any liability from this store-credit as there is no present obligation arising from this Golden Bean as of September, 30 2022, and 2021, and the utilization of these Golden Beans is not expected to result in an outflow from the Company’s resources embodying economic benefits.
Lease
Under ASC Topic 842, the Company determines if an arrangement is a lease at inception. Lease assets and liabilities are recognized at the present value of the future lease payments at the lease commencement date. The interest rate used to determine the present value of the future lease payments is the Company’s incremental borrowing rate based on the information available at the lease commencement date. The Company generally uses the base, non-cancelable lease term in calculating the right-of-use assets and lease liabilities.
The Company may recognize the lease payments in the condensed consolidated statements of operation on a straight-line basis over the lease terms and variable lease payments in the periods in which the obligations for those payments are incurred, if any. The lease payments under the lease arrangements are fixed.
The Company elected the package of practical expedients which allow the Company to carryforward its historical lease classification, its assessment on whether a contract is or contains a lease, and its initial direct costs for any lease that exists prior to adoption of the new standard.
The Company also elected to apply the short-term lease exception for lease arrangements with a lease term of 12 months or less at commencement. Lease terms used to compute the present value of lease payments do not include any option to extend, renew, or terminate the lease that the Company is not reasonably certain to exercise upon the lease inception. Accordingly, operating lease right-of-use assets and liabilities do not include leases with a lease term of 12 months or less.
Research and Development Expenses
Research and development (R&D) expenses are all costs associated with the original development and design of the product as well as any intellectual property (IP) generated during the development phase, including patents and copyrights. Research and development expenses are included in the overall operating expenses and reflected as a separate line item on the consolidated statement of operations.
We purchase the consumer preventive health food and health related household products sold on our platforms from our suppliers; we did not develop, design, or manufacture those products. Moreover, although we have built our online platform and mobile commerce in-house, the compensation costs for our in-house technology team were not significant. Accordingly, instead of capitalizing the compensation costs of our in-house technology team as Research and Development in Balance Sheet or presenting it as Research and Development expenses, we included these amounts in Employee Compensation and Benefit expenses within General and Administrative expenses for the years ended September 30, 2022 and 2021.
Selling Expenses
Selling expenses consist primarily of marketing and promotional service fee to service agents and other costs incurred by our sales and marketing department such as staff costs, office supplies and other incidental expenses that are incurred directly to attract or retain consumers.
Our selling expenses for the years ended September 30, 2022 and 2021 were $6,641,485 and $3,741,389, respectively. We recognized the marketing and promotional service expense when our service agents performed marketing activities, promotions, and exhibitions for our business and products. For the years ended September 30, 2022 and 2021, we recorded marketing and promotional service fee to our service agents in an amount of $5,844,846 and $2,929,080, respectively.
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Concentration of Risk
Credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and other receivable. As September 30, 2022 and 2021, $252,512 (RMB1,796,861) and $1,886,622 (RMB12,162,295), respectively, were deposited with various major financial institutions located in the PRC. While management believes that these financial institutions are of high credit quality, it also continually monitors their credit worthiness.
Historically, deposits in Chinese banks are secure due to state policy to protect depositor interests. However, China promulgated a Bankruptcy Law in August 2006 that came into effect on June 1, 2007, which contains a separate article expressly stating that the State Council may promulgate implementation measures to provide for the bankruptcy of Chinese banks based on the Bankruptcy Law. Under the current Bankruptcy Law, a Chinese bank may file bankruptcy if it deems itself to be insolvent. In addition, since China’s concession to the World Trade Organization, foreign banks have been gradually permitted to operate in China and have intensified competition in many aspects, especially since the opening of the Renminbi business to foreign banks in late 2006. Therefore, the risk of bankruptcy at the institutions that the Company maintains deposits has increased. In the event of bankruptcy, the Company is unlikely to reclaim its deposits in full since it is unlikely to be classified as a secured creditor under PRC laws.
Risks of variable interest entity structure
In the opinion of management, (i) the corporate structure of the Company is in compliance with existing PRC laws and regulations; (ii) the VIE Arrangements are valid and binding, and do not result in any violation of PRC laws or regulations currently in effect; and (iii) the business operations of the foreign-invested enterprise and the VIE are in compliance with existing PRC laws and regulations in all material respects.
However, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Accordingly, the Company cannot be assured that PRC regulatory authorities will not ultimately take a contrary view to the foregoing opinion of its management. If the current corporate structure of the Company or the VIE Arrangements is found to be in violation of any existing or future PRC laws and regulations, the Company may be required to restructure its corporate structure and operations in the PRC to comply with changing and new PRC laws and regulations. In the opinion of management, the likelihood of loss in respect of the Company’s current corporate structure or the VIE Arrangements is remote based on current facts and circumstances.
Foreign currency exchange risk
The value of RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC government. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in greater fluctuation of the RMB against the U.S. dollar. The Company is a holding company and it relies on dividends paid by the Company’s operating subsidiaries in China for its cash needs. Any significant revaluation of the RMB may materially and adversely affect its liquidity and cash flows. To the extent that the Company needs to convert U.S. dollars into RMB for its operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount the Company would receive. Conversely, if the Company decides to convert RMB into U.S. dollars for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount the Company would receive.
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty raising liquid funds to meet commitments as they fall due. See our commitments and contingencies in Note 13 under Item 8, Financial Statements and Supplementary Data. In meeting its liquidity requirements, the Company continues to focus on increasing its revenue through the sale of consumer health care products on its online platform, King Eagle Mall, and promoting its own brand of preventive health care related products on its new online platform to reduce its costs of goods sold, streamlining its overhead costs, or obtaining financing from its stockholders or directors.
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Concentration of customers and vendors
There was no revenue from customers that individually represent greater than 10% of the total revenues for the years ended September 30, 2022, and 2021.
For the year ended September 30, 2022, four major vendors accounted for 18%, 16%, 16% and 12% of the Company’s total cost of sales.
For the year ended September 30, 2021, three major vendors accounted for 22%, 16% and 14% of the Company’s total cost of sales.
Income Taxes
We account for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Company records a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
We apply ASC 740, Accounting for Income Taxes, to account for uncertainty in income taxes and the evaluation of a tax position is a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met.
Commitments and Contingencies
The Company follows the ASC 450-20, “Contingencies” to report accounting for contingencies. Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or un-asserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or un-asserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Management does not believe, based upon information available at this time, that these matters will have a material adverse effect on the Company’s financial position, results of operations, or cash flows. However, there is no assurance that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations or cash flows.
Recent Accounting Pronouncement
Recently Adopted Accounting Standards
Income Taxes. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which modifies and eliminates certain exceptions to the general principles of ASC 740, Income Taxes. This standard was effective for KPIL after September 30, 2021. The Company evaluated that this new guidance does not have significant impact on its consolidated financial statements.
Accounting Pronouncements Issued But Not Yet Adopted
Financial Instruments. In June 2016, the FASB issued Accounting Standards Update No. 2016-13,”Financial Instruments - Credit Losses (Topic 326)” (“ASU 2016-13”). ASU 2016-13 revises the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. Originally, ASU 2016-13 was effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. In November 2019, FASB issued ASU 2019-10, “Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842).” This ASU defers the effective date of ASU 2016-13 for public companies that are considered smaller reporting companies as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is planning to adopt this standard in the first quarter of fiscal 2023.The Company is currently evaluating the potential effects of adopting the provisions of ASU No. 2016-13 on its consolidated financial statements.
In the period from October 2022 through December 2022, the FASB has not issued any additional accounting standards updates that have a significant impact on the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not required to provide the information required by this Item because the Company is a smaller reporting company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements are included on pages F-1 through F-28, which appear at the end of this Annual Report.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On January 6, 2021, Kun Peng International Ltd. (the “Company”) provided Malone Bailey, LLP (“Malone Bailey”) with its disclosures in the Current Report on Form 8-K disclosing the termination of the engagement of Malone Bailey and requested in writing that Malone Bailey furnish the Company with a letter addressed to the Securities and Exchange Commission stating whether or not they agree with such disclosures. Malone Bailey’s response was filed as an exhibit to the Current Report on Form 8-K filed on January 8, 2021.
The auditor reports by Malone Bailey contained in the financial statements of the Company for the years ended September 30, 2019 and 2018, filed as part of the annual reports on Form 10-K for the years ended September 30, 2019 and 2018, did not contain an adverse opinion or disclaimer of opinion or were qualified or modified as to uncertainty, audit scope or accounting principles, other than to state that there is substantial doubt as to the Company’s ability to continue as a going concern. There had been no disagreements with Malone Bailey on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure during the years ended September 30, 2019, and 2018, nor in the subsequent period through January 6, 2021.
On January 4, 2021, the Board of Directors of the Company engaged JLKZ CPA LLP (“JLKZ”) as its independent accountant to provide auditing services for going forward for the Company. The Company has terminated the engagement of Malone Bailey. The decision to hire JLKZ was approved by the Company’s Board of Directors.
During our two most recent fiscal years and through the subsequent interim period through the date Malone Bailey was dismissed, Malone Bailey did not advise us as to any reportable events as set forth in Item 304(a)(1)(v)(A) through (D) of Regulation S-K (“Item 304”). Furthermore, during our two most recent fiscal years, and the subsequent interim period prior to engaging JLKZ, we (nor anyone on our behalf) did not consult JLKZ regarding either the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on our financial statements, and neither a written report was provided to us nor oral advice was provided that JLKZ concluded was an important factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issue; or any matter that was either the subject of a disagreement (as defined in paragraph (a)(1)(iv) of Item 304 and the related instructions to this item) or a reportable event (as described in paragraph (a)(1)(v) of Item 304).
We provided Malone Bailey with a copy of the disclosures/statements we made in response to Item 304(a). We requested and received from Malone Bailey a letter, dated January 7, 2021, addressed to the SEC stating that it agreed with such statements. A copy of the letter was attached as Exhibit 16.1 to the Current Report on Form 8-K dated January 8, 2021.
On November 29, 2021, the Board of Directors of KPIL engaged J&S Associate PLT (F.K.A.: J&S Associate) (AF002380) (“J&S”) as its independent auditor for the fiscal year ended September 30, 2021. The Board of Directors dismissed JLKZ CPA LLP (“JLKZ”), concurrently with the engagement of J&S.
On November 29, 2021, the Company advised JLKZ of its dismissal, and requested that JLKZ furnish the Company with a letter addressed to the Securities and Exchange Commission that discloses the information required by Item 304(a)(1) of Regulation S-K, including compliance with Item 304(a)(3) of Regulation S-K. A copy of that letter addressed to the Securities and Exchange Commission from JLKZ was filed as Exhibit 16.1 to the Company’s Current Report on Form 8-K dated November 29,2021.
During the years fiscal years ended September 30, 2019 and 2020 and the subsequent interim periods through September 30, 2021, the Company has not consulted with JS regarding either: (i) the application of accounting principles to any specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements; or (ii) any matter that was either the subject of a disagreement (as defined in Regulation S-K, Item 304(a)(1)(iv) and the related instructions) or “reportable events” (as defined in Regulation S-K, Item 304(a)(1)(v)).
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The Company has given JLKZ permission to respond fully to the inquiries of the successor principal accountant-JS.
The audit report of JLKZ on the financial statements of the Company and its subsidiaries as of and for the year ended September 30, 2020, did not contain any adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope, or accounting principles.
During the fiscal year ended September 30, 2020, and for the interim period through November 29, 2021, there were no (i) disagreements with JLKZ on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to JLKZ’s satisfaction, would have caused JLKZ to make reference to the subject matter thereof in connection with its report for such year; or (ii) reportable events.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15I under the Exchange Act. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based on his evaluation as of the end of the fiscal year ended September 30, 2022, our chief executive officer and our chief financial officer and principal accounting manager, concluded that our disclosure controls and procedures were not effective in insuring that the information relating to our Company required to be disclosed in our Securities and Exchange Commission reports (i) is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our chief executive officer, to allow timely decisions regarding required disclosure as a result of the material weaknesses in our internal control over financial reporting due to the existence of the following material weaknesses:
| ● | A lack of sufficient and adequately trained internal accounting and finance personnel with appropriate understanding of U.S. GAAP and SEC reporting requirements; | |
| ● | A lack of segregation of duties within significant accounts; | |
| ● | A lack of a functioning audit committee and a majority of outside directors on the Company’s Board of Directors. |
Management’s Report on Internal Control over Financial Reporting
As of September 30, 2022, management assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting established in the 2013 updated Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and SEC guidance on conducting such assessments. Based on that evaluation, management concluded that, during the period covered by this report, such internal controls and procedures were not effective to detect the inappropriate application of US GAAP rules as more fully described below. This was due to deficiencies that existed in the design or operation of our internal controls over financial reporting that adversely affected our internal controls and that are considered to be material weaknesses as described herein above. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
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Notwithstanding the existence of these material weaknesses in our internal control over financial reporting, our management believes that the financial statements included in its reports fairly present in all material respects the Company’s financial condition, results of operations, and cash flows for the periods presented. We continue to evaluate the effectiveness of internal controls and procedures on an on-going basis. Once our cash position improves, we plan to hire an experienced controller and work to build an internal accounting team with sufficient in-house expertise in US GAAP reporting. However, due to our current limited cash flow, we cannot assure you when we will be able to implement those remediation methods.
