ITEM
1. BUSINESS
Regulatory
Overview - Legal and Operational Risks
Kun
Peng International Ltd. (“KPIL”) is not a Chinese operating company but rather a Nevada holding company with operations in
the People’s Republic of China (“PRC” or “China”) conducted by various subsidiaries and through contractual
agreements with a variable interest entity (“VIE”) (King Eagle (Tianjin) Technology Co., Ltd, hereinafter referred to as
“King Eagle VIE”), as discussed in greater detail below, which structure involves unique risks to shareholders and investors
including but not limited to the following:
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PRC
laws and regulations prohibit or restrict foreign ownership of companies that operate Internet information and content, value added
telecommunications and certain other businesses in which we are engaged or could be deemed to be engaged. Consequently, certain of
our operations and businesses in the PRC are conducted through contractual arrangements with King Eagle VIE which give us effective
control over and enable us to obtain substantially all of the economic benefits arising from these business operations.
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While
we have been advised by our PRC counsel that the ownership structures of our PRC subsidiary and the King Eagle VIE in China do not
violate any applicable PRC law, regulation, or rule currently in effect; that the contractual arrangements are valid, binding, and
enforceable in accordance with their terms and applicable PRC laws and regulations currently in effect but have not been tested in
court, KPIL faces uncertainty with respect to future actions by the PRC government that could significantly affect the enforceability
of the VIE Agreements, King Eagle VIE’s financial performance and the value of a shareholders KPIL’s shares.
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Although
the PRC’s Ministry of Commerce and its National Development and Reform Commission have announced new edicts regarding the use
of VIEs for new overseas offerings, they have indicated that such new requirements will not affect the foreign ownership of companies
already listed overseas. Nonetheless there can be no assurance that such new rules and regulations will not be applied retroactively
which may have a substantial impact on KPIL’s business and consequently on the value of KPIL’s securities.
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Shareholders
do not have a direct equity ownership interest in King Eagle VIE but control and receive the economic benefits of its respective
business operations in China through the VIE Agreements. Therefore, should the Chinese government disallow or limit the use of the
VIE, it could result in a material change in the value of your share ownership including that your shares could significantly decline
in value or become worthless.
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Because
all of our operations are conducted in the PRC through our wholly owned subsidiaries, the Chinese government may exercise significant
oversight and discretion over the conduct of our business and may intervene in or influence our operations at any time, which could
result in a material change in our operations and/or the value of your shares.
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Regulatory
authorities in China have implemented and are considering further legislative and regulatory proposals concerning privacy and data
protection and more stringent laws and regulations may be introduced in China. The PRC Cybersecurity Law provides that personal information
and important data collected and generated by operators of critical information infrastructure in the course of their operations
in the PRC should be stored in the PRC, and the law imposes heightened regulation and additional security obligations on operators
of critical information infrastructure. We do not believe that our company constitutes a critical information infrastructure operator
pursuant to the Cybersecurity Review Measures that became effective in April 2020. However, the interpretation and application of
consumer and data protection laws in China are often uncertain, in flux and complicated, including differentiated requirements for
different groups of people or different types of data and there can be no assurance that in the future our operations may not be
subject to these regulations which could have a significant material impact on our financial performance and value of our securities.
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KPIL’s
PRC subsidiaries’ ability to distribute dividends is based upon their distributable earnings. Current PRC regulations permit
our PRC subsidiaries to pay dividends to their respective shareholders only out of their accumulated profits, if any, determined
in accordance with PRC accounting standards and regulations. In addition, each of our PRC subsidiaries is required to set aside at
least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of each of their
registered capitals. These reserves are not distributable as cash dividends.
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To
address persistent capital outflows and the RMB’s depreciation against the U.S. dollar in the fourth quarter of 2016, the People’s
Bank of China, and the State Administration of Foreign Exchange, or SAFE, have implemented a series of capital control measures in
the subsequent months, including stricter vetting procedures for China-based companies to remit foreign currency for overseas acquisitions,
dividend payments and shareholder loan repayments. The PRC government may continue to strengthen its capital controls and our PRC
subsidiaries’ dividends and other distributions may be subject to tightened scrutiny in the future. The PRC government also
imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. Therefore, we
may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment
of dividends from our profits, if any. Furthermore, if our subsidiaries in the PRC incur debt on their own in the future, the instruments
governing the debt may restrict their ability to pay dividends or make other payments.
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In
addition, the Enterprise Income Tax Law and its implementation rules provide that a withholding tax at a rate of 10% will be applicable
to dividends payable by Chinese companies to non-PRC-resident enterprises unless reduced under treaties or arrangements between the
PRC central government and the governments of other countries or regions where the non-PRC resident enterprises are tax resident.
Pursuant to the tax agreement between Mainland China and the Hong Kong Special Administrative Region, the withholding tax rate in
respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise may be reduced to 5% from a standard rate of 10%.
However, if the relevant tax authorities determine that our transactions or arrangements are for the primary purpose of enjoying
a favorable tax treatment, the relevant tax authorities may adjust the favorable withholding tax in the future. Accordingly, there
is no assurance that the reduced 5% withholding rate will apply to dividends received by our Hong Kong subsidiary from our PRC subsidiaries.
