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)
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| (State or Other Jurisdiction of | (IRS Employer | |
| Incorporation or Organization) | Identification Number) |
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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
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller
reporting company | |
| Emerging
growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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Yes
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As of February 20, 2024, the registrant had shares of common stock issued and outstanding.
FORM 10-Q
KUN PENG INTERNATIONAL LTD.
INDEX
| 1 |
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)
| December 31, | September 30, | |||||||||
| Note | 2023 | 2023 | ||||||||
| Assets | ||||||||||
| Current assets | ||||||||||
| Cash and cash equivalents | $ | $ | ||||||||
| Trade receivable, net | 4 | |||||||||
| Advance and prepayments | 5 | |||||||||
| Other receivables | 6 | |||||||||
| Inventory | 7 | |||||||||
| Total current assets | ||||||||||
| Noncurrent assets | ||||||||||
| Property and equipment, net | 8 | |||||||||
| Intangible assets, net | 9 | |||||||||
| Security deposits | ||||||||||
| Right-of-use assets | 15 | |||||||||
| Others | ||||||||||
| Total noncurrent assets | ||||||||||
| Total assets | $ | $ | ||||||||
| Liabilities | ||||||||||
| Current liabilities | ||||||||||
| Trade and other payables | ||||||||||
| Deferred revenue | 10 | |||||||||
| Payroll payable | ||||||||||
| Tax payable | ||||||||||
| Amounts due to related parties | 11 | |||||||||
| Operating lease obligations, current portion | 15 | |||||||||
| Total current liabilities | ||||||||||
| Noncurrent liabilities | ||||||||||
| Operating lease obligations, net of current portion | 15 | |||||||||
| Total noncurrent liabilities | ||||||||||
| Total liabilities | ||||||||||
| Commitment and contingencies | ||||||||||
| Equity | ||||||||||
| Preferred stock, $ par value, shares authorized; shares issued and outstanding as of December 31, 2023 and September 30, 2023 | 12 | |||||||||
| Common stock, $ par value, shares authorized; shares issued and outstanding as of December 31, 2023 and September 30, 2023 | 12 | |||||||||
| Additional paid-in capital | 12 | |||||||||
| Accumulated deficits | ( | ) | ( | ) | ||||||
| Accumulated other comprehensive income | ||||||||||
| Total stockholders’ equity | ( | ) | ( | ) | ||||||
| Non-controlling interests | ( | ) | ( | ) | ||||||
| Total equity | ( | ) | ( | ) | ||||||
| Total liabilities and equity | $ | $ | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 2 |
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 December 31, | ||||||||||
| Note | 2023 | 2022 | ||||||||
| Revenue, net | 13 | $ | $ | |||||||
| Cost of revenue | 13 | ( | ) | ( | ) | |||||
| Gross profit | ||||||||||
| Operating expenses | ||||||||||
| General and administrative expenses | ||||||||||
| Selling expense | ||||||||||
| Total operating expenses | ||||||||||
| Loss from operations | ( | ) | ( | ) | ||||||
| Other income: | ||||||||||
| Interest income | ||||||||||
| Other income | ||||||||||
| Total other income, net | ||||||||||
| Loss before income taxes | ( | ) | ( | ) | ||||||
| Income tax expense | 14 | |||||||||
| Net loss | ( | ) | ( | ) | ||||||
| Less: Net loss attributable to non-controlling interest | ( | ) | ||||||||
| Net loss attributable to Kun Peng International Ltd | ( | ) | ( | ) | ||||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ||||||
| Comprehensive loss | ( | ) | ( | ) | ||||||
| Less: Comprehensive loss attributable to non-controlling interest | ( | ) | ||||||||
| Comprehensive loss attributable to Kun Peng International Ltd | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share attributable to common stockholders | ||||||||||
| Basic and diluted | $ | ) | $ | ) | ||||||
| Weighted average shares used to compute net loss per share attributable to common stockholders | ||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 3 |
KUN PENG INTERNATIONAL LTD
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
(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 | income | equity | interest | equity | |||||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||
| Capital contribution | - | |||||||||||||||||||||||||||||||
| Net loss attributable to common stockholders | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Net loss attributable to noncontrolling interest | - | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance, December 31, 2023 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||
| 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* | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Net loss attributable to common stockholders | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Foreign currency translation adjustment | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||
| * |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 4 |
KUN PENG INTERNATIONAL LTD
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In U.S. Dollars, except share data or otherwise stated)
Three Months Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | ( | ) | ( | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of right-of-use assets | ||||||||
| Changes in operating assets and liabilities | ||||||||
| Advance and prepayments | ( | ) | ||||||
| Trade receivables | ( | ) | ||||||
| Other receivables | ( | ) | ( | ) | ||||
| Inventory | ||||||||
| Trade payables | ||||||||
| Other payables and accrual | ( | ) | ||||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Payroll payable | ( | ) | ||||||
| Amounts due to related parties | ||||||||
| Tax payable | ( | ) | ||||||
| Lease liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities | ||||||||
| Acquisition of property and equipment and construction-in-progress | ( | ) | ||||||
| Acquisition of trademarks | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Effect of exchange rate changes on cash | ||||||||
| Net change in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents, beginning balance | ||||||||
| Cash and cash equivalents, ending balance | $ | $ | ||||||
| Supplementary cash flows information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income tax | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 5 |
KUN PENG INTERNATIONAL LTD
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 December 31, 2023
Preferred stock: ● with par value $ per share
● shares issued and outstanding as of December 31, 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
● Deregistration from Hong Kong Inland Revenue Department and Hong Kong Company Registry approved on February 2, 2024 |
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$) |
||||||
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”) since March 3, 2023
●
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 $
Paid-in
capital approximately $ |
||||||
| King Eagle (Huai’an) Health Management Co., Ltd. | ● a limited liability company incorporated in the People’s Republic of China
●
Incorporated on |
|
Registered
capital of $
Paid-in
capital approximately $ |
|||||
| Kun Zhi Jian (Huai’an) Technology Co., Ltd. | ● a limited liability company incorporated in the People’s Republic of China
●
Incorporated on |
Registered
capital of $ |
||||||
Kun Zhi Jian (Shandong) Health Management Co., Ltd
|
● a limited liability company incorporated in the People’s Republic of China
●
Incorporated on |
Registered
capital of $ |
||||||
| Chengdu Wenjiang Pengrun Internet Healthcare Co., Ltd | ● a limited liability company incorporated in the People’s Republic of China
●
Incorporated on |
Registered
capital of $ |
||||||
| 6 |
Authorized Shares and Name Change
Effective
as of September 9, 2021, the Company’s Articles of Incorporation were amended to change the name of the Company from CX Network
Group, Inc. to Kun Peng International Limited. (“KPIL”) and to increase the Company’s authorized capital to
Effective October 12, 2022, we increased our authorized common stock from shares, par value $, to shares, par value $, and on October 18, 2022, we effected a 10:1 forward stock split after which we have shares of common stock issued and outstanding.
On November 8, 2022, the Company changed its name from CX Network Group, Inc. to Kun Peng International Ltd. and its trading symbol was changed to “KPEA.”
On November 11, 2022, the Company received an electronic notice that OTC Markets had approved its application for uplisting from OTC Pink to the OTCQB Venture Market (OTCQB). The Company’s securities commenced trading on the OTCQB at the market open on November 14, 2022. The Company’s shares trade on the OTCQB under the current ticker symbol, “KPEA.”
Kun Peng International Holding Limited
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 Kun Peng (China) Industrial Development Company Limited (“KP (China)”), which was incorporated in Hong Kong on August 11, 2017, at a cash consideration of approximately $ (HK$). After the ownership transfer, KP International Holding became the sole shareholder of KP (China). KP International Holding is a holding company.
Kun Peng (China) Industrial Development Company Limited
Kun
Peng (China) Industrial Development Company Limited (“KP (China)”) 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 (China) is ordinary shares at $
| 7 |
On August 24, 2023, we filed an application with the Companies Registry of Hong Kong for deregistration and dissolution of KP (China). We expect that the company will be dissolved by March 2024.
Kun Peng (Hong Kong) Industrial Development Limited
Kun Peng (Hong Kong) Industrial Development Limited (“KP (Hong Kong)”) was incorporated as a limited liability company in Hong Kong on June 21, 2021. It is a holding company and is wholly owned by Kun Peng International Holding Limited. The share capital of this entity upon formation is $ (HK$).
King Eagle (China) Co., Ltd.
King
Eagle (China) Co., Ltd. (“King Eagle (China)”) was incorporated as a limited liability company in Beijing Economic
Technological Development Zone in the People’s Republic of China (“the PRC”) on March 20, 2019 with a registered
capital of approximately $
On
March 26, 2021, Guoxin Ruilian Group Co., Ltd entered into equity transfer agreements with KP (China) 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 transferred an
On
November 1, 2022, KP (China) entered into ownership transfer agreements with Kun Peng (Hong Kong) Industrial Development Limited and
Kun Peng Tian Yu Health Technology Co., Ltd. The agreements provided that KP (China) would transfer
| 8 |
As discussed below, King Eagle (China) has entered into agreements (the “VIE Agreements”) with King Eagle (Tianjin) Technology Co., Ltd. and its shareholders through which King Eagle (China) controls and receives the economic benefits of King Eagle (Tianjin) Technology Co., Ltd.’s business operations.
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 binding rights over the VIE’s subsidiaries in the contractual arrangements between King Eagle (China) and King Eagle (Tianjin) are implicit and indirect and the company laws and regulations in the PRC governing the business operations of the VIE’s subsidiaries are uncertain. 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.
