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)
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EIN
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| (State or Other Jurisdiction of | (IRS Employer | |
| Incorporation or Organization) | Identification Number) |
(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 ☐ |
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Smaller
reporting company
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Emerging
growth company
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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 June 30, 2023, the registrant had shares of common stock issued and outstanding.
FORM 10-Q
KUN PENG INTERNATIONAL LTD.
INDEX
| 2 |
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 |
June 30, 2023 |
September 30, 2022 |
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| (Audited) | ||||||||||||
| Assets | ||||||||||||
| Current assets | ||||||||||||
| Cash and cash equivalents | $ |
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$ |
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| Advance and prepayments | 4 |
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| Other receivables | 5 |
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| Amount due from a related party | 9 |
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| Total current assets |
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| Noncurrent assets | ||||||||||||
| Property, plant and equipment, net | 6 |
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| Intangible assets, net | 7 |
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| Security deposits |
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| Right-of-use assets | 12 |
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| Others |
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| Total noncurrent assets |
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| Total assets |
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| Liabilities | ||||||||||||
| Current liabilities | ||||||||||||
| Trade payables |
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| Other payables and accrual |
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| Deferred revenue | 8 |
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| Payroll payable |
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| Tax payable |
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| Amounts due to related parties | 9 |
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| Operating lease obligations-current portion | 12 |
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| Total current liabilities |
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| Noncurrent liabilities | ||||||||||||
| Operating lease obligations-net of current portion | 12 |
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| Total noncurrent liabilities |
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| Total liabilities |
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| Commitment and contingencies | ||||||||||||
| Equity | ||||||||||||
| Preferred stock, $ par value, shares authorized; shares issued and outstanding as of June 30, 2023 and September 30, 2022 | 1 | |||||||||||
| Common stock, $ par value, shares authorized; shares issued and outstanding as of June 30, 2023 and September 30, 2022 * | 10 |
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| Additional paid-in capital | 10 |
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(
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) | ||||||||
| Accumulated deficits |
(
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(
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) | ||||||||
| Accumulated other comprehensive income |
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| Total stockholders’ equity |
(
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) |
(
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) | ||||||||
| Non-controlling interests |
(
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(
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) | ||||||||
| Total equity |
(
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) |
(
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) | ||||||||
| Total liabilities and equity | $ |
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$ |
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| * |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 3 |
KUN PENG INTERNATIONAL LTD
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(UNAUDITED)
(In U.S. Dollars, except share data or otherwise stated)
|
Three months ended June 30, |
Nine months ended June 30, |
|||||||||||||||||||
| Note | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||
| Revenue, net | 11 | $ |
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$ |
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$ |
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$ |
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|||||||||||
| Cost of revenue | 11 |
(
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) |
(
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) |
(
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) |
(
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) | |||||||||||
| Gross profit |
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| Operating expenses | ||||||||||||||||||||
| General and administrative expenses |
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| Selling expense |
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| Total operating expenses |
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| Loss from operations |
(
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) |
(
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) |
(
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(
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| Other (expenses) income: | ||||||||||||||||||||
| Interest income |
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| Other (expenses) income |
(
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) |
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| Total other (expenses) income, net |
(
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) |
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| Loss before income taxes |
(
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) |
(
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) |
(
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) |
(
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) | ||||||||||||
| Income tax expense | 12 | |||||||||||||||||||
| Net loss |
(
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) |
(
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) |
(
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) |
(
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) | ||||||||||||
| Less: Net loss attributable to non-controlling interest |
(
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) |
(
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) | ||||||||||||||||
| Net loss attributable to common stockholders |
(
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) |
(
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) |
(
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(
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| Foreign currency translation adjustment |
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| Comprehensive loss |
(
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) |
(
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) |
(
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) |
(
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) | ||||||||||||
| Less: Comprehensive loss attributable to noncontrolling interest |
(
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) |
(
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) | ||||||||||||||||
| Comprehensive loss attributable to common stockholders | $ |
(
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) | $ |
(
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) | $ |
(
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) | $ |
(
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) | ||||||||
| Net loss per share attributable to common stockholders | ||||||||||||||||||||
| Basic and diluted * | $ |
(
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) | $ |
(
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) | $ |
(
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) | $ |
(
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) | ||||||||
| Weighted average shares used to compute net loss per share attributable to common stockholders * |
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| * |
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The accompanying notes are an integral part of these unaudited consolidated financial statements
| 4 |
KUN PENG INTERNATIONAL LTD
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
For the Nine Months Ended June 30, 2023
(UNAUDITED)
In U.S. Dollars, except share data or otherwise stated)
| 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, 2022 * |
|
$ |
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$ |
(
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) | $ |
(
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) | $ |
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$ |
(
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) | $ |
(
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) | $ |
(
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) | ||||||||||||
| Net loss attributable to common stockholders | - |
(
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) |
(
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) |
(
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) | |||||||||||||||||||||||||
| Capital contribution | - |
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| Foreign currency translation adjustment | - |
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| Balance, June 30, 2023 |
|
$ |
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$ |
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$ |
(
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) | $ |
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$ |
(
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) | $ |
(
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) | $ |
(
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) | |||||||||||||
| Common stock | Additional paid-in | Accumulated | Accumulated other comprehensive | Total stockholders’ | Non- Controlling | Total | ||||||||||||||||||||||||||
| Shares | Amount | capital | Deficits | loss | equity | Interest | Equity | |||||||||||||||||||||||||
| Balance, March 31, 2023 |
|
$ |
|
$ |
|
$ |
(
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) | $ |
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$ |
(
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) | $ |
(
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) | $ |
(
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) | |||||||||||||
| Net loss attributable to common stockholders | - |
(
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) |
(
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) |
(
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) | |||||||||||||||||||||||||
| Capital contribution | - |
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| Foreign currency translation adjustment | - |
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| Balance, June 30, 2023 |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
|
$ |
(
|
) | $ |
(
|
) | $ |
(
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) | |||||||||||||
| 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 |
|
$ |
|
$ |
(
|
) | $ |
(
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) | $ |
(
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) | $ |
(
|
) | $ |
(
|
) | $ |
(
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) | |||||||||||
| Net loss attributable to common stockholders | - |
(
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) |
(
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) |
(
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) | |||||||||||||||||||||||||
| Net loss attributable to noncontrolling interest | - |
(
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) |
(
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) | |||||||||||||||||||||||||||
| Foreign currency translation adjustment | - |
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| Balance, June 30, 2022 |
|
$ |
|
$ |
(
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) | $ |
(
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) | $ |
|
$ |
(
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) | $ |
(
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) | $ |
(
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) | ||||||||||||
| Common stock |
Additional paid-in |
Accumulated |
Accumulated other comprehensive |
Total stockholders’ |
Non- Controlling |
Total | ||||||||||||||||||||||||||
| Shares | Amount | capital | Deficits | loss | equity | Interest | Equity | |||||||||||||||||||||||||
| Balance, March 31, 2022 |
|
$ |
|
$ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
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) | |||||||||||
| Net loss attributable to common stockholders | - |
(
|
) |
(
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) |
(
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) | |||||||||||||||||||||||||
| Net loss attributable to noncontrolling interest | - |
(
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) |
(
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) | |||||||||||||||||||||||||||
| Foreign currency translation adjustment | - |
|
|
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| Balance, June 30, 2022 |
|
$ |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
$ |
(
|
) | $ |
(
|
) | $ |
(
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) | ||||||||||||
| * |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 5 |
KUN PENG INTERNATIONAL LTD
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In U.S. Dollars, except share data or otherwise stated)
|
Nine months ended June 30, |
||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ |
(
|
) | $ |
(
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) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities | ||||||||
| Depreciation and amortization |
|
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| Amortization of right-of-use assets |
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| Loss on disposal of property and equipment |
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| Changes in operating assets and liabilities | ||||||||
| Advance and prepayments |
(
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) |
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| Other receivables |
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(
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) | |||||
| Security deposits |
(
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) | ||||||
| Trade payables |
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| Other payables and accrual |
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(
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) | |||||
| Deferred revenue |
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(
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) | |||||
| Payroll payable |
|
(
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) | |||||
| Amounts due to related parties |
(
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) |
|
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| Tax payable |
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(
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) | |||||
| Lease liabilities |
(
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) |
(
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) | ||||
| Net cash provided by (used in) operating activities |
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(
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) | |||||
| Cash flows from investing activities | ||||||||
| Purchase of property and equipment |
(
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) | ||||||
| Payments for construction-in-progress |
(
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) | ||||||
| Acquisition of trademarks |
(
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) | ||||||
| Net cash used in investing activities |
(
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) |
(
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) | ||||
| Cash flows from financing activities | ||||||||
| Capital contribution |
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| Net cash provided by financing activities |
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| Effect of exchange rate changes on cash |
(
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) |
(
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) | ||||
| Net increase (decrease) in cash and cash equivalents |
|
(
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) | |||||
| Cash and cash equivalents, beginning balance |
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|
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| Cash and cash equivalents, ending balance | $ |
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| Supplementary cash flows information: | ||||||||
| Cash paid for interest | $ | |||||||
| Cash paid for income tax | $ | |||||||
| Non-cash financing and investing activities: | ||||||||
| Right-of-use assets acquired with operating lease obligation | $ |
|
$ |
|
||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 6 |
KUN PENG INTERNATIONAL LTD
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(UNAUDITED)
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Kun Peng International Limited (“the Company,” “KPIL,” “KPEA,” “we,” “us,” “our”), a Nevada corporation (formerly known as CX Network Group, Inc.), through its subsidiaries and VIE, is currently engaged in the sale of health care and health-related household products through its online platforms, King Eagle Mall and Kun Zhi Jian.