Because we are an emerging growth company, this Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting.
(b) Changes in internal controls over financial reporting
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth fiscal quarter of the fiscal year ended September 30, 2022, covered by this report that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting other than the facts disclosed above.
ITEM 9B. OTHER INFORMATION
None.
Part III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Executive Officers and Directors
The following table and text set forth the names and ages of all directors and executive officers as of the date of this Annual Report.
There are no family relationships among our directors and executive officers. Each director is elected at our annual meeting of shareholders and holds office until the next annual meeting of shareholders, or until his successor is elected and qualified. Also provided herein are brief descriptions of the business experience of each director and executive officer during the past five years and an indication of directorships held by each director in other companies subject to the reporting requirements under the Federal securities laws. None of our officers or directors is a party adverse to us or has a material interest adverse to us.
The following table sets forth certain information concerning our directors and executive officers:
| Name | Age | Position | ||
| Mr. Richun Zhuang | 58 | Chief Executive Officer and Director | ||
| Ms. Yuanyuan Zhang | 41 | Chief Financial Officer | ||
| Ms. Chengyuan Li | 35 | Director | ||
| Ms. Lili Zhang | 38 | Non-Executive Independent Director | ||
| Ms. Lingya Jia | 30 | Non-Executive Independent Director |
Mr. Richun Zhuang, Chief Executive Officer
Mr. Richun Zhuang obtained a Bachelor’s degree in Political Studies from Heilongjiang Province National College in 1983. He started his career as a secretary at Heilongjiang Province Wangkui County Public Transport Bureau until 1989. He was promoted to the position of Deputy General of Heilongjiang Province Wangkui County Transport Management Station in 1989. He then transferred to Heilongjiang Daqing Long-distance Bus Station as Chief Dispatcher in 1991. In 2008, Mr. Zhuang was appointed as Vice President, Marketing of Wuxi Kangjiafu Technology Co., Ltd. He joined Beijing Luji Culture Media Co., Ltd as Chief Executive Officer in 2017. In June 2020, he joined King Eagle (China) as General Consultant focusing on enterprise operation and strategic planning. On May 14, 2021, Mr. Zhuang was appointed as a Director of KP International Holding and, effective December 1, 2021, he was elected as the Company’s Chief Executive Officer.
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Ms. Yuanyuan Zhang, Chief Financial Officer
Ms. Zhang attended Beijing College of Science and Technology from which she earned a Bachelor’s degree in International Finance in 2005. Ms. Zhang developed her career as a sales specialist at Fenghua Haojing Real Estate where she achieved sales of approximately RMB 120 million during her tenure from September 2005 through December 2006. She then became a Sales Manager at Tianan Tiandi Real Estate Development Co., Ltd from January 2007 through March 2012. Ms. Zhang was appointed as a Marketing Director at Tongbang Real Estate Brokerage Co., Ltd for two years from April 2012 and General Manager at One Central Apartment project of Sunac Real Estate Company from May 2014 through August 2015. Thereafter, she was a General Manager at Beijing Jinfeng Venture Real Estate Brokerage and an Assistant to the Secretary General at China Association of Real Estate Investment & Financing.
In October 2017, Ms. Zhang established her own business, “Fre Flo Bread & 16.” In July 2020, she became the Executive Deputy General Manager of King Eagle (China) and was appointed Chief Financial Officer of the Company n April 2021.
Mrs. Chengyuan Li, Director
Mrs. Li earned an Associate Degree in Computer Information System at Beihua University in 2006 and bachelor’s degree in Finance at Harbin Institute of Finance in 2020. Mrs. Li established her trading business in health care supplies through Wangkuihua Trading Company from September 2006 through September 2015. In September 2015, she joined Wangkui Daren Pharmaceuticals Co. Ltd as Quality Control Coordinator. In June 2020, she joined King Eagle (China) as Business Consultant and was appointed as a director of the Company in April 2021.
Mrs. Lili Zhang, Non-Executive Independent Director
Mrs. Zhang has 13 years of experience in the high-end international financial planning industry through which she has developed an expertise in private placement, asset allocation, trust, insurance, and other industries. Currently, Mrs. Zhang is employed as an assistant to the president of America Great Health co-managing important issues.
From 2014 to 2020, Mrs. Zhang was employed as a senior financial manager in Zhongtian Jiahua Wealth Management Co. Ltd. and for a period of 3 years with Wells Fargo Chase Asset Management Co. Ltd., providing a full range of asset allocation, trust, asset management, private equity, equity investment, overseas immigration, Hong Kong insurance, and other investment products for high-end customers. From 2012 to 2014, Mrs. Zhang served as a VIP account manager in DBS Beijing Branch providing comprehensive asset allocation consulting for middle and high-end clients. Her performance in that position ranked first in the Beijing Branch and third in the Northern region in China. From 2009 to 2012, Mrs. Zhang was employed at the Beijing Branch of ICBC AXA Life Insurance Co., LTD. (ICB-AXA) where her duties included assisting the company in actively fulfilling the business targets established by AXA Holding Company in France and providing customized health protection and asset preservation planning services for clients.
Mrs. Zhang graduated from Nankai University in the People’s Republic of China with a bachelor’s degree in 2007. She currently has permanent residency in the United States and is also qualified as an insurance agent and fund practitioner in China.
Ms. Lingya Jia, Non-Executive Independent Director
Ms. Jia has an extensive background in international business relations and brand crisis management with a wide range of experience in the capital markets, business research, and marketing communication advertisement.
From 2018 to 2021, Ms. Jia served as the brand product marketing director of CV China, an influential VC/PE media organization in the People’s Republic of China, where she was responsible for several listed companies in communication training and business plan guidance, capital market analysis reports, and other brands’ external cooperation. From 2016 to 2018, Ms. Jia worked at Edelman International PR (PRC) Co. Ltd., the branch of a large independent communications group in the United States, as the account executive of market communication, branding promotion and analysis for technology clients, including Tencent Ads BU, a smartphone vendor, Vivo, and other international brands.
Ms. Jia graduated from the University of Bath (UK) in 2015 with a Master of Arts degree in International Relations and from Shanghai International Studies University with a Bachelor’s degree in Management. During this time, Ms. Jia also obtained related qualifications of fund and securities in the People’s Republic of China.
Our directors hold their positions until the next annual meeting of shareholders and until his or her successor is elected and qualified by our shareholders, or until earlier death, retirement, resignation, or removal.
Director Independence
Except as reported above, our directors do not hold any directorships in other reporting companies. Ms. Lili Zhang and Ms. Lingya Jia qualify as “independent directors” under the Rules of NASDAQ, Marketplace Rule 4200(a)(15).
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Family Relationships
There are no family relationships between any of our directors or executive officers.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive officers has, during the past ten years:
| ● | been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); | |
| ● | had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation, or business association of which he or she was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time; | |
| ● | been subject to any order, judgment, or decree, not subsequently reversed, suspended, or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending, or otherwise limiting his or her involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity; | |
| ● | been found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; | |
| ● | been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended, or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or | |
| ● | been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended, or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity, or organization that has disciplinary authority over its members or persons associated with a member. |
Except as set forth in our discussion below in “Certain Relationships and Related Transactions,” none of our directors or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates, or associates which are required to be disclosed pursuant to the rules and regulations of the Securities and Exchange Commission.
Director Qualifications
Directors are responsible for overseeing the Company’s business consistent with their fiduciary duty to the stockholders. This significant responsibility requires highly skilled individuals with various qualities, attributes, and professional experience. Our Board of Directors believes that there are general requirements for service on the Board that are applicable to directors and that there are other skills and experience that should be represented on the Board as a whole but not necessarily by each director. The Board considers the qualifications of directors and director candidates individually and in the broader context of the Board’s overall composition and the Company’s current and future needs.
Qualifications for All Directors
In its assessment of each potential candidate, including those recommended by the stockholders, the Board will consider the nominee’s judgment, integrity, experience, independence, understanding of the Company’s business or other related industries, and such other factors it determines are pertinent in light of the current needs of the Board. The Board also takes into account the ability of a director to devote the time and effort necessary to fulfill his or her responsibilities to the Company.
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The Board requires that each director be a recognized person of high integrity with a proven record of success in his or her field. Each director must demonstrate innovative thinking, familiarity with and respect for corporate governance requirements and practices, an appreciation of multiple cultures, and a commitment to sustainability and to dealing responsibly with social issues. In addition to the qualifications required of all directors, the Board conducts interviews of potential director candidates to assess intangible qualities including the individual’s ability to ask difficult questions and, simultaneously, to work collegially.
Qualifications, Attributes, Skills, and Experience to be Represented on the Board as a Whole
The Board has identified particular qualifications, attributes, skills, and experience that should be represented on the Board as a whole, in light of the Company’s current needs and its business priorities. The Board believes that it should include some directors with a high level of financial literacy and some directors who possess relevant business experience as a chief executive officer, president, or similar position at a company.
Code of Ethics
We are developing a Code of Business Conduct and Ethics that applies to our principal executive officers and principal financial officer, principal accounting officer or controller, or persons performing similar functions and also to other employees.
Corporate Governance
The business and affairs of the Company are managed under the direction of our Board of Directors. Each stockholder will be given specific information on how he or she can direct communications to the officers and directors of the Company at our annual stockholders’ meetings. All communications from stockholders are relayed to the members of the Board of Directors.
Role in Risk Oversight
Our Board of Directors is primarily responsible for overseeing our risk management processes. The Board of Directors receives and reviews periodic reports from management, legal counsel, and others, as considered appropriate, regarding our Company’s assessment of risks. The Board of Directors focuses on the most significant risks facing our Company and our Company’s general risk management strategy, and also ensures that risks undertaken by our Company are consistent with the Board’s appetite for risk. While the Board oversees our Company’s risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our Company and that our Board leadership structure supports this approach.
Board Leadership Structure and Role in Risk Oversight
The Board of Directors intends to exercise its oversight in the following manner:
| ● | appointing, retaining, and overseeing the work of the independent auditors, including resolving disagreements between the management and the independent auditors relating to financial reporting; | |
| ● | approving all auditing and non-auditing services permitted to be performed by the independent auditors; | |
| ● | reviewing annually the independence and quality control procedures of the independent auditors; | |
| ● | reviewing and approving all proposed related party transactions; | |
| ● | discussing the annual audited financial statements with the management; and | |
| ● | meeting separately with the independent auditors to discuss critical accounting policies, management letters, recommendations on internal controls, the auditor’s engagement letter and independence letter and other material written communications between the independent auditors and the management. |
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Committees of the Board of Directors
We intend to establish the following committees:
Audit Committee. The audit committee will consist of our independent directors and its duties will be to recommend to the Board the engagement of independent auditors to audit our financial statements and to review our accounting and auditing principles. The audit committee will review the scope, timing and fees for the annual audit and the results of audit examinations performed by the internal auditors and independent public accountants, including their recommendations to improve the system of accounting and internal controls. The audit committee will at all times be composed exclusively of directors who are, in the opinion of the Board, free from any relationship which would interfere with the exercise of independent judgment as a committee member and who possess an understanding of financial statements and generally accepted accounting principles.
Audit Committee Financial Expert. The Board currently acts as our audit committee. The Board has not designated an “audit committee financial expert” as defined in Regulation S-K and is seeking an additional director that is “independent” as that term is used in Section 10A of the Exchange Act.
Compensation Committee. The compensation committee will review and approve our salary and benefits policies, including compensation of executive officers.
