KPEA 10-Q
Kun Peng International Ltd. (KPEA)
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
Mark One
For
the quarterly period ended
For the transition period from ______ to _______
Commission
File No.
(Exact name of registrant as specified in its charter)
CX NETWORK GROUP, INC.
(Formerly Known As)
| EIN
| ||
| (State or Other Jurisdiction of | (IRS Employer | |
| Incorporation or Organization) | Identification Number) |
Technology Zone
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the registrant 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 (§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 is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes
☐
As of February 19, 2022, the registrant had shares of common stock issued and outstanding.
FORM 10-Q
KUN PENG INTERNATIONAL LTD.
INDEX
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PART I
Item 1. Financial statements.
KUN PENG INTERNATIONAL LTD
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In U.S. Dollars, except share data or otherwise stated)
| Note | December 31, 2021 | September 30, 2021 | ||||||||
| (Audited) | ||||||||||
| Assets | ||||||||||
| Current assets | ||||||||||
| Cash and cash equivalents | $ | $ | ||||||||
| Advance and prepayments | 4 | |||||||||
| Other receivables | 5 | |||||||||
| Total current assets | ||||||||||
| Noncurrent assets | ||||||||||
| Property, plant and equipment, net | 6 | |||||||||
| Intangible assets, net | 7 | |||||||||
| Right-of-use assets | 12 | |||||||||
| 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 December 31, 2021 and September 30, 2021 | 1 | - | - | |||||||
| Common stock, $ par value, shares authorized; shares issued and outstanding as of December 31, 2021and September 30, 2021 | 10 | |||||||||
| Additional paid-in capital | 10 | ( | ) | ( | ) | |||||
| Accumulated deficits | ( | ) | ( | ) | ||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||||
| Total stockholders’ equity | ( | ) | ( | ) | ||||||
| Non-controlling interests | ( | ) | ( | ) | ||||||
| Total equity | ( | ) | ( | ) | ||||||
| Total liabilities and equity | $ | $ | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
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KUN PENG INTERNATIONAL LTD
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(UNAUDITED)
(In U.S. Dollars, except share data or otherwise stated)
For the three months ended December 31 | ||||||||||
| Note | 2021 | 2020 | ||||||||
| Revenue, net | $ | $ | ||||||||
| Cost of revenue | ( | ) | ( | ) | ||||||
| Gross profit | ||||||||||
| Operating expenses | ||||||||||
| General and administrative expenses | ||||||||||
| Selling expense | ||||||||||
| Total operating expenses | ||||||||||
| Income (loss) from operations | ( | ) | ||||||||
| Other (expenses) income: | ||||||||||
| Interest income | ||||||||||
| Other income | - | |||||||||
| Total other income, net | ||||||||||
| Income (loss) before income taxes | ( | ) | ||||||||
| Income tax expense | 11 | - | - | |||||||
| Net income (loss) | ( | ) | ||||||||
| Less: Net income (loss) attributable to non-controlling interest | ( | ) | ||||||||
| Net income (loss) attributable to Kun Peng International Ltd | ( | ) | ||||||||
| Foreign currency translation adjustment | ( | ) | ||||||||
| Comprehensive income (loss) | ( | ) | ||||||||
| Less: Comprehensive income (loss) attributable to non-controlling interest | ( | ) | ||||||||
| Comprehensive income (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 unaudited condensed consolidated financial statements
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KUN PENG INTERNATIONAL LTD
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
(UNAUDITED)
| 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 | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||
| Net loss attributable to common stockholders | - | - | - | ( | ) | - | ( | ) | - | ( | ) | |||||||||||||||||||||
| Net loss attributable to noncontrolling interest | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||
| 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 income attributable to common stockholders | - | - | - | - | - | |||||||||||||||||||||||||||
| Net income attributable to noncontrolling interest | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | ||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
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KUN PENG INTERNATIONAL LTD
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In U.S. Dollars, except share data or otherwise stated)
For the three months ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of right-of-use assets | ||||||||
| Changes in operating assets and liabilities | ||||||||
| Advance and prepayments | ( | ) | ||||||
| Other receivables | ( | ) | ( | ) | ||||
| Trade and other payables | ( | ) | ||||||
| Deferred revenue | ( | ) | ||||||
| Payroll payable | ( | ) | ( | ) | ||||
| Amounts due to related parties | ( | ) | ||||||
| Tax payable | ( | ) | ||||||
| Lease liabilities | ( | ) | ( | ) | ||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Cash flows from investing activities | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| 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 | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
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KUN PENG INTERNATIONAL LTD
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021
(UNAUDITED)
NOTE 1. DESCRIPTION OF THE BUSINESS AND ORGANIZATION
Kun Peng International Limited (“the Company”, “KPIL”, “CXKJ”, “we”, “us”, “our”), a Nevada corporation (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.