| 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 June 30, 2023
Preferred stock: ● with par value $ per share
● shares issued and outstanding as of June 30, 2023 |
|
|||||
| Kun Peng International Holding Limited |
● A BVI company
●
Incorporated on
|
|
Paid
capital:
|
|
||||
| Kunpeng (China) Industrial Development Company Limited |
● A Hong Kong company
●
Incorporated on
● Approvals for deregistration from Hong Kong Inland Revenue Department and Hong Kong Company Registry are pending |
|
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$ ) |
|
||||
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Kun Peng Tian Yu Health Technology (Tianjin) Co., Ltd.
|
● a limited liability company incorporated in the People’s Republic of China and a wholly foreign owned enterprise (“WFOE”)
●
Incorporated on
|
|
Registered
capital of RMB
|
|
||||
| King Eagle (China) Co., Ltd |
● a wholly foreign owned enterprise (“WFOE”) until March 3, 2023 and a limited liability company incorporated in the People’s Republic of China
●
Incorporated on
|
Wholly owned by Kun Peng (China) Industrial Development Company Limited until March 3, 2023
Starting March 3, 2023,
|
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 $
Paid-in capital approximately $
|
|
||||
| King Eagle (Beijing) Technology Co., Ltd |
● a limited liability company incorporated in the People’s Republic of China
●
Incorporated on
|
|
Registered
capital of RMB
Paid-in capital approximately $
|
|
| 7 |
Authorized Shares and Name Change
Effective
as of September 9, 2021, the Company’s Articles of Incorporation were amended 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. The accompanying consolidated financial statements’ share and per share information as of September 30, 2022 has been retroactively adjusted to reflect the forward stock split.
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
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 $
On November 1, 2022, KP Industrial
approved and entered into ownership transfer agreements with Kun Peng (Hong Kong) Industrial Development Limited and Kun Peng Tian Yu
Health Technology Co., Ltd. The agreements provide that KP Industrial agreed to transfer
On May 9, 2023, KP Industrial ’ s director and its sole shareholder, KP International Holding, approved a deregistration of KP Industrial. The entity filed a request for a “ Notice of No Objection to a Company being Deregistered ” with the Hong Kong Inland Revenue Department on the same day. The application for such notice is being reviewed by the Hong Kong Inland Revenue Department. Upon approval and issuance of a “ Notice of No Objection ” by the Hong Kong Inland Revenue Department, KP Industrial is required to submit an application for deregistration to the Hong Kong Company Registry. We estimate that the entire deregistration process will be completed in January 2024.
| 8 |
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$ ).
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 $
King Eagle (China) Co., Ltd.
King
Eagle (China) Co., Ltd. (“King Eagle (China)”) was incorporated as a limited liability company in the 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
On November 1, 2022, KP Industrial approved and entered into ownership
transfer agreements with Kun Peng (Hong Kong) Industrial Development Limited and Kun Peng Tian Yu Health Technology Co., Ltd. The agreements
provide that KP Industrial agreed to transfer
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 $
Some of the business engaged in by King Eagle (Tianjin) is restricted or prohibited for foreign investment under PRC regulations. Therefore, King Eagle (China) has entered into VIE Agreements with King Eagle (Tianjin) and its shareholders. We do not own any equity interests in King Eagle (Tianjin), but control and receive the economic benefits of its 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; such SAFE registration was effected on May 14, 2021. These shareholders of King Eagle (Tianjin) were required 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.
| 9 |
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 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, 2022 included in the Form 10-K filed with the SEC on December 29, 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 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 the condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates 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 nine months ended June 30, 2023 and 2022 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.
| 10 |
Reclassification
Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. Such reclassifications had no effect on the prior period net income, accumulated deficit, net assets, or total shareholders’ deficit.
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 on 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 nine months ended June 30, 2023, although the
Company incurred cash inflows from operating activities and financing 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 are not limited to, increasing sales through the Company’s online business , reducing overhead costs, obtaining advances of funds from the Company’s stockholders and directors, or financing through the issuance of shares. Since the first quarter of 2022, the Company has been focusing on increasing its revenue through its new online platform, Kun Zhi Jian, to explore wholesale markets. This online platform focuses on promoting and selling our own brand of preventive health care products to wholesalers. The Company also launched advertising campaigns to promote its own brand. The Company also streamlined its administrative overhead costs, including a reduction in the compensation and benefits of our administrative and managerial employees and decreased lease expense which continues into 2023.
In order to continue as a going concern for the next 12 months, the Company continues to focus on increasing its revenue through its online platforms and streamlining its overhead costs or obtaining financing from its stockholders or directors. Our service agents and our sales and marketing department continue to launch marketing campaigns every week to promote our own brand products, particularly thermal therapy cabins. However, the Company cannot provide any assurance that it will be able to increase revenue or 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. We expect that our 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
Businesses and markets in mainland China have reopened and mainland China relaxed its policies and controls relating to COVID-19 in early December 2022. In addition, in July 2023, the PRC government fully opened its border to foreigners without requirements of quarantine or application for a health code upon arrival in the PRC. However, it will take time for the country to recover from the impact of COVID-19 and the effects of the restrictive governmental policies and controls. The administrative processing of the PRC local government agencies has not yet fully resumed. We continue to follow up on the status of our applications for Smart Kiosks and we estimate the administrative processing of our applications at the local government agencies may be resumed by the end of calendar year 2023.
| 11 |
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, Kun Zhi Jian, 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. The Company expects to obtain government approval by December 2023.
While we do not expect that the virus will continue to have a material adverse effect on our business or financial results at this time, it is not possible to predict the unanticipated consequence of the pandemic on our future business performance and liquidity. 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 our common stock by the weighted average number of shares of common stock outstanding during the year. Diluted income (loss) per share is calculated by dividing net income (loss) attributable to the holders of our common stock, as adjusted for the effect of dilutive common stock equivalents, if any, by the weighted average number of shares of common stock and dilutive common stock equivalents outstanding during the period. However, common stock 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 respective functional currencies as determined based on the criteria of ASC 830, “Foreign Currency Translation.”
Assets and liabilities are translated at the unified exchange rate at the end of the period. Income and expense accounts are translated at the average translation rates and 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 loss amounted to $
The following table shows the foreign exchange rates used for translation:
| Exchange rates set forth in the H.10 statistical release of the Federal Reserve Board |
Hong Kong Dollar (HKD) |
Chinese Renminbi (RMB) |
||||||
| For the nine month period ended June 30, 2023 (Average Rate) | ||||||||
| United States dollar ($1) |
|
|
||||||
| As of June 30, 2023 (Closing Rate) | ||||||||
| United States dollar ($1) |
|
|
||||||
| Exchange rates set forth on the www.xe.com |
Hong Kong Dollar (HKD) |
Chinese Renminbi (RMB) |
||||||
| For the nine month period ended June 30, 2022 (Average Rate) | ||||||||
| United States dollar ($1) |
|
|
||||||
| As of September 30, 2022 (Closing Rate) | ||||||||
| United States dollar ($1) |
|
|
||||||
| 12 |
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 in e-wallets. As of June 30, 2023 and September 30, 2022, 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. Additionally, we perceive low risk associated with the cash held in e-wallets.
Financial Instruments
The carrying amounts reported in the balance sheet for cash, other receivables, accrued liabilities, and other payables approximate fair value because of the immediate or short-term maturities 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 |
|
|
| Office equipment |
|
|
| Computer equipment |
|
|
| Computer software |
|
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.
| 13 |
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 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 condensed 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 (Loss) Income
Other comprehensive (loss) income refers to revenues, expenses, gains, and losses that under generally accepted accounting principles are included in comprehensive income but are excluded from net (loss) income as these amounts are recorded directly as an adjustment to stockholders’ equity. Our other comprehensive (loss) income for the nine months ended June 30, 2023 and 2022 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. 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.
| 14 |
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.
We recognize revenue when control of the promised goods is transferred to customers of King Eagle Mall and our new online platform. Revenue is measured at the transaction price, which is based on the amount of consideration that we expect to receive in exchange for transferring the promised goods to our customers. The revenue mainly includes two customer types: retail (“King Eagle Mall” online platform) and wholesale (“Kun Zhi Jian,” our new online platform). The revenue is recognized at a point in time when control of the promised goods is transferred to our 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. We
anticipate that approximately $
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 defective goods and goods lost in transit. As we have experienced insignificant amounts of goods returned and claims from goods lost in transit in the past, our product liability is insignificant; therefore, management believes product liability accrual as at June 30, 2023 and September 30, 2022 is de minimis.