Nominating Committee. Our Board of Directors currently acts as our nominating committee and our Company does not have any defined policy or procedure requirements for stockholders to submit recommendations or nominations for directors. The directors believe that, given the early stage of our development, a specific nominating policy would be premature and of little assistance until our business operations develop to a more advanced level. Our Company does not currently have any specific or minimum criteria for the election of nominees to the Board of Directors and we do not have any specific process or procedure for evaluating such nominees. Our directors assess all candidates, whether submitted by management or stockholders, and make recommendations for election or appointment.
All proceedings of our Board of Directors were conducted by resolutions consented to in writing by all the directors and filed with the minutes of the proceedings of the directors. Such resolutions consented to in writing by the directors entitled to vote on that resolution at a meeting of the directors are, according to the corporate laws of the state of Nevada and the bylaws of our Company, as valid and effective as if they had been passed at a meeting of the directors duly called and held.
A stockholder who wishes to communicate with our Board of Directors may do so by directing a written request addressed to our president, at the address appearing on the first page of this Annual Report.
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ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation earned for services rendered to the Company for the two fiscal years ended September 30, 2022, and 2021 by each of the following named executive officers and directors.
Summary Compensation Table
Name & Principal Position | Fiscal Year | Base unless otherwise noted) | Performance Award | Stock Options | Total Annual | |||||||||||||
| Ms. Xiangyi Mao, CEO(1) | Fiscal year ended September 30, 2022 | $ | 5,589 | $ | - | $ | - | $ | 5,589 | |||||||||
| Fiscal year ended September 30, 2021 | $ | 10,984 | $ | 12,623 | $ | - | $ | 23,607 | ||||||||||
| From inception through September 30, 2020 | $ | - | $ | - | $ | - | $ | - | ||||||||||
| Ms. Yuanyuan Zhang, CFO(2) | Fiscal year ended September 30, 2022 | $ | 24,932 | $ | $ | $ | 24,932 | |||||||||||
| Fiscal year ended September 30, 2021 | $ | 35,792 | $ | 23,202 | $ | - | $ | 58,995 | ||||||||||
| From inception through September 30, 2020 | $ | 9,038 | $ | 5,988 | $ | - | $ | 15,026 | ||||||||||
| Mr. Yanlu Li, Vice President(3) | Fiscal year ended September 30, 2022 | $ | 22,223 | $ | $ | $ | 22,223 | |||||||||||
| Fiscal year ended September 30, 2021 | $ | 24,018 | $ | 21,365 | $ | - | $ | 45,384 | ||||||||||
| From inception through September 30, 2020 | $ | 15,702 | $ | 10,264 | $ | - | $ | 25,966 | ||||||||||
| Ms. Lili Zhang, Non-Executive Independent Director(4) | Fiscal year ended September 30, 2022 | $ | 800 | $ | $ | $ | 800 | |||||||||||
| Fiscal year ended September 30, 2021 | $ | - | $ | - | $ | - | $ | - | ||||||||||
| From inception through September 30, 2020 | $ | - | $ | - | $ | - | $ | - | ||||||||||
| Ms. Lingya Jia, Non-Executive Independent Director(5) | Fiscal year ended September 30, 2022 | $ | 800 | $ | - | $ | - | $ | 800 | |||||||||
| Fiscal year ended September 30, 2021 | $ | - | $ | - | $ | - | $ | - | ||||||||||
| From inception through September 30, 2020 | $ | - | $ | - | $ | - | $ | - | ||||||||||
| (1) | Mrs. Xiangyi Mao joined King Eagle VIE as Chief Executive Officer on November 3, 2020. She was appointed Chief Executive Officer of the Company on April 20, 2021. She resigned from both positions on November 30, 2021. |
| (2) | Ms. Yuanyuan Zhang joined King Eagle (China) as Executive Vice President on July 10, 2020, and was appointed as Chief Financial Officer of the Company on April 20, 2021. |
| (3) | Mr. Yanlu Li joined King Eagle (China) on June 1, 2020, as Chief Executive Officer. He became Vice President of the Company on April 20, 2021. He resigned from both positions on June 15, 2022. |
| (4) | Mrs. Lili Zhang was appointed a Non-Executive Independent Director of the Company as of August 25, 2022. |
| (5) | Ms. Lingya Jia was appointed a Non-Executive Independent Director of the Company as of August 25, 2022. |
| 76 |
Stock Option Plan
Currently, we do not have a stock option plan in favor of any director, officer, consultant, or employee of our Company.
Stock Options/SAR Grants
There were no stock options exercised during the years ended September 30, 2022 and 2021 by the executive officers named in the Executive Compensation Table. Further, there are no options, warrants, or rights to receive any of the Company’s securities outstanding.
Outstanding Equity Awards at 2022 Fiscal Year End
There were no outstanding equity awards for the fiscal year ended September 30, 2022.
Compensation Discussion and Analysis
We strive to provide our named executive officers (as defined in Item 402 of Regulation S-K) with a competitive base salary that is in line with their roles and responsibilities when compared to peer companies of comparable size in similar locations.
It is not uncommon for PRC private companies to have base salaries as the sole form of compensation. The base salary level is established and reviewed based on the level of responsibilities, the experience and tenure of the individual, and the current and potential contributions of the individual. The base salary is compared to the list of similar positions within comparable peer companies and consideration is given to the executive’s relative experience in his or her position. Base salaries are reviewed periodically and at the time of promotion or other changes in responsibilities.
We intend to form a compensation committee to oversee the compensation of our named executive officers. The majority of the members of the compensation committee will be independent directors.
Compensation of Directors
Directors are permitted to receive fixed fees and other compensation for their services as directors. The Board of Directors has the authority to fix the compensation of directors.
As of the date of this report, only our non-executive independent directors have received compensation for their service on the Board of Directors.
Aggregated Option Exercises and Fiscal Year-End Option Value Table
There were no stock options exercised from inception through September 30, 2022, by the executive officers named in the Executive Compensation Table. Further, there are no option, warrants or rights to receive any of the Company’s securities outstanding.
Pension, Retirement or Similar Benefit Plans
There are no arrangements or plans in which we provide pension, retirement, or similar benefits for directors or executive officers. We have no material bonus or profit-sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that stock options may be granted at the discretion of the Board of Directors or a committee thereof.
| 77 |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information concerning the number of shares of our common stock owned beneficially as of December 22, 2022, by: (i) each person (including any group) known to us to own more than five percent (5%) of any class of our voting securities; (ii) each of our directors and each of our named executive officers (as defined under Item 402(m)(2) of Regulation S-K); and (iii) officers and directors as a group. Unless otherwise indicated, the shareholders listed possess sole voting and investment power with respect to the shares shown except to the extent voting power may be shared with a spouse. Unless otherwise indicated, the address for each director and executive officer listed is c/o Kun Peng International Ltd., 1F, Building 3, No 1001 Huihe South Street, Banbidian Village, Gaobeidian Town, Chaoyang District, Beijing, PRC.
| Common Stock Beneficially Owned | ||||||||
| Name and Address of Beneficial Owner | Number of Shares and Nature of Beneficial Ownership(1) | Percentage of Total Common Equity(2) | ||||||
| Mr. Richun Zhuang | 0 | 0.0 | % | |||||
| Ms. Chengyuan Li (3) | 65,754,900 | 16.4 | % | |||||
| Ms. Yuanyuan Zhang | 0 | 0.0 | % | |||||
| Ms. Lili Zhang | 0 | 0.0 | % | |||||
| Ms. Lingya Jia | 0 | 0.0 | % | |||||
| All executive officers and directors as a group | 65,754,900 | 16.4 | % | |||||
| 5% or Greater Stockholders: | ||||||||
| Pui Chun Wong | 222,029,540 | 55.5 | % | |||||
| Kunpeng TJ Limited | 65,754,900 | 16.4 | % | |||||
| Wenqiang Wang | 34,158,400 | 8.5 | % | |||||
| (1) | Number of shares reflects the 10:1 forward stock split effected on October 18, 2022. |
| (2) | Beneficial ownership is determined in accordance with SEC rules and generally includes voting or investment power with respect to securities. Applicable percentage ownership is based on 400,000,000 shares of common stock outstanding as of December 22, 2022. There are no outstanding options, warrants, or other rights to acquire shares of our common stock. |
| (3) | These shares are owned of record by Kunpeng TJ Limited. As the sole director and majority shareholder of Kunpeng TJ Limited, Chengyuan Li may be deemed to beneficially own these shares. |
Changes in Control
As of the date of this Annual Report, there are no arrangements known to the registrant the operation of which may at a subsequent date result in a change in control of the registrant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except for the ownership of our securities, and except as set forth below, none of the directors, executive officers, holders of more than 5% of our outstanding shares of common stock, or any member of the immediate family of any such person have, to our knowledge, had a material interest, direct or indirect, in any transaction or proposed transaction which may materially affect our Company.
| 78 |
Policy for Approval of Related Party Transactions
Our Board of Directors is charged with reviewing and approving all potential related party transactions. All such related party transactions must then be reported under applicable SEC rules. We have not adopted other procedures for review, or standards for approval, of such transactions, but instead review them on a case-by-case basis.
Amount due from a related party
Amount due from a related party represented the prepaid service fee remitted to Guoxin Star Network Co., Ltd. by our VIE, King Eagle (Tianjin). Guoxin Star Network Co. Ltd. was formerly our related party due to its being wholly owned by Guoxin Ruilian Group Co., Ltd, which also owns Guoxin Zhengye, Guoxin Zhengye was the 8% shareholder of King Eagle (China) but transferred its entire ownership interest in King Eagle (China) to KP Industrial on August 26, 2022.
On March 31, 2021, King Eagle (Tianjin) entered into a Cooperation Agreement with a related party, Guoxin Star Network Co., Ltd, a wholly owned subsidiary of Guoxin Rulian Group Co. Ltd. Under the Cooperation Agreement, King Eagle (Tianjin) is required to pay Guoxin Star Network Co., Ltd. approximately $1.05 million (RMB 7.5 million) for the franchise of the operation of Smart Kiosks. Both parties are entitled to exercise the Force Majeure Clause of the contract. As such, this prepaid service fee may or may not be recoverable. In April 2021, King Eagle (Tianjin) remitted $0.32 million (RMB2,250,000) to Guoxin Star Network Co., Ltd. The remaining obligation, approximately $0.74 million (RMB5.3 million), is payable upon the completion of the construction of Smart Kiosks. As of September 30, 2022 and 2021, the amount due from Guoxin Star Network Co., Ltd was $316,192 and $349,019, respectively.
Amount due to related parties
Amounts due to related parties are payables arising from transactions between the Company and related parties, such as payments of operating expenses by such related parties on behalf of our entities in the PRC and funding to meet working capital requirements. The payables owed to the related parties are interest free, unsecured, and repayable on demand.
Amounts due to related parties consisted of the following:
| September 30, | ||||||||||||
| Name of related party | Relationship | Nature of transactions | 2022 | 2021 | ||||||||
| Mr. Yihe Pang | Director | Payments made to lessors on behalf of King Eagle (China). The balance was paid off in December 2021. | $ | - | $ | 39,629 | ||||||
| Ms. Xiujin Wang | One of the shareholders of King Eagle (Tianjin) | Operational support to King Eagle (Tianjin) to meet its working capital requirement. | 267,006 | - | ||||||||
| Total | $ | 267,006 | $ | 39,629 | ||||||||
| 79 |
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table shows the fees that were billed for audit and other services provided by J & S Associate, our independent auditor for the fiscal years ended September 30, 2022 and 2021.
| Fiscal
Year Ended September 30, |
||||||||
| 2022 | 2021 | |||||||
| Audit Fees(1) | $ | 62,000 | $ | 68,000 | ||||
| Audit-related Fees(2) | - | - | ||||||
| Tax Fees(3) | - | - | ||||||
| All Other Fees(4) | - | - | ||||||
| Total | $ | 62,000 | $ | 68,000 | ||||
| (1) | Audit Fees - This category includes the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form 10-Q, and services that are normally provided by independent auditors in connection with statutory and regulatory filings or the engagement for fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements. |
| (2) | Audit-Related Fees - This category consists of assurance and related services by our independent auditor that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.” The services for the fees disclosed under this category include consultation regarding our correspondence with the SEC. |
| (3) | Tax Fees - This category consists of professional services rendered by our independent auditors for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and technical tax advice. |
| (4) | All Other Fees - This category consists of fees for other miscellaneous items such as travel and out-of-pocket expenses. |
Pre-Approval Policies and Procedures
As stated elsewhere in this Annual Report, we do not have an independent audit committee and our entire Board serves as the audit committee for all purposes relating to communication with our auditors and responsibility for our audit. All engagements for audit services, audit-related services, and tax services are approved in advance by our Board of Directors.