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”), 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 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. As of December 31, 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 Ltd. (“KPIL”) and to increase the Company’s authorized capital to authorized shares of Capital Stock with designated as $ par value Common Stock, and designated as $ par value Preferred Stock.
Kun Peng International Holding Limited
Kun
Peng International Holding Limited (“KP International”) was incorporated in the British Virgin Islands on April 20, 2021.
KP International is a holding company and entered into a Bought and Sold Note with Kunpeng (China) Industrial Development Company Limited
(“KP Industrial”), incorporated in Hong Kong on August 11, 2017, at a
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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. 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 phrase and 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 on May 3, 2021.
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.
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
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 $
| 8 |
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 $
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) applicable to quarterly financial information and the requirements of Form 10-Q and Rule 8-03 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosure required by accounting principles generally accepted in the United States of America for complete financial statements. Quarterly results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial position and the results of operations and cash flows for the quarterly periods have been included.
These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended September 30, 2021 included in the Form 10-K/A filed with the SEC on February 8, 2022.
The condensed 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 condensed consolidated financial statements are expressed in U.S. dollars.
Basis of Consolidation
The condensed 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 the condensed 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 three months ended December 31, 2021 and 2020 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.
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Going Concern
The
accompanying condensed 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 three months ended December 31, 2021, although the Company generated cash inflows from operating activities
of $
The
Company continues to monitor its operations to help refine the Company’s financial liquidity. 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. During the first quarter of 2022, the Company
focused on increasing its revenue through its online platform and slimming its overhead costs. For example, we reduced the compensation
and benefits of our executives, decreased office supplies expense, trimmed staff meeting expense and terminated the lease arrangements
of employee accommodations. Additionally, the Company obtained a fund advance of approximately $
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, 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 ongoing and evolving COVID-19 pandemic continues to spread throughout the world and outbreak prompted governments and business to take a widespread of quarantines, lockdowns, site closures. It has negatively impacted the global economy, workforces, customers, and created significant volatility and disruption of economic activities.
During
the first quarter of 2022, the restrictions, quarantines and closures remained in certain affected areas and government agencies in the
PRC. The approval process of our applications for the construction permits of smart kiosks was delayed by the local governmental agencies
and the construction project of smart kiosks was also postponed. The Company continues to focus its business through its online platform,
King Eagle Mall, to mitigate the adverse impacts by COVID-19 and follows up closely with the local governmental agencies for the application
for the construction permits of smart kiosks. In fact, the pandemic increased the overall public health consciousness in the PRC and
the Company experienced a significant growth in its average monthly online sale revenue by $
The Company does not expect that the coronavirus COVID-19 will have a material adverse effect on its online business or financial results at this time. Still, 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.
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Cash and Cash Equivalents
We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. We maintain with various financial institutions in PRC. As of December 31, 2021 and September 30, 2021, cash balances held in PRC banks are uninsured. We have not experienced any losses in bank accounts and believes we are not exposed to any risks on our cash in bank accounts.
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. 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.
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.
Lease
The Company adopted ASC Topic 842 using the modified retrospective transition method on July 1, 2020. There was no cumulative effect of initially applying ASC Topic 842 that required an adjustment to the opening retained earnings on the adoption date nor revision of the balances in comparative periods. As a result of the adoption, the Company recognized a lease liability and right-of-use asset for each of the existing lease arrangement.
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 unaudited condensed 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 January 2022 through February 2022, the FASB has not issued additional accounting standards updates.
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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
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.