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 approximately $
| 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 $
King Eagle (Huai’an) Health Management Co., Ltd.
King
Eagle (Huai’an) Health Management Co., Ltd. (“King Eagle (Huai’an)”) was established on September 19, 2023 under
the laws of the People’s Republic of China. with a registered capital of approximately $
Kun Zhi Jian (Huai’an) Technology Co., Ltd.
Kun
Zhi Jian (Huai’an) Technology Co., Ltd. (“Kun Zhi Jian (Huai’an)”) was established on October 26, 2023
under the laws of the People’s Republic of China. with a registered capital of approximately $
Kun Zhi Jian (Shandong) Health Management Co., Ltd
Kun
Zhi Jian (Shandong) Health Management Co., Ltd (“Kun Zhi Jian (Shangdong)”) was established on January 30, 2024 under the
laws of the People’s Republic of China. with a registered capital of approximately $
Chengdu Wenjiang Pengrun Internet Healthcare Co., Ltd
Chengdu
Wenjiang Pengrun Internet Healthcare Co., Ltd (“Chengdu Wenjiang”) was established on February 1, 2024 under the laws of
the People’s Republic of China with a registered capital of approximately $
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.
| 10 |
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, 2023 included in the Form 10-K filed with the SEC on January 16, 2024.
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.
Principles 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 three months ended December 31, 2023 and 2022 include the collectability of receivables, the valuation of inventory, the useful lives of long-lived assets and intangibles, the assumptions used in assessing impairment of long-lived assets, the valuation of accruals for expenses and tax due.
Going Concern
The
accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted
in the United States of America which contemplate continuation of the Company as a going concern. The going-concern basis assures that
assets are realized and liabilities are extinguished in the ordinary course of business at amounts disclosed on the financial statements.
The Company’s ability to continue as a going concern depends on the liquidation of its current assets and business developments.
In assessing the Company’s liquidity, the Company monitors and analyzes its cash and cash equivalents and its operating and capital
expenditure commitments. The Company’s liquidity needs are to meet its working capital requirements, operating expenses, and capital
expenditure obligations. For the three months ended December 31, 2023, the Company experienced cash outflows from operating activities
of $
The
Company continues to monitor its operations to help refine its financial liquidity. Options under consideration in the review
process include, but are not limited to, increase of sales through the Company’s online business, reduction of operating
costs, fund advance from the Company’s stockholders and directors, or financing through the issuance of shares. The Company
has been focusing on increasing its revenue through its online platform and trimming its operating costs. For example, it explored
additional revenue streams and reduced service agent service fee. Additionally, the Company obtained capital funding of
approximately $
| 11 |
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. On the other hand, a type of respiratory illness, especially among children, surged in China and some parts of the world in November 2023. However, this is a treatable disease and is containable according to the medical experts in China.
The Company launched the Kun Zhi Jian Mini Program in November 2023 to expand its customer services and promote preventive health care products. The Company believes that such Mini Program helped increase the consciousness of preventive health care of the local citizens in the PRC.
We do not expect that the virus and the respiratory illness will have a material adverse effect on our business or financial results at this time. However, it is not possible to predict the unanticipated consequence of the recurring 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 ordinary shares by the weighted average number of ordinary shares outstanding during the year. Diluted income (loss) per share is calculated by dividing net income (loss) attributable to the holders of ordinary shares as adjusted for the effect of dilutive ordinary share equivalents, if any, by the weighted average number of ordinary shares and dilutive ordinary share equivalents outstanding during the period. However, ordinary share equivalents are not included in the denominator of the diluted earnings per share calculation when inclusion of such shares would be anti-dilutive, such as in a period in which a net loss is recorded.
Foreign Currency Translation
The reporting currency of the Company is the U.S. Dollar. Our entity in the British Virgin Islands uses the U.S. dollar. Our entities in the PRC and Hong Kong use the local currencies, Renminbi (RMB) and Hong Kong Dollar (HKD), as their 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 gain amounted to $
The following table shows the foreign exchange rates set forth in the H.10 statistical release of the Federal Reserve Board used for translation:
Hong Kong Dollar (HKD) | Chinese Renminbi (RMB) | |||||||
| As of December 31, 2023 (Closing Rate) | ||||||||
| United States dollar ($1) | ||||||||
| For the three months ended December 31, 2023 (Average Rate) | ||||||||
| United States dollar ($1) | ||||||||
| 12 |
Hong Kong Dollar (HKD) | Chinese Renminbi (RMB) | |||||||
| As of September 30, 2023 (Closing Rate) | ||||||||
| United States dollar ($1) | ||||||||
Hong Kong Dollar (HKD) | Chinese Renminbi (RMB) | |||||||
| For the three month period ended December 31, 2022 (Average Rate) | ||||||||
| United States dollar ($1) | ||||||||
Cash and Cash Equivalents
Cash and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions and a certain amount of cash kept in electronic wallets, “e-wallets.”
We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. We maintain accounts with various financial institutions in the PRC, and also e-wallets. As of December 31, 2023 and September 30, 2023, cash balances held in PRC banks are uninsured. Monies that are held in e-wallets are deemed equivalent to cash, they are highly liquid, and are relatively unsafe compared to cash in banks. We have not experienced any losses in bank accounts or e-wallets and believe that we are not exposed to significant risks with respect to our cash in bank accounts and we are exposed to low risk with respect to our cash kept in e-wallets.
Trade Receivable
Trade receivable represents the commission revenue earned from selling health care equipment on behalf of third parties but have not yet collected. Trade receivable is recorded at net realizable value. We establish allowance for credit losses when there is objective evidence that we may not be able to collect amounts due. Management reviews the adequacy of the allowance for credit losses on an ongoing basis, using historical collection trends and individual account analysis. The allowance is based on management’s best estimates of specific losses on individual party exposures, as well as historical trends of collections. Account balances are charged off against the allowance after all means of collection have been exhausted and the likelihood of collection is remote.
We incurred commission revenue and the related trade receivable in the first quarter of 2024. We did not expect and did not have any objective evidence or historical trend that the balance incurred as of December 31, 2023 deemed uncollectable. Accordingly, as of December 31, 2023, management believed it was not necessary to accrue an allowance for credit losses. Management continues to monitor the collectability of the balance due and estimates the allowance for credit losses on an individual basis when there is any objective evidence that it may not be able to collect the outstanding balance.
Inventory
Inventory
consists of finished goods, which include beverages, distilled water dispensers, water filters and bathroom accessories. Inventory is
measured at the lower of cost or net realizable value on a first-in, first-out basis. When evidence exists that the net realizable value
of inventory is lower than its cost, provisions shall be made to write inventory down and a loss shall be recognized in earnings in the
period in which it occurs. That loss may be required, for example, due to damage, physical deterioration, obsolescence, changes in price
levels, or other reasons. As of December 31, 2023, there was an amount of $
| 13 |
Financial Instrument
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 are as follows:
| Classification | Estimated useful life | |
| Leasehold improvements | ||
| Office equipment | ||
| Computer equipment | ||
| Computer software |
Intangible Assets
Intangible assets represent the licensing cost for the trademark registration. For intangible assets with indefinite lives, the Company evaluates intangible assets for impairment at least annually and more often whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value. For intangible assets with definite lives, they are amortized over estimated useful lives, and are reviewed annually for impairment. The Company has not recorded impairment of intangible assets as of December 31, 2023 and September 30, 2023.
Impairment of Long-lived Assets
Long-lived assets, including buildings and intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying value of an asset may not be recoverable. We assess the recoverability of the assets based on the undiscounted future cash flows the assets are expected to generate and recognize an impairment loss when estimated discounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When we identify an impairment, we reduce the carrying amount of the asset to the estimated fair value based on a discounted cash flows approach or, when available and appropriate, to comparable market values. As of December 31, 2023 and September 30, 2023, management determined that there was no impairment.
Fair Value Measurements
The Company applies the provisions of ASC Subtopic 820-10, “Fair Value Measurements,” for fair value measurements of financial assets and financial liabilities and for fair value measurements of non-financial items that are recognized or disclosed at fair value in the financial statements. ASC 820 also establishes a framework for measuring fair value and expands disclosures about fair value measurements.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
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ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes three levels of inputs that may be used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
| ● | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| ● | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments. |
| ● | Level 3 inputs to the valuation methodology are unobservable and significant to the fair value. |
The Company’s financial assets and liabilities include cash, receivables, accounts payable and accrued expenses.
Related Party Transactions
The Company follows the ASC 850-10, “Related Party Disclosures” for the identification of related parties and disclosure of related party transactions.
Pursuant to section 850-10-20 the related parties include a) affiliates of the Company; b) entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of section 825-10-15, to be accounted for by the equity method by the investing entity; c) trusts for the benefit of employees, such as pension and income-sharing trusts that are managed by or under the trusteeship of management; d) principal owners of the Company; e) management of the Company; f) other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and g) other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
The 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 Income (Loss)
Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but are excluded from net income (loss) as these amounts are recorded directly as an adjustment to stockholders’ equity. Our other comprehensive loss for the three months ended December 31, 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. Pursuant to FASB ASU No. 2016-08, Revenue from Contracts with Customers (TOPIC 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), the Company recorded revenue on a gross basis, net of surcharges and value added tax (“VAT”) of gross sales. The Company recorded revenue on a gross basis because the Company is the primary obligor of the sales arrangements has latitude in establishing prices, has discretion in suppliers’ selection and assumes credit risks on receivables on gross sales from customers.
The Company adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”) using the full retrospective transition method. The Company’s adoption of ASU 2014-09 did not have a material impact on the amount and timing of revenue recognized in its consolidated financial statements.