All audit and non-audit services that may be provided by our principal accountant to us require pre-approval by the Board of Directors. Further, our auditor shall not provide those services to us specifically prohibited by the SEC, including bookkeeping or other services related to the accounting records or financial statements of the audit client, financial information systems design and implementation, appraisal or valuation services, fairness opinion, or contribution-in-kind reports, actuarial services, internal audit outsourcing services, management functions, human resources, broker-dealer, investment adviser, or investment banking services, legal services and expert services unrelated to the audit, and any other service that the Public Company Oversight Board determines, by regulation, is impermissible.
Prior to engaging our accountants to perform particular services, our Board of Directors obtains an estimate for the service to be performed. All of the services described above were approved by the Board of Directors in accordance with its procedures.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following exhibits are filed as part of this Annual Report.
* Filed with the original Form 10-K on December 29, 2022
** Filed with Amendment 1 to the Form 10-K on May 22, 2023
*** Filed herewith
| 80 |
SIGNATURES
Pursuant to the requirements of section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this amended report to be signed on its behalf by the undersigned, thereunto duly authorized.
Kun Peng International Ltd. (Registrant) | ||
| Date: July 13, 2023 | By: | /s/ Zhuang Richun |
| Zhuang Richun | ||
| Chief Executive Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this amended report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
| Signature | Title | Date | ||
| /s/ Yuanyuan Zhang | Chief Financial Officer | July 13, 2023 | ||
| Yuanyuan Zhang | ||||
| /s/ Chengyuan Li | Director | July 13, 2023 | ||
| Chengyuan Li | ||||
| /s/ Lili Zhang | Director | July 13, 2023 | ||
| Lili Zhang | ||||
| /s/ Lingya Jia | Director | July 13, 2023 | ||
| Lingya Jia |
| 81 |
KUN PENG INTERNATIONAL LTD.
(FORMELY CX NETWORK GROUP, INC.)
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2022 AND 2021
AND
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Consolidated Financial Statements for the years ended September 30, 2022 and 2021
| F-1 |
J&S ASSOCIATE PLT (F.K.A:J&S ASSOCIATE) 202206000037 (LLP0033395-LCA) & AF002380 (Registered with US PCAOB and Malaysia MIA) B-11-14, Megan Avenue II, 12 Jalan Yap Kwan Seng, 50450, Kuala Lumpur, Malaysia. |
Tel : +603 – 4813 9469
Email : [email protected] | ||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Director and Stockholder of
KUN PENG INTERNATIONAL LTD.
(Formerly CX Network Group, Inc.)
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Kun Peng International Ltd. and its subsidiaries (collectively, the “Company”) as of September 30, 2021 and 2022, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ deficit and cash flows for each of the years ended September 30, 2022 and 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2022 and 2021, and the results of its operations and its cash flows for the years ended September 30, 2022 and 2021 are in conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt about the Company’s Ability to Continue as a Going Concern
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 suffered from an accumulated deficit of $3,653,996 as of September 30, 2022. This factor creates uncertainty as to the Company’s ability to continue as a going concern. Management’s plans in regard to this matter 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 audit. 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether 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 audit, 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 audit 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 audit 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 audit provides a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or are required to be communicated to the audit committee and that (1) relate to accounts or disclosure that are material to the financial statement and (2) involved especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
| /s/
|
|
| (F.K.A: J&S Associate) | |
| Certified Public Accountants | |
| PCAOB
Number: |
|
| December 29, 2022 | |
We have served as the Company’s auditor since 2021.
| F-2 |
KUN PENG INTERNATIONAL LTD.
CONSOLIDATED BALANCE SHEET
| September 30, | ||||||||||
| Note | 2022 | 2021 | ||||||||
| (restated) | ||||||||||
| Assets | ||||||||||
| Current assets | ||||||||||
| Cash and cash equivalents | $ | $ | ||||||||
| Advance and prepayments | 4 | |||||||||
| Other receivables | 5 | |||||||||
| Amount due from a related party | 9 | |||||||||
| Total current assets | ||||||||||
| Noncurrent assets | ||||||||||
| Property, plant and equipment, net | 6 | |||||||||
| Intangible assets, net | 7 | |||||||||
| Security deposits | ||||||||||
| Right-of-use assets | 12 | |||||||||
| Others | ||||||||||
| Total noncurrent assets | ||||||||||
| Total assets | $ | $ | ||||||||
| Liabilities | ||||||||||
| Current liabilities | ||||||||||
| Trade and other payables | ||||||||||
| Deferred revenue | 8 | |||||||||
| Payroll payable | ||||||||||
| Tax payable | ||||||||||
| Amounts due to related parties | 9 | |||||||||
| Operating lease obligations, current portion | 12 | |||||||||
| Total current liabilities | ||||||||||
| Noncurrent liabilities | ||||||||||
| Operating lease obligations, net of current portion | 12 | |||||||||
| Total noncurrent liabilities | ||||||||||
| Total liabilities | ||||||||||
| Commitment and contingencies | ||||||||||
| Equity | ||||||||||
| Preferred stock, $ par value, shares authorized; shares issued and outstanding as of September 30, 2022 and 2021 | 1 | |||||||||
| Common stock, $par value, shares authorized; shares issued and outstanding as of September 30, 2022 and 2021* | 10 | |||||||||
| Additional paid-in capital | 10 | ( | ) | ( | ) | |||||
| Accumulated deficits | ( | ) | ( | ) | ||||||
| Accumulated other comprehensive income / (loss) | ( | ) | ||||||||
| Total stockholders’ equity | ( | ) | ( | ) | ||||||
| Non-controlling interests | ( | ) | ( | ) | ||||||
| Total equity | ( | ) | ( | ) | ||||||
| Total liabilities and equity | $ | $ | ||||||||
| * |
The accompanying notes are an integral part of these audited consolidated financial statements
| F-3 |
KUN PENG INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
| Years ended September 30 | ||||||||||
| Note | 2022 | 2021 | ||||||||
| Revenue, net | $ | $ | ||||||||
| Cost of revenue | ( | ) | ( | ) | ||||||
| Gross profit | ||||||||||
| Operating expenses | ||||||||||
| General and administrative expenses | ||||||||||
| Selling expense | ||||||||||
| Total operating expenses | ||||||||||
| Loss from operations | ( | ) | ( | ) | ||||||
| Other income: | ||||||||||
| Interest income | ||||||||||
| Other income (expenses) | ( | ) | ||||||||
| Total other income, net | ||||||||||
| Loss before income taxes | ( | ) | ( | ) | ||||||
| Income tax expense | 11 | |||||||||
| Net loss | ( | ) | ( | ) | ||||||
| Less: Net loss attributable to non-controlling interest | ( | ) | ( | ) | ||||||
| Net loss attributable to Kun Peng International Ltd | ( | ) | ( | ) | ||||||
| Foreign currency translation adjustment | ( | ) | ||||||||
| Comprehensive loss | ( | ) | ( | ) | ||||||
| Less: Comprehensive loss attributable to non-controlling interest | ( | ) | ( | ) | ||||||
| Comprehensive loss attributable to Kun Peng International Ltd | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share attributable to common stockholders | ||||||||||
| Basic and diluted* | $ | ( | ) | $ | ( | ) | ||||
| Weighted average shares used to compute net loss per share attributable to common stockholders* | ||||||||||
| * |
The accompanying notes are an integral part of these audited consolidated financial statements
| F-4 |
KUN PENG INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
For the Years Ended September 30, 2022, and 2021
| Common stock | Additional paid-in | Accumulated | Accumulated other comprehensive | Total stockholders’ | Non- Controlling | Total | ||||||||||||||||||||||||||
| Shares | Amount | capital | Deficits | loss | equity | Interest | Equity | |||||||||||||||||||||||||
| Balance, September 30, 2021* | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||
| Net loss attributable to common stockholders | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Net loss attributable to noncontrolling interest | - | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | |||||||||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Common stock* | Additional paid-in | Accumulated | Accumulated other comprehensive | Total stockholders’ | Non- Controlling | Total | ||||||||||||||||||||||||||
| Shares | Amount | capital | Deficits | loss | equity | Interest | Equity | |||||||||||||||||||||||||
| Balance, September 30, 2020 | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||
| Cancellation of shares | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Reverse acquisition recapitalization | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net loss attributable to common stockholders | - | ( | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net loss attributable to noncontrolling interest | - | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
| Forward stock split* | ( | ) | ||||||||||||||||||||||||||||||
| Balance, September 30, 2021* | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||
| * |
The accompanying notes are an integral part of these audited consolidated financial statements
| F-5 |
KUN PENG INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| (restated) | ||||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of right-of-use assets | ||||||||
| Loss on disposal of property and equipment | ||||||||
| Changes in operating assets and liabilities | ||||||||
| Advance and prepayments | ( | ) | ||||||
| Other receivables | ||||||||
| Security deposits | ( | ) | ||||||
| Trade and other payables | ||||||||
| Deferred revenue | ||||||||
| Payroll payable | ( | ) | ||||||
| Amount due to a related party | ( | ) | ||||||
| Tax payable | ( | ) | ||||||
| Lease liabilities | ( | ) | ( | ) | ||||
| Net cash (used in) provided by operating activities | ( | ) | ||||||
| Cash flows from investing activities | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Acquisition of intangible assets | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Effect of exchange rate changes on cash | ( | ) | ||||||
| Net increase in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents, beginning balance | ||||||||
| Cash and cash equivalents, ending balance | $ | $ | ||||||
| Supplementary cash flows information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income tax | $ | $ | ||||||
| Supplemental disclosures of noncash transactions | ||||||||
| Right-of-use assets acquired with operating lease obligation | $ | $ | ||||||
The accompanying notes are an integral part of these audited consolidated financial statements
| F-6 |
KUN PENG INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022, and 2021
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Kun Peng International Limited (“the Company”, “KPIL”, “KPEA”, “we”, “us”, “our”), a Nevada corporation is (formerly known as CX Network Group, Inc.), through its subsidiaries and VIE, currently engages in the sale of health care and health related household products through its online platform, King Eagle Mall.
| Name | Background | Ownership | Registered capital / Authorized shares | Principal activities | ||||
| Kun Peng International Limited |
● A U.S. company ● Incorporated on |
Authorized shares:
● Common stock: with par value $ per share
● shares issued and outstanding as of September 30, 2022
Preferred stock: ● with par value $ per share
● shares issued and outstanding as of September 30, 2022 |
||||||
| Kun Peng International Holding Limited |
● A BVI company ● Incorporated on |
Paid capital: $ |
||||||
| Kunpeng (China) Industrial Development Company Limited |
● A Hong Kong company ● Incorporated on |
Paid share capital : ordinary shares at $ (HKD) | ||||||
| Kun Peng (Hong Kong) Industrial Development Limited |
● A Hong Kong company ● Incorporated on |
Paid share capital: ordinary share at $ (HK$) |
||||||
| King Eagle (China) Co., Ltd |
● a limited liability company incorporated in the People’s Republic of China
● Incorporated on |
|
Registered capital: approximately $ |
|||||
|
King Eagle (Tianjin) Technology Co., Ltd.
|
● a limited liability company incorporated in the People’s Republic of China
● Incorporated on
● Became a variable interest entity
(VIE) of King Eagle (China) Co., Ltd on |
Owned by multiple individuals:
Chengyuan Li (approximately |
Registered capital of approximately $ |
|||||
|
Kun Peng Tian Yu Health Technology (Tianjin) Co., Ltd.
|
● a limited liability company incorporated in the People’s Republic of China
● Incorporated on |
|
Registered capital of RMB |
|||||
| King Eagle (Beijing) Technology Co., Ltd |
● a limited liability company incorporated in the People’s Republic of China
● Incorporated on |
Registered capital of RMB |
| F-7 |
Reverse Merger
On May 17, 2021, the Company entered into a share exchange agreement (“Share Exchange Agreement”) with (i) Kun Peng International Holding Limited (“KP International Holding”), a limited liability company incorporated in British Virgin Islands on April 20, 2021, and (ii) the five members of KP International to acquire all the issued and outstanding capital stock of KP International in exchange for the issuance to those members of an aggregate of shares of our common stock (“Reverse Acquisition”). Pursuant to the terms of the Exchange Agreement, and as a condition to the completion of the transactions contemplated by the Share Exchange Agreement, the Company also agreed to enter into an agreement with Wenhai Xia (“the Stockholder”), to cancel an aggregate of shares of the Company’s Common Stock owned by the Stockholder. The Reverse Acquisition was closed on May 17, 2021.