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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 through voting rights, right to receive the expected residual returns of the entity or 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 activities at King Eagle (Tianjin) that most significantly impact such entity’s economic performance, and | |
| (2) | The obligation to absorb losses of, and the right to receive benefits from, King Eagle (Tianjin) that could potentially be significant to such entity. |
Pursuant to the Contractual Arrangements, King Eagle (Tianjin) pays service fees equal to all of its net profit after tax payments to King Eagle (China). At the same time, to King Eagle (China) is obligated to absorb all of their losses. The Contractual Arrangements are designed so that King Eagle (Tianjin) operates to the benefit of King Eagle (China) and ultimately the Company.
| 13 |
Based
on the foregoing VIE Agreements, King Eagle (China) has effective
Accordingly, the accounts of the 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 December 31, 2021 and September 30, 2021. The carrying amounts and classification of the VIE’s assets and liabilities included in the consolidated balance sheets are as follows:
| December 31, | September 30, | |||||||
| 2021 | 2021 | |||||||
| Current assets | $ | $ | ||||||
| Noncurrent assets | ||||||||
| Total assets | ||||||||
| Total liabilities | ||||||||
| Net liabilities | $ | ( | ) | $ | ( | ) | ||
The VIE’s liabilities consisted of the following as of December 31, 2021 and September 30, 2021:
| December 31, | September 30, | |||||||
| 2021 | 2021 | |||||||
| Current liabilities | ||||||||
| Trade and other payable | $ | $ | ||||||
| Amount due to a related party | ||||||||
| Deferred revenue | ||||||||
| Payroll payable | ||||||||
| Tax payable | ||||||||
| Operating lease obligations-current portion | ||||||||
| Total current liabilities | ||||||||
| Total noncurrent liabilities | ||||||||
| Operating lease obligations-net of current portion | ||||||||
| Total noncurrent liabilities | ||||||||
| Total liabilities | $ | $ | ||||||
The operating results of the VIE were as follows:
For the three months ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Revenue | $ | $ | ||||||
| Gross profit | ||||||||
| Income (loss) from operations | ( | ) | ||||||
| Other income | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| 14 |
NOTE 4 - ADVANCE AND PREPAYMENTS
Prepayments consisted of the following:
| December 31, | September 30, | |||||||
| 2021 | 2021 | |||||||
| Prepaid service fee(1) | $ | $ | ||||||
| Prepaid rent and building management and utilities | ||||||||
| Prepaid supplies(2) | ||||||||
| Prepaid system maintenance services | ||||||||
| Prepaid income tax | ||||||||
| Prepaid professional services(3) | ||||||||
| Prepaid others | ||||||||
| Total prepayments | $ | $ | ||||||
| (1) |
| (2) |
| (3) |
These amounts are expected to be recoverable within twelve (12) months.
NOTE 5 - OTHER RECEIVABLES
Other receivables included the following:
| December 31, | September 30, | |||||||
| 2021 | 2021 | |||||||
| Rental deposits | $ | $ | ||||||
| Advance to employees | ||||||||
| Others | - | |||||||
| Total other receivables, net | $ | $ | ||||||
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 be repaid by cash within a year or employees are required to submit expense receipts for business expenses within three months.
| 15 |
NOTE 6 - PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
| December 31, | September 30, | |||||||
| 2021 | 2021 | |||||||
| Leasehold improvements | $ | $ | ||||||
| Furniture and fixtures | ||||||||
| Computer equipment | ||||||||
| Office equipment | ||||||||
| Computer software | ||||||||
| Subtotal | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Total property and equipment, net | $ | $ | ||||||
The
depreciation expense was $
NOTE 7 – INTANGIBLE ASSETS
| December 31, | September 30, | |||||||
| 2021 | 2021 | |||||||
| Trademarks | $ | $ | ||||||
| Subtotal | ||||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||
| Total intangible assets, net | $ | $ | ||||||
Intangible
assets consist of the Company’s trademarks of King Eagle Mall with the useful life of
Amortization
expense was $
NOTE 8 – DEFERRED REVENUE
| December 31, | September 30, | |||||||
| 2021 | 2021 | |||||||
| Advance payments from customers | $ | $ | ||||||
| Total deferred revenue | $ | $ | ||||||
Deferred
revenue resulted from transactions where the Company received the advanced payments from the customers but revenue recognition criteria
under the five-step model have yet to be met. As of December 31, 2021 and September 30, 2021, the Company had a total deferred revenue
of $
| 16 |
NOTE 9 - RELATED PARTY BALANCES AND TRANSACTIONS
Amounts due to related parties are payables arising from transactions between the Company and a related parties, such as payments of operating expenses by such related party on behalf of our entities in PRC and funding to meet working capital requirements. The payables owed to the related party are interest free, unsecured, and repayable on demand.