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 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 Golden Beans as of June 30, 2023 and September 30, 2022, and the utilization of these Golden Beans is not expected to result in an outflow from the Company’s resources embodying economic benefits.
| 15 |
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 allows the Company to carry-forward 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 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 on the Balance Sheet or presenting them as research and development expenses, we included these amounts in employee compensation and benefit expenses within general and administrative expenses for the nine months ended June 30, 2023 and 2022.
Selling Expenses
Selling expenses consist primarily of marketing and promotional service fees 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 nine months ended June 30, 2023 and 2022 were $
| 16 |
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 adopted this standard in the first quarter of fiscal 2023 and evaluated that this new guidance does not have a significant impact on its condensed consolidated financial statements.
In the period from June 2023 through mid-August 2023, the FASB has not issued additional accounting standards updates.
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) 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 the 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 for King Eagle (Tianjin) 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 the remaining amount of King Eagle (Tianjin)’s profit before tax in the corresponding year after deducting 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 withdrawals 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. 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 the expiration.
| 17 |
Business Operation Agreement
Pursuant to the terms of the Business Operation Agreement dated 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 transaction that has substantial impact upon its operations, assets, rights, obligations, and personnel without King Eagle (China)’s written approval. The shareholders of King Eagle (Tianjin) and King Eagle (Tianjin) will take King Eagle (China)’s advice on the appointment or dismissal of directors, employment of King Eagle (Tianjin)’s employees, regular operation, and financial management. 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.
Proxy Agreement
Pursuant to the terms of the Proxy Agreement dated 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 voting 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 consent of the King Eagle (Tianjin) shareholders and King Eagle (China) or upon 30-day notice by King Eagle (China).
Equity Disposal Agreement
Pursuant to the terms of the Equity Disposal Agreement dated 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 all or part of King Eagle (Tianjin)’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 (Tianjin) agreed to give King Eagle (Tianjin) 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 (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 the Equity Pledge Agreement dated 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 the Equity Disposal Agreement (each, an “Agreement” and, collectively, the “Agreements”). If King Eagle (Tianjin) or its shareholders breach their respective contractual obligations under any Agreement, or cause to occur one of the events regarded 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 Agreement is valid until all the obligations due under the Agreements have been fulfilled.
| 18 |
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, 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, 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 King Eagle (Tianjin)’s losses. The Contractual Arrangements are designed so that King Eagle (Tianjin) operates to the benefit of King Eagle (China) and ultimately the Company.
Based on the foregoing VIE Agreements, King Eagle (China) has effective 100% full control of King Eagle (Tianjin), which enables King Eagle (China) to receive all of King Eagle (Tianjin)’s expected residual returns and absorb its expected losses. Accordingly, the Company consolidates the accounts of King Eagle (Tianjin) and its subsidiary 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, the financial positions and results of operations of the Company’s subsidiaries are included in the Company’s financial statements.
VIE Financial Information
Set forth below is the condensed consolidated balance sheets information as of June 30, 2023 and September 30, 2022, condensed consolidated statements of operations and cash flows for the nine month periods ended June 30, 2023 and 2022, and 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:
For purposes of this section:
“Parent entity” refers to Kun Peng International Limited;
“Non-VIE and Non-WFOE 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)”) | |
| ● | Kun Peng Tian Yu Health Technology Co., Ltd. (“KP Tian Yu”) until March 3, 2023 |
“WFOE” refers to King Eagle (China) Co., Ltd. (“King Eagle (China)”) until March 3, 2023 and KP Tian Yu commencing March 3, 2023
“VIE” refers to King Eagle (Tianjin) Technology Co., Ltd. (“King Eagle (Tianjin)”) and King Eagle (Beijing) Technology Co., Ltd (“King Eagle (Beijing)”)
| 19 |
Condensed Consolidated Balance Sheet
As of June 30, 2023
| Parent Only |
Non-VIE and Non-WFOE Subsidiaries Consolidated |
WFOE |
VIE and VIE’s Subsidiary Consolidated |
Elimination Entries and Reclassification Entries | Consolidated | |||||||||||||||||||
| Cash and cash equivalent | $ | $ |
|
$ |
|
$ |
|
$ | $ |
|
||||||||||||||
| Intercompany receivables-current |
|
(2) |
|
(1) |
(
|
) | ||||||||||||||||||
| Total current Assets |
|
|
|
(
|
) |
|
||||||||||||||||||
| Intercompany receivables-noncurrent |
|
(
|
) | |||||||||||||||||||||
| Total non-current Assets |
|
|
|
(
|
) |
|
||||||||||||||||||
| Total assets |
|
|
|
|
(
|
) |
|
|||||||||||||||||
| Intercompany payables |
|
|
(1) |
|
(1) |
(
|
) | |||||||||||||||||
| Total current liabilities |
|
(3) |
|
|
|
(
|
) |
|
||||||||||||||||
| Total noncurrent liabilities |
|
|
|
|||||||||||||||||||||
| Total liabilities |
|
|
|
|
(
|
) |
|
|||||||||||||||||
| Total shareholders’ Equity |
(
|
) |
(
|
) |
(
|
) |
(
|
) |
|
(
|
) | |||||||||||||
| Non-controlling interests |
(
|
) |
(
|
) |
(
|
) | ||||||||||||||||||
| Total equity |
(
|
) |
(
|
) |
(
|
) |
(
|
) |
|
(
|
) | |||||||||||||
| Total liabilities and equity | $ |
|
$ |
|
|
|
(
|
) |
|
|||||||||||||||
| (1) |
|
|
| (2) |
|
|
| (3) |
|
As of September 30, 2022
| Parent Only |
Non-VIE and Non-WFOE Subsidiaries Consolidated |
WFOE | VIE | Elimination Entries and Reclassification Entries | Consolidated | |||||||||||||||||||
| Cash and cash equivalent | $ | $ |
|
$ |
|
$ |
|
$ | $ |
|
||||||||||||||
| Intercompany receivables-current |
|
(2) |
|
(1) |
(
|
) | ||||||||||||||||||
| Total current Assets |
|
|
|
(
|
) |
|
||||||||||||||||||
| Intercompany receivables-noncurrent |
|
(
|
) | |||||||||||||||||||||
| Total non-current Assets |
|
|
|
|
(
|
) |
|
|||||||||||||||||
| Total assets |
|
|
|
|
(
|
) |
|
|||||||||||||||||
| Intercompany payables |
|
(3) |
|
(1) (2) |
|
(1) |
(
|
) | ||||||||||||||||
| Total current liabilities |
|
|
|
|
(
|
) |
|
|||||||||||||||||
| Total noncurrent liabilities |
|
|
|
|||||||||||||||||||||
| Total liabilities |
|
|
|
|
(
|
) |
|
|||||||||||||||||
| Total shareholders’ Equity |
(
|
) |
(
|
) |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||||||
| Non-controlling interests |
(
|
) |
(
|
) |
(
|
) | ||||||||||||||||||
| Total equity |
(
|
) |
(
|
) |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||||||
| Total liabilities and equity |
|
|
|
|
(
|
) |
|
|||||||||||||||||
| (1) |
|
| (2) |
|
| (3) |
|
| 20 |
Condensed Consolidated Statements of Operations Data
| Nine months ended June 30, 2023 | ||||||||||||||||||||||||
| Parent Only |
Non-VIE and Non-WFOE Subsidiaries Consolidated |
WFOE |
VIE and VIE’s Subsidiary Consolidated |
Eliminating Adjustments | Consolidated Totals | |||||||||||||||||||
| Revenue | $ | $ | $ | $ |
|
$ | $ |
|
||||||||||||||||
| Intercompany revenue |
|
|
(
|
) | ||||||||||||||||||||
| Cost of revenue and related tax |
|
|
|
|
||||||||||||||||||||
| Gross profit |
|
|
|
(
|
) |
|
||||||||||||||||||
| Total operating expenses |
|
|
|
|
|
|||||||||||||||||||
| Intercompany operating expenses |
|
(
|
) | |||||||||||||||||||||
| (Loss) income from operations |
(
|
) |
|
(
|
) |
(
|
) |
(