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The Company applies the following five steps in order to determine the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements:
● identify the contract with a customer;
● identify the performance obligations in the contract;
● determine the transaction price;
● allocate the transaction price to performance obligations in the contract; and
● recognize revenue as the performance obligation is satisfied.
Consistent with the criteria of ASC 606 “Revenue from Contracts with Customers,” we recognize revenue when performance obligations are satisfied by transferring control of a promised good or service to a customer. For performance obligations that are satisfied at a point in time, we also consider the following indicators to assess whether control of a promised good or service is transferred to the customer: (i) right to payment, (ii) legal title, (iii) physical possession, (iv) significant risks and rewards of ownership, and (v) acceptance of the good or service. For performance obligations satisfied over time, we recognize revenue over time by measuring the progress toward complete satisfaction of a performance obligation.
Deferred Revenue
Deferred revenue results from transactions where the Company has received the payments from the customers but revenue recognition criteria under the five-step model of ASC Topic 606 have yet to be met. Once all revenue recognition criteria have been satisfied, the revenues will be recognized upon the transfer of risk and rewards to the customers in the consolidated statement of operations. We anticipated the majority of the revenue will be recognized in the fiscal year 2024. Management agreed that the amount received is non-refundable; however, this term is not bound by any agreement. Thus, the customers may have the rights to challenge and demand the advances to be refunded under relevant Commercial Laws or regulations.
Accrued Product Liability
The Company records accruals for product liability when deemed probable and estimable based on facts and circumstances and prior claims experience. Accruals for product credit are valued based upon the Company’s prior claims experience, including 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 December 31, 2023 and September 30, 2023 is negligible.
Lease
Under ASC Topic 842, the Company determines if an arrangement is a lease at inception. Lease assets and liabilities are recognized at the present value of the future lease payments at the lease commencement date. The interest rate used to determine the present value of the future lease payments is the Company’s incremental borrowing rate based on the information available at the lease commencement date. The Company generally uses the base, non-cancelable lease term in calculating the right-of-use assets and lease liabilities.
The Company may recognize the lease payments in the condensed consolidated statements of operation on a straight-line basis over the lease terms and variable lease payments in the periods in which the obligations for those payments are incurred, if any. The lease payments under the lease arrangements are fixed.
The Company elected the package of practical expedients which allow the Company to carryforward its historical lease classification, its assessment on whether a contract is or contains a lease, and its initial direct costs for any lease that exists prior to adoption of the new standard.
| 16 |
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 condensed consolidated statements 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 it as Research and Development expenses, we included these amounts in Employee Compensation and Benefit expenses within General and Administrative expenses for the three months ended December 31, 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 customers.
Our
selling expenses for the three months ended December 31, 2023 and 2022 were $
Concentration of Risk
Credit risk
Financial
instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash
equivalents and other receivables. As of December 31, 2023 and September 30, 2023, $
Historically, deposits in Chinese banks are secure due to state policy to protect depositor interests. However, China promulgated a Bankruptcy Law in August 2006 that came into effect on June 1, 2007, which contains a separate article expressly stating that the State Council may promulgate implementation measures to provide for the bankruptcy of Chinese banks based on the Bankruptcy Law. Under the current Bankruptcy Law, a Chinese bank may file bankruptcy if it deems itself to be insolvent. In addition, since China’s concession to the World Trade Organization, foreign banks have been gradually permitted to operate in China and have intensified competition in many aspects, especially since the opening of the Renminbi business to foreign banks in late 2006. Therefore, the risk of bankruptcy at the institutions that the Company maintains deposits has increased. In the event of bankruptcy, the Company is unlikely to reclaim its deposits in full since it is unlikely to be classified as a secured creditor under PRC laws.
| 17 |
Risks of variable interest entity structure
As of the date of this report, King Eagle (Tianjin) has established five subsidiaries, King Eagle (Beijing) Technology Co., Ltd, King Eagle (Huai’an) Health Management Co., Ltd., Kun Zhi Jian (Huai’an) Technology Co., Ltd., Kun Zhi Jian (Shandong) Health Management Co., Ltd, and Chengdu Wenjiang Pengrun Internet Healthcare Co., Ltd on December 1, 2022, September 19, 2023, October 26, 2023, January 31, 2024, and February 1, 2024, respectively, in the PRC. King Eagle (Tianjin) is the controlling shareholder under the company laws of the PRC. The binding rights over the VIE’s subsidiaries in the contractual arrangements between King Eagle (China) and King Eagle (Tianjin) are implicit and indirect and the company laws and regulations in the PRC governing the business operations of the VIE’s subsidiaries are uncertain.
In the opinion of management, (i) the corporate structure of the Company is in compliance with existing PRC laws and regulations; (ii) the VIE Agreements are valid and binding and do not result in any violation of PRC laws or regulations currently in effect; and (iii) the business operations of the foreign-invested enterprise and the VIE are in compliance with existing PRC laws and regulations in all material respects.
However, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Accordingly, the Company cannot be assured that PRC regulatory authorities will not ultimately take a contrary view to the foregoing opinion of its management. If the current corporate structure of the Company or the VIE Agreements is found to be in violation of any existing or future PRC laws and regulations, the Company may be required to restructure its corporate structure and operations in the PRC to comply with changing and new PRC laws and regulations. In the opinion of management, the likelihood of loss in respect of the Company’s current corporate structure or the VIE Agreements is remote based on current facts and circumstances.
Foreign currency exchange risk
The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC government. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in greater fluctuation of the RMB against the U.S. dollar. The Company is a holding company and it relies on dividends paid by the Company’s operating subsidiaries in China for its cash needs. Any significant revaluation of the RMB may materially and adversely affect its liquidity and cash flows. To the extent that the Company needs to convert U.S. dollars into RMB for its operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount the Company would receive. Conversely, if the Company decides to convert RMB into U.S. dollars for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount the Company would receive.
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty raising liquid funds to meet commitments as they fall due. See our commitments and contingencies in Note 16, Financial Statements and Supplementary Data. In meeting its liquidity requirements, the Company continues to focus on increasing its revenue through the sale of consumer health care products through its Kun Zhi Jian Mini Program and promoting its own brand of preventive health care related products on its new online platform to reduce its costs of goods sold, streamlining its overhead costs, or obtaining financing from its stockholders or directors.
Concentration of customers and vendors
There
was no revenue from customers that individually represent greater than
For
the three months ended December 31, 2023, three major vendors accounted for
For
the three months ended December 31, 2022, two major vendors accounted for
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Income Taxes
We account for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Company records a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
We apply ASC 740, Accounting for Income Taxes, to account for uncertainty in income taxes and the evaluation of a tax position is a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met.
Commitments and Contingencies
The Company follows the ASC 450-20, “Contingencies” to report accounting for contingencies. Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or un-asserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or un-asserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Management does not believe, based upon information available at this time that these matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows. However, there is no assurance that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations or cash flows.
Recent Accounting Pronouncement
Recently Adopted Accounting Standards
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.
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Accounting Standards to Be Adopted
Income Tax. In December 2023, the FASB Issued Accounting Standards Update No. 2023-09, “Income Taxes (Topic 740)”. ASU 2023-09 addresses investor requests for more disclosure about the tax risks in an entity’s global operations. This provides guidance for a disclosure of more detailed tax rate reconciliation and income tax paid in various jurisdictions. This ASU is effective for fiscal years beginning after December 15, 2024 for public business entities and December 15, 2025 for all other entities. The Company evaluated that the additional disclosure requirements do not have a significant impact on its condensed consolidated financial statements.
In the period from January 2024 through mid-February 2024, the FASB has not issued any additional accounting standards updates that have a significant impact on the Company.
NOTE 3 - VARIABLE INTEREST ENTITIES- “VIE” AGREEMENTS
On May 15, 2021, King Eagle (China) entered into a series of contractual arrangements with King Eagle (Tianjin) and its shareholders. As a result of the contractual arrangements, the Company classified King Eagle (Tianjin) as a Variable Interest Entity “VIE.”
King
Eagle (Tianjin) Technology Co., Ltd. (“King Eagle (Tianjin)”) was incorporated as a limited liability company in Tianjin
Pilot Free Trade Zone in the People’s Republic of China on September 2, 2020, with a registered capital of approximately $
The VIE Agreements are as follows:
| (1) | Consulting Service Agreement |
| (2) | Business Operation Agreement |
| (3) | Proxy Agreement |
| (4) | Equity Disposal Agreement |
| (5) | Equity Pledge Agreement |
Consulting Service Agreement
Pursuant to the terms of the Exclusive Consulting Service Agreement dated May 15, 2021, between King Eagle (China) and King Eagle (Tianjin) (the “Consulting Service Agreement”), King Eagle (China) is the exclusive consulting service provider to King Eagle (Tianjin) to provide business-related software research and development services; design, installation, and testing services; network equipment support, upgrade, maintenance, monitor, and problem-solving services; employees technical training services; technology development and sublicensing services; public relations services; market investigation, research, and consultation services; short to medium term marketing plan-making services; compliance consultation services; marketing events and membership related activities organizing services; intellectual property permits; equipment and rental services; and business-related management consulting services. Pursuant to the Consulting Service Agreement, the service fee is the remaining amount after King Eagle (Tianjin)’s profit before tax in the corresponding year deducts King Eagle (Tianjin)’s losses, if any, in the previous year, the necessary costs, expenses, taxes, and fees incurred in the corresponding year, and the withdraws of the statutory provident fund. King Eagle (Tianjin)agreed not to transfer its rights and obligations under the Consulting Service Agreement to any third party without prior written consent from King Eagle (China). In addition, King Eagle (China) may transfer its rights and obligations under the Consulting Service Agreement to King Eagle (China)’s affiliates without King Eagle (Tianjin)’s consent, but King Eagle (China) shall notify King Eagle (Tianjin) of such transfer. This Agreement is valid for a term of 10 years subject to any extension requested by King Eagle (China) unless terminated by King Eagle (China) unilaterally prior to the expiration.