Amounts due to related parties consisted of the following:
| December 31, | September 30, | |||||||||||
| Name of related party | Relationship | Nature of transactions | 2021 | 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 authorized shares of Capital Stock with designated as $ par value Common Stock, and designated as $ par value Preferred Stock.
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 December 31, 2021 and September 30, 2021.
Common stock
The Company’s authorized shares of common stock were shares, with a par value of $. The issued and outstanding shares of common stock were as of December 31, 2021 and September 30, 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 completed on May 17, 2021.
| 17 |
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 unaudited condensed 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 unaudited condensed 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 December 31, 2021, there were shares of common stock issued and outstanding.
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
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 December 31, 2021 and September 30, 2021, the Company had negative
net assets which included common stock, additional paid-in capital, 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 December 31, 2021, King Eagle (China), King Eagle (Tianjin) and KP Tian Yu incurred negative net assets which amounted to $
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.
| 18 |
United States
Kun Peng International Ltd 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 three months ended December 31, 2021 and 2020.
British Virgin Islands
KP International 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, 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 three months ended December 31, 2021 and 2020 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, 16.5%, for the calculation of deferred taxes for our subsidiaries in Hong Kong.
PRC
The
PRC’s statutory income tax rate is
Income tax expense was comprised of the following:
| For the three months ended December 31 | ||||||||
| 2021 | 2020 | |||||||
| Current | $ | $ | ||||||
| Federal | - | - | ||||||
| State | - | - | ||||||
| Foreign | - | - | ||||||
| Total current | - | - | ||||||
| Deferred | ||||||||
| Federal | - | - | ||||||
| State | - | - | ||||||
| Foreign | - | - | ||||||
| Total deferred | - | - | ||||||
| Total income tax expense | $ | $ | ||||||
| 19 |
A reconciliation between the Company’s actual provision for income taxes and the provision at the statutory rate is as follow:
For the three months ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Income (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 | % | % | ||||||
Uncertain tax positions
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by the respective jurisdictions, where applicable. The statute of limitations for the tax returns varies by jurisdictions.
The statute of limitations for the Internal Revenue Services to assess the income tax returns on a taxpayer expires three years from the due date of the income tax return or the date on which it was filed, whichever is later.
In accordance with the Hong Kong profits tax regulations, a tax assessment by the IRD may be initiated within six years after the relevant year of assessment, but extendable to 10 years in the case of potential willful underpayment or evasion.
In accordance with PRC Tax Administration Law on the Levying and Collection of Taxes, the PRC tax authorities generally have up to five years to assess underpaid tax plus penalties and interest for PRC entities’ tax filings. In the case of tax evasion, which is not clearly defined in the law, there is no limitation on the tax years open for investigation. Accordingly, the PRC entities remain subject to examination by the tax authorities based on the above.
As of December 31, 2021 and September 30, 2021, the Company did not accrue any liability, interest or penalties related to uncertain tax positions in the provision for income taxes in its consolidated financial statements. The Company does not expect that its assessment regarding unrecognized tax positions will materially change over the next 12 months.
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 December 31, 2021, and September 30, 3021:
| Assets/liabilities | Classification | December 31, 2021 | September 30, 2021 | |||||||
| Assets | ||||||||||
| Operating lease right-of-use assets | Operating lease assets | $ | $ | |||||||
| Liabilities | ||||||||||
| Current | ||||||||||
| Operating lease liabilities - current | Current operating lease liabilities | $ | $ | |||||||
| Long-term | ||||||||||
| Operating lease liabilities – net of current portion | Long-term operating lease liabilities | $ | $ | |||||||
| Total lease liabilities | $ | $ | ||||||||
| 20 |
The operating lease expense for the three months ended December 31, 2021 and 2020 was as follows:
For the three months ended December 31, | ||||||||||
| Lease Cost | Classification | 2021 | 2020 | |||||||
| Operating lease cost | General and administrative | $ | $ | |||||||
| Total lease cost | $ | $ | ||||||||
Maturities of operating lease liabilities as of December 31, 2021 were as follow:
| Maturity of Lease Liabilities | Operating Leases | |||
| 2022 (remaining) | $ | |||
| 2023 | ||||
| Thereafter | ||||
| Total lease payments | $ | |||
| Less: interest | ( | ) | ||
| Present value of lease payments | $ | |||
Supplemental information related to operating leases was as follows:
For the three months ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| 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 $84,273 and $64,148 for the three months ended December 31, 2021 and 2020, respectively.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
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
As of December 31, 2021, the Company evaluated and concluded that there are no subsequent events that have occurred that would require recognition or disclosure in the financial statements other than as disclosed above.