|
) | |||||||||||||||
| Other (expenses) income |
(
|
) |
|
|
|
|||||||||||||||||||
| (Loss) income before income taxes |
(
|
) |
|
(
|
) |
(
|
) |
(
|
) | |||||||||||||||
| Income tax expense | ||||||||||||||||||||||||
| Net (loss) income |
(
|
) |
|
(
|
) |
(
|
) |
(
|
) | |||||||||||||||
| Nine months ended June 30, 2022 | ||||||||||||||||||||||||
| Parent Only |
Non-VIE and Non-WFOE Subsidiaries Consolidated |
WFOE | VIE | Eliminating Adjustments | Consolidated Totals | |||||||||||||||||||
| Revenue | $ | $ | $ | $ |
|
$ | $ |
|
||||||||||||||||
| Intercompany revenue |
|
(
|
) | |||||||||||||||||||||
| Cost of revenue and related tax |
|
|
|
|||||||||||||||||||||
| Gross profit |
|
|
(
|
) |
|
|||||||||||||||||||
| Total operating expenses |
|
|
|
|
|
|||||||||||||||||||
| Intercompany operating expenses |
|
(
|
) | |||||||||||||||||||||
| Loss from operations |
(
|
) |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||||||||
| Other income |
|
|
|
|||||||||||||||||||||
| Loss before income taxes |
(
|
) |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||||||||
| Income tax expense | ||||||||||||||||||||||||
| Net loss | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ | $ |
(
|
) | ||||||||
| 21 |
Condensed Consolidation Schedule of Cash Flows
| Nine months ended June 30, 2023 | ||||||||||||||||||||||||
| Parent Only |
Non-VIE
Subsidiaries Consolidated |
WFOE | VIE and VIE’s Subsidiary |
Eliminating
Adjustments |
Consolidated | |||||||||||||||||||
| Net income (loss) | $ |
(
|
) | $ |
|
$ |
(
|
) | $ |
(
|
) | $ | $ |
(
|
) | |||||||||
| Intercompany receivables |
(
|
) |
(
|
) |
|
|||||||||||||||||||
| Intercompany payables |
|
|
|
|
(
|
) | ||||||||||||||||||
| Net cash provided by (used in) operating activities |
|
(
|
) |
|
|
|
||||||||||||||||||
| - | ||||||||||||||||||||||||
| Net cash used in investing activities |
(
|
) |
(
|
) |
(
|
) | ||||||||||||||||||
| Net cash provided by financing activities |
|
|
||||||||||||||||||||||
| Effect of exchange rate fluctuation on cash | $ | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||||||
| Nine months ended June 30, 2022 | ||||||||||||||||||||||||
| Parent Only |
Non-VIE and Non-WFOE Subsidiaries Consolidated |
WFOE | VIE | Eliminating Adjustments | Consolidated | |||||||||||||||||||
| Net loss | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ | $ |
(
|
) | ||||||||
| Intercompany receivables |
(
|
) |
(
|
) |
|
|||||||||||||||||||
| Intercompany payables |
|
|
|
(
|
) |
(
|
) | |||||||||||||||||
| Net cash provided by (used in) operating activities |
(
|
) |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||||||||
| - | ||||||||||||||||||||||||
| Net cash used in investing activities |
(
|
) |
(
|
) | ||||||||||||||||||||
| Effect of exchange rate fluctuation on cash |
|
|
(
|
) |
|
(
|
) | |||||||||||||||||
The Company consolidated its VIE as of June 30, 2023 and September 30, 2022. The carrying amounts and classification of the VIE’s assets and liabilities included in the consolidated balance sheets are as follows:
| 22 |
| June 30, 2023 | September 30, 2022 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ |
|
$ |
|
||||
| Trade receivable-intercompany |
|
|
||||||
| Advance and prepayments |
|
|
||||||
| Other receivables – third parties |
|
|
||||||
| Other receivables – intercompany |
|
|
||||||
| Amount due from a related party |
|
|
||||||
| Total current assets |
|
|
||||||
| Noncurrent assets | ||||||||
| Right-of-use assets |
|
|
||||||
| Total noncurrent assets |
|
|
||||||
| Total assets |
|
|
||||||
| Liabilities | ||||||||
| Current liabilities | ||||||||
| Trade payables |
|
|
||||||
| Other payables and accrual |
|
|
||||||
| Deferred revenue |
|
|
||||||
| Payroll payable |
|
|
||||||
| Tax payable |
|
|
||||||
| Amounts due to related parties |
|
|
||||||
| Operating lease obligations-current portion |
|
|
||||||
| Total current liabilities |
|
|
||||||
| Noncurrent liabilities | ||||||||
| Operating lease obligations-net of current portion |
|
|
||||||
| Total noncurrent liabilities |
|
|
||||||
| Total liabilities |
|
|
||||||
| Commitment and contingencies | ||||||||
| Equity | ||||||||
| Additional paid-in capital |
|
|||||||
| Accumulated deficits |
(
|
) |
(
|
) | ||||
| Accumulated other comprehensive income |
|
|
||||||
| Total stockholders’ equity |
(
|
) |
(
|
) | ||||
| Non-controlling interests |
(
|
) |
(
|
) | ||||
| Total equity |
(
|
) |
(
|
) | ||||
| Total liabilities and equity | $ |
|
$ |
|
||||
| 23 |
The operating results of the VIE were as follows:
| Three months ended June 30, | Nine months ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenue, net | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Cost of revenue |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||
| Gross profit |
|
|
|
|
||||||||||||
| Operating expenses | ||||||||||||||||
| General and administrative expenses |
|
|
|
|
||||||||||||
| Selling expense |
|
|
|
|
||||||||||||
| Total operating expenses |
|
|
|
|
||||||||||||
| Loss from operations |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||
| Other (expenses) income: | ||||||||||||||||
| Interest income |
|
|
|
|
||||||||||||
| Other (expenses) income |
(
|
) |
|
|
|
|||||||||||
| Total other income, net |
(
|
) |
|
|
|
|||||||||||
| Loss before income taxes |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||
| Income tax expense | ||||||||||||||||
| Net loss |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||
| Less: Net loss attributable to non-controlling interest |
(
|
) |
(
|
) | ||||||||||||
| Net loss attributable to Kun Peng International Ltd | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||
| 24 |
The cash flows of the VIE were as follows:
| Nine months ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ |
(
|
) | $ |
(
|
) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities | ||||||||
| Amortization of right-of-use assets |
|
|
||||||
| Changes in operating assets and liabilities | ||||||||
| Advance and prepayments |
(
|
) |
|
|||||
| Trade receivable – intercompany |
(
|
) | ||||||
| Other receivables – third parties |
|
(
|
) | |||||
| Other receivables - intercompany |
(
|
) |
(
|
) | ||||
| Amount due from a related party | ||||||||
| Security deposits |
(
|
) | ||||||
| Trade payable – third parties |
|
|
||||||
| Trade payable – intercompany |
|
(
|
) | |||||
| Other payables and accrual – third parties |
|
(
|
) | |||||
| Other payables and accrual – intercompany |
|
|||||||
| Deferred revenue |
|
(
|
) | |||||
| Payroll payable |
|
(
|
) | |||||
| Amounts due to related parties |
(
|
) |
|
|||||
| Tax payable |
|
(
|
) | |||||
| Lease liabilities |
(
|
) |
(
|
) | ||||
| Net cash provided by (used in) operating activities |
|
(
|
) | |||||
| Cash flows from financing activities | ||||||||
| Capital contribution |
|
|||||||
| Net cash provided by financing activities |
|
|||||||
| Effect of exchange rate changes on cash |
(
|
) |
(
|
) | ||||
| Net increase (decrease) in cash and cash equivalents |
|
(
|
) | |||||
| Cash and cash equivalents, beginning balance |
|
|
||||||
| Cash and cash equivalents, ending balance | $ |
|
$ |
|
||||
NOTE 4 - ADVANCE AND PREPAYMENTS
Prepayments consisted of the following:
| June 30, | September 30, | |||||||
| 2023 | 2022 | |||||||
| Prepaid rent and building management and utilities | $ |
|
$ |
|
||||
| Prepaid supplies (1) |
|
|
||||||
| Prepaid income tax |
|
|
||||||
| Prepaid VAT tax |
|
|||||||
| Prepaid professional services (2) |
|
|
||||||
| Prepaid others |
|
|
||||||
| Total prepayments | $ |
|
$ |
|
||||
| 25 |
| (1) |
|
| (2) |
As
of September 30, 2022, the ending balance of prepaid professional services included two types of prepayments, $
|
These amounts are expected to be recoverable within twelve (12) months.
NOTE 5 - OTHER RECEIVABLES
Other receivables included the following:
| June 30, | September 30, | |||||||
| 2023 | 2022 | |||||||
| Rental deposits | $ |
|
$ |
|
||||
| Advance to employees |
|
|
||||||
| Short-term borrowing to third parties |
|
|
||||||
| Others |
|
|
||||||
| Total other receivables, net | $ |
|
$ |
|
||||
Advance to employees represents funds provided to our officers and employees for business expenses, such as travel, parking, gasoline, membership, and 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 in cash within a year.
Short-term borrowings to third parties represented capital funding to two third parties. Those loans were interest free and were repaid to King Eagle (Tianjin) on December 11, 2022 and August 11, 2023.