This withholding tax will reduce the amount of dividends we may receive from our PRC subsidiaries.
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Please
see Item 1A “Risk Factors” beginning on page 26 of this report for additional information.
Corporate
History and Structure
Kun
Peng International Ltd. (formerly known as CX Network Group, Inc.)
The
Company was incorporated in the State of Florida on September 3, 2010, under the name of “mLight Tech, Inc.” (“MLGT”).
On July 11, 2017, MLGT merged with and into CX Network Group, Inc., a company incorporated in Nevada on July 25, 2005, with the Company
as the surviving corporation pursuant to an agreement and plan of merger (the “Merger Agreement”) dated July 3, 2017.
Pursuant
to the Merger Agreement, immediately after the effective time of the Merger, the Company’s corporate existence is governed by the
laws of the State of Nevada and the Articles of Incorporation and bylaws of the Company (the “Domicile Change”), and each
outstanding share of MLGT’s common stock, par value $0.0001 per share was converted into 0.0667 outstanding share of common stock
of CXKJ, par value $0.0001 per share at a one-for-fifteen reverse split ratio (the “Reverse Stock Split”) which resulted
in reclassification of capital from par value to capital in excess of par value. Immediately prior to the effectiveness of the reverse
stock split, we had 217,300,000 shares of common stock of MLGT issued and outstanding. Immediately upon the effectiveness of the reverse
stock split, we had 14,486,670 shares of common stock of CXKJ issued and outstanding.
The
Name Change, Domicile Change, and Reverse Stock Split went effective on June 12, 2017. Subsequently, the Company’s trading symbol
for its common stock was changed to “CXKJ”.
Effective
as of September 9, 2021, the Company’s Articles of Incorporation were amended to change the name of the Company from CX Network
Group, Inc. to Kun Peng International Ltd. (“KPIL”) and to increase the Company’s authorized capital to 210,000,000
authorized shares of Capital Stock with 200,000,000 designated as $0.0001 par value Common Stock, and 10,000,000 designated as $0.0001
par value Preferred Stock.
The
Company’s common stock, which presently trades on the OTC Pink Market under the trading symbol “CXKJ” will change as
a result of the name change. Also, as a result of the name change the Company will obtain a new CUSIP number. We have submitted the requisite
documents and other information to the Financial Information Regulatory Association, Inc. (“FINRA”) to process the name change
and we will make a subsequent announcement at such time as we are assigned a new trading symbol.
On
March 20, 2018, KPIL, Chuangxiang Holdings Inc., a company incorporated om February 4. 2016, under the laws of the Cayman Islands (“CX
Cayman”), and Continent Investment Management Limited, a British Virgin Islands company (“Continent”), and Golden Fish
Capital Investment Limited, a British Virgin Islands company (“Golden Fish”, together with “Continent”, the “CX
Cayman Stockholders”) entered into a share exchange agreement (the “Share Exchange Agreement”), pursuant to which KPIL
acquired 100% of the issued and outstanding equity securities of CX Cayman in exchange for 5,350,000 shares of common stock, par value
$0.0001 per share (the “Common Stock”) of KPIL (the “Share Exchange”). As a result of the Share Exchange, CX
Cayman became the Company’s wholly owned subsidiary.
Immediately
prior to entering into the Share Exchange Agreement with CX Cayman stockholders of CX Cayman, we were a shell company with no significant
asset or operation. As a result of the Share Exchange, we operate through our PRC affiliated entity, namely Chuangxiang Network Technology
(Shenzhen) Limited, located in Shenzhen, China. CX Cayman does not have any substantive operations other than holding CX HK, which in
return holding CX Network, who controls Shenzhen CX through certain contractual arrangements.
Preceding
our business combination with CX Cayman, our business focused on development and operation of online dating and mobile gaming products
either developed and operated by us or developed by us but co-operated by third parties; or developed by third parties but co-operated
by us.
On
March 30, 2021, certain of our shareholders (the “Sellers”), and certain investor (the “Purchaser”) entered into
a Stock Purchase Agreement (the “SPA”), pursuant to which the Purchasers acquired 16,683,334 shares of common stock, par
value $0.0001 per share (the “Shares”), for an aggregate purchase price of $255,000, subject to satisfaction or waiver of
the closing conditions set forth in the SPA.
In
connection with the SPA, on the same day, we entered into a spin-off agreement (the “Spin-Off Agreement”) with Chuangxiang
Holdings Inc., a Cayman Islands corporation (“Spin-Off Subsidiary”), and Continent Investment Management Limited and Golden
Fish Capital Investment Limited, (“Spin-Off Subsidiary buyers”). Pursuant to the Spin-Off Agreement, Spin-Off Subsidiary
buyers will receive all of the issued and outstanding capital stock of Spin-Off Subsidiary at a purchase price of $1 at the closing.
As a result, Spin-Off Subsidiary buyers will become the sole equity owner of Spin-Off Subsidiary and the Company will have no further
interest in Spin-Off Subsidiary.