| 21 |
Item 2. 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 the awareness of preventive care to the people in the PRC, we have developed and launched our mobile social e-commerce platform (King Eagle Mall). We also started establishing physical (Smart Kiosk) platforms with the cooperation with Guoxin Star Network Co., Ltd.
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 affiliated merchants. Our major products include health care products such as dietary supplements, nutritional health foods, beauty cosmeceuticals, and other categories (for instance, milk powder, dried fruits) of health foods for supporting the cardiovascular system and bone joint health. 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 for 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.
At the same time, we operate customer service centers with whom our members can directly communicate for any assistance related to product purchases, suggestions for health care products and services, and delivery logistics.
Smart Kiosk
We introduced “Smart Kiosk” with the support from the previous stakeholder of King Eagle (China), Guoxin Ruilian Group Co., Ltd (“Guoxin Ruilian”), which is a wholly owned subsidiary of CITIC Group Corporation Ltd and a related party of Guoxin Zhengye. The construction of Smart Kiosk was initiated and administered by Guoxin Ruilian Group Co., Ltd. After the completion of the construction of Smart Kiosk, Guoxin Ruilian Group Co., Ltd assigned its wholly-owned subsidiary, Guoxin Star Network Co., Ltd to cooperate with King Eagle (Tianjin) in development of Smart Kiosk. The Smart Kiosk is a physical platform which focuses on developing a “small shop economy.” It is integrated with the King Eagle Mall which creates a “social, health and physical store” to provide people with more professional and comprehensive preventive health care products and services. Smart Kiosk is a principal component of our business.
The smart service kiosk functions as a physical customer service center and community marketing for attracting customers, providing customer services, 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.
Recent Developments
COVID-19 Update
The ongoing and evolving COVID-19 pandemic continues to spread throughout the world and outbreak prompted governments and business to take a widespread of quarantines, lockdowns, site closures. It has negatively impacted the global economy, workforces, customers, and created significant volatility and disruption of economic activities.
| 22 |
During the first quarter of 2022, the restrictions, quarantines and closures remained in certain affected areas and government agencies in the PRC. The approval process of our applications for the construction permits of smart kiosks was delayed by the local governmental agencies and the construction project of smart kiosks was also postponed. The Company continues to focus its business through its online platform, King Eagle Mall, to mitigate the adverse impacts by COVID-19 and follows up closely with the local governmental agencies for the application for the construction permits of smart kiosks. In fact, the pandemic increased the overall public health consciousness in the PRC and the Company experienced a significant growth in its average monthly online sale revenue by $1.4 million or 755.2% from $0.2 million for the three months ended December 31, 2020 to $1.6 million for the three months ended December 31, 2021.
The Company does not expect that the coronavirus COVID-19 will have a material adverse effect on its online business or financial results at this time. Still, 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.
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, 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.
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 regulation 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 are great uncertainties 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 issued the Measures for Cybersecurity Review (Revision Draft for Comments), or the Measures, for public comments, which propose 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. The Measures are soliciting comments and subject to change. As we have less than one million users, we believe that the Measures are not applicable to us even after they take effect 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. Further, our consulting business with respect to overseas listing and capital raising may be adversely affected.