NOTE 6 - PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
| June 30, | September 30, | |||||||
| 2023 | 2022 | |||||||
| Leasehold improvements | $ |
|
$ |
|
||||
| Furniture and fixtures |
|
|
||||||
| Computer equipment |
|
|
||||||
| Office equipment |
|
|
||||||
| Subtotal |
|
|
||||||
| Less: accumulated depreciation |
(
|
) |
(
|
) | ||||
| Total property and equipment, net | $ |
|
$ |
|
||||
The
depreciation expense was $
| 26 |
NOTE 7 - INTANGIBLE ASSETS
| June 30, | September 30, | |||||||
| 2023 | 2022 | |||||||
| Trademarks | $ |
|
$ |
|
||||
| Subtotal |
|
|
||||||
| Less: accumulated amortization |
(
|
) |
(
|
) | ||||
| Total intangible assets, net | $ |
|
$ |
|
||||
Intangible
assets consist of the Company’s trademarks of King Eagle Mall with a useful life of ten years. Approximately $
Amortization
expense was $
NOTE 8 - DEFERRED REVENUE
| June 30, | September 30, | |||||||
| 2023 | 2022 | |||||||
| Advance payments from customers | $ |
|
$ |
|
||||
| Total deferred revenue | $ |
|
$ |
|
||||
Deferred
revenue resulted from transactions where the Company received advanced payments from customers but revenue recognition criteria
under the five-step model have yet to be met. As of June 30, 2023 and September 30, 2022, the Company had total deferred revenue of
$
NOTE 9 - RELATED PARTY BALANCES AND 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 Guoxin Star Network Co., Ltd., which, at that time,
was our related party. 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
Under
the Cooperation Agreement, King Eagle (Tianjin) is required to pay Guoxin Star Network Co., Ltd. approximately $
| Name of related party | Relationship | Nature of transactions | June 30, 2023 | September 30, 2022 | ||||||||
| Guoxin Star Network Co., Ltd |
|
|
$ |
|
$ |
|
||||||
| Total | $ |
|
$ |
|
||||||||
| 27 |
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:
| Name of related party | Relationship | Nature of transactions | June 30, 2023 | September 30, 2022 | ||||||||
| Ms. Jinjing Zhang |
|
|
|
|||||||||
| Ms. Xiujin Wang |
|
|
$ |
|
$ |
|
||||||
| Total | $ |
|
$ |
|
||||||||
NOTE 10 - EQUITY
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 Company’s $ par value 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 had 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 of September 16, 2022 and an effective date of October 18, 2022. No fractional shares were issuable as a result of the forward stock split. After the forward stock split, there are shares of common stock of the Company issued and outstanding. The par value per share remained unchanged at $ per share after the forward stock split.
Preferred stock
The Company’s authorized shares of preferred stock are shares, with a par value of $ per share, 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. shares of preferred stock were issued and outstanding as of June 30, 2023 and September 30, 2022.
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 June 30, 2023 and September 30, 2022, respectively. The issued and outstanding shares of common stock were as of June 30, 2023 and September 30, 2022.
| 28 |
Restricted net assets :
Our ability to pay dividends is primarily dependent on us receiving distributions of funds from our subsidiary or VIE. Relevant PRC statutory laws and regulations permit payments of dividends only out of a company’s retained earnings, if any, as determined in accordance with PRC accounting standards and regulations and after the Company 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 its 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 entities from transferring
funds to the Company in the form of dividends, loans, and advances. As of June 30, 2023 and September 30, 2022, 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 of the VIE that are included in the Company’s consolidated financial statements.
As of June 30, 2023, King Eagle (China), King Eagle (Tianjin), KP Tian Yu, and King Eagle (Bejing) incurred negative net assets which
amounted to $
| 29 |
NOTE 11- REVENUE
The following table presents revenues and the related cost of goods sold disaggregated by customer type for the three and nine months ended June 30, 2023 and 2022:
| Three months ended June 30, | Nine months ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Retail | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Wholesale |
|
|
||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
Cost of Revenue
| Three months ended June 30, | Nine months ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Retail | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Wholesale |
|
|
||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
NOTE 12- INCOME TAXES
The Company accounts for income taxes pursuant to the accounting standards that require 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.
United States
Kun Peng International Ltd is incorporated in the State of Nevada and is subject to 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 nine ended June 30, 2023 and 2022.
British Virgin Islands
KP International is a holding company 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 and 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 utilize the two-tier profits tax rates on its profits tax return. The election is irrevocable. The Company elected KP (Hong Kong) to utilize the two-tier profits tax rates. KP Industrial and KP (Hong Kong) did not earn any income that was derived in Hong Kong for the nine months ended June 30, 2023 and 2022 and, therefore, KP Industrial and KP (Hong Kong) were not subject to Hong Kong profits tax for the periods reported.
| 30 |
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:
| Three months ended June 30, | Nine months ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Current | $ | $ | $ | $ | ||||||||||||
| Federal | ||||||||||||||||
| State | ||||||||||||||||
| Foreign | ||||||||||||||||
| Total current | ||||||||||||||||
| Deferred | ||||||||||||||||
| Federal | ||||||||||||||||
| State | ||||||||||||||||
| Foreign | ||||||||||||||||
| Total deferred | ||||||||||||||||
| Total income tax expense | $ | $ | $ | $ | ||||||||||||
A reconciliation between the Company’s actual provision for income taxes and the provision at the statutory rate is as follows:
| Three months ended June 30, | Nine months ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| 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 |
|
% |
|
% |
|
% |
|
% | ||||||||
| 31 |
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 jurisdiction.
The statute of limitations for the U.S. Internal Revenue Service to assess the income tax returns of 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 that period is extendable to 10 years in the case of potential willful underpayment or evasion.
In accordance with the 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 June 30, 2023 and September 30, 2022, 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 13 - 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 June 30, 2023 and September 30, 2022:
| Assets/liabilities | Classification | June 30, 2023 | September 30, 2022 | |||||||
| 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 | $ |
|
$ |
|
||||||
The operating lease expense for the nine months ended June 30, 2023 and 2022 was as follows:
| Three months ended June 30, | Nine months ended June 30, | |||||||||||||||||
| Lease cost | Classification | 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Operating lease cost | General and administrative | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||
| Total lease cost | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||
| 32 |
Maturities of operating lease liabilities as of June 30, 2023 were as follow:
| Maturity of lease liabilities | Operating leases | |||
| Remaining of 2023 | $ |
|
||
| 2024 |
|
|||
| 2025 |
|
|||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total lease payments | $ |
|
||
| Less: interest |
(
|
) | ||
| Present value of lease payments | $ |
|
||
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 | $ |
|
||
Supplemental information related to operating leases was as follows:
| Three months ended June 30, | Nine months ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| New operating lease assets obtained in exchange for operating lease liabilities | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
The
amortization expense was $
NOTE 14 – COMMITMENTS AND CONTINGENCIES
Purchase and service commitments
King
Eagle (China) and King Eagle (Tianjin) entered into multiple purchase and service commitments. As of June 30, 2023 and September 30,
2022, King Eagle (China) and King Eagle (Tianjin) had purchase and service commitments in the amount of $
Cooperation commitment for Smart Kiosks
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 15 - SUBSEQUENT EVENT
On May 9, 2023, KP Industrial’s director and sole shareholder, KP International Holding, approved a deregistration of KP Industrial. The entity filed a request for a “Notice of No Objection to a Company being Deregistered” with the Hong Kong Inland Revenue Department on the same day. The application for such notice is being reviewed by the Hong Kong Inland Revenue Department. Upon approval and issuance of a “Notice of No Objection” by the Hong Kong Inland Revenue Department, KP Industrial is required to submit an application for deregistration to the Hong Kong Company Registry. We estimate that the entire deregistration process will be completed in January 2024.
As of June 30, 2023, 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.
| 33 |
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 awareness of preventive care among the people in the PRC, we have developed and launched our mobile platform (King Eagle Mall). With cooperation from Guoxin Star Nework Co. Ltd. (“Guoxin Star”), we also started planning the development of physical (Smart Kiosk) platforms. Guoxin Star 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 that was launched in July 2020 and that 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, and 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 arrangements or fulfill customer orders through our outsourced networks.
Our King Eagle Mall customers primarily consist of individual members. As of August 16, 2023, King Eagle Mall had approximately 5,669 members.
Kun Zhi Jian (New Online Platform)
In October 2022, King Eagle (Tianjin) introduced and implemented a new online platform, Kun Zhi Jian, which focuses on promoting and selling our own brand of preventive health care and health related household products to wholesalers. During 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.
Our new online platform, Kun Zhi Jian, focuses on wholesalers. As of August 16, 2023, Kun Zhi Jian had approximately 1,732 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 Kiosk
With support and cooperation from Guoxin Star, we introduced the Smart Kiosk concept. The Smart 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 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.
| 34 |
The construction of Smart Kiosks will be initiated and originally administered by Guoxin Star. However, due to the imposition of COVID-19 quarantines and closures in certain affected areas by the central and local governments of the PRC in 2021, the approval process for our applications for construction permits of Smart Kiosks has been delayed. Although mainland China relaxed its COVID-19 policies and controls in early December 2022 , the PRC local government agencies have experienced a higher volume and longer administrative processing time than normal. We continue to follow up on the status of our applications and we estimate the administrative processing of our application at the local government agencies may be initiated by the end of calendar year 2023.
COVID-19 Update
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 PRC government also fully opened its border to foreigners without requirements of quarantine or application for a health code upon arrival in the PRC in July 2023. Nevertheless, it will take time for the country to recover from the impact of COVID-19 and the effects of the restrictive governmental policies and controls. The local government agencies continue to experience a higher volume and longer processing time than normal. We continue to follow up on the status of our applications and we estimate the administrative processing of our applications at the local government agencies may be resumed by the end of calendar year 2023.
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.
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.