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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 of King Eagle (Tianjin). The shareholders of King Eagle (Tianjin) have agreed to transfer any dividends, distributions, or 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 on May 15, 2021, among King Eagle (China) and the shareholders of King Eagle (Tianjin) (the “Proxy Agreement”), the shareholders of King Eagle (Tianjin) have entrusted their 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 King Eagle (Tianjin)’s shareholders and King Eagle (China) or upon a 30-day notice of King Eagle (China).
Equity Disposal Agreement
Pursuant to the terms of the Equity Disposal Agreement dated 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 the equity interests in and/or assets of King Eagle (Tianjin) 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 (China) the total amount of the exercise price as a gift, or other method, upon King Eagle (China)’s written consent to transfer the exercise price to King Eagle (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 Agreement have been fulfilled.
A VIE is an entity that has either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest, such as voting rights and the right to receive the expected residual returns of the entity or the obligation to absorb the expected losses of the entity. The variable interest holder, if any, that has a controlling financial interest in a VIE is deemed to be the primary beneficiary and must consolidate the VIE. King Eagle (China) is deemed to have a controlling financial interest and be the primary beneficiary of King Eagle (Tianjin) because it has both of the following characteristics:
| (1) | The power to direct the activities of King Eagle (Tianjin) that most significantly impact such entity’s economic performance, and |
| (2) | The obligation to absorb losses of, or the right to receive benefits from, King Eagle (Tianjin) that could potentially be significant to such entity. |
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As of the date of this report, King Eagle (Tianjin) has established five subsidiaries: King Eagle (Beijing) Technology Co., Ltd, King Eagle (Huai’an) Health Management Co., Ltd., Kun Zhi Jian (Huai’an) Technology Co., Ltd., Kun Zhi Jian (Shandong) Health Management Co., Ltd, and Chengdu Wenjiang Pengrun Internet Healthcare Co., Ltd on December 1, 2022, September 19, 2023, October 26, 2023, January 31, 2024, and February 1, 2024, respectively, in the PRC. King Eagle (Tianjin) is the controlling shareholder under the company laws of the PRC. The binding rights over the VIE’s subsidiaries in the contractual arrangements between King Eagle (China) and King Eagle (Tianjin) are implicit and indirect and the company laws and regulations in the PRC governing the business operations of the VIE’s subsidiaries are uncertain.
Pursuant to the VIE Agreements, the shareholders of King Eagle (Tianjin) have agreed to transfer any dividends, distributions, or other profits that they receive to King Eagle (China). King Eagle (Tianjin) pays service fees equal to all of its net profit after tax to King Eagle (China). The VIE Agreements are designed so that King Eagle (Tianjin) operates for the benefit of King Eagle (China) and ultimately the Company.
Moreover, King Eagle (Tianjin) has agreed to subject the operations and management of its business to the full control under King Eagle (China) and King Eagle (Tianjin) will take King Eagle (China)’s advice on the appointment or dismissal of directors and employment, regular operation, and financial management. Accordingly, the Company consolidates the accounts of King Eagle (Tianjin) and its subsidiaries for the periods presented herein, in accordance with Accounting Standards Codification, or ASC, 810-10, “Consolidation.”
Accordingly, the accounts of King Eagle (Tianjin) and its subsidiaries are consolidated in the accompanying financial statements pursuant to ASC 810-10, “Consolidation.” In addition, their financial positions and results of operations are included in the Company’s financial statements.
VIE Financial Information
Set forth below is the consolidated balance sheet information as of December 31, 2023 and September 30, 2023 and the consolidated statements of operations and cash flows for the three months ended December 31, 2023 and 2022, 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:
“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”) | |
| ● | Kun Peng (China) Industrial Development Company Limited (“KP (China)”) | |
| ● | 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 | |
| ● | King Eagle (China) Co., Ltd. (“King Eagle (China)”) commencing 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)”), King Eagle (Beijing) Technology Co., Ltd (“King Eagle (Beijing)”), King Eagle (Huai’an) Health Management Co., Ltd. (“King Eagle (Huai’an)”), and Kun Zhi Jian (Huai’an) Technology Co., Ltd. (“Kun Zhi Jian (Huai’an)”).
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Condensed Consolidated Balance Sheets
As of December 31, 2023
| Parent
Only | Non-VIE
and Non-WFOE Subsidiaries Consolidated | WFOE | VIE
and VIE’s Subsidiaries Consolidated | Elimination
Entries and Reclassification Entries | Consolidated | |||||||||||||||||||
| Cash and cash equivalent | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Trade receivable, net | ||||||||||||||||||||||||
| Advance and Prepayments | ||||||||||||||||||||||||
| Other receivables - third parties | ||||||||||||||||||||||||
| Inventory | ||||||||||||||||||||||||
| Intercompany receivables-current | (2) | (1) | ( | ) | ||||||||||||||||||||
| Total current Assets | ( | ) | ||||||||||||||||||||||
| Property and equipment, net | ||||||||||||||||||||||||
| Intangible Assets, net | ||||||||||||||||||||||||
| Security deposits, noncurrent | ||||||||||||||||||||||||
| ROU assets | ||||||||||||||||||||||||
| Others | ||||||||||||||||||||||||
| Intercompany receivables-noncurrent | ( | ) | ||||||||||||||||||||||
| Investment in subsidiary | ( | ) | ||||||||||||||||||||||
| Total non-current Assets | ( | ) | ||||||||||||||||||||||
| Total assets | ( | ) | ||||||||||||||||||||||
| Trade payable | ||||||||||||||||||||||||
| Other payables – third parties | ||||||||||||||||||||||||
| Deferred revenue | ||||||||||||||||||||||||
| Intercompany payables | (3) | (1) | (1) | (4) | ( | ) | ||||||||||||||||||
| Payroll payable | ||||||||||||||||||||||||
| Tax payable | ||||||||||||||||||||||||
| Operating lease obligations-current | ||||||||||||||||||||||||
| Amount due to related parties | ||||||||||||||||||||||||
| Total current liabilities | ( | ) | ||||||||||||||||||||||
| Total noncurrent liabilities | ||||||||||||||||||||||||
| Total liabilities | ( | ) | ||||||||||||||||||||||
| Total shareholders’ Equity | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Non-controlling interests | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Total equity | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Total liabilities and equity | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| (1) | ||
| (2) | ||
| (3) | ||
| (4) |
| 23 |
As of September 30, 2023
| Parent
Only | Non-VIE
and Non-WFOE Subsidiaries Consolidated | WFOE | VIE
and VIE’s Subsidiaries Consolidated | Elimination
Entries and Reclassification Entries | Consolidated | |||||||||||||||||||
| Cash and cash equivalent | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Advance and Prepayments | ||||||||||||||||||||||||
| Other receivables - third party | ||||||||||||||||||||||||
| Inventory | ||||||||||||||||||||||||
| Intercompany receivables-current | (2) | (1) | ( | ) | ||||||||||||||||||||
| Total current Assets | ( | ) | ||||||||||||||||||||||
| Property and equipment, net | ||||||||||||||||||||||||
| Intangible Assets, net | ||||||||||||||||||||||||
| Security deposits and prepayments, noncurrent | ||||||||||||||||||||||||
| Prepayments, noncurrent | ||||||||||||||||||||||||
| ROU assets | ||||||||||||||||||||||||
| Intercompany receivables-noncurrent | ( | ) | ||||||||||||||||||||||
| Investment in subsidiary | ( | ) | ||||||||||||||||||||||
| Total non-current Assets | ( | ) | ||||||||||||||||||||||
| Total assets | ( | ) | ||||||||||||||||||||||
| Trade payable | ||||||||||||||||||||||||
| Other payables and accrual | ||||||||||||||||||||||||
| Advances from customers | ||||||||||||||||||||||||
| Intercompany payables | (3) | (1) | (1) | (4) | ( | ) | ||||||||||||||||||
| Salary payable | ||||||||||||||||||||||||
| Provision for taxation | ||||||||||||||||||||||||
| Operating lease obligations-current | ||||||||||||||||||||||||
| Amount due to related parties | ||||||||||||||||||||||||
| Total current liabilities | ( | ) | ||||||||||||||||||||||
| Total noncurrent liabilities | ||||||||||||||||||||||||
| Total liabilities | ( | ) | ||||||||||||||||||||||
| Total shareholders’ Equity | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Non-controlling interests | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Total equity | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Total liabilities and equity | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| (1) | ||
| (2) | ||
| (3) | ||
| (4) |
| 24 |
Condensed Consolidated Statements of Operations Data
| Three Months Ended December 31, 2023 | ||||||||||||||||||||||||
| Parent Only | Non-VIE and Non-WFOE Subsidiaries Consolidated | WFOE | VIE and VIE’s Subsidiaries 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 income (expense) | ( | ) | ||||||||||||||||||||||
| (Loss) income before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Income tax expense | ||||||||||||||||||||||||
| Net (loss) income | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||
| Three Months Ended December 31, 2022 | ||||||||||||||||||||||||
| 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 from operations | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Other (expenses) income | ( | ) | ||||||||||||||||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Income tax expense | ||||||||||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||
| 25 |
Condensed Consolidated Schedules of Cash Flows
| Three Months Ended December 31, 2023 | ||||||||||||||||||||||||
| Parent Only | Non-VIE and Non-WFOE Subsidiaries Consolidated | WFOE | VIE and VIE’s Subsidiary Consolidated | Eliminating Adjustments | Consolidated | |||||||||||||||||||
| Net loss | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||
| Intercompany receivables | ( | )) | ( | ) | ||||||||||||||||||||