| 23 |
Financial Operations Overview
Results of Operations for the three months ended December 31, 2021 and 2020
| For the three months ended December 31, | ||||||||||||||||
| 2021 | 2020 | |||||||||||||||
| Amount | % of revenue | Amount | % of revenue | |||||||||||||
| Revenues | $ | 4,669,408 | 100.0 | % | $ | 545,961 | 100.0 | % | ||||||||
| Cost of revenues | 709,209 | 15.2 | 93,850 | 17.2 | ||||||||||||
| Gross profit | 3,960,199 | 84.8 | 452,111 | 82.8 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative expenses | 381,901 | 8.2 | 434,418 | 79.6 | ||||||||||||
| Selling expense | 3,265,453 | 69.9 | 388,464 | 71.2 | ||||||||||||
| Total operating expenses | 3,647,354 | 78.1 | 822,882 | 150.8 | ||||||||||||
| Income (loss) from operations | 312,845 | 6.7 | (370,771 | ) | (68.0 | ) | ||||||||||
| Other income | 25,013 | 0.5 | 53 | 0.0 | ||||||||||||
| Income (loss) before income taxes | 337,858 | 7.2 | (370,718 | ) | (68.0 | ) | ||||||||||
| Income tax expense | - | - | - | - | ||||||||||||
| Net income (loss) | $ | 337,858 | 7.2 | $ | (370,718 | ) | (68.0 | )% | ||||||||
Revenues
For the three months ended December 31, 2021 and 2020, revenues amounted to $4,669,408 and $545,961, respectively. Our revenues primarily included the sale of health care and health related household products to our customers via our mobile application, King Eagle Mall, which was launched in July 2020. Compared to the three months ended December 31, 2020, we generated a higher revenue amount during the three months ended December 31, 2021 as we engaged service agents to promote our platform and products since December 2020. We recognized our revenue on a gross basis, net of sub-charges and value-added tax (“VAT”) of gross sales.
Cost of revenue
Our cost of revenue for the three months ended December 31, 2021 and 2020 were $709,209 and $93,850, respectively. This primarily included the purchase of health care and health related household products from our suppliers. We incurred a higher cost of revenue for the three months ended December 31, 2021, compared to that in the same period of 2020, because we generated a higher revenue amount during the three months ended December 31, 2021 as discussed above.
Gross profit
For the three months ended December 31, 2021, and 2020, our gross profit amounted to $3,960,199 or 84.8%, and $452,111 or 82.8%, respectively. While our gross profit amount for the three months ended December 31, 2021 was significantly higher than that for the same period in 2020 due to a higher revenue generated during the three months ended December 31, 2021, our gross profit margin for the three months ended December 31, 2021 remained comparable to the same period in 2020.
Operating Expenses
Our operating expenses consist of general and administrative expenses and selling expense. For the three months ended December 31, 2021 and 2020, our total operating expenses were $3,647,354 and $822,882, respectively. We experienced a higher amount of operating expenses in the three months ended December 31, 2021, compared to the same period in 2020 primarily due to the higher selling expense.
| 24 |
General and administrative expenses
General and administrative expenses for the three months ended December 31, 2021 and 2020 were $381,901 and $434,418, respectively. The decrease in general and administrative expenses by $52,517 was chiefly triggered by a lower employee compensation and benefits and office supplies during the three months ended December 31, 2021. Our employee compensation and benefit and office supplies and meeting decreased by $36,987 and $21,529, respectively, for the three months ended December 31, 2021. During the three months ended December 31, 2021, the CEO of the Company and King Eagle (Tianjin) resigned and the basic salary amounts of our executives were reduced in order to save operating costs. Our office supplies and meeting expenses for the three months ended December 31, 2021 also decreased during the three months ended December 31, 2021 compared to the same period in 2020. As we started our operation in July 2020, we incurred additional office supplies and decoration expenses during the three months ended December 31, 2020.
Our general and administrative expenses for the three months ended December 31, 2021 and 2020 were comprised of the following:
| For the three months ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Employee compensation and benefit | $ | 156,325 | $ | 193,312 | ||||
| Office rent and building management | 95,845 | 93,360 | ||||||
| Office supplies and meeting | 7,405 | 28,934 | ||||||
| Professional services fee | 85,759 | 75,254 | ||||||
| Travel, transportation and gasoline | 4,556 | 15,641 | ||||||
| Meals and entertainment | 8,352 | 12,536 | ||||||
| Depreciation and amortization | 7,963 | 4,794 | ||||||
| Repair and maintenance | - | 4,550 | ||||||
| Others | 15,696 | 6,037 | ||||||
| Total | $ | 381,901 | $ | 434,418 | ||||
Selling expense
Our selling expense, which was primarily incurred by our sales and marketing department, for the three months ended December 31, 2021 and 2020, were $3,265,453 and $388,464, respectively. Compared to the three months ended December 31, 2020, our selling expense for the three months ended December 31, 2021 increased by $2,876,989. Such significant increase was primarily driven by an increase in service agent fee by $2,765,877, as we engaged service agents since December 2020 to promote our platform and products. Compared to the three months ended December 31, 2020, the average monthly revenue from our online sales for the same period in 2021 increased by approximately $1.4 million, from approximately $0.2 million for the three months ended December 31, 2020 to approximately $1.6 million for the same period in 2021. The increase in selling expense also included an increase in employee compensation and benefit by $76,734 as well as travel, transportation and gasoline and by $31,768. During the three months ended December 31, 2021, we increased our headcount and compensation for our planning team. Our sales and marketing department as well as executives launched marketing activities in various cities which resulted in a higher travel expense.