On
May 17, 2021, we entered into the Share Cancellation Agreement with a stockholder, Wenhai Xia, to cancel an aggregate of 15,535,309
shares of the Company’s Common Stock owned by the Stockholder.
On
May 17, 2021, we entered into the Share Exchange Agreement with KP International Holdings and holders of all outstanding capital stock
of KP International Holdings, we acquired 100% of the outstanding capital stock of KP International Holdings, and in exchange, we issued
to five former shareholders of KP International Holdings an aggregate of 34,158,391 shares of the Company’s common stock. As a
result of the reverse acquisition closed on May 17, 2021, KP International Holdings became our wholly owned subsidiary and the former
shareholders of KP International Holdings became the holders of approximately 85% of our issued and outstanding capital stock on a fully
diluted basis. For accounting purpose, the transaction with KP International Holdings was treated as a reserve acquisition, with KP International
Holdings as the acquirer and KPIL (formerly CX Network) as the acquired party. Unless the context suggests otherwise, when we refer in
this report to business and financial information for periods prior to the consummation of the Reverse Acquisition, we are referring
to the business and financial information of KP International Holdings and its subsidiaries and consolidated entities. As a result of
the reverse acquisition, KPIL is engaged in the sale of health care products and services through its online platform in the PRC.
Kun
Peng International Holding Limited
Kun
Peng International Holding Limited (“KP International Holdings”) was incorporated in the British Virgin Islands on April
20, 2021. KP International Holdings is a holding company and entered into a Bought and Sold Note with Kunpeng (China) Industrial Development
Company Limited (“KP Industrial”), incorporated in Hong Kong on August 11, 2017, at a cash consideration of $0.129 (HK$1)
on May 3, 2021. After the ownership transfer, it became a sole shareholder of KP Industrial.
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 $0.13 (HK$1).
Kun
Peng Tian Yu Health Technology (Tianjin) Co., Ltd
Kun
Peng Tian Yu Health Technology (Tianjin) Co., Ltd was established as a wholly owned subsidiary of KP (Hong Kong) on August 10, 2021.
Kunpeng
(China) Industrial Development Company Limited
Kunpeng
(China) Industrial Development Company Limited (“KP Industrial”) was incorporated as a limited liability company in Hong
Kong under the name of Jing Jin Ji Investment Group Co., Limited (“Jing Jin Ji”) on August 11, 2017. The share capital of
KP Industrial is 10,000 ordinary shares at $1,292 (HKD10,000) and was wholly owned by an individual. On November 9, 2018, Jing Jin Ji
changed its name to “Kunpeng (China) Industrial Development Company Limited” and filed a Certificate of Change of Name with
the Hong Kong Company Registry on the same day. Although it was incorporated in 2017, it did not commence operations until July 2020
as it focused on exploring business opportunities in its initial phrase and developing our online mobile application, King Eagle Mall,
through its subsidiary, King Eagle (China) Co., Ltd. It became a wholly owned subsidiary of KP International Holdings on May 3, 2021.
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
$15 million (RMB100 million). King Eagle (China) was a wholly owned subsidiary of KP Industrial at the time of establishment. KP Industrial
transferred its approximately $2.2 million (RMB 15 million) or 15% to Guoxin Ruilian Group Co., Ltd., a limited liability company incorporated
in Beijing, the PRC, on November 2, 2020.
On
March 26, 2021, Guoxin Ruilian Group Co., Ltd entered into equity transfer agreements with KP Industrial and Guoxin Zhengye. Both Guoxin
Ruilian Group Co., Ltd and Guoxin Zhengye are wholly owned by a common shareholder, Guoxin United Holdings Group Co., Ltd. Under the
agreements, Guoxin Ruilian Group Co., Ltd agreed to transfer its 8% of its ownership in King Eagle (China) to Guoxin Zhengye and the
remaining 7% ownership in King Eagle (China) to KP Industrial on April 20, 2021. After the transfer, KP Industrial and Guoxin Zhengye
became the 92% and 8% shareholders of King Eagle (China), respectively.
Some
of the business engaged in by King Eagle VIE is restricted or prohibited for foreign investment under PRC regulations. As such, King
Eagle (China) has entered into the VIE Agreements with King Eagle VIE and their shareholders. We do not own any equity interests in King
Eagle VIE, but control and receive the economic benefits of their respective business operations through the VIE Agreements. The VIE
Agreements enable us to provide King Eagle VIE with consulting services on an exclusive basis, in exchange for all of its annual profits,
if any. In addition, we are able to appoint its senior executives and approve all matters requiring approval of its shareholders. The
VIE Agreements are comprised of a Consulting Service Agreement, Business Operation Agreement, Proxy Agreement, Equity Disposal Agreement,
and Equity Pledge Agreement which are described in further detail under “Contractual Arrangements” below.
Under
current Chinese laws and regulations, we believe that the VIE Agreements are not subject to any government approval. The shareholders
of King Eagle VIE were required to register with SAFE when they established offshore vehicles to hold KP International Holdings, and
such SAFE registration was affected on May 14, 2021. These shareholders of King Eagle VIE will have to register their equity pledge arrangement
as required under the Equity Pledge Agreement with King Eagle (China). The Company faces uncertainty with respect to future actions by
the PRC government that could significantly affect King Eagle VIE’s financial performance and the enforceability of the VIE Agreements.