| Intercompany payables | ( | ) | ||||||||||||||||||||||
| Net cash (used in) provided by operating activities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| - | ||||||||||||||||||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||||||||||||||||||
| Effect of exchange rate fluctuation on cash | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Three Months Ended December 31, 2022 | ||||||||||||||||||||||||
| Parent Only | Non-VIE and Non-WFOE Subsidiaries Consolidated | WFOE | VIE and VIE’s Subsidiary Consolidated | Eliminating Adjustments | Consolidated | |||||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Intercompany receivables | ( | ) | ||||||||||||||||||||||
| Intercompany payables | ( | ) | ||||||||||||||||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| - | ||||||||||||||||||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||||||||||||||||||
| Effect of exchange rate fluctuation on cash | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||
| 26 |
The Company consolidated its VIE as of December 31, 2023 and September 30, 2023. The carrying amounts and classification of the VIE’s assets and liabilities included in the consolidated balance sheets are as follows:
| December 31, 2023 | September 30, 2023 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Trade receivable – third parties | ||||||||
| Trade receivable-intercompany | ||||||||
| Advance and prepayments | ||||||||
| Other receivables – third parties | ||||||||
| Other receivables – intercompany | ||||||||
| Inventory | ||||||||
| Total current assets | ||||||||
| Noncurrent assets | ||||||||
| Property and equipment, net | ||||||||
| Right-of-use assets | ||||||||
| Total noncurrent assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities | ||||||||
| Current liabilities | ||||||||
| Trade payables – third parties | $ | $ | ||||||
| Other payables and accrual | ||||||||
| Deferred revenue | ||||||||
| Intercompany payables | ||||||||
| 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 | $ | $ | ||||||
| 27 |
The operating results of the VIE were as follows:
| Three Months Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenue, net | $ | $ | ||||||
| Cost of revenue | ( | ) | ( | ) | ||||
| Gross profit | ||||||||
| Operating expenses | ||||||||
| General and administrative expenses | ||||||||
| Selling expense | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other income: | ||||||||
| Interest income | ||||||||
| Other income | ||||||||
| 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 | $ | ( | ) | $ | ( | ) | ||
The cash flows of the VIE were as follows:
| Three Months Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of right-of-use assets | ||||||||
| Changes in operating assets and liabilities | ||||||||
| Advance and prepayments | ( | ) | ||||||
| Trade receivable – third parties | ( | ) | ||||||
| Trade receivable – intercompany | ( | ) | ( | ) | ||||
| Other receivables – third parties | ( | ) | ( | ) | ||||
| Other receivables - intercompany | ( | ) | ( | ) | ||||
| Inventory | ||||||||
| 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 used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities | ||||||||
| Purchase of equipment | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ||||||
| Effect of exchange rate changes on cash | ( | ) | ||||||
| Net change in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents, beginning balance | ||||||||
| Cash and cash equivalents, ending balance | $ | $ | ||||||
| 28 |
NOTE 4 - TRADE RECEIVABLE
Trade receivable, net consisted of the following:
| December 31, | September 30, | |||||||
| 2023 | 2023 | |||||||
| Trade receivable | $ | $ | ||||||
| Less: Allowance for credit loss | ||||||||
| Trade receivable, net | $ | $ | ||||||
Trade receivable represented the commission to be received from the third-party sellers on whose behalf we sold health care instruments.
NOTE 5- ADVANCE AND PREPAYMENTS
Prepayments consisted of the following:
| December 31, | September 30, | |||||||
| 2023 | 2023 | |||||||
| Prepaid rent and building management and utilities | $ | $ | ||||||
| Prepaid supplies(1) | ||||||||
| Prepaid income tax | ||||||||
| Prepaid professional services(2) | ||||||||
| Prepaid others | ||||||||
| Total prepayments | $ | $ | ||||||
| (1) | |
| (2) |
As
of December 31, 2023, the ending balance of prepaid professional services included $ |
These amounts are expected to be recoverable within twelve (12) months.
| 29 |
NOTE 6 - OTHER RECEIVABLES
Other receivables included the following:
| December 31, | September 30, | |||||||
| 2023 | 2023 | |||||||
| Rental and vendor deposits | $ | $ | ||||||
| Advance to employees | ||||||||
| 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.
NOTE 7 - INVENTORY
Inventory consisted of the following:
| December 31, | September 30, | |||||||
| 2023 | 2023 | |||||||
| Finished goods | $ | $ | ||||||
| Total | $ | $ | ||||||
NOTE 8 – PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
| December 31, | September 30, | |||||||
| 2023 | 2023 | |||||||
| Leasehold improvements | $ | $ | ||||||
| Furniture and fixtures | ||||||||
| Computer equipment | ||||||||
| Office equipment | ||||||||
| Service equipment | ||||||||
| Construction in progress | ||||||||
| Subtotal | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Total property and equipment, net | $ | $ | ||||||
Depreciation
expense was $
| 30 |
NOTE 9 - INTANGIBLE ASSETS
| December 31, | September 30, | |||||||
| 2023 | 2023 | |||||||
| 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
Amortization
expense was $
NOTE 10 - DEFERRED REVENUE
| December 31, | September 30, | |||||||
| 2023 | 2023 | |||||||
| Advance payments from customers | $ | $ | ||||||
| Total deferred revenue | $ | $ | ||||||
Deferred
revenue resulted from transactions where the Company has received the payments from the customers but revenue recognition criteria
under the five-step model have yet to be met. As of December 31, 2023 and September 30, 2023, the Company had total deferred revenue
of $
NOTE 11 - RELATED PARTY TRANSACTIONS
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:
| December 31, | September 30, | |||||||||||
| Name of related party | Relationship | Nature of transactions | 2023 | 2023 | ||||||||
| Ms.Chengyuan Li | $ | $ | ||||||||||
| Ms. Jinjing Zhang | ||||||||||||
| Ms. Xiujin Wang | ||||||||||||
| Total | $ | $ | ||||||||||
| 31 |
NOTE 12 - EQUITY
Effective
as of September 9, 2021, the Company’s Articles of Incorporation were amended to increase the Company’s authorized capital
to
Effective on October 12, 2022, a Certificate of Amendment was filed with the Nevada Secretary of State to increase the authorized number of shares of the 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 received 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, the Company has shares of common stock outstanding. The par value of the common stock remained unchanged at per share after the stock split.
Preferred stock
The Company’s authorized shares of preferred stock are shares, with a par value of $. The preferred stock 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 December 31, 2023 and September 30, 2023.
Common stock
The Company’s authorized shares of common stock were and shares with a par value of $, as of December 31, 2023 and September 30, 2023, respectively. The issued and outstanding shares of common stock were as of December 31, 2023 and September 30, 2023, respectively.
Restricted net assets
Our
ability to pay dividends is primarily dependent on us receiving distributions of funds from our VIE. Relevant PRC statutory laws and
regulations permit payments of dividends by our VIE and its subsidiaries only out of their retained earnings, if any, as determined
in accordance with PRC accounting standards and regulations and after they have met the PRC requirements for appropriation to
statutory reserves. Share capital of our PRC subsidiaries 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 KP Tian Yu, the
foreign-invested enterprise, King Eagle (China), King Eagle (Tianjin), the VIE, and its subsidiaries. The Company is required to set
aside at least
As
a result of the foregoing restrictions, King Eagle (China), King Eagle (Tianjin), and KP Tian Yu are restricted in their ability to transfer
their net assets to the Company. Foreign exchange and other regulations in the PRC may further restrict these entities from transferring
funds to the Company in the form of dividends, loans, and advances. As of December 31, 2023, King Eagle (China), King Eagle (Tianjin)
and KP Tian Yu incurred negative assets in the amount of $
| 32 |
NOTE 13- REVENUE
Revenue:
The following tables present disaggregated revenues for the three months ended December 31, 2023 and 2022:
Three Months Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Retail product sales | $ | $ | ||||||
| Wholesale product sales | ||||||||
| Commissions | ||||||||
| Equipment services | ||||||||
| Training | ||||||||
| Total | $ | $ | ||||||
Three Months Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Performance obligations satisfied at a point in time | $ | $ | ||||||
| Performance obligations satisfied over time | ||||||||
| Total | $ | $ | ||||||
Cost of revenue:
We disaggregated our cost of revenue for the three months ended December 31, 2023 and 2022 as follows:
Three Months Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Retail | $ | $ | ||||||
| Wholesale | ||||||||
| Equipment service fees | ||||||||
| Training fees | ||||||||
| Total | $ | $ | ||||||
NOTE 14- 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.
| 33 |
United States
Kun Peng International Limited 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 three months ended December 31, 2023 and 2022.
British Virgin Islands
KP International Holding 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 profits tax rates regime,
the profits tax rate for the first $
Since KP (China) and KP (Hong Kong) are wholly owned and under the control of KP International Holding, these entities are connected entities. Under the Ordinance, it is an entity’s election to nominate the entity that will be subject to the two-tier profits tax rates on its profits tax return. The election is irrevocable. The Company elected KP (Hong Kong) to be subject to the two-tier profits tax rates. KP (China) and KP (Hong Kong) did not earn any income that was derived in Hong Kong for the three months ended December 31, 2023 and 2022, and, therefore, KP (China) and KP (Hong Kong) were not subject to Hong Kong profits tax for the periods reported.