For accounting purpose, the transaction with KP International Holding was treated as a reverse acquisition and KP International Holding is deemed to be the acquirer and the Company as the acquired party. Consequently, the assets and liabilities and the historical operations that will be reflected in the accompanying consolidated financial statements prior to the Reverse Acquisition will be those of KP International Holding and its consolidated subsidiaries and will be recorded at the historical cost basis of KP International Holding, and the accompanying consolidated financial statements after consummation of the reverse acquisition will include the assets and liabilities of KP International Holding and its subsidiaries and VIE, historical operations of KP International and its subsidiaries and VIE, and operations of the Company from the Closing Date of the Reverse Acquisition. The accompanying consolidated financial statements share and per share information has been retroactively adjusted to reflect the exchanged shares in the Acquisition. The equity structure of the Company was retrospectively adjusted under ASC Topic 805-40. As of September 30, 2021, there were shares issued and outstanding.
Authorized Shares and Name Change
Effective
as of September 9, 2021, the Company’s Articles of Incorporation were amended to change the name of the Company from CX Network
Group, Inc. to Kun Peng International Limited. (“KPIL”) and to increase the Company’s authorized capital to
Effective October 12, 2022, we increased our authorized common stock from shares, par value $, to shares, par value , and on October 18, 2022, we effected a 10:1 forward stock split after which we have shares of common stock issued and outstanding.
On November 8, 2022, the Company changed its name from CX Network Group, Inc. to Kun Peng International Ltd. and its trading symbol was changed to “KPEA.”
On November 11, 2022, the Company received an electronic notice that OTC Markets had approved its application for uplisting from OTC Pink to the OTCQB Venture Market (OTCQB). The Company’s securities commenced trading on the OTCQB at the market open on November 14, 2022. The Company’s shares trade on the OTCQB under the current ticker symbol, “KPEA.”
Kun Peng International Holding Limited
KP International Holding was incorporated in the British Virgin Islands on April 20, 2021. On May 3, 2021, KP International Holding purchased all of the issued and outstanding equity securities of Kunpeng (China) Industrial Development Company Limited (“KP Industrial”), incorporated in Hong Kong on August 11, 2017, at a cash consideration of $ (HK$). After the ownership transfer, KP International Holding became the sole shareholder of KP Industrial. KP International Holding is a holding company.
Kunpeng (China) Industrial Development Company Limited
Kunpeng
(China) Industrial Development Company Limited (“KP Industrial”) was incorporated as a limited liability company in Hong
Kong under the name of Jing Jin Ji Investment Group Co., Limited (“Jing Jin Ji”) on August 11, 2017. The share capital of
KP Industrial is ordinary shares at $
Kun Peng (Hong Kong) Industrial Development Limited
Kun Peng (Hong Kong) Industrial Development Limited (“KP (Hong Kong)”) was incorporated as a limited liability company in Hong Kong on June 21, 2021. It is a holding company and is wholly owned by Kun Peng International Holding Limited. The share capital of this entity upon formation is $ (HK$).
King Eagle (China) Co., Ltd.
King
Eagle (China) Co., Ltd. (“King Eagle (China)”) was incorporated as a limited liability company in Beijing Economic Technological
Development Zone in the People’s Republic of China (“the PRC”) on March 20, 2019 with a registered capital of approximately
$
On
March 26, 2021, Guoxin Ruilian Group Co., Ltd entered into equity transfer agreements with KP Industrial and Guoxin Zhengye. Both Guoxin
Ruilian Group Co., Ltd and Guoxin Zhengye are wholly owned by a common shareholder, Guoxin United Holdings Group Co., Ltd. Under the
agreements, Guoxin Ruilian Group Co., Ltd agreed to transfer its
| F-8 |
Some of the business engaged in by King Eagle (Tianjin) is restricted or prohibited for foreign investment under PRC regulations. As such, King Eagle (China) has entered into the VIE Agreements with King Eagle (Tianjin) and their shareholders. We do not own any equity interests in King Eagle (Tianjin), but control and receive the economic benefits of their respective business operations through the VIE Agreements. The VIE Agreements enable us to provide King Eagle (Tianjin) with consulting services on an exclusive basis, in exchange for all of its annual profits, if any. In addition, we are able to appoint its senior executives and approve all matters requiring approval of its shareholders. The VIE Agreements are comprised of a Consulting Service Agreement, Business Operation Agreement, Proxy Agreement, Equity Disposal Agreement, and Equity Pledge Agreement.
Under current Chinese laws and regulations, the Company believes that the VIE Agreements are not subject to any government approval. The shareholders of King Eagle (Tianjin) were required to register with SAFE when they established offshore vehicles to hold KP International, and such SAFE registration was effected on May 14, 2021. These shareholders of King Eagle (Tianjin) will have to register their equity pledge arrangement as required under the Equity Pledge Agreement with King Eagle (China). The Company faces uncertainty with respect to future actions by the PRC government that could significantly affect King Eagle (Tianjin)’s financial performance and the enforceability of the VIE Agreements.
King Eagle (Tianjin) Technology Co., Ltd.
King
Eagle (Tianjin) Technology Co., Ltd. (“King Eagle (Tianjin)”) was incorporated as a limited liability company in Tianjin
Pilot Free Trade Zone in the People’s Republic of China on September 2, 2020, with a registered capital of approximately $
Kun Peng Tian Yu Health Technology (Tianjin) Co., Ltd.
Kun
Peng Tian Yu Health Technology Co., Ltd. (“KP Tian Yu”) was incorporated as a limited liability company in Tianjin Pilot
Free Trade Zone in the People’s Republic of China on August 10, 2021 with a registered capital of RMB
King Eagle (Beijing) Technology Co., Ltd
King
Eagle (Beijing) Technology Co., Ltd (“King Eagle (Beijing)”) was incorporated as a limited liability company in Beijing in
the People’s Republic of China on December 1, 2022 with a registered capital of RMB
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America. This basis of accounting involves the application of accrual accounting and consequently, revenues and gains are recognized when earned, and expenses and losses are recognized when incurred. The consolidated financial statements are expressed in U.S. dollars.
| F-9 |
Principles of Consolidation
The consolidated financial statements include the financial statements of the Company, its subsidiaries and variable interest entity (“VIE”). All significant intercompany transactions and balances within the Company have been eliminated upon consolidation.
Use of Estimates and Assumptions
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimate and assumptions that impact the presented amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the presented amounts of revenues and expenses during the period. Actual results may differ from those estimates. Significant estimates during the year ended September 30, 2022 and 2021 include the collectability of receivables, the useful lives of long-lived assets and intangibles, assumptions used in assessing impairment of long-lived assets, valuation of accruals for expenses and tax due.
Reclassification
Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation.
Going Concern
The
accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the
United States of America which contemplate continuation of the Company as a going concern basis. The going-concern basis assures
that assets are realized and liabilities are extinguished in the ordinary course of business at amounts disclosed on the financial
statements. The Company’s ability to continue as a going concern depends on the liquidation of its current assets and business
developments. In assessing the Company’s liquidity, the Company monitors and analyzes its cash and cash equivalents and its
operating and capital expenditure commitments. The Company’s liquidity needs are to meet its working capital requirements,
operating expenses and capital expenditure obligations. For the year ended September 30, 2022, the Company incurred cash outflows
from operating activities of $
The
Company continues to monitor its operations to help refine the Company’s financial liquidity. The financial liquidity of the
Company has declined to very unhealthy level in this year due to the decline in the balance of cash and cash equivalent. Options
under consideration in the review process include, but not limited to, increase of sales on its online business, reduction of
overhead costs, fund advance from the Company’s stockholders and directors, or financing through issuance of shares. Besides,
our new online platform which focuses on promoting and selling own brand preventive health care products to wholesalers and
retailers was placed in service in October 2022. Since the first quarter of 2022, the Company has been focusing on increasing its
revenue through its online platform to reduce the costs of goods sold and slimming its administrative overhead costs. For example,
we reduced the compensation and benefits of our executives, decreased office supplies expense, trimmed staff meeting expense.
Additionally, the Company obtained a fund advance of approximately $
| F-10 |
In order to continue as a going concern for the next 12 months, the Company continues to focus on increasing its revenue through the sale of health care products on its online platform, King Eagle Mall, and promoting and selling its own brand health care products on its new online platform to reduce costs of goods sold, streamlining its overhead costs or obtaining a financing from its stockholders or directors. However, the Company cannot provide any assurance that it will be able to increase revenue, that it will be able to successfully implement its business plan, or that financing that will be available to it on commercially acceptable terms, if at all. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern. The directors will continue to support the group by providing adequate financial assistance to enable the group to continue its business operations for the foreseeable future.
COVID-19 Outbreak
The COVID-19 pandemic has resulted in quarantines, travel restrictions, limitations on social or public gatherings, and the temporary closure of business venues and facilities around the world. Due to restrictions, quarantines and closures in certain affected areas and government agencies in the PRC, the approval process of our applications for construction permits for Smart Kiosks was delayed by the local governmental agencies and construction projects of Smart Kiosks were therefore postponed.
Businesses
and markets in mainland China have reopened and mainland China relaxed its policies and controls relating to COVID-19 in early
December 2022. The number of cases of COVID-19 is expected to increase greatly which may cause restrictions on our service agents to travel and launch face-to-face marketing activities. Construction of our Smart Kiosks may not be
immediate, which impacts our plan of enhancing our face-to-face customer services and increasing our market share. The Company
continues to focus its business on its online platform, King Eagle Mall, and to promote its own brand of consumer health care and
health related household products on its new online platform, which was introduced and implemented in October 2022, to mitigate the
adverse impacts of COVID-19. The Company also follows up closely with the local governmental agencies regarding its applications for
construction permits for Smart Kiosks. However, as the pandemic increased overall public health consciousness in the PRC, the
Company’s average monthly online sale revenue increased by $
Therefore, we do not expect that the virus will have a material adverse effect on our business or financial results at this time. However, it is not possible to predict the unanticipated consequence of the pandemic on our future business performance and liquidity due to the severity of global situation of COVID-19. The Company continues to monitor and assess the evolving situation closely and evaluate its potential exposure.
Basic income (loss) per share is computed by dividing net income (loss) attributable to the holders of ordinary shares by the weighted average number of ordinary shares outstanding during the year. Diluted income (loss) per share is calculated by dividing net income (loss) attributable to the holders of ordinary shares as adjusted for the effect of dilutive ordinary share equivalents, if any, by the weighted average number of ordinary shares and dilutive ordinary share equivalents outstanding during the period. However, ordinary share equivalents are not included in the denominator of the diluted earnings per share calculation when inclusion of such shares would be anti-dilutive, such as in a period in which a net loss is recorded.
Foreign Currency Translation
The
reporting currency of the Company is the U.S. Dollar. Our entity in British Virgin Islands use U.S. dollar. Our entities in the PRC and
Hong Kong use the local currencies, Renminbi (RMB) and Hong Kong Dollar (HKD), as its functional currencies as determined based on the
criteria of ASC 830, “Foreign Currency Translation”. Assets and liabilities are translated at the unified exchange rate as
quoted by www.xe.com at the end of the period. Income and expense accounts are translated at the average translation rates and the equity
accounts are translated at historical rates. Translation adjustments resulting from this process are included in accumulated other comprehensive
income in the statement of equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated
in a currency other than the functional currency are included in the results of operations as incurred. Translation adjustments included
in accumulated other comprehensive gain (loss) amounted to $
| F-11 |
Below is a table with foreign exchange rates used for translation:
For the year ended September 30, 2022 (Average Rate) | Hong Kong Dollar (HKD) | Chinese Renminbi (RMB) | ||||||
| United States dollar ($1) | ||||||||
| As of September 30, 2022 (Closing Rate) | ||||||||
| United States dollar ($1) | ||||||||
For the year ended September 30, 2021 (Average Rate) | Hong Kong Dollar (HKD) | Chinese Renminbi (RMB) | ||||||
| United States dollar ($1) | ||||||||
| As of September 30, 2021 (Closing Rate) | ||||||||
| United States dollar ($1) | ||||||||
Cash and Cash Equivalents
Cash and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions and a certain amount of cash kept in electronic wallets, “e-wallets”.