See “Contractual Arrangements” below.
King
Eagle (Tianjin) Technology Co., Ltd.
King
Eagle (Tianjin) Technology Co., Ltd. (“King Eagle VIE”) was incorporated as a limited liability company in Tianjin Pilot
Free Trade Zone in the People’s Republic of China on September 2, 2020, with a registered capital of approximately $1.5 million
(RMB 10 million). It is owned by multiple individuals: Chengyuan Li, 51%, Jinjing Zhang, Wanfeng Hu, Cuilian Liu, Zhizhong Wang (each
of them owns 6%), Zhandong Fan, Yanlu Li, Yuanyuan Zhang, Xiangyi Mao and Hui Teng (each of them owns 5%). Those shareholders also indirectly
own KP International Holdings through two British Virgin Islands entities: Kunpeng Tech Limited and Kunpeng TJ Limited. Additionally,
out of these stakeholders, three of them are the director and executives of KP International Holdings which include: Chenyuan Li, Director,
Yuanyuan Zhang, Chief Financial Officer and Yanlu Li, Vice President.
The
following diagram illustrates our corporate structure as of the date of this Report:
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(1)
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Consulting
Service Agreement
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(2)
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Business
Operation Agreement
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(3)
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Proxy
Agreement
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(4)
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Equity
Disposal Agreement
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(5)
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Equity
Pledge Agreement
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Contractual
Arrangements
While
we do not have any equity interest in our consolidated affiliated entities, we have been and are expected to continue to be dependent
on them to operate our business as long as there is limitation or prohibition in the interpretation and application by local governments
of regulations concerning foreign investments in companies such as our consolidated affiliated entities. We rely on our consolidated
affiliated entities to maintain or renew their respective qualifications, licenses or permits necessary for our business in China. We
believe that under the VIE Agreements, we have substantial control over our consolidated affiliated entities and their respective shareholders
to renew, revise or enter into new contractual arrangements prior to the expiration of the current arrangements on terms that would enable
us to continue to operate our business in China after the expiration of the current arrangements, or pursuant to certain amendments and
changes of the current applicable PRC laws, regulations and rules on terms that would enable us to continue to operate our business in
China legally. While we currently do not anticipate any changes to PRC laws in the near future that may impact our ability to carry out
our business in China, no assurances can be made in this regard. See “Risk Factors—Risks Related to Doing Business in
China—Changes in China’s economic, political or social conditions or government policies could have a material adverse effect
on our business and operations.” and “Risk Factors—Risks Related to Doing Business in China—Uncertainties
with respect to the PRC legal system could limit the legal protections available to you and us.” For a detailed description
of the risks associated with our corporate structure and the contractual arrangements that support our corporate structure, see “Risk
Factors—Risks Related to Our Commercial Relationship with VIE(s)”.
On
May 15, 2021, King Eagle (China) Co., Ltd. (“King Eagle (China)”) and the shareholders of King Eagle VIE entered into a series
of contractual agreements for King Eagle VIE to qualify as variable interest entity or VIE (the “VIE Agreements”). The VIE
Agreements are summarized as follows:
Consulting
Service Agreement
Pursuant
to the terms of certain Exclusive Consulting Service Agreement dated May 15, 2021, between King Eagle (China) and King Eagle VIE (the
“Consulting Service Agreement”), King Eagle (China) is the exclusive consulting service provider to King Eagle VIE to provide
business-related software research and development services; design, installation, and testing services; network equipment support, upgrade,
maintenance, 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 VIE’s profit before tax in the corresponding year deducts King Eagle VIE’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 VIE 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 VIE’s consent, but
King Eagle (China) shall notify King Eagle VIE 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.
The
foregoing summary of the Consulting Service Agreement does not purport to be complete and is subject to, and qualified in its entirety
by, the Consulting Service Agreement, which was filed as Exhibit 10.1 to our Form 8-K dated May 17, 2021.
Business
Operation Agreement
Pursuant
to the terms of certain Business Operation Agreement dated on May 15, 2021, among King Eagle (China), King Eagle VIE and the shareholders
of King Eagle VIE (the “Business Operation Agreement”), King Eagle VIE has agreed to subject the operations and management
of its business to the control of King Eagle (China). According to the Business Operation Agreement, King Eagle VIE is not allowed to
conduct any transactions that has substantial impact upon its operations, assets, rights, obligations and personnel without the King
Eagle (China)’s written approval. The shareholders of King Eagle VIE and King Eagle VIE will take King Eagle (China) ‘s advice
on appointment or dismissal of directors, employment of King Eagle VIE’s employees, regular operation, and financial management
of King Eagle VIE. The shareholders of King Eagle VIE have agreed to transfer any dividends, distributions, or any other profits that
they receive as the shareholders of King Eagle VIE to King Eagle (China) without consideration. The Business Operation Agreement is valid
for a term of 10 years or longer upon the request of King Eagle (China) prior to the expiration thereof. The Business Operation Agreement
might be terminated earlier by King Eagle (China) with a 30-day written notice.