Since
the two-tier profit tax rates regime is tentative, we applied the original profits tax rate,
PRC
The
PRC’s statutory income tax rate is
Income tax expense was comprised of the following:
Three Months Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Current | ||||||||
| Federal | $ | $ | ||||||
| State | ||||||||
| Foreign | ||||||||
| Total current | ||||||||
| Deferred | ||||||||
| Federal | ||||||||
| State | ||||||||
| Foreign | ||||||||
| Total deferred | ||||||||
| Total income tax expense | $ | $ | ||||||
| 34 |
A reconciliation between the Company’s actual provision for income taxes and the provision at the statutory rate is as follow:
Three Months Ended December 31, | ||||||||
| 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 | % | % | ||||||
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 December 31, 2023 and September 30, 2023, 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.
| 35 |
NOTE 15 - RIGHT-OF-USE ASSETS AND LEASE
The Company has operating leases for its office facilities and employee accommodation. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term.
The following table provides a summary of leases as of December 31, 2023 and September 30, 2023:
| Assets/liabilities | Classification | December 31, 2023 | September 30, 2023 | |||||||
| Assets | ||||||||||
| Operating lease right-of-use assets | Operating lease assets | $ | $ | |||||||
| Liabilities | ||||||||||
| Current | ||||||||||
| Operating lease liability - current | Current operating lease liabilities | $ | $ | |||||||
| Long-term | ||||||||||
| Operating lease liability – net of current portion | Long-term operating lease liabilities | $ | $ | |||||||
| Total lease liabilities | $ | $ | ||||||||
The operating lease expense for the three months ended December 31, 2023 and 2022 was as follows:
| Three Months Ended December 31, | ||||||||||
| Lease cost | Classification | 2023 | 2022 | |||||||
| Operating lease cost | General and administrative | $ | $ | |||||||
| Total lease cost | $ | $ | ||||||||
| 36 |
Maturities of operating lease liabilities as of December 31, 2023 were as follows:
| Maturity of lease liabilities | Operating leases | |||
| Remaining of 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total lease payments | $ | |||
| Less: interest | ( | ) | ||
| Present value of lease payments | $ | |||
Maturities of operating lease liabilities as of September 30, 2023, were as follows:
| Maturity of Lease Liabilities | Operating Leases | |||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total lease payments | $ | |||
| Less: interest | ( | ) | ||
| Present value of lease payments | $ | |||
Supplemental information related to operating leases was as follows:
| Three Months Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | $ | ||||||
| New operating lease assets obtained in exchange for operating lease liabilities | $ | $ | ||||||
| Weighted average remaining lease term | ||||||||
| Weighted average discount rate | % | % | ||||||
Amortization
expense was $
NOTE 16 - COMMITMENTS AND CONTINGENCIES
Purchase and service commitments
We
entered into multiple purchase and service commitments. As of December 31, 2023 and September 30, 2023, we had purchase and service
commitments in an amount of $
NOTE 17 - SUBSEQUENT EVENT
King Eagle (Tianjin) established two additional subsidiaries, Kun Zhi Jian (Shandong) Health Management Co., Ltd. (“Kun Zhi Jian (Shangdong)”) and Chengdu Wenjiang Pengrun Internet Healthcare Co., Ltd (“Chengdu Wenjiang”) in the PRC on January 30, 2024 and February 1, 2024, respectively. Kun Zhi Jian (Shangdong) plans to commence operations in March 2024 while Chengdu Wenjiang is applying for permits for its online health care services and expects to start its operation in May 2024.
On February 2, 2024, the deregistration of Kunpeng (China) Industrial Development Company Limited was approved by Hong Kong Inland Revenue Services and Hong Kong Company Registry.
As of December 31, 2023, the Company evaluated and concluded that there are no subsequent events that would require recognition or disclosure in the financial statements, other than as disclosed above.
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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 COVID-19 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 developed and launched our mobile platform, King Eagle Mall, in July 2020, an online platform, Kun Zhi Jian, in October 2022, and Kun Zhi Jian Mini Program in November 2023.
King Eagle Mall
King Eagle Mall is a mobile social e-commerce platform launched in July 2020 that promotes preventive health care products and services. It adopts the S2B2C business model and integrates many major health care products and services. King Eagle Mall is designed to enable health-related products to be sold by us and by third parties. King Eagle Mall’s products are divided into two sectors: self-operated products and selected products which promote preventive health care. Our team screens and examines products that are and will be offered both by us and by affiliated merchants. Our major products include health care products such as dietary supplements, nutritional health foods, beauty cosmeceuticals, and other categories of health foods (for instance, milk powder, dried fruits) for supporting the cardiovascular system and bone joint health. We also offer collagen peptides, probiotics, and health foods for improving blood circulation and vein health, as well as household products that can promote and improve a healthier lifestyle for our members. We receive customer orders and may arrange fulfillment through our merchants who are responsible for delivery or we may fill customer orders through our outsourced networks. As of February 18, 2024, December 31, 2023 and September 30, 2023, King Eagle Mall had approximately 5,669 members. King Eagle Mall’s membership declined during the year ended September 30, 2023 because the Company focused on promoting and selling products on Kun Zhi Jian, the new online platform, and some of the members of King Eagle Mall switched to Kun Zhi Jian.
We also operate customer service centers with which our members can communicate directly for any assistance related to product purchases, suggestions for health care products and services, and delivery logistics.
Kun Zhi Jian and Kun Zhi Jian Mini Program
In October 2022, we introduced and implemented a new online platform, Kun Zhi Jian. In its initial phase of operation, we focused on selling a thermal therapy cabin to wholesalers. Currently, we promote and sell physiotherapy equipment products and our own brand, as well as other popular brands, of preventive health care related products. In November 2023 we also launched the Kun Zhi Jian Mini Program, which is composed of three main areas: physiotherapy cabin, a customer service center, and an online shopping mall (Kun Zhi Jian). We coordinate with local health service providers and leverage their health care expertise and technology to provide health screening and consulting services to our customers and members at the Kun Zhi Jian customer service center. Based on their health conditions, we provide nutritional consulting services and offer suggestions for our preventive health care products. As of February 18, 2024, December 31, 2023, and September 30, 2023, our new online platform had approximately 2,162, 2,120 and 2,112 members, respectively.
COVID-19
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. On the other hand, a type of respiratory illness, especially among children, surged in China and some parts of the world in November 2023. However, this is a treatable disease and is containable according to the medical experts in China.
The Company launched the Kun Zhi Jian Mini Program in November 2023 to expand its customer services and promote preventive health care products. The Company believes that such Mini Program helped increase the consciousness of preventive health care of the local citizens in the PRC.
We do not expect that the COVID-19 virus will have a material adverse effect on our business or financial results at this time. However, it is not possible to predict the unanticipated consequence of the recurring pandemic on our future business performance and liquidity. The Company continues to monitor and assess the evolving situation closely and evaluate its potential exposure.
Recent Regulatory Developments in China
Under current Chinese laws and regulations, the Company believes that the VIE Agreements are not subject to any government approval. The shareholders of King Eagle (Tianjin) were required to register with SAFE when they established offshore vehicles to hold KP International. Such SAFE registration was effected on May 14, 2021. These shareholders of King Eagle (Tianjin) were also required to register their equity pledge arrangement by the Equity Pledge Agreement with King Eagle (China). However, the Company faces uncertainty with respect to future actions by the PRC government that could significantly affect King Eagle (Tianjin)’s financial performance and the enforceability of the VIE Agreements.
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On July 6, 2021, the PRC government issued the Opinions on Strictly Cracking Down on Illegal Securities Activities, calling for: (i) tightening oversight of data security, cross-border data flow and administration of classified information, as well as amendments to relevant regulations to specify responsibilities of overseas listed Chinese companies with respect to data security and information security; (ii) enhanced oversight of overseas listed companies as well as overseas equity fundraising and listing by Chinese companies; and (iii) extraterritorial application of China’s securities laws. As the Opinions on Strictly Cracking Down on Illegal Securities Activities were recently issued, there is great uncertainty with respect to the interpretation and implementation thereof. We will closely monitor further developments.
In addition, on July 10, 2021, the Cyberspace Administration of China (the “CAC”) issued the Measures for Cybersecurity Review, or the Measures, which proposed to authorize the relevant government authorities to conduct cybersecurity review on a range of activities that affect or may affect national security, including listings in foreign countries by companies that possess the personal data of more than one million users. On January 4, 2022, the CAC issued the New Measures for Cybersecurity Review (the “New Measures”), which amended the Measures for Cybersecurity Review (Draft Revisions) released on July 10, 2021. As our VIE has less than one million customers, we believe that the Measures are not applicable to us in current form. The PRC government is increasingly focused on data security, recently launching cybersecurity review against a number of mobile apps operated by several US-listed Chinese companies and prohibiting these apps from registering new users during the review period. There are great uncertainties regarding the interpretation and enforcement of PRC laws, rules, and regulations regarding data and privacy security. We may be required to change our data and other business practices and be subject to regulatory investigations, penalties, increased cost of operations, or declines in issuer growth or engagement as a result of these laws and policies.