Environmental, Social and Governance Standards
The concept of environmental, social and corporate governance standards or metrics (“ESG”) is an emerging global trend. Management believes the PRC is at the forefront of this global trend, as evidenced by the PRC’s desire to reach peak carbon by 2030 and become carbon neutral by 2060. These goals require companies to start transitioning to a lower-carbon business model. Moreover, corporate reporting on a complete set of ESG metrics will assist regulators to timely adjust their policies and enable investors and customers to make informed decisions. Our management is actively addressing environmental and social responsibility as part of its strategy and goals for the Company. The steps taken include identifying and setting goals in line with the Company’s environmental and social responsibility goals.
ESG represents the three main criteria for investors and customers to evaluate a company’s level of sustainability. Specifically, environmental criteria take into account a company’s performance in protecting the environment; social criteria examine how it manages relationships with employees, suppliers, customers, and communities; and governance criteria deal with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
Environment. Our Company has been implementing the concept of environmental protection by utilizing capital resources for enhancing product quality, reviewing the practices of manufacturers, including the sourcing and sustainability of packaging materials, such as single-use plastics, identifying a growing demand for natural or organic products and ingredients, understanding evolving consumer concerns regarding the effects of ingredients or substances present in products, changing consumer sentiment toward non-local products or sources, and changing perceptions of environmental impacts (including packaging, energy and water use and waste management). Our Company has initiated application of a sustainable environmental protection packaging, the newly designed selene-rich egg packaging, which reduces environmental pollution.
| 35 |
Social. The value of a company is not only reflected in the profits and value it creates, but also in its contribution to society. We are striving as a business to give back to society in five areas: health, quality, partnership, environment, and public welfare. We are actively addressing social concerns, such as participating in rural revitalization tourism, supporting the development of our employees, promoting the standardized operation of the industry, and responding to our government’s call for low-carbon green development. Recently, a number of online media, including Xinhua News Agency, Tencent, China Fortune, and Toutiao praised our Company’s employees who were volunteers in caring for autistic teenagers.
Corporate. Since the Company was established, we have attempted to be a major participant in the digitalization of business and commercialization of digital businesses. From a series of operations, such as member use, purchase experience, and data viewing, King Eagle Mall provides functions, such as one-click operation, real time information feedback, and intelligent recommendations. In the process of deepening the digital strategy of King Eagle Mall, the overall strength of our Company has also significantly improved, and it can provide consumers with a new shopping experience in the future.
As an international start-up company, we will be addressing, identifying, and setting our ESG goals. These will be further disclosed in future filings of our periodic reports with the Securities and Exchange Commission.
Financial Operations Overview
Results of Operations for the three months ended June 30, 2023 and 2022
| Three Months Ended June 30, | ||||||||||||||||
| 2023 | 2022 | |||||||||||||||
| Amount |
% of revenue |
Amount |
% of revenue |
|||||||||||||
| Revenues | $ | 460,643 | 100.0 | % | $ | 642,596 | 100.0 | % | ||||||||
| Cost of revenues | 64,878 | 14.1 | 105,597 | 16.4 | ||||||||||||
| Gross profit | 395,765 | 85.9 | 536,999 | 83.6 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative expenses | 423,757 | 92.0 | 460,024 | 71.6 | ||||||||||||
| Selling expense | 1,231,189 | 267.3 | 767,506 | 119.4 | ||||||||||||
| Total operating expenses | 1,654,946 | 359.3 | 1,227,530 | 191.0 | ||||||||||||
| Loss from operations | (1,259,181 | ) | (273.4 | ) | (690,531 | ) | (107.4 | ) | ||||||||
| Other (expenses) income | (10,230 | ) | (2.2 | ) | 532 | 0.1 | ||||||||||
| Loss before income taxes | (1,269,411 | ) | (275.6 | ) | (689,999 | ) | (107.3 | ) | ||||||||
| Income tax expense | - | - | - | - | ||||||||||||
| Net loss | $ | (1,269,411 | ) | (275.6 | )% | $ | (689,999 | ) | (107.3 | )% | ||||||
Revenues
For the three months ended June 30, 2023 and 2022, revenues amounted to $460,643 and $642,596, respectively.
The following table presents revenues disaggregated by customer type for the three months ended June 30, 2023 and 2022:
| Three months ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Retail | $ | 49,634 | $ | 642,596 | ||||
| Wholesale | 411,009 | - | ||||||
| Total | $ | 460,643 | $ | 642,596 | ||||
| 36 |
Our retail revenue primarily included the sale of health care and health related household products to our retail customers via our mobile application, King Eagle Mall, which was launched in July 2020. Our wholesale revenue came from our new online platform, Kun Zhi Jian, which was launched in October 2022. This new online platform focuses on promoting and selling our own brand of preventive health care related products, such as the thermal therapy cabin, to our wholesalers. We recognize our revenue net of sub-charges and value-added tax (“VAT”).
Compared to the three months ended June 30, 2022, we generated substantially lower revenues during the three months ended June 30, 2023 due to the slowdown of economic development in the PRC. Our retail revenue from King Eagle Mall during the three months ended June 30, 2023 plummeted by 92% compared to the same period in 2022. To boost our sales, we lowered the retail price of our products. Accordingly, our retail revenue from King Eagle Mall significantly declined during the three months ended June 30, 2023. Our new online platform, Kun Zhi Jian, was launched in October 2022. Accordingly, we derived approximately $411,009 in wholesale revenue during the three months ended June 30, 2023.
Cost of revenue
Our cost of revenue for the three months ended June 30, 2023 and 2022 was $64,878 and $105,597, respectively. This primarily included the purchase of health care and health related household products from our suppliers. We disaggregated our cost of revenue by customer type, retail and wholesale, for the three months ended June 30, 2023 and 2022:
| Three months ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Retail | $ | 19,386 | $ | 105,597 | ||||
| Wholesale | 45,492 | - | ||||||
| Total | $ | 64,878 | $ | 105,597 | ||||
We incurred a lower cost of revenue related to our retail revenue for the three months ended June 30, 2023 compared to the same period in 2022 because we generated lower retail volume and amount from King Eagle Mall during the three months ended June 30, 2023, as discussed above. Since our new online platform, Kun Zhi Jian, was launched in October 2022, we incurred $45,492 cost of goods sold related to our wholesale revenue in the three months ended June 30, 2023.
Gross profit
For the three months ended June 30, 2023 and 2022, the gross profit and gross profit margin for our retail business of King Eagle Mall amounted to $30,248 or 60.9% and $536,999 or 83.6%, respectively. Our gross profit or margin for our retail business of King Eagle Mall for the three months ended June 30, 2023 was substantially lower than that for the same period in 2022. As previously discussed, our retail revenue amount decreased in the current period as we reduced the retail price for our products.
The gross profit and margin for our wholesale business of Kun Zhi Jian for the three months ended June 30, 2023 was $365,517 or 88.9%. Our new online platform, Kun Zhi Jian, was launched in October 2022 and accordingly, we did not incur revenue and cost of revenue related to our wholesale revenue in the three months ended June 30, 2022.
Operating expenses
Our operating expenses consist of general and administrative expenses and selling expense. For the three months ended June 30, 2023 and 2022, total operating expenses were $1,654,946 and $1,227,530, respectively. We experienced a higher amount of operating expenses in the three months ended June 30, 2023 compared to the same period in 2022 primarily due to a higher selling expense.
General and administrative expenses
General and administrative expenses for the three months ended June 30, 2023 and 2022 were $423,757 and $460,024, respectively. Our general and administrative expenses for the three months ended June 30, 2023 slightly decreased by $36,267 compared to the same period in 2022. We reduced our office rent and building management fee by $55,961 to minimize our overhead cost. On the other hand, our salary expense increased by $16,961 as we increased the employee benefits for our administrative employees during the three months ended June 30, 2023.
| 37 |
Our general and administrative expenses for the three months ended June 30, 2023 and 2022 were comprised of the following:
|
Three Months Ended June 30, |
||||||||
| 2023 | 2022 | |||||||
| Employee compensation and benefit | $ | 147,338 | $ | 130,377 | ||||
| Office rent and building management | 78,428 | 134,389 | ||||||
| Office supplies and meeting | 13,788 | 25,390 | ||||||
| Professional services fee | 118,745 | 122,648 | ||||||
| Travel, transportation and gasoline | 24,333 | 9,328 | ||||||
| Meals and entertainment | 13,709 | 12,688 | ||||||
| Depreciation and amortization | 14,649 | 7,071 | ||||||
| Others | 12,767 | 18,133 | ||||||
| Total | $ | 423,757 | $ | 460,024 | ||||
Selling expense
For the three months ended June 30, 2023 and 2022, our selling expense, which was primarily incurred by our sales and marketing department, was $1,231,189 and $767,506, respectively. Our selling expense in the three months ended June 30, 2023 was $463,683 higher compared to the same period in 2022. The spike in our selling expense was primarily driven by an increase in service agent fee by $256,282, meeting by $44,759, and entertainment by $199,692. During the three months ended June 30, 2023, with the goal of improving our sales revenue and expanding our market share, our service agents and our sales and marketing team launched a series of small-scale promotions and marketing activities to promote our new platform and boost sales. Our overall increase in selling expense was offset by a decrease in employee compensation and benefit expense by $37,238 as we eliminated three managerial headcounts in our sales and marketing department in the three months ended June 30, 2023. To further streamline our selling costs, we no longer engaged external customer support services in the three months ended June 30, 2023.