Our selling expense included the following:
| For the three months ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Service agents | $ | 3,020,635 | $ | 254,758 | ||||
| Employee compensation and benefit | 160,312 | 83,578 | ||||||
| Office supplies and meeting | 18,259 | 32,859 | ||||||
| Customer services | 13,547 | 8,432 | ||||||
| Travel, transportation and gasoline | 36,504 | 4,736 | ||||||
| Meals and entertainment | 14,627 | 3,423 | ||||||
| Depreciation and amortization | 1,569 | 678 | ||||||
| Total | $ | 3,265,453 | $ | 388,464 | ||||
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Other income
Other income primarily included bank interest income, foreign exchange gain or loss and other service income. Our other income for the three months ended December 31, 2021 and 2020 were $25,013 and $53, respectively. During the three months ended December 31, 2021, we incurred an additional source of income in an amount of $17,737 which was related to online technical support services of our lutein supplement provided to a corporate customer. We also incurred a higher interest income during the three months ended December 31, 2021. Due to a higher revenue amount, our average monthly cash balance in our bank accounts during this period was higher compared to the same period in 2020. Conversely, we only incurred bank interest income in an amount of $53 for the three months ended December 31, 2020.
Income tax expense
For the three months ended December 31, 2021 and 2020, the income tax expense of the Company was nil. During the three months ended December 31, 2021, King Eagle (Tianjin) incurred book income before income tax and taxable income and utilized the net operating loss carryforwards to offset its entire taxable income. On the other hand, KPIL, the subsidiaries in Hong Kong and King Eagle (China) incurred book loss and tax loss. The Company recognized a full valuation allowance against the deferred tax assets of these entities as it believes that it is more likely than not that these entities will not recognize its deferred tax assets in a near future. During the three months ended December 31, 2020, the Company generated net loss before income tax and the Company recognized a full valuation allowance 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 recognize its net operating loss carryforwards in a near future or before it expires.
Net income (loss)
As a result of the factors discussed above, the Company posted a net income in an amount of $337,858 for the three months ended December 31, 2021 while it recorded a net loss in an amount of $370,718 for the three months ended December 31, 2020.
Foreign currency translation adjustment
The functional currency of our operation in PRC is Chinese Yuan or Renminbi (“RMB”) and while 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 $13,004 and $(14,139) for the three months ended December 31, 2021, and 2020, respectively.
Comprehensive income (loss)
The Company recognized a comprehensive income in an amount of $350,862 for the three months ended December 31, 2021 whereas it recorded a comprehensive loss in an amount of $384,857 for the same period in 2020.
Liquidity and Capital Resources
As of December 31, 2021 and September 30, 2021, we had a cash and cash equivalents balance of $2,687,348 and $2,059,685, respectively.
For the three months ended December 31, 2021, net cash provided by operating activities totaled to $679,690. Operating cash inflow was mainly attributable to the net income, $337,858, a decrease in prepayments to vendors, $103,754 and an increase in amount due to related parties, $741,889, offset by payments made to third party vendors, $366,122, an increase in advance to our employees, $30,413, a decrease in customers’ prepayment, $78,588, an increase in payroll payments, $13,936 and an increase in indirect tax payments, $24,284.
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Net cash used in investing activities totaled to $7,459, was primarily related to the purchase of office and computer equipment.
There was no financing activity for the three months ended December 31, 2021.
Effect of exchange rate change on cash totaled $44,568. The resulting change in cash for the period was an increase of $627,663.
For the three months ended December 31, 2020, net cash used in operating activities totaled to $3,428. Operating cash outflow was primarily attributable to a net loss of $370,718, an increase in prepayments to vendors and lessors, $127,180, an increase in rental deposit payments and advance to employees, $249,790, repayments to a related party who paid rent deposits and lease payments to our lessors on behalf of King Eagle (China), $69,407 and an increase in payroll payments, $8,963. The overall cash outflow was offset by an increase in trade and other payable, $242,576, an increase in customers’ prepayments, $550,383 and a decrease in indirect tax payments, $24,198.