Cash Transfers Within our Organization
As between the Company and its subsidiaries, cash will generally be transferred by means of capital contributions and/or interest-free intercompany loans. Cash to be transferred or settled between the Company and its subsidiaries, on the one hand, and the consolidated VIE and its subsidiaries, on the other hand, will typically be transferred through payments for fees under our contractual arrangements with the VIE, expense reimbursements, or intercompany borrowings between the Company or one of its subsidiaries and the consolidated VIE. Any such loans will be interest-free, unsecured and payable on demand. For more information regarding these contractual arrangements, see Note 3 – Variable Interest Entities - “VIE” Agreements. The enforceability and treatment of the intercompany agreements within our organization, including intercompany borrowings and the contractual arrangements with our VIE, have not been tested in court. To the extent cash and/or assets in the business are in the PRC and/or Hong Kong or our PRC and/or Hong Kong entities, such funds and/or assets may not be available to fund operations or for other use outside of the PRC and/or Hong Kong due to interventions in or the imposition of restrictions and limitations imposed by the PRC government on the ability of the Company or its subsidiaries to transfer cash and/or assets. There are no tax consequences for intercompany borrowings or the payment for intercompany services, except for the standard value added taxes and/or income taxes for the revenues and/or profits generated from such services.
The proceeds of any transactions within our organization, including with the VIE and its subsidiaries, are eliminated in our consolidated financial statements. For more details, please refer to the principles of consolidation set forth in the notes to our Condensed Consolidated Financial Statements for the three months ended December 31, 2023 included in this report.
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Financial Operations Overview
Results of operations for the three months ended December 31, 2023 and 2022
| Three Months Ended December 31, | ||||||||||||||||
| 2023 | 2022 | |||||||||||||||
| Amount | % of revenue | Amount | % of revenue | |||||||||||||
| Revenues | $ | 562,158 | 100.0 | % | $ | 452,118 | 100.0 | % | ||||||||
| Cost of revenues | 149,347 | 26.6 | 109,188 | 24.2 | ||||||||||||
| Gross profit | 412,811 | 73.4 | 342,930 | 75.8 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative expenses | 547,819 | 97.4 | 374,824 | 82.9 | ||||||||||||
| Selling expense | 431,988 | 76.8 | 728,792 | 161.2 | ||||||||||||
| Total operating expenses | 979,807 | 174.2 | 1,103,616 | 244.1 | ||||||||||||
| Loss from operations | (566,996 | ) | (100.8 | ) | (760,686 | (168.3 | ) | |||||||||
| Other income | 32,190 | 5.7 | 373 | 0.1 | ||||||||||||
| Loss before income taxes | (534,806 | ) | (95.1 | ) | (760,313 | ) | (168.2 | ) | ||||||||
| Income tax expense | - | - | - | - | ||||||||||||
| Net loss | $ | (534,806 | ) | (95.1 | )% | $ | (760,313 | ) | (168.2 | )% | ||||||
Revenues
For the three months ended December 31, 2023 and 2022, revenues amounted to $562,158 and $452,118, respectively.
The following tables present disaggregated revenues for the three months ended December 31, 2023 and 2022:
| Three Months Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Retail product sale | $ | 506,333 | $ | 21,087 | ||||
| Wholesale product sale | 1,805 | 431,031 | ||||||
| Commission | 11,046 | - | ||||||
| Equipment service | 8,668 | - | ||||||
| Training | 34,306 | - | ||||||
| Total | $ | 562,158 | $ | 452,118 | ||||
| Three Months Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Performance obligations satisfied at a point in time | $ | 553,490 | $ | 452,118 | ||||
| Performance obligations satisfied over time | 8,668 | - | ||||||
| Total | $ | 562,158 | $ | 452,118 | ||||
We recognized our revenue on a gross basis, net of sub-charges and value-added tax (“VAT”) of gross sales.
For the three months ended December 31, 2022, our retail revenue primarily included the sale of consumer health care and health-related household products to our customers via our mobile application, King Eagle Mall, which was launched in July 2020. Our wholesale revenue was derived 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.
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Compared to the same period in 2022, our total revenues for the three months ended December 31, 2023 increased by $110,040, or 24.3%. For the three months ended December 31, 2023, we incurred three additional revenue streams: commission revenue, equipment service revenue, and training revenue, besides the sale of preventive health care products on King Eagle Mall and Kun Zhi Jian to our retail and wholesale customers. We launched Kun Zhi Jian Mini Program (“Mini Program”) to expand our customer services and preventive health care in November 2023. Through this Mini Program, we sold health care instruments on behalf of third parties and earned commission revenue upon the successful sale of the instruments. We also sold prepaid cards to our customers for the use of card-operated health screening equipment displayed at Kun Zhi Jian Customer Service Center. We recognized equipment service revenue when our customers consumed the prepaid cards for the use of our card-operated health screening equipment. We earned training revenue after the training session for our customers was completed.
Cost of revenue
Our cost of revenue for the three months ended December 31, 2023 and 2022 was $149,347 and $109,188, respectively. This primarily included the purchase of health care and health related household products from our suppliers and payments of training fees to our third-party trainers. Our cost of revenue rose by $40,159 in the three months ended December 31, 2023, compared to the same period in 2022. During the three months ended December 31, 2023, we increased our retail product sales through our Kun Zhi Jian Mini Program. Moreover, we offered equipment service and training during the three months ended December 31, 2023 through the Kun Zhi Jian Mini Program. The equipment service fee included the prepaid card activation fee and the technical support fee. The training fee consisted of the training fees, accommodations, and transportation of the third-party trainers.
We disaggregated our cost of revenue for the three months ended December 31, 2023 and 2022 as follows:
| Three Months Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Retail | $ | 123,135 | $ | 8,565 | ||||
| Wholesale | 919 | 100,623 | ||||||
| Equipment service fee | 4,987 | - | ||||||
| Training fee | 20,306 | - | ||||||
| Total | $ | 149,347 | $ | 109,188 | ||||
Gross profit
| Three Months Ended December 31, | ||||||||||||||||
| 2023 | 2022 | |||||||||||||||
| Retail product sales | $ | 383,198 | 75.7 | % | $ | 12,522 | 59.4 | % | ||||||||
| Wholesale product sales | 886 | 49.1 | 330,408 | 76.7 | ||||||||||||
| Commissions | 11,046 | 100.0 | - | - | ||||||||||||
| Equipment service | 3,681 | 42.5 | - | - | ||||||||||||
| Training | 14,000 | 40.8 | - | - | ||||||||||||
| Total | $ | 412,811 | 73.4 | % | $ | 342,930 | 75.9 | % | ||||||||
For the three months ended December 31, 2023 and 2022, our overall gross profit and margin was $412,811, or 73.4%, and $342,930, or 75.9%, respectively.
For the three months ended December 31, 2023 and 2022, the gross profit and margin of our retail business amounted to $383,198, or 75.7%, and $12,522, or 59.4%, respectively. Our gross profit or margin for our retail business for the three months ended December 31, 2023 was higher than that for the same period in 2022. During the three months ended December 31, 2023, we added a variety of products such as dietary supplements, prepaid health screening cards, and sale of physiotherapy equipment sold to our retail customers which have a higher profit margin.
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For the three months ended December 31, 2023 and 2022, the gross profit and margin of our wholesale business amounted to $886, or 49.1%, and $330,408, or 76.7%, respectively. During December 31, 2022, we focused on the sale of a thermal heat cabin to our wholesale customers. However, during the three months ended December 31, 2023, we launched the Kun Zhi Jian Mini Program through which we refocused on selling dietary supplements, prepaid health screening cards, and the sale of physiotherapy equipment to our retail customers. We lowered the selling price of the thermal heat cabin to our wholesale customers. Accordingly, the gross margin of our wholesale business line shrank during the three months ended December 31, 2023.
The gross margins for our commission, equipment service, and training for the three months ended December 31, 2023 were 100.0%, 42.5%, and 40.8%, respectively. As discussed above, we introduced these three additional revenue streams in November 2023. The gross margins for these three revenue streams were nil for the same period in 2022.
Operating expenses
Our operating expenses consist of general and administrative expenses and selling expense. For the three months ended December 31, 2023 and 2022, our total operating expenses were $979,807 and $1,103,616, respectively. The lower operating expenses for the three months ended December 31, 2023 compared to the three months ended December 31, 2022 was primarily due to lower selling expenses, as discussed below.
General and administrative expenses
General and administrative expenses for the three months ended December 31, 2023 and 2022 were $547,819 and $374,824, respectively. Our general and administrative expenses for the three months ended December 31, 2023 and 2022 were comprised of the following:
| Three Months Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Employee compensation and benefit | $ | 163,578 | $ | 102,389 | ||||
| Office rent and building management | 91,436 | 94,894 | ||||||
| Office supplies and meeting | 13,773 | 8,288 | ||||||
| Professional services fee | 149,895 | 113,464 | ||||||
| Travel, transportation, and gasoline | 46,591 | 13,788 | ||||||
| Meals and entertainment | 53,855 | 11,216 | ||||||
| Depreciation and amortization | 11,958 | 14,429 | ||||||
| Others | 16,733 | 16,356 | ||||||
| Total | $ | 547,819 | $ | 374,824 | ||||
Our general and administrative expenses for the three months ended December 31, 2023 and 2022 were $547,819 and $374,824, respectively, with an increase of $172,995. Such increase was primarily driven by an increase in employee compensation and benefit of $61,189, professional service fee of $37,138, travel, transportation, and gasoline of $32,803, and meals and entertainment of $42,639. Compared to the same period in 2022, for the three months ended December 31, 2023, we had additional 12 administrative employees particularly for our three VIE subsidiaries that were placed in service in January 2023, September 2023 and November 2023, respectively. Moreover, one of our VIE’s subsidiaries, King Eagle (Huai’an), engaged consulting services for business development and new business lines. We incurred a higher auto insurance premium for our leased automobile and car rental expense as well as entertainment expense during the current quarter. Compared to the same quarter in 2022 when COVID-19 measures and regional lockdown in the PRC were still in effect, COVID-19 restrictions were relaxed nationally by the end of December 2022. Since then, our executives resumed their travels to various regions in the PRC to explore new business opportunities and meet potential business partners. Hence, travel, transportation, gasoline as well as meals and entertainment expenses were significantly higher during the three months ended December 31, 2023 compared to the same period in 2022.