Our selling expense included the following:
|
Three Months Ended June 30, |
||||||||
| 2023 | 2022 | |||||||
| Service agents | $ | 874,671 | $ | 618,389 | ||||
| Employee compensation and benefit | 69,703 | 106,941 | ||||||
| Office supplies and meeting | 51,570 | 6,811 | ||||||
| Travel, transportation and gasoline | 18,862 | 12,928 | ||||||
| Meals and entertainment | 200,912 | 1,220 | ||||||
| Depreciation and amortization | 805 | 1,065 | ||||||
| Advertising | 14,666 | 20,152 | ||||||
| Total | $ | 1,231,189 | $ | 767,506 | ||||
Other (expenses) income
Other (expenses) income primarily included bank interest income, foreign exchange gain or loss, and other service income.
Our other (expenses) income for the three months ended June 30, 2023 and 2022 was $(10,230) and $532, respectively. Our other expenses incurred during the three months ended June 30, 2023 primarily related to a foreign exchange loss of $10,446, offset by interest income of $126, and other income of $90.
Income tax expense
For the three months ended June 30, 2023 and 2022, our income tax expense was nil. During the three months ended June 30, 2023, we generated a net loss before income tax and recognized a full valuation allowance against our deferred tax assets, which included net operating loss carry-forwards. Management believes it is more likely than not that we will not recognize our net operating loss carry-forwards in the near future or before expiration. During the three months ended June 30, 2022 King Eagle (Tianjin) incurred book income before income tax and taxable income and utilized the net operating loss carry-forwards 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. Therefore, we recognized a full valuation allowance against the deferred tax assets of these entities as we believe it is more likely than not that these entities will not recognize their respective deferred tax assets in the near future.
Net loss
As a result of the factors discussed above, we posted a net loss in the amount of $1,269,411 and $689,999 for the three months ended June 30, 2023 and 2022, respectively.
| 38 |
Foreign currency translation adjustment
The functional currency for our operations in the PRC is the Chinese Yuan or Renminbi (“RMB”); the functional currency for our operations in Hong Kong is the Hong Kong Dollar (“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 of $239,743 and $145,766 for the three months ended June 30, 2023 and 2022, respectively.
Comprehensive loss
We recognized a comprehensive loss of $1,029,668 for the three months ended June 30, 2023 compared to a comprehensive loss of $544,233 for the same period in 2022.
Results of Operations for the nine months ended June 30, 2023 and 2022
| Nine months ended June 30, | ||||||||||||||||
| 2023 | 2022 | |||||||||||||||
| Amount |
% of revenue |
Amount |
% of revenue |
|||||||||||||
| Revenues | $ | 1,231,712 | 100.0 | % | $ | 7,330,768 | 100.0 | % | ||||||||
| Cost of revenues | 246,102 | 20.0 | 1,152,271 | 15.7 | ||||||||||||
| Gross profit | 985,610 | 80.0 | 6,178,497 | 84.3 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative expenses | 1,383,119 | 112.3 | 1,278,220 | 17.4 | ||||||||||||
| Selling expense | 2,323,347 | 188.6 | 5,901,192 | 80.5 | ||||||||||||
| Total operating expenses | 3,706,466 | 300.9 | 7,179,412 | 97.9 | ||||||||||||
| Loss from operations | (2,720,856 | ) | (220.9 | ) | (1,000,915 | ) | (13.6 | ) | ||||||||
| Other income | 99,111 | 8.0 | 34,097 | 0.5 | ||||||||||||
| Loss before income taxes | (2,621,745 | ) | (212.9 | ) | (966,818 | ) | (13.1 | ) | ||||||||
| Income tax expense | - | - | - | - | ||||||||||||
| Net loss | $ | (2,621,745 | ) | (212.9 | )% | $ | (966,818 | ) | (86.6 | )% | ||||||
Revenues
For the nine months ended June 30, 2023 and 2022, revenues amounted to $1,231,712 and $7,330,768, respectively.
The following table presents revenues disaggregated by customer type for the nine months ended June 30, 2023 and 2022:
| Nine months ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Retail | $ | 113,073 | $ | 7,330,768 | ||||
| Wholesale | 1,118,639 | - | ||||||
| Total | $ | 1,231,712 | $ | 7,330,768 | ||||
Our retail revenue primarily included the sale of health care and health-related household products to our retail customers via our mobile application, King Eagle Mall, which was launched in July 2020. Our wholesale revenue came from our new online platform, Kun Zhi Jian, which was launched in October 2022. This new online platform focuses on promoting and selling our own brand of preventive health care related products, such as the thermal therapy cabin, to our wholesalers. We recognize our revenue net of sub-charges and value-added tax (“VAT”).
For the nine months ended June 30, 2023, we generated substantially lower revenues than during the nine months ended June 30, 2022. Our retail revenue from King Eagle Mall during the nine months ended June 30, 2023 plummeted by 99% compared to the same period in 2022. Due to the COVID-19 resurgence and significant rise of COVID-19 cases after the reopening in December 2022, the shortage of logistics and delivery capacity in the affected communities and the slowdown of economic development in the PRC, we lowered the retail price of our products. Accordingly, our retail revenue from King Eagle Mall significantly slid during the nine months ended June 30, 2023. Our new online platform, Kun Zhi Jian, was launched in October 2022. Accordingly, we derived approximately $1,118,639 in wholesale revenue during the nine months ended June 30, 2023.
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Cost of revenue
Our cost of revenue for the nine months ended June 30, 2023 and 2022 was $246,102 and $1,152,271, respectively. This primarily included the purchase of health care and health-related household products from our suppliers. The following table presents our cost of revenue disaggregated by customer type, retail and wholesale, for the nine months ended June 30, 2023 and 2022:
| Nine months ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Retail | $ | 45,263 | $ | 1,152,271 | ||||
| Wholesale | 200,839 | - | ||||||
| Total | $ | 246,102 | $ | 1,152,271 | ||||
We incurred a lower cost of revenue related to our retail revenue for the nine months ended June 30, 2023 compared to the same period in 2022 because we generated lower retail revenue volume and amount from King Eagle Mall during the nine months ended June 30, 2023 as discussed above. Since our new online platform, Kun Zhi Jian, was launched in October 2022, we incurred $246,102 cost of goods sold related to our wholesale revenue in the nine months ended June 30, 2023 and nil in the nine months ended June 30, 2022.
Gross profit
For the nine months ended June 30, 2023 and 2022, the gross profit and margin for our retail business of King Eagle Mall amounted to $67,810, or 60%, and $6,178,497, or 84.3%, respectively. Our gross profit or margin for our retail business of King Eagle Mall for the nine months ended June 30, 2023 was substantially lower than that for the same period in 2022. As previously discussed, our retail revenue amount decreased in the current period as we reduced the retail price for our products.
The gross profit and margin for our wholesale business of Kun Zhi Jian for the nine months ended June 30, 2023 was $917,800, or 82%. Our new online platform, Kun Zhi Jian, was launched in October 2022 and, accordingly, we did not incur revenue and cost of revenue related to our wholesale revenue in the nine months ended June 30, 2022.
Operating Expenses
Our operating expenses consist of general and administrative expenses and selling expense. For the nine months ended June 30, 2023 and 2022, our total operating expenses were $3,706,466 and $7,179,412, respectively. We experienced a reduced amount of operating expenses in the nine months ended June 30, 2023 compared to the same period in 2022 primarily due to the lower selling expense.
General and administrative expenses
General and administrative expenses for the nine months ended June 30, 2023 and 2022 were $1,383,119 and $1,278,220, respectively. The slight increase in general and administrative expenses during the nine months ended June 30, 2023 by $104,899 was triggered by an increase in professional service fees by $254,177, travel, transportation, and gasoline by $26,755, offset by a decrease in employee compensation and benefits by $68,287, office rent and building management by $82,926. During the nine months ended June 30, 2023, we incurred additional professional fees and travel, transportation, and gasoline for exploring new business and setting up business events. We reduced our administrative headcount by 3 from 33 employees for the nine months ended June 30, 2022 to 30 employees for the same period in 2023. We also cancelled our office lease in Tianjin to streamline our overhead costs.