We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. We maintain accounts with various financial institutions in the PRC, and also e-wallets. As of September 30, 2022 and 2021, cash balances held in PRC banks are uninsured. Monies that are held in e-wallets are deemed equivalent to cash, they are highly liquid, and are relatively unsafe compared to cash in banks. We have not experienced any losses in bank accounts or e-wallets and believe we are not exposed to significant risks with respect to our cash in bank accounts and low risk for our cash in e-wallets.
Financial Instrument
The carrying amount reported in the balance sheet for cash, other receivables, accrued liabilities and other payables approximate fair value because of the immediate or short-term maturity of these financial instruments.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and impairment losses. Gains and losses on dispositions of property and equipment are included in operating income (loss). Major additions, renewals and improvements are capitalized, while maintenance and repairs are recognized as expense as incurred.
Depreciation is provided over the estimated useful life of each class of depreciable assets and is computed using the straight-line method over the useful lives of the assets are as follows:
| Classification | Estimated useful life |
|||
| Leasehold improvements | ||||
| Office equipment | ||||
| Computer equipment | ||||
| Computer software |
| F-12 |
Intangible Assets
Intangible assets represent the licensing cost for the trademark registration. For intangible assets with indefinite lives, the Company evaluates intangible assets for impairment at least annually and more often whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value. For intangible assets with definite lives, they are amortized over estimated useful lives, and are reviewed annually for impairment. The Company has not recorded impairment of intangible assets as of September 30, 2022 and 2021.
Impairment of Long-lived Assets
Long-lived assets, including buildings and intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying value of an asset may not be recoverable. We assess the recoverability of the assets based on the undiscounted future cash flows the assets are expected to generate and recognize an impairment loss when estimated discounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When we identify an impairment, reduce the carrying amount of the asset to the estimated fair value based on a discounted cash flows approach or, when available and appropriate, to comparable market values. As of September 30, 2022 and 2021, management determined that there was no impairment.
Fair Value Measurements
The Company applies the provisions of ASC Subtopic 820-10, “Fair Value Measurements”, for fair value measurements of financial assets and financial liabilities and for fair value measurements of non-financial items that are recognized or disclosed at fair value in the financial statements. ASC 820 also establishes a framework for measuring fair value and expands disclosures about fair value measurements.
Fair value is defined as the price that would be received to sell 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 pricing the asset or liability.
ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes three levels of inputs that may be used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
| ● | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. | |
| ● | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments. | |
| ● | Level 3 inputs to the valuation methodology are unobservable and significant to the fair value. |
The Company’s financial assets and liabilities include cash, receivables, accounts payable and accrued expenses.
Related Party Transactions
The Company follows the ASC 850-10, “Related Party Disclosures” for the identification of related parties and disclosure of related party transactions.
Pursuant to section 850-10-20 the related parties include a) affiliates of the Company; b) entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of section 825–10–15, to be accounted for by the equity method by the investing entity; c) trusts for the benefit of employees, such as pension and income-sharing trusts that are managed by or under the trusteeship of management; d) principal owners of the Company; e) management of the Company; f) other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and g) other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
The consolidated financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall include: a) the nature of the relationship(s) involved; b) a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented; and c) such other information deemed necessary to an understanding of the nature of the related party transactions.
Comprehensive Income (Loss)
Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but are excluded from net income (loss) as these amounts are recorded directly as an adjustment to stockholders’ equity. Our other comprehensive loss for the years ended September 30, 2022 and 2021 was comprised of foreign currency translation adjustments.
| F-13 |
Revenue Recognition
Revenue is comprised of sales of goods and represents the amount of consideration the Company is entitled to upon the transfer of goods. Pursuant to FASB ASU No. 2016-08, Revenue from Contracts with Customers (TOPIC 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), the Company recorded revenue on a gross basis, net of surcharges and value added tax (“VAT”) of gross sales. The Company recorded revenue on a gross basis because the Company is the primary obligor of the sales arrangements has latitude in establishing prices, has discretion in suppliers’ selection and assumes credit risks on receivables on gross sales from customers.
The Company adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”) using the full retrospective transition method. The Company’s adoption of ASU 2014-09 did not have a material impact on the amount and timing of revenue recognized in its consolidated financial statements.
The Company applies the following five steps in order to determine the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements:
● identify the contract with a customer;
● identify the performance obligations in the contract;
● determine the transaction price;
● allocate the transaction price to performance obligations in the contract; and
● recognize revenue as the performance obligation is satisfied.
Consistent with the criteria of ASC 606 “Revenue from Contracts with Customers,” we recognize revenue when performance obligations are satisfied by transferring control of a promised good or service to a customer. For performance obligations that are satisfied at a point in time, we also consider the following indicators to assess whether control of a promised good or service is transferred to the customer: (i) right to payment, (ii) legal title, (iii) physical possession, (iv) significant risks and rewards of ownership, and (v) acceptance of the good or service. For performance obligations satisfied over time, we recognize revenue over time by measuring the progress toward complete satisfaction of a performance obligation.
Deferred Revenue
Deferred revenue results from transactions where the Company has received the payments from the customers but revenue recognition criteria under the five-step model of ASC Topic 606 have yet to be met. Once all revenue recognition criteria have been satisfied, the revenues will be recognized upon the transfer of risk and rewards to the customers in the consolidated statement of operations. We anticipated the majority of the revenue will be recognized in the fiscal year 2023. Management agreed that the amount received is non-refundable; however, this term is not bound by any agreement. Thus, the customers may have the rights to challenge and demand the advances to be refunded under relevant Commercial Laws or regulations.
Accrued Product Liability
The Company records accruals for product liability when deemed probable and estimable based on facts and circumstances, and prior claims experience. Accruals for product credit are valued based upon the Company’s prior claims experience, including defect goods, goods lost in transit. We have experienced insignificant amount of goods returned and claims from goods lost in transit from the past, our product liability is insignificant; therefore, Management believes product liability accrual as at September, 30 2022 and 2021 is not required.
Discount allowed - Accrued Store-Credit
We provide store-credit, “Golden Beans” to our customers after sales of goods to them. The Golden Beans can be utilized against their future purchases with restrictions and expiry date. The amount utilized will be recognized as direct discount as and when the sales arise, and the price net of this discount has been controlled and set by the management, to ensure that the sales will always result in a gross profit. As such, we do not accrue any liability from this store-credit as there is no present obligation arising from this Golden Bean as of September, 30 2022, and 2021, and the utilization of these Golden Beans is not expected to result in an outflow from the Company’s resources embodying economic benefits.
Lease
Under ASC Topic 842, the Company determines if an arrangement is a lease at inception. Lease assets and liabilities are recognized at the present value of the future lease payments at the lease commencement date. The interest rate used to determine the present value of the future lease payments is the Company’s incremental borrowing rate based on the information available at the lease commencement date. The Company generally uses the base, non-cancelable lease term in calculating the right-of-use assets and lease liabilities.
The Company may recognize the lease payments in the condensed consolidated statements of operation on a straight-line basis over the lease terms and variable lease payments in the periods in which the obligations for those payments are incurred, if any. The lease payments under the lease arrangements are fixed.
The Company elected the package of practical expedients which allow the Company to carryforward its historical lease classification, its assessment on whether a contract is or contains a lease, and its initial direct costs for any lease that exists prior to adoption of the new standard.
The Company also elected to apply the short-term lease exception for lease arrangements with a lease term of 12 months or less at commencement. Lease terms used to compute the present value of lease payments do not include any option to extend, renew, or terminate the lease that the Company is not reasonably certain to exercise upon the lease inception. Accordingly, operating lease right-of-use assets and liabilities do not include leases with a lease term of 12 months or less.
| F-14 |
Research and Development Expenses
Research and development (R&D) expenses are all costs associated with the original development and design of the product as well as any intellectual property (IP) generated during the development phase, including patents and copyrights. Research and development expenses are included in the overall operating expenses and reflected as a separate line item on the consolidated statement of operations.
We purchase the consumer preventive health food and health related household products sold on our platforms from our suppliers and we did not develop, design or manufacture those products. Moreover, although we have built our online platform and mobile commerce in-house, the compensation costs for our in-house technology team were not significant. Accordingly, instead of capitalizing the compensation costs of our in-house technology team as Research and Development in Balance Sheet or presenting it as Research and Development expenses, we included these amounts in Employee Compensation and Benefit expenses within General and Administrative expenses for the years ended September 30, 2022 and 2021.
Selling Expenses
Selling expenses consist primarily of marketing and promotional service fee to service agents and other costs incurred by our sales and marketing department such as staff costs, office supplies and other incidental expenses that are incurred directly to attract or retain consumers.
Our
selling expenses for the years ended September 30, 2022 and 2021 were $
Concentration of Risk
Credit risk
Financial
instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents
and other receivable. As September 30, 2022 and 2021, $
Historically, deposits in Chinese banks are secure due to state policy to protect depositor interests. However, China promulgated a Bankruptcy Law in August 2006 that came into effect on June 1, 2007, which contains a separate article expressly stating that the State Council may promulgate implementation measures to provide for the bankruptcy of Chinese banks based on the Bankruptcy Law. Under the current Bankruptcy Law, a Chinese bank may file bankruptcy if it deems itself to be insolvent. In addition, since China’s concession to the World Trade Organization, foreign banks have been gradually permitted to operate in China and have intensified competition in many aspects, especially since the opening of the Renminbi business to foreign banks in late 2006. Therefore, the risk of bankruptcy at the institutions that the Company maintains deposits has increased. In the event of bankruptcy, the Company is unlikely to reclaim its deposits in full since it is unlikely to be classified as a secured creditor under PRC laws.
Risks of variable interest entity structure
In the opinion of management, (i) the corporate structure of the Company is in compliance with existing PRC laws and regulations; (ii) the VIE Arrangements are valid and binding, and do not result in any violation of PRC laws or regulations currently in effect; and (iii) the business operations of the foreign-invested enterprise and the VIE are in compliance with existing PRC laws and regulations in all material respects.
However, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Accordingly, the Company cannot be assured that PRC regulatory authorities will not ultimately take a contrary view to the foregoing opinion of its management. If the current corporate structure of the Company or the VIE Arrangements is found to be in violation of any existing or future PRC laws and regulations, the Company may be required to restructure its corporate structure and operations in the PRC to comply with changing and new PRC laws and regulations. In the opinion of management, the likelihood of loss in respect of the Company’s current corporate structure or the VIE Arrangements is remote based on current facts and circumstances.
Foreign currency exchange risk
The value of RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC government. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in greater fluctuation of the RMB against the U.S. dollar. The Company is a holding company and it relies on dividends paid by the Company’s operating subsidiaries in China for its cash needs. Any significant revaluation of the RMB may materially and adversely affect its liquidity and cash flows. To the extent that the Company needs to convert U.S. dollars into RMB for its operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount the Company would receive. Conversely, if the Company decides to convert RMB into U.S. dollars for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount the Company would receive.
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty raising liquid funds to meet commitments as they fall due. See our commitments and contingencies in Note 13 under Item 8, Financial Statements and Supplementary Data. In meeting its liquidity requirements, the Company continues to focus on increasing its revenue through the sale of consumer health care products on its online platform, King Eagle Mall, and promoting its own brand of preventive health care related products on its new online platform to reduce its costs of goods sold, streamlining its overhead costs, or obtaining financing from its stockholders or directors.
| F-15 |
Concentration of customers and vendors
There
was no revenue from customers that individually represent greater than
For
the year ended September 30, 2022, four major vendors accounted for
For
the year ended September 30, 2021, three major vendors accounted for
Income Taxes
We account for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Company records a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
We apply ASC 740, Accounting for Income Taxes, to account for uncertainty in income taxes and the evaluation of a tax position is a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met.
Commitments and Contingencies
The Company follows the ASC 450-20, “Contingencies” to report accounting for contingencies. Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or un-asserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or un-asserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Management does not believe, based upon information available at this time that these matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows. However, there is no assurance that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations or cash flows.
Recent Accounting Pronouncement
Recently Adopted Accounting Standards
Income Taxes. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which modifies and eliminates certain exceptions to the general principles of ASC 740, Income Taxes. This standard was effective for KPIL after September 30, 2021. The Company evaluated that this new guidance does not have significant impact on its consolidated financial statements.