The
foregoing summary of the Business Operation Agreement does not purport to be complete and is subject to, and qualified in its entirety
by, the Business Operation Agreement, which was filed as Exhibit 10.2 to our Form 8-K filed dated May 17, 2021.
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 VIE (the “Proxy
Agreement”), the shareholders of King Eagle VIE have entrusted their vote rights as King Eagle VIE’s shareholders to King
Eagle (China) for the longest duration permitted by PRC law. The Proxy Agreement can be terminated by mutual consents of King Eagle VIE
Shareholders and King Eagle (China) or upon a 30-day notice of King Eagle (China).
The
foregoing summary of the Proxy Agreement does not purport to be complete and is subject to, and qualified in its entirety by, the Proxy
Agreement, which was filed as Exhibit 10.3 to our Form 8-K dated May 17, 2021.
Equity
Disposal Agreement
Pursuant
to the terms of the Equity Disposal Agreement dated on May 15, 2021, among King Eagle (China), King Eagle VIE, and the shareholders of
King Eagle VIE (the “Equity Disposal Agreement”), the shareholders of King Eagle VIE granted King Eagle (China) or its designees
an irrevocable and exclusive purchase option (the “Option”) to purchase King Eagle VIE’s all or partial equity interests
and/or assets at the lowest purchase price permitted by PRC laws and regulations. The option is exercisable at any time at King Eagle
(China)’s discretion in full or in part, to the extent permitted by PRC law. The shareholders of King Eagle VIE agreed to give
King Eagle VIE the total amount of the exercise price as a gift, or in other methods upon King Eagle (China)’s written consent
to transfer the exercise price to King Eagle VIE. The Equity Disposal Agreement is valid for a term of 10 years or longer upon the request
of King Eagle (China).
The
foregoing summary of the Equity Disposal Agreement does not purport to be complete and is subject to, and qualified in its entirety by,
the Equity Disposal Agreement, which was filed as Exhibit 10.4 to our Form 8-K dated May 17, 2021.
Equity
Pledge Agreement
Pursuant
to the terms of certain Equity Pledge Agreement dated on May 15, 2021, among King Eagle (China) and the shareholders of King Eagle VIE
(the “Pledge Agreement”), the shareholders of King Eagle VIE pledged all of their equity interests in King Eagle VIE to King
Eagle (China), including the proceeds thereof, to guarantee King Eagle VIE’s performance of its obligations under the Business
Operation Agreement, the Consulting Service Agreement and Equity Disposal Agreement (each, an “Agreement”, collectively,
the “Agreements”). If King Eagle VIE or its shareholders breach its respective contractual obligations under any Agreement
or cause to occur one of the events regards as an event of default under any Agreement, King Eagle (China), as pledgee, will be entitled
to certain rights, including the right to dispose of the pledged equity interest in King Eagle VIE. During the term of the Pledge Agreement,
the pledged equity interests cannot be transferred without King Eagle (China)’s prior written consent. The Pledge Agreements is
valid until all the obligations due under the Agreements have been fulfilled.
The
foregoing summary of the Equity Pledge Agreement does not purport to be complete and is subject to, and qualified in its entirety by,
the Equity Pledge Agreement, which was filed as Exhibit 10.5 to our Form 8-K dated May 17, 2021.
Our
Business
A
vast majority of people in the PRC are in a sub-healthy state and the number of chronic diseases increased significantly each year. Based
on the governmental statistics on the healthiness of the people in the PRC, approximately:
70%
of Chinese are at risk of death from overwork
76%
of white-collar workers are in a sub-health state
23%
of Chinese people have chronic diseases
120
million fatty liver patients
121
million people with diabetes
200
million people with dyslipidemia (including hyperlipidemia)
420
million hypertensive population
507
million overweight and obese people
One
person has cancer in 10 seconds
One
person has diabetes in 30 seconds
At
least one person died of cardiovascular disease in 30 seconds
Chronic
disease mortality accounted for 86%
22%
of middle-aged and elderly deaths are due to cardiovascular and cerebrovascular diseases
A
Fundamental Public Health Regulation of the PRC was passed in December 2019 which intended to promote the public health and hygiene awareness
and improve the medical care system. The regulation particularly focuses on promoting preventive care measures, strengthening non-medical
health nourishment, reducing the number of incidence of diseases, and developing a healthy China 2030. An investment in preventive care
measures can significantly lower the cost of medical care and treatment.
Since
the global health issue and pandemic, people have increased their health and nutrition consciousness. King Eagle (China) believes preventive
care is the most effective investment in health. Based on the statistics performed by Euromonitor, China Health Care Association, Prospective
Industry Research Institute, the market size of health care products in China is as follows:
In
the most recent years, e-commerce has developed rapidly in the PRC and management believes that we are in a new era of e-commerce with
additional characteristics of sharing economy, offline support and social interaction evolving. We believe the rise of social e-commerce
will positively impact the development of our health care business.
To
promote the awareness of preventive care to the vast population of the people in the PRC, we intend to serve our customers through our
mobile (King Eagle Mall) and physical (Smart Kiosk) platforms.