Selling expense
Selling expenses for the three months ended December 31, 2023 and 2022 were $431,988 and $728,792, respectively. Our selling expenses for the three months ended December 31, 2023 and 2022 were comprised of the following:
| Three Months Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Service agents | $ | 308,607 | $ | 546,660 | ||||
| Employee compensation and benefit | 67,472 | 67,336 | ||||||
| Office supplies and meeting | 35,958 | 13,003 | ||||||
| Customer services | - | 40 | ||||||
| Travel, transportation and gasoline | 15,265 | 21,971 | ||||||
| Meals and entertainment | 3,290 | 52,687 | ||||||
| Depreciation and amortization | 299 | 794 | ||||||
| Advertising | 1,097 | 26,301 | ||||||
| Total | $ | 431,988 | $ | 728,792 | ||||
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Our selling expenses for the three months ended December 31, 2023 were $431,988, a reduction of $296,804 from the same period in 2022. The significant decrease in selling expenses for the three months ended December 31, 2023 was primarily driven by a decrease in service agent fees of $238,053 as marketing and promotional service fees paid to our service agents declined significantly. To further streamline our selling costs, we no longer engaged external customer support services. While the number of employees of our sales and marketing department decreased by 4 in the three months ended December 31, 2023 compared to the same period in 2022, the amount of employee compensation and benefit was comparable. To retain our employees, we increased the compensation and benefit of our sales and marketing employees. Since the number of employees of our sales and marketing department reduced, the travel expenses and meal and entertainment expenses incurred by our sales and marketing department also fell in the three months ended December 31, 2023. On the other hand, our sales and marketing department acquired more office supplies and launched more meetings during the three months ended December 31, 2023 for the operations of our new entities and new business lines.
Other income
Other income primarily included bank interest income and foreign exchange gain or loss. Our other income for the three months ended December 31, 2023 and 2022 was $32,190 and $373, respectively. Other income for the three months ended December 31, 2023 increased by $31,817 as we received an economic subsidy from the City of Tianjin.
Income tax expense
For both the three months ended December 31, 2023 and 2022, the income tax expense of the Company was nil. Due to the net loss before income tax, the Company recognized a full valuation recognition against its deferred tax assets, which mainly included net operating loss carryforwards, as management believes it is more likely than not that the Company will not realize its net operating loss carryforwards in the near future or before they expire.
Net loss
As a result of the factors discussed above, for the three months ended December 31, 2023 and 2022 our net loss amounted to $534,806 and $760,313, respectively.
Foreign currency translation adjustment
The functional currency of our operations in the PRC is Chinese Yuan or Renminbi (“RMB”), while the functional currency of our operation in Hong Kong is Hong Kong Dollars (“HKD”). The financial statements are translated to U.S. dollars using the period end rates of exchange for assets and liabilities; equity is translated at historical exchange rates; and average rates of exchange (for the period) are used for revenues and expenses and cash flows. Transaction gains and/or losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. As a result of foreign currency translation, which is a noncash adjustment, we reported a foreign currency translation loss of $145,966 and $138,610 for the three months ended December 31, 2023 and 2022, respectively. This non-cash loss had the effect of increasing our reported comprehensive loss.
Comprehensive loss
We recognized a comprehensive loss of $680,772 for the three months ended December 31, 2023 compared to comprehensive loss of $898,923 for the same period in 2022.
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Liquidity and capital resources
As of December 31, 2023 and September 30, 2023, we had cash and a cash equivalents balance of $120,343 and $457,580, respectively.
For the three months ended December 31, 2023, net cash used in operating activities totaled $303,608. Operating cash outflow was mainly attributable to our net loss of $534,806 and a decline in customer advances of $1,323,176, offset by a decrease in inventory of $56,732 and the receipt of an advance from a related party of $1,508,580.
Net cash used in investing activities totaled $44,008 and was primarily related to the acquisition of service equipment and construction-in-progress of the leasehold improvement of Kun Zhi Jian Customer Service Center and our office during the three months ended December 31, 2023.
There was no financial activity during the three months ended December 31, 2023.
The effect of exchange rate change on cash totaled $10,379. The resulting change in cash for the period was a decrease of $337,237.
For the three months ended December 31, 2022, net cash used in operating activities totaled $242,912. Operating cash outflow was mainly attributable to the net loss of $760,313, payments for payroll payable of $5,728, payments to lessors of $19,224, and payments to third-party vendors of $7,467. The overall cash outflow was offset by an increase in trade and other payable of $534,327 and amount due to related parties of $16,310.
Net cash used in investing activities totaled $509, which was primarily related to the acquisition of trademarks.
There was no financing activity for the three months ended December 31, 2022.
The effect of exchange rate change on cash totaled $1,610. The resulting change in cash for the period was a decrease of $241,811.
The following table sets forth a summary of changes in our working capital as of December 31, 2023 and September 30, 2023:
| December 31, | September 30, | |||||||
| 2023 | 2023 | |||||||
| Current Assets | $ | 520,363 | $ | 661,947 | ||||
| Current Liabilities | 6,718,236 | 6,185,690 | ||||||
| $ | (6,197,873 | ) | $ | (5,523,743 | ) | |||
We require cash of approximately $5.6 million within the next twelve months, primarily related to third-party vendor payables and related-party payables. As of December 31, 2023, we had received customer advances in an amount of approximately $0.9 million. We anticipate that the majority of the revenue will be recognized in the fiscal year 2024. Management has agreed that the amount received is non-refundable. However, this term is not bound by any agreement. Therefore, the customers may have the right to challenge and demand the advances be refunded under relevant Commercial Laws or regulations. Additionally, we had an approximately $0.4 million commitment related to purchase and service agreements as of December 31, 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 refund of their advance payments, the Company focused on increasing its revenue through its online platform. In November 2023, we launched Kun Zhi Jian Mini Program and explored three additional revenue streams. We have continued to engage service agents to promote our products and to reduce our administrative overhead costs such as operating leases. Simultaneously, our directors and stakeholders continue to support our operation financially. We believe that such measures will improve our liquidity in the next twelve months. If we are not able to increase revenue or obtain any financing, we may be unable to continue as a going concern.
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Going Concern Consideration
The financial statements included in this interim report have been prepared in conformity with accounting principles generally accepted in the United States of America which contemplate continuation of the Company as a going concern. The going-concern basis assumes that assets are realized and liabilities are extinguished in the ordinary course of business at amounts disclosed on the financial statements. The Company’s ability to continue as a going concern depends on the liquidation of its current assets. For the three months ended December 31, 2023, the Company experienced cash outflows from operating activities of $303,608, incurred a net loss of $534,806, and had negative working capital of $6,197,873. These conditions raise substantial doubt about the ability of the Company to continue as a going concern.
The Company continues to monitor its operations to help refine its financial liquidity. Options under consideration in the review process include, but are not limited to, increase of sales through the Company’s online business, reduction of operating costs, fund advance from the Company’s stockholders and directors, or financing through the issuance of shares. The Company has been focusing on increasing its revenue through its online platform and trimming its operating costs. For example, it explored additional revenue streams and reduced service agent fees. Additionally, the Company obtained capital funding of approximately $1.5 million from our director to meet its working capital requirements. In order to continue as a going concern for the next 12 months, through Kun Zhi Jian Mini Program, the Company continues to explore additional revenue streams, leverage the health care expertise and technology with local health care service providers, promote and sell preventive health care dietary supplements and products, and offer health care equipment services at the Kun Zhi Jian Customer Service Center. 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 intend to 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 loans from our directors and major shareholders and on equity sales of our common shares in order to continue to fund our business operations. Issuances of additional shares will result in dilution to existing stockholders. There is no assurance that we will achieve any additional sales of equity securities or arrange for debt or other financing to fund our operations and other activities, or if we are able, there is no guarantee that existing shareholders will not be substantially diluted.
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 in the Company’s Form 10-K for the fiscal year ended September 30, 2023 previously filed with the SEC.
Recent Accounting Pronouncements
See Note 2 to the financial statements included herewith and Note 2 to the financial statements in the Company’s Form 10-K for the fiscal year ended September 30, 2023 previously filed with the SEC.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to respond to this item.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15I under the Securities Exchange Act of 1934, as amended. 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 December 31, 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 appropriate understanding of U.S. GAAP and SEC reporting requirements; |
| ● | A lack of segregation of duties within significant accounts; |
| ● | A lack of a functioning audit committee and a majority of outside directors on the Company’s board of directors. |
Management’s Report on Internal Control over Financial Reporting
As of December 31, 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 U.S. 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 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 our internal controls and procedures on an on-going basis. We are currently hiring additional personnel in financial reporting and accounting, and we are providing training 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 U.S. 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 Securities Exchange Act of 1934, as amended) during the fiscal quarter ended December 31, 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 PROCEDINGS.
We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry, or investigation before or by any court, public board, government agency, self-regulatory organization, or body pending or, to the knowledge of the executive officers of our Company, threatened against or affecting our Company or our common stock, in which an adverse decision could have a material adverse effect.
ITEM 1A. RISK FACTORS
As a smaller reporting company, we are not required to respond to this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
| 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: February 20, 2024 | By: | /s/ Zhuang Richun |
| Zhuang Richun, President | ||
| Date: February 20, 2024 | By: | /s/ Zhang Yuanyuan |
| Zhang Yuanyuan , Chief Financial Officer | ||
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