Accounting Pronouncements Issued But Not Yet Adopted
Financial Instruments. In June 2016, the FASB issued Accounting Standards Update No. 2016-13,”Financial Instruments - Credit Losses (Topic 326)” (“ASU 2016-13”). ASU 2016-13 revises the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. Originally, ASU 2016-13 was effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. In November 2019, FASB issued ASU 2019-10, “Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842).” This ASU defers the effective date of ASU 2016-13 for public companies that are considered smaller reporting companies as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is planning to adopt this standard in the first quarter of fiscal 2023.The Company is currently evaluating the potential effects of adopting the provisions of ASU No. 2016-13 on its consolidated financial statements.
In the period from October 2022 through December 2022, the FASB has not issued any additional accounting standards updates that have a significant impact on the Company.
| F-16 |
NOTE 3 - VARIABLE INTEREST ENTITIES “VIE” ARRANGEMENTS
On May 15, 2021, King Eagle (China) entered into a series of contractual arrangements with King Eagle (Tianjin) and its shareholders. As a result of the contractual arrangements, the Company classified King Eagle (Tianjin) as a Variable Interest Entity “VIE.”
King
Eagle (Tianjin) Technology Co., Ltd. (“King Eagle (Tianjin)”) was incorporated as a limited liability company in Tianjin
Pilot Free Trade Zone in the People’s Republic of China on September 2, 2020, with a registered capital of approximately $
The VIE Agreements are as follows:
| (1) | Consulting Service Agreement |
| (2) | Business Operation Agreement |
| (3) | Proxy Agreement |
| (4) | Equity Disposal Agreement |
| (5) | Equity Pledge Agreement |
Consulting Service Agreement
Pursuant to the terms of certain Exclusive Consulting Service Agreement dated May 15, 2021, between King Eagle (China) and King Eagle (Tianjin) (the “Consulting Service Agreement”), King Eagle (China) is the exclusive consulting service provider to King Eagle (Tianjin) to provide business-related software research and development services; design, installation, and testing services; network equipment support, upgrade, maintenance, monitor, and problem-solving services; employees technical training services; technology development and sublicensing services; public relations services; market investigation, research, and consultation services; short to medium term marketing plan-making services; compliance consultation services; marketing events and membership related activities organizing services; intellectual property permits; equipment and rental services; and business-related management consulting services. Pursuant to the Consulting Service Agreement, the service fee is the remaining amount after King Eagle (Tianjin)’s profit before tax in the corresponding year deducts King Eagle (Tianjin)’s losses, if any, in the previous year, the necessary costs, expenses, taxes, and fees incurred in the corresponding year, and the withdraws of the statutory provident fund. King Eagle (Tianjin)agreed not to transfer its rights and obligations under the Consulting Service Agreement to any third party without prior written consent from King Eagle (China). In addition, King Eagle (China) may transfer its rights and obligations under the Consulting Service Agreement to King Eagle (China)’s affiliates without King Eagle (Tianjin)’s consent, but King Eagle (China) shall notify King Eagle (Tianjin) of such transfer. This Agreement is valid for a term of 10 years subject to any extension requested by King Eagle (China) unless terminated by King Eagle (China) unilaterally prior to the expiration.
Business Operation Agreement
Pursuant to the terms of certain Business Operation Agreement dated on May 15, 2021, among King Eagle (China), King Eagle (Tianjin)and the shareholders of King Eagle (Tianjin) (the “Business Operation Agreement”), King Eagle (Tianjin) has agreed to subject the operations and management of its business to the control of King Eagle (China). According to the Business Operation Agreement, King Eagle (Tianjin) is not allowed to conduct any transactions that has substantial impact upon its operations, assets, rights, obligations and personnel without the King Eagle (China)’s written approval. The shareholders of King Eagle (Tianjin) and King Eagle (Tianjin) will take King Eagle (China) ‘s advice on appointment or dismissal of directors, employment of King Eagle (Tianjin)’s employees, regular operation, and financial management of King Eagle (Tianjin). The shareholders of King Eagle (Tianjin) have agreed to transfer any dividends, distributions or any other profits that they receive as the shareholders of King Eagle (Tianjin) to King Eagle (China) without consideration. The Business Operation Agreement is valid for a term of 10 years or longer upon the request of King Eagle (China) prior to the expiration thereof. The Business Operation Agreement might be terminated earlier by King Eagle (China) with a 30-day written notice.
| F-17 |
Proxy Agreement
Pursuant to the terms of the Proxy Agreement dated on May 15, 2021, among King Eagle (China), and the shareholders of King Eagle (Tianjin) (the “Proxy Agreement”), the shareholders of King Eagle (Tianjin) have entrusted their vote rights as King Eagle (Tianjin)’s shareholders to King Eagle (China) for the longest duration permitted by PRC law. The Proxy Agreement can be terminated by mutual consents of King Eagle (Tianjin) Shareholders and King Eagle (China) or upon a 30-day notice of King Eagle (China).
Equity Disposal Agreement
Pursuant to the terms of the Equity Disposal Agreement dated on May 15, 2021, among King Eagle (China), King Eagle (Tianjin), and the shareholders of King Eagle (Tianjin) (the “Equity Disposal Agreement”), the shareholders of King Eagle (Tianjin) granted King Eagle (China) or its designees an irrevocable and exclusive purchase option (the “Option”) to purchase King Eagle (Tianjin)’s all or partial equity interests and/or assets at the lowest purchase price permitted by PRC laws and regulations. The option is exercisable at any time at King Eagle (China)’s discretion in full or in part, to the extent permitted by PRC law. The shareholders of King Eagle (Tianjin) agreed to give King Eagle (Tianjin) the total amount of the exercise price as a gift, or in other methods upon King Eagle (China)’s written consent to transfer the exercise price to King Eagle (Tianjin). The Equity Disposal Agreement is valid for a term of 10 years or longer upon the request of King Eagle (China).
Equity Pledge Agreement
Pursuant to the terms of certain Equity Pledge Agreement dated on May 15, 2021, among King Eagle (China) and the shareholders of King Eagle (Tianjin) (the “Pledge Agreement”), the shareholders of King Eagle (Tianjin) pledged all of their equity interests in King Eagle (Tianjin)to King Eagle (China), including the proceeds thereof, to guarantee King Eagle (Tianjin)’s performance of its obligations under the Business Operation Agreement, the Consulting Service Agreement and Equity Disposal Agreement (each, a “Agreement”, collectively, the “Agreements”). If King Eagle (Tianjin) or its shareholders breach its respective contractual obligations under any Agreement, or cause to occur one of the events regards as an event of default under any Agreement, King Eagle (China), as pledgee, will be entitled to certain rights, including the right to dispose of the pledged equity interest in King Eagle (Tianjin). During the term of the Pledge Agreement, the pledged equity interests cannot be transferred without King Eagle (China)’s prior written consent. The Pledge Agreements is valid until all the obligations due under the Agreements have been fulfilled.
A VIE is an entity that has either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest, such as voting rights and the right to receive the expected residual returns of the entity or the obligation to absorb the expected losses of the entity. The variable interest holder, if any, that has a controlling financial interest in a VIE is deemed to be the primary beneficiary and must consolidate the VIE. King Eagle (China) is deemed to have a controlling financial interest and be the primary beneficiary of King Eagle (Tianjin) because it has both of the following characteristics:
| (1) | The power to direct the activities of King Eagle (Tianjin) that most significantly impact such entity’s economic performance, and | |
| (2) | The obligation to absorb losses of, or the right to receive benefits from, King Eagle (Tianjin) that could potentially be significant to such entity. |
| F-18 |
Pursuant to the Contractual Arrangements, the shareholders of King Eagle (Tianjin) have agreed to transfer any dividends, distributions or any other profits that they receive to King Eagle (China). King Eagle (Tianjin) pays service fees equal to all of its net profit after tax to King Eagle (China). The Contractual Arrangements are designed so that King Eagle (Tianjin) operates for the benefit of King Eagle (China) and ultimately the Company.
Moreover, King Eagle (Tianijn) has agreed to subject the operations and management of its business to the full control under King Eagle (China) and King Eagle (Tianjin) will take King Eagle (China)’s advice on the appointment of dismissal of directors and employment, regular operation and financial management. Accordingly, the Company consolidates the accounts of King Eagle (Tianjin) and its subsidiaries for the periods presented herein, in accordance with Accounting Standards Codification, or ASC, 810-10, Consolidation.
Accordingly, the accounts of King Eagle (Tianjin) are consolidated in the accompanying financial statements pursuant to ASC 810-10, Consolidation. In addition, their financial positions and results of operations are included in the Company’s financial statements.
The Company consolidated its VIE as of September 30, 2022, and 2021. The carrying amounts and classification of the VIE’s assets and liabilities included in the consolidated balance sheets are as follows:
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Current assets | $ | $ | ||||||
| Noncurrent assets | ||||||||
| Total assets | ||||||||
| Total liabilities | ||||||||
| Net liabilities | $ | ( | ) | $ | ( | ) | ||
The VIE’s liabilities consisted of the following as of September 30, 2022, and 2021:
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Current liabilities | ||||||||
| Trade and other payable | $ | $ | ||||||
| Amount due to a related party | ||||||||
| Deferred revenue | ||||||||
| Payroll payable | ||||||||
| Tax payable | ||||||||
| Operating lease obligations, currents | ||||||||
| Total current liabilities | ||||||||
| Total noncurrent liabilities | ||||||||
| Operating lease obligations, net of current portion | ||||||||
| Total noncurrent liabilities | ||||||||
| Total liabilities | $ | $ | ||||||
| F-19 |
The operating results of the VIE were as follows:
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenue | $ | $ | ||||||
| Gross profit | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other income | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
NOTE 4 - ADVANCE AND PREPAYMENTS
Prepayments consisted of the following:
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Prepaid rent and building management and utilities | $ | $ | ||||||
Prepaid supplies(1) | ||||||||
| Prepaid system maintenance services | ||||||||
| Prepaid income tax | ||||||||
| Prepaid professional services(2) | ||||||||
| Prepaid others | ||||||||
| Total prepayments | $ | $ | ||||||
| (1) | |
| (2) |
As
of September 30, 2021, the ending balance of our prepaid professional service fee was $ |
These amounts are expected to be recoverable within twelve (12) months.
NOTE 5 - OTHER RECEIVABLES
Other receivables included the following:
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Rental deposits | $ | $ | ||||||
| Advance to employees | ||||||||
| Others | ||||||||
| Total other receivables, net | $ | $ | ||||||
| F-20 |
Advance
to employees represents funds provided to our officers and employees for the business expenses, such as travel, parking, gasoline, membership,
meals, that are anticipated to be incurred by our officers and employees on behalf of the Company. Advances to employees are required
to repay within a year. Others, $
NOTE 6 - PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Leasehold improvements | $ | $ | ||||||
| Furniture and fixtures | ||||||||
| Computer equipment | ||||||||
| Office equipment | ||||||||
| Computer software | ||||||||
| Subtotal | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Total property and equipment, net | $ | $ | ||||||
Depreciation
expense was $
On
February 28, 2022, King Eagle (China) entered into a lease agreement for its new office in Beijing. As it moved to a new office premise
in May 2022, it removed the leasehold improvement in May 2022 and the estimated useful life of the leasehold improvements of our previous
office in Beijing changed from 60 months to 22 months. Accordingly, an additional amount of depreciation expense of the relative leasehold
improvements, $
NOTE 7 – INTANGIBLE ASSETS
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Trademarks | $ | $ | ||||||
| Subtotal | ||||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||
| Total intangible assets, net | $ | $ | ||||||
| F-21 |
Intangible
assets consist of the Company’s trademarks of King Eagle Mall with the useful life of ten years. Approximately $
Amortization
expense was $
NOTE 8 – DEFERRED REVENUE
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Advance payments from customers | $ | $ | ||||||
| Total deferred revenue | $ | $ | ||||||
Deferred
revenue resulted from transactions where the Company has received the payments from the customers but revenue recognition criteria under
the five-step model have yet to be met. As at September 30, 2022 and 2021, the Company had a total deferred revenue of $
NOTE 9 - RELATED PARTY TRANSACTIONS
Amount due from a related party represented the prepaid service fee
remitted to Guoxin Star Network Co., Ltd. by our VIE, King Eagle (Tianjin). On March 31, 2021, King Eagle (Tianjin) entered into a Cooperation
Agreement with our related party, Guoxin Star Network Co., Ltd. Guoxin Star Network Co. Ltd. was formerly our related party due
to its being wholly owned by Guoxin Rulian Group Co. Ltd., which also owns Guoxin Zhengye. Guoxin Zhengye was the
Under the Cooperation Agreement, King Eagle (Tianjin) is required to pay Guoxin Star
Network Co., Ltd. in an amount of approximately $
| September 30, | ||||||||||||
| Name of related party | Relationship | Nature of transactions | 2022 | 2021 | ||||||||
| Guoxin Star Network Co., Ltd | interest in King Eagle (China) until August 2022 | $ | $ | |||||||||
| Total | $ | $ | ||||||||||
Amounts due to related parties are payables arising from transactions between the Company and related parties, such as payments of operating expenses by such related parties on behalf of our entities in PRC and funding to meet working capital requirements. The payables owed to the related parties are interest free, unsecured, and repayable on demand.
| F-22 |
Amounts due to related parties consisted of the following:
| September 30, | ||||||||||||
| Name of related party | Relationship | Nature of transactions | 2022 | 2021 | ||||||||
| Mr. Yihe Pang | $ | $ | ||||||||||
| Ms. Xiujin Wang | ||||||||||||
| Total | $ | $ | ||||||||||
NOTE 10 - EQUITY
Effective
as of September 9, 2021, the Company’s Articles of Incorporation were amended to increase the Company’s authorized capital
to
Effective on October 12, 2022, a Certificate of Amendment was filed with the Nevada Secretary of State to increase the authorized number of shares of the Corporation’s $ par value common stock (the “Common Stock”) from shares to shares of Common Stock.