Net cash used in investing activities totaled to $13,626 included the purchase of office and computer equipment, software and leasehold improvements.
There was no financing activity for the period for the three months ended December 31, 2020.
Effect of exchange rate change on cash totaled $5,408. The resulting change in cash for the period was a decrease by $11,646.
The following table sets forth a summary of changes in our working capital as of December 31, 2021 and September 30, 2021:
| December 31, | September 30, | |||||||
| 2021 | 2021 | |||||||
| Current Assets | $ | 3,416,783 | 2,871,157 | |||||
| Current Liabilities | 5,311,868 | 5,189,941 | ||||||
| $ | (1,895,085 | ) | (2,318,784 | ) | ||||
We require additional cash of approximately $1.5 million within the next twelve months which primarily relates to third party vendors payables. In an effort to support and maintain our financial positions and operations, the Company focused on increasing its revenue through its online platform and slimming its overhead costs. As aforementioned, during the first quarter of 2022, our average monthly online sales increased. We also reduced the compensation and benefits of our executives, decreased office supplies expense, trimmed staff meeting expense and terminated the lease arrangements of employee accommodations. 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.
Going Concern Consideration
The accompanying condensed 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 three months ended December 31, 2021, although the Company generated cash inflows from operating activities of $679,690 and a net income of $337,858, it incurred a negative working capital of $1,895,085. Moreover, as the COVID-19 outbreak continues, there is a delay in the progress of construction and approval for the construction permit of smart kiosk due to the lockdown of the affected areas in the PRC and the closure of the government agencies in the PRC. These conditions raise substantial doubt about the ability of the Company to continue as a going concern.
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The Company continues to monitor its operations to help refine the Company’s financial liquidity. 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. During the first quarter of 2022, the Company focused on increasing its revenue through its online platform and slimming its overhead costs, for example, we reduced the compensation and benefits of our executives, decreased office supplies expense, trimmed staff meeting expense and terminated the lease arrangements of employee accommodations. Additionally, the Company obtained a fund advance of approximately $0.8 million from one of the shareholders of King Eagle (Tianjin) to meet its working capital requirements.
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, 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.
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 the 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.
Critical Accounting Policies
We regularly evaluate the accounting policies and estimates that we use to make budgetary and financial statement assumptions. A complete summary of these policies is included in the notes to our financial statements. In general, management’s estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.
See Note 2 to the financial statements included herewith and Note 2 to the financial statements on Form 10-K/A for the fiscal year ended September 30, 2021, previously filed with the SEC.
Recent Accounting Pronouncements
See Note 2 to the financial statements included herewith and Note 2 to the financial statements on Form 10-K/A for the fiscal year ended September 30, 2021, previously filed with the SEC.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As a smaller reporting company, we are not required to respond to this item.
Item 4. 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 Securities Exchange Act of 1934. 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 quarter ended December 31, 2021 our chief executive officer and our chief financial officer and principal accounting manager, concluded that our disclosure controls and procedures were not effective such 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 appropriated understanding of U.S. GAAP and SEC reporting requirement; | |
| ● | 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 director. |
Management’s Report on Internal Control over Financial Reporting
As of December 31, 2021, 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 quarterly financial statements will not be prevented or detected on a timely basis.
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. We are currently hiring additional personnel in financial reporting and accounting, and we are providing trainings to newly hired personnel. In addition, 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 the limited cash flow we are currently having, we cannot assure you when we will be able to implement those remediation methods.
Because we are a smaller reporting company, this 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 first fiscal quarter ended December 31, 2021, 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.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our Company, threatened against or affecting our Company, or our common stock, in which an adverse decision could have a material adverse effect.
Item 1A. Risk Factors
As a smaller reporting company, we are not required to respond to this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
None
Item 6. Exhibits
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| KUN PENG INTERNATIONAL LTD | ||
| Date: February 18, 2022 | By: | /s/ Zhuang Richun |
Zhuang Richun, President | ||
| Date: February 18, 2022 | By: | /s/ Zhang Yuanyuan |
| Zhang Yuanyuan , Chief Financial Officer | ||
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