King
Eagle Mall
We
developed and launched a mobile social e-commerce platform, King Eagle Mall, which promotes preventive health care products and services
as our core business. It adopts the S2B2C business model and integrates many major health care products and services.
The
three cores and six features that we are developing through the King Eagle Mall are:
Core
1: Integration of resources in the health care industry
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Feature
1
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Closed-loop
supply chain
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Compared
with the traditional B2B and B2C marketing models, the mobile application, King Eagle Mall, has a more scientific marketing layout
without stocking of inventory and capital investment. All the goods in demand are supported by upstream suppliers. Members can sell
goods more flexibly, and the distribution of goods is promoted by the way of direct supply by manufacturers, which meets the needs
of customers and promotes the increase in product sales. This complete closed-loop supply chain is more conducive to the rapid development
of King Eagle (China) and enhance resource utilization.
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Feature
2
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S2B2C
model perfectly provides three-terminal users with the most intuitive service and use value.
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S2B2C
is an innovative e-commerce model that can drive much greater value innovation than traditional models. This kind of innovation is
reflected in S (supplier) and B (platform) working together to provide C (customer) with more thorough services. In other words,
S empowers B and supports B to conduct product and service transactions with C, while B and C pass on their needs to S, so that S
can better serve B and C, satisfying a wider group and achieving a larger demand channel.
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Core
2: Personal health management
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Feature
3
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Combined
with Smart Kiosk to enhance personal care service dimensions
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Through
our physical platform, Smart Kiosk, we create profiles for each member to record personal health data and rely on big data analysis
to prompt all aspects of health-related clothing, food, housing, transportation, and other daily living styles. For example, based
on the member’s personal health background and medical history, the kiosk analyzes the health condition of the member and suggests
types of health supplements, food, health-related products or health checking tools, etc, that are suitable for the member.
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Feature
4
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Connecting
to health and wellness experience, improving service height.
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Ecological
+ elderly care + healthy lifestyle experience is an indispensable part of the health industry, and it is also a supply and demand
gap that will inevitably appear in industrial development and economic development. For middle and high net worth groups, we provide
different types of health and elderly lifestyle experience environments. The Smart Kiosk APP provides full-cycle and full-view high-end
services, so that there is a connection between health and living.
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Core
3: Wealth value
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Feature
5
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Sharing
Wealth
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Health
itself is wealth. King Eagle Mall is not just a comprehensive consumer docking platform, it is also a new channel to provide wealth
for upstream supply chain enterprises and terminal members. Through the integrated platform, King Eagle (China) shares healthy lifestyle
with its members and meets different health needs of different members.
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Feature
6
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Quality
of Life
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To
strengthen the concept of healthiness, King Eagle Mall will go deep into every corner of life in the future, providing members with
more healthy choices in five aspects: clothing, food, home living, daily necessities, and transportation, and guiding our members
to lead a healthier and quality life.
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The
products focus on health-related products and services. King
Eagle Mall is designed to enable health-related products to be sold by us and by third parties. King Eagle Mall’s products are
divided into two sectors: self-operated products and strictly selected products which promote preventive health care. Our team screens
and examines products that are and will be offered both by us and affiliated merchants. Our major products include health care products
such as dietary supplements, nutritional health foods, beauty cosmeceuticals, and other categories (for instance, milk powder, dried
fruits) health foods for supporting the cardiovascular system, and bone joint health. We offer collagen peptides, probiotics, and health
foods for improving blood circulation and vein health, as well as household products which can promote and improve a healthier lifestyle
of our members. We receive customer orders and may arrange fulfillment with our merchants who are responsible for delivery arrangement
or fulfill customer orders through our outsourced networks.
At
the same time, we operate customer service centers with whom our members can directly communicate for any assistance related to product
purchases, suggestions for health care products and services, and delivery logistics.
Smart
Kiosk
We
introduced “Smart Kiosk” with the support from the previous stakeholder of King Eagle (China), Guoxin Ruilian Group Co.,
Ltd (“Guoxin Ruilian”), wholly owned subsidiary of CITIC Group Corporation Ltd and a related party of Guoxin Zhengye. The
construction of Smart kiosk was initiated and administered by Guoxin Ruilian Group Co., Ltd. After the completion of the construction
of Smart Kiosk, Guoxin Ruilian Group Co., Ltd assigned its wholly owned subsidiary, Guoxin Star Network Co., Ltd to cooperate with King
Eagle VIE in development of Smart Kiosk. The Smart Kiosk is a physical platform which focuses on developing “small shop economy”.
It is integrated with the King Eagle Mall which creates a “social, health and physical store” to provide people with a more
professional and comprehensive preventive health care products and services. Smart Kiosk is a principal component of our business.
The
smart service kiosk functions as a physical customer service center and community marketing for attracting customers, providing customer
services, promoting our 500+ preventive health care and health related household products and introducing concepts of maintaining a healthy
life. 5G internet connection is also available for our customers to connect to our online application, King Eagle Mall, so that our customers
can access to King Eagle Mall and place orders of our products. Our plans to establish Smart Kiosks in the City of Zhengzhou,
in Henan Province, and in the City of Wuhan, in Hubei Province as well as our intention in the
future, to deploy Smart Kiosks in 20 provinces across the PRC have been indefinitely delayed due to COVID-19.