The Company’s board of directors approved and declared a 10:1 forward split of its common stock on September 6, 2022. As a result of the stock split, holders of pre-split shares of common stock have the right to receive post-split shares of common stock at a ratio of ten (10) shares of post-split common stock for every one (1) share of pre-split common stock. The stock split had a record date on September 16, 2022 and an effective date on October 18, 2022. No fractional shares will be issuable as a result of the Forward Stock Split. After the forward stock split, the issued and outstanding of our common stock is shares with par value per share remained unchanged at per share after the stock split.
Preferred stock
The Company’s authorized shares of preferred stock were shares, with a par value of $, which may be issued in series and with such voting powers, designations, preferences, limitations, restrictions, and relative rights as the Board of Directors shall determine in its sole discretion shall remain authorized. shares of preferred stock were issued and outstanding as of September 30, 2022, and 2021.
Common stock
With the retrospective effect of the increase in authorized shares of common stock and 10:1 forward stock split, the Company’s authorized shares of common stock were and shares with a par value of $, as of September 30, 2022, and 2021, respectively. The issued and outstanding shares of common stock were as of September 30, 2022 and 2021, respectively.
Reverse acquisition
On May 17, 2021, the Company entered into a share exchange agreement (“Share Exchange Agreement”) with (i) Kun Peng International Holding Limited (“KP International”), a limited liability company incorporated in British Virgin Islands on April 20, 2021, and (ii) the five members of KP International to acquire all the issued and outstanding capital stock of KP International in exchange for the issuance to those members of an aggregate of shares of our common stock (“Reverse Acquisition”). Pursuant to the terms of the Exchange Agreement, and as a condition to the completion of the transactions contemplated by the Share Exchange Agreement, the Company also agreed to enter into an agreement with Wenhai Xia (“the Stockholder”), to cancel an aggregate of shares of the Company’s Common Stock owned by the Stockholder. The Reverse Acquisition was closed on May 17, 2021.
| F-23 |
For accounting purpose, the transaction with KP International was treated as a reverse acquisition and KP International is deemed to be the acquirer and the Company as the acquired party. Consequently, the assets and liabilities and the historical operations that will be reflected in the accompanying consolidated financial statements prior to the Reverse Acquisition will be those of KP International and its consolidated subsidiaries and will be recorded at the historical cost basis of KP International, and the accompanying consolidated financial statements after consummation of the reverse acquisition will include the assets and liabilities of KP International and its subsidiaries and VIE, historical operations of KP International and its subsidiaries and VIE, and operations of the Company from the Closing Date of the Reverse Acquisition. The accompanying consolidated financial statements share and per share information has been retroactively adjusted to reflect the exchanged shares in the Acquisition. The equity structure of the Company was retrospectively adjusted under ASC Topic 805-40.
Restricted net assets
Our ability to pay dividends is primarily dependent on us receiving distributions of funds from its subsidiary or VIE. Relevant PRC statutory laws and regulations permit payments of dividends by only out of its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations and after it has met the PRC requirements for appropriation to statutory reserves. Share capital of the PRC subsidiary and VIE included in the Company’s consolidated net assets are also non-distributable for dividend purposes. The results of operations reflected in the accompanying consolidated financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of King Eagle (China), the foreign-invested enterprise, King Eagle (Tianjin), the VIE and KP Tian Yu. The Company is required to set aside at least 10% of their after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. In addition, the Company may allocate a portion of its after-tax profits based on PRC accounting standards to enterprise expansion fund and staff bonus and welfare fund at its discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends.
As
a result of the foregoing restrictions, King Eagle (China), King Eagle (Tianjin) and KP Tian Yu are restricted in their ability to transfer
their net assets to the Company. Foreign exchange and other regulation in the PRC may further restrict these two entities from transferring
funds to the Company in the form of dividends, loans and advances. As of September 30, 2022, and 2021, the Company had negative net assets
which included common stock, additional paid-in capital, subscription receivable, accumulated deficit and foreign exchange translation
adjustment of its subsidiaries in BVI, Hong Kong and the PRC and the VIE that are included in the Company’s consolidated financial
statements. As of September 30, 2022, King Eagle (China), King Eagle (Tianjin) and KP Tian Yu incurred negative assets in an amount of
$
NOTE 11- INCOME TAXES
The Company accounts for income taxes pursuant to the accounting standards that requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carryforwards. Additionally, the accounting standards require the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. The Company and its subsidiaries file separate income tax returns.
| F-24 |
United States
Kun Peng International Limited is incorporated in the State of Nevada and is subject to the United States federal income tax. No provision for income taxes in the U.S. has been made as the Company has no U.S. taxable income for the years ended September 30, 2022, and 2021.
British Virgin Islands
KP International Holding is a holding corporation organized as an International Business Company under the laws of the British Virgin Islands (“BVI”), and its principal operating subsidiaries are organized under the laws of Hong Kong and the laws of the PRC. KP International and its subsidiaries are not subject to income taxes in the BVI.
Hong Kong
The
two-tier profits tax rates system was introduced under the Inland Revenue (Amendment)(No.3) Ordinance 2018 (“the Ordinance”)
of Hong Kong became effective for the assessment year 2018/2019. Under the two-tier profit tax rates regime, the profits tax rate for
the first $
Since KP Industrial and KP (Hong Kong) are wholly owned and under the control of KP International Holding, these entities are connected entities. Under the Ordinance, it is an entity’s election to nominate the entity that will be subject to the two-tier profits tax rates on its profits tax return. The election is irrevocable. The Company elected KP (Hong Kong) to be subject to the two-tier profits tax rates. KP Industrial and KP (Hong Kong) did not earn any income that was derived in Hong Kong for years ended September 30, 2022 and 2021 and therefore, KP Industrial and KP (Hong Kong) were not subject to Hong Kong profits tax for the periods reported.
Since
the two-tier profit tax rates regime is tentative, we applied the original profits tax rate,
PRC
The
PRC’s statutory income tax rate is
Income tax expense was comprised of the following:
| September 30 | ||||||||
| 2022 | 2021 | |||||||
| Current | $ | $ | ||||||
| Federal | ||||||||
| State | ||||||||
| Foreign | ||||||||
| Total current | ||||||||
| Deferred | ||||||||
| Federal | ||||||||
| State | ||||||||
| Foreign | ||||||||
| Total deferred | ||||||||
| Total income tax expense | $ | $ | ||||||
| F-25 |
A reconciliation between the Company’s actual provision for income taxes and the provision at the statutory rate is as follow:
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Loss before income tax expense | $ | ( | ) | $ | ( | ) | ||
| Computed tax expense (benefit) with statutory tax rate | % | % | ||||||
| Impact of different tax rates in other jurisdictions | % | % | ||||||
| Tax effect of non-deductible expenses | ( | )% | ( | )% | ||||
| Change in valuation allowance | ( | )% | ( | )% | ||||
| Effective tax rate | % | % | ||||||
Deferred tax assets included the following:
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Deferred tax assets | $ | $ | ||||||
| Net operating loss carryforwards | ||||||||
| Organizational expense | ||||||||
| Total deferred tax assets | ||||||||
| Valuation allowance | ( | ) | ( | ) | ||||
| Total deferred tax assets, net | $ | $ | ||||||
As
of September 30, 2022, and 2021, the Company had generated gross net operating loss carryforwards in an amount of $
The
Companies in Hong Kong incurred gross net operating loss carryforwards in an amount of $
Our
entities in the PRC generated $
At this time, the Company considered it is more likely than not that its US, Hong Kong and PRC entities have sufficient taxable income in the near future that will allow us to realize these DTAs. Therefore, the Company recorded a full valuation allowance against all of its deferred tax assets as of September 30, 2022, and 2021. The Company intends to continue maintaining a full valuation allowance on its deferred tax assets until there is sufficient evidence to support the reversal of all or portion of these allowances.
| F-26 |
NOTE 12 - RIGHT-OF-USE ASSETS AND LEASE
The Company has operating leases for its office facilities and employee accommodation. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term.
The following table provides a summary of leases as of September 30, 2022, and 2021:
| Assets/liabilities | Classification | September 30, 2022 | September 30, 2021 | |||||||
| Assets | ||||||||||
| Operating lease right-of-use assets | Operating lease assets | $ | $ | |||||||
| Liabilities | ||||||||||
| Current | ||||||||||
| Operating lease liability - current | Current operating lease liabilities | $ | $ | |||||||
| Long-term | ||||||||||
| Operating lease liability – net of current portion | Long-term operating lease liabilities | $ | $ | |||||||
| Total lease liabilities | $ | $ | ||||||||
The operating lease expense for the years September 30, 2022, and 2021 was as follows:
| September 30 | ||||||||||
| Lease Cost | Classification | 2022 | 2021 | |||||||
| Operating lease cost | General and administrative | $ | $ | |||||||
| Total lease cost | $ | $ | ||||||||
Maturities of operating lease liabilities as of September 30, 2022, were as follow:
| Maturity of Lease Liabilities | Operating Leases | |||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total lease payments | $ | |||
| Less: interest | ( | ) | ||
| Present value of lease payments | $ | |||
| F-27 |
Maturities of operating lease liabilities as of September 30, 2021, were as follow:
| Maturity of Lease Liabilities | Operating Leases | |||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total lease payments | $ | |||
| Less: interest | ( | ) | ||
| Present value of lease payments | $ | |||
Supplemental information related to operating leases was as follows:
| September 30 | ||||||||
| 2022 | 2021 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | $ | ||||||
| New operating lease assets obtained in exchange for operating lease liabilities | $ | $ | ||||||
| Weighted average remaining lease term | ||||||||
| Weighted average discount rate | % | % | ||||||
The
amortization expense was $
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Purchase and service commitments
King
Eagle (China) and King Eagle (Tianjin) entered into multiple purchase and service commitments. As of September 30, 2022 and 2021, King
Eagle (China) and King Eagle (Tianjin) had purchase and service commitments in an amount of $
Cooperation commitment of smart kiosk
On
March 31, 2021, King Eagle (Tianjin) entered into a Cooperation Agreement with Guoxin Star Network Co., Ltd who assigned and franchised
the operation of 50 Smart Kiosks to King Eagle (Tianjin) for
NOTE 14 - SUBSEQUENT EVENT
Effective October 12, 2022, we increased our authorized common stock from shares, par value $,
to shares, par value $, and on October 18, 2022, we effected a
In October 2022, we introduced and implemented a new online platform which focuses on promoting and selling our own brand health care related products to wholesalers and retailers.
On November 11, 2022, Kun Peng International Ltd. (“Kun Peng”) received an electronic notice that OTC Markets had approved Kun Peng’s application for uplisting from OTC Pink to the OTCQB Venture Market (OTCQB). Kun Peng commenced trading on the OTCQB at the market open on November 14, 2022. Kun Peng’s shares trade on the OTCQB under the current ticker symbol, “KPEA”. Existing shareholders will see their shares quoted on the OTCQB without any further action needed.
On December 1, 2022, King Eagle (Beijing) Technology Co., Ltd. (“King Eagle (Beijing)”) was established as a wholly-owned subsidiary of King Eagle (Tianjin).
As of September 30, 2022, the Company evaluated and concluded that there are no other subsequent events have occurred that would require recognition or disclosure in the financial statements other than ones disclosed above.
| F-28 |