Our general and administrative expenses for the nine months ended June 30, 2023 and 2022 were comprised of the following:
| Nine months ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Employee compensation and benefit | $ | 378,630 | $ | 446,916 | ||||
| Office rent and building management | 271,977 | 354,903 | ||||||
| Office supplies and meeting | 30,247 | 41,895 | ||||||
| Professional services fee | 557,977 | 303,800 | ||||||
| Travel, transportation and gasoline | 43,690 | 16,935 | ||||||
| Meals and entertainment | 33,722 | 35,851 | ||||||
| Depreciation and amortization | 44,102 | 39,678 | ||||||
| Others | 22,774 | 38,242 | ||||||
| Total | $ | 1,383,119 | $ | 1,278,220 | ||||
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Selling expense
Our selling expense, which was primarily incurred by our sales and marketing department, for the nine months ended June 30, 2023 and 2022, were $2,323,347 and $5,901,192, respectively. Compared to the nine months ended June 30, 2022, our selling expenses for the nine months ended June 30, 2023 declined by $3,577,845, or 60.6%. The plunge was primarily driven by a decrease in service agent fees of $3,767,888 as marketing and promotional service fees to our service agents declined significantly. Additionally, our employee compensation and benefit expense decreased by $208,324 as we reduced the headcount in our sales and marketing department by five employees in the nine months ended June 30, 2023 from eight employees in the nine months ended June 30, 2022 to three employees in the same period in 2023. To further streamline our selling costs, we no longer engaged external customer support services in the nine months ended June 30, 2023. On the other hand, our sales and marketing department launched small-scale marketing and promotional activities for our new platform during the nine months ended June 30, 2023. Accordingly, our total selling expense was offset by increases in meetings of $105,443, meals and entertainment of $299,034, and advertising of $23,830.
Our selling expense included the following:
| Nine months ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Service agents | $ | 1,506,180 | $ | 5,274,068 | ||||
| Employee compensation and benefit | 193,286 | 401,610 | ||||||
| Office supplies and meeting | 162,349 | 56,906 | ||||||
| Travel, transportation and gasoline | 49,508 | 64,263 | ||||||
| Meals and entertainment | 350,949 | 51,915 | ||||||
| Depreciation and amortization | 2,423 | 4,214 | ||||||
| Advertising | 58,612 | 34,782 | ||||||
| Others | 40 | 13,434 | ||||||
| Total | $ | 2,323,347 | $ | 5,901,192 | ||||
Other income
Other income primarily included bank interest income, foreign exchange gain or loss, and other service income.
Our other income for the nine months ended June 30, 2023 and 2022 was $99,111 and $34,097, respectively. Since the first quarter of 2022, we recognized an additional source of income related to online technical support services with respect to our supplement products provided to a corporate customer. During the nine months ended June 30, 2022, we recognized $36,130 related to the provision of this service in other income, offset by a loss on disposal of furniture and fixture of $3,809. However, such service was not requested for 2023 by this corporate customer due to the economic slowdown and low sales volume of the lutein supplement products. Compared to the interest income of $1,776 earned in the nine months ended June 30, 2022, our interest income in the same period in 2023 was $218 due to a significantly lower average monthly cash balance in our bank accounts as a result of lower revenue. Government grants amounted to $97,970 and nil for the nine months ended June 30, 2023 and 2022.
Income tax expense
For the nine months ended June 30, 2023 and 2022, the income tax expense of the Company was nil. During the nine months ended June 30, 2023 and 2022, the Company generated net losses 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 carryforward in the near future or before it expires.
Net loss
As a result of the factors discussed above, the Company posted a net loss in the amount of $2,621,745 and $966,818 for the nine months ended June 30, 2023 and 2022, respectively.
Foreign currency translation adjustment
The functional currency of our operation in the PRC is Chinese Yuan or Renminbi (“RMB”) and 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 of $152,425 and $111,684 for the nine months ended June 30, 2023 and 2022, respectively.
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Comprehensive loss
The Company recognized a comprehensive loss in the amount of $2,469,320 and $855,134 for the nine months ended June 30, 2023 and 2022, respectively.
Liquidity and capital resources
As of June 30, 2023 and September 30, 2022, we had a cash and cash equivalents balance of $575,789 and $267,131, respectively.
For the nine months ended June 30, 2023, net cash provided by operating activities totaled $142,789. Operating cash inflow was mainly attributable to advance payments from our customers, $1,370,302, an increase in trade creditors, $1,052,509, an increase in other payable, $161,547, an increase in payroll payable, $10,930, tax payable, $124,620 and a non-cash item, depreciation and amortization, $46,525. The overall cash inflow was offset by the net loss, $2,621,745.
Net cash used in investing activities totaled $1,177, which was primarily related to the acquisition of trademarks.
Net cash provided by financing activities totaled $200,327, which was primarily related to the contribution from shareholders.
For the nine months ended June 30, 2022, net cash used in operating activities totaled $1,689,741. Operating cash outflow was mainly attributable to the net loss of $966,818, a decrease in trade and other payables of $658,014 and lease payments to lessors of $353,325. The cash outflow was offset by non-cash items: depreciation and amortization of $43,892, right-of-assets amortization of $305,054, and a loss on disposal of property and equipment of $3,809.
Net cash used in investing activities totaled $95,981, including the purchase of office and computer equipment of $856 and a payment for construction-in-progress related to the renovation of our new office in Beijing of $95,125.
There was no financing activity for the nine months ended June 30, 2022.
The following table sets forth a summary of changes in our working capital as of June 30, 2023 and September 30, 2022:
| June 30, | September 30, | |||||||
| 2023 | 2022 | |||||||
| Current assets | $ | 1,255,705 | $ | 917,479 | ||||
| Current liabilities | 7,666,084 | 5,172,077 | ||||||
| $ | (6,410,379 | ) | $ | (4,254,598 | ) | |||
We require cash of approximately $3.4 million within the next twelve months, primarily related to third party vendor payables. As of June 30, 2023, we received customer advances in the amount of approximately $4.2 million. We anticipate that approximately $1.5 million and $2.7 million of this advance receipt will be recognized in revenue in fiscal years 2023 and 2024, respectively. Management has agreed that the amount received is non-refundable. However, this term is not binding by any written contractual agreement. Therefore, customers may have the right to challenge and demand the advances be refunded under relevant commercial laws and regulations. Additionally, we had approximately $0.3 million in commitments related to purchase and service agreements and the cooperation agreement for Smart Kiosks as of June 30, 2023.
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 refunds of their advanced payments, we will continue to focus on increasing our revenue through our online platforms. In October 2022, we introduced and implemented our second online platform, Kun Zhi Jian, which focuses on promoting and selling our own brand of health care-related products, particularly the thermal therapy cabin, to wholesalers and retailers. We will continue to engage service agents to promote our products and reduce our administrative overhead costs, such as the restructuring of our administrative department. Simultaneously, our directors and stakeholders continue to financially support our operations. We believe that such measures will improve our liquidity during 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 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 on 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 nine months ended June 30, 2023, although the Company incurred cash inflows from operating activities and financing activities of $142,789 and $200,327, it incurred a net loss of $2,621,745 and a negative working capital of $6,410,379. The economy in China was slowdown even after the COVID-19 restrictions in China had been released. Our monthly sales gradually picked up from $128,512 in the six months ended March 31, 2023 to $136,857 in the nine months ended June 30, 2023. On the other hand, there remains a delay in the approval process for our permit for the construction of Smart Kiosks as local government agencies continue to experience a higher volume and longer processing time than normal. 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 the Company’s financial liquidity. Options under consideration in the review process include, but are not limited to, increasing sales through the Company’s online business , reducing overhead costs, obtaining advances of funds from the Company’s stockholders and directors, or financing through the issuance of shares. Since the first quarter of 2022, the Company has been focusing on increasing its revenue through its new online platform, Kun Zhi Jian, to explore wholesale markets. This online platform focuses on promoting and selling our own brand of preventive health care products to wholesalers. The Company also launched advertising campaigns to promote its own brand. The Company streamlined its administrative overhead costs. For example, we reduced the compensation and benefits of our administrative and managerial employees and decreased lease expense which continues into 2023.
In order to continue as a going concern for the next 12 months, the Company continues to focus on increasing its revenue through its online platforms and streamlining its overhead costs or obtaining financing from its stockholders or directors. Each of our service agents plans to launch three marketing campaigns every week to promote our own brand products, particularly thermal therapy cabins. 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.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements, including arrangements that would affect our liquidity, capital resources, market risk support, credit risk support, or other benefits.
Future Financings
We will continue to rely on equity sales of our common stock 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 for the fiscal year ended September 30, 2022 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 for the fiscal year ended September 30, 2022 previously filed with the SEC.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As a smaller reporting company, we are not required to respond to this item.
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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-15(e) 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 their evaluation as of the end of the quarter ended June 30, 2023, 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 directors. |
Management’s Report on Internal Control over Financial Reporting
As of June 30, 2023, 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 third fiscal quarter ended June 30, 2023 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
Not applicable
Item 6. Exhibits
| Exhibit | ||
| Number | Description | |
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act | |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act | |
| 32.1 | Certification of Chief Executive Officer Under Section 1350 as Adopted Pursuant Section 906 of the Sarbanes-Oxley Act | |
| 32.2 | Certification of Chief Financial Officer Under Section 1350 as Adopted Pursuant Section 906 of the Sarbanes-Oxley Act | |
| 101.INS | Inline XBRL Instance Document | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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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: August 21, 2023 | By: | /s/ Zhuang Richun |
| Zhuang Richun, President | ||
| Date: August 21, 2023 | By: | /s/ Zhang Yuanyuan |
| Zhang Yuanyuan, Chief Financial Officer | ||
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