On
March 31, 2021, King Eagle VIE entered into an agreement with Guoxin
Star Network Co., Ltd., and was granted the right to operate 50 Smart Kiosks for five years starting in April 2021. King Eagle VIE is
also entitled to the profit sharing from the operation of the Smart Kiosks. The operation of the Smart Kiosks can be administered in
one of the three models:
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Operation
by King Eagle VIE: The operation of Smart Kiosk is solely administered by King Eagle VIE. Advertising, product promotion, human resources,
product display and sales strategies are planned, established, and operated by King Eagle VIE. Profit sharing from the operation
of Smart Kiosk is allocated between King Eagle VIE and the party who purchases the right-of-use of Smart Kiosks based on the mutually
agreed terms.
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Cooperative
operation of health care and health related product suppliers: King Eagle VIE granted the right of use of Smart Kiosks to its product
suppliers who sell their health care and health related household products on King Eagle Mall. The profit sharing is allocated between
King Eagle VIE and those product suppliers based on the mutually agreed terms.
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Franchise
operation: Members of King Eagle Mall are granted the right-of-use of Smart Kiosks to run the business with the training, advertising,
sales, and marketing strategies provided by King Eagle VIE. Profit sharing is allocated between King Eagle VIE and the members based
on the mutually agreed terms.
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COVID-19
The
ongoing coronavirus pandemic as well as the newer Omicron variant has had and will continue to spread nearly all areas around the world.
The spread of coronavirus impacted the operation of business and caused delays in the development or construction of business properties
due to shut down in the affected areas. Since the shutdown of several areas in the PRC, the approval process of our applications for
the construction permits of smart kiosks was delayed by the local governmental agencies and the construction project of smart kiosks
was also postponed. We continue to focus our business through our online platform, King Eagle Mall, to mitigate the adverse impacts by
COVID-19 and follow up closely with the local governmental agencies for the application for the construction permits of smart kiosks.
Although we do not expect that the virus will have a material adverse effect on our business or financial results at this time, it is
not possible to predict the unanticipated consequence of the pandemic on our future business performance and liquidity due to the severity
of global situation of COVID-19 and we may take actions as may be required by local government authorities or that we determine are in
the best interests of our employees, partners and community.
Strategic
Relationships to Provide Comprehensive Health Services
Preventive
health care focuses upon the relationship between genetics, environment, physiology, psychology, and lifestyle, to assist in addressing
health and disease. Physical examinations assist in providing personalized solutions to eliminate the cause of the disease and treat
and regulate functional changes, so to help patients overcome disease and lead healthier lives.
Although
King Eagle (China) terminated its Cooperation Agreement with Peking Union Lawke Center for Functional Medicine Co., Limited, it continues
to explore potential strategic relations with other health service providers in order to offer its members and customers integrated health
conditioning, tracking management, high-level, personalized, and convenient health and health care, testing, consulting, and other services,
based on user testing data in the King Eagle Mall and integrated with global physician resources,
Through
strategic relationships, King Eagle (China) intends to create a “social e-commerce + health + physical store” integration
platform, using smart kiosks as the carrier to provide people with more professional and comprehensive health services. Functional medicine
starts from the relationship between genetics, environment, physiology, psychology, and lifestyle, studying the decline of human function
to pathological changes, and finally finding the root cause of the disease. Functional medicine offers comprehensive physical examinations
and provides personalized solutions to the members to minimize their health risks and treat and regulate body functions.
Sales
and Marketing
We
will and do engage in a variety of marketing activities intended to drive user traffic to our mobile application and give us the opportunity
to introduce our products and services to prospective members. For our online mobile application, King Eagle Mall, we (i) pay various
mobile app channels to broadcast our apps to raise awareness of our products and increase their ranking to attract new users, (ii) engage
in self-promoting on social media, (iii) advertise our products via our cooperative public platforms, (iv) organize off-line experience
events and activities; and (v) we enter into business alliance with various well-known regional and global health care product business
partners and prestige health organizations; (vi) we will provide health education on our official website: kp-china.com. With respect
to our King Eagle Mall mobile application which we launched in September 2020, our marketing strategy focuses upon seeking well known
network and platform providers to broadcast the products and services, improving the products and services to raise its ranking in app
stores, and display advertising to increase the exposure to attract new users.
Our
Customers
Our
current and future customers mainly include individual members. As of the date of this report, we had approximately 10,000 members and
as of December 20, 2021, we had approximately 12,000 members.
Customer
Service
Our
call center and email support teams monitor our mobile applications as well as mobile application developed by other companies for fraudulent
activity, assist members with billing questions, help members complete personal profiles and answer technical questions. Customer service
representatives receive ongoing training in an effort to better personalize the experience for members and paying subscribers who call
or email us and to capitalize on upselling opportunities.
Technology
Our
internal product teams focused on the development and maintenance of products in addition to building and managing our software and hardware
infrastructure. We intend to continue investing in the development of new products, such as mobile applications, and enhancing the efficiency
and functionality of our existing products and infrastructure.
Our
network infrastructure and operations are designed to deliver high levels of availability, performance, security, and scalability in
a cost-effective manner. We operate web and database servers co-located at a third-party data center facility in Beijing, PRC.
Our
Competition
We
operate in a highly competitive environment with minimal barriers to entry. We believe the primary competitive factors in creating a
community on the Internet are functionality, brand recognition, reputation, critical mass of members, member affinity and loyalty, ease-of-use,
quality of service and reliability. We compete with a number of large and small companies, including vertically integrated Internet portals
and specialty-focused media companies that provide online and offline products and services to the online market we serve.
In
2020, the total size of China’s social e-commerce market exceeded 2.3 trillion RMB, and the social e-commerce market based on the
membership model was 363.26 billion RMB in 2019, accounting for about 18% of social e-commerce.
King
Eagle (China)’s competitors mainly come from social e-commerce platforms, including Pinduoduo (based on the group buying model),
Weimeng (providing services for micro-businesses), Taobao, JD, etc.
We
believe our ability to compete depends upon many factors both within and beyond our control, including the following:
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the
size and diversity of our member and paying subscriber bases;
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the
timing and market acceptance of our apps, including the developments and enhancements to those apps and features relative to those
offered by our competitors;
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●
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customer
service and support efforts;
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●
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selling
and marketing efforts; and
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●
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our
brand strength in the marketplace relative to our competitors.
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Competitive
advantage
Experienced
management:
King
Eagle (China) acquired talents in developing its online and offline platforms, creating business models, marketing, managing, from multi-national
corporations, public companies, and prestige universities.
Shared
resources from our stakeholder:
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
$15 million (RMB100 million). King Eagle (China) was a wholly owned subsidiary of KP Industrial at the time of establishment. KP Industrial
transferred its approximately $2.2 million (RMB 15 million) or 15% to Guoxin Ruilian Group Co., Ltd., a limited liability company incorporated
in Beijing, the PRC, on November 2, 2020.
On
March 26, 2021, Guoxin Ruilian Group Co., Ltd entered into equity transfer agreements with KP Industrial and Guoxin Zhengye. Both Guoxin
Ruilian Group Co., Ltd and Guoxin Zhengye are wholly owned by a common shareholder, Guoxin United Holdings Group Co., Ltd. Under the
agreements, Guoxin Ruilian Group Co., Ltd agreed to transfer its 8% of its ownership in King Eagle (China) to Guoxin Zhengye and the
remaining 7% ownership in King Eagle (China) to KP Industrial on April 20, 2021. After the transfer, KP Industrial and Guoxin Zhengye
became the 92% and 8% shareholders of King Eagle (China), respectively.
Government
support:
A
Fundamental Public Health Regulation of the PRC was passed in December 2019 which intended to promote the public health and hygiene awareness
and improve the medical care system. The regulation particularly focuses on promoting preventive care measures, strengthening non-medical
health nourishment, reducing the number of incidence of diseases, and developing a healthy China 2030.
The
State Council has initiated Pilot Free Trade Zone Plan (“the Plan”) in Beijing, Hunan Province, Anhui and Zhejiang province
on September 21, 2020. The Plan provides that the free trade zone area in Beijing is approximately 120 square kilometers and is divided
into three major sections:
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31.85
square kilometers for technology innovation area
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This
zoning includes 21.59 square kilometers of Zhongguancun Science City and 10.26 square kilometers of usable industrial space around Beijing
Life Science Park. This area focuses on the development of a new generation of information technology, biology and health, science and
technology services and other industries, a global venture capital center, and a pilot demonstration zone for scientific and technological
system reform.
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48.34
square kilometers for international business service area
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This
area includes 28.5 square kilometers of usable industrial space around Capital International Airport, 4.96 square kilometers of Beijing
CBD, 2.96 square kilometers of Jinzhan International Cooperation Service Area, and 10.87 square kilometers of usable industrial space
around the city’s sub-central Canal Business District and Zhangjiawan Design Town. This zoning focuses on the development of digital
trade, cultural trade, business conventions and exhibitions, medical and health, international delivery logistics and cross-border finance.
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39.49
square kilometers for high-end industrial area:
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This
section includes 10.36 square kilometers of usable industrial space on the west side of Daxing International Airport and 27.83 square
kilometers of Beijing Economic and Technological Development Zone. It focuses on the development of industries such as business services,
international finance, cultural creativity, biotechnology, and general health care.
Since
King Eagle (China) established its business in Beijing Free Trade Zone, the development of King Eagle (China) is supported by the facilities
established by of the Plan as well as is entitled to lower customs and tax rate for its business which reduces the cost of its operations.
Our
Intellectual Property
We
rely on a combination of intellectual property rights, including trade secrets, copyrights, trademarks, and domain names, as well as
contractual restrictions to protect intellectual property and proprietary technology owned or used by us.
All
of our employees have entered into standard employment agreements requiring them to keep confidential all information relating to our
customers, methods, business and trade secrets during their terms of employment with us and thereafter and to assign to us their inventions,
technologies and designs they develop during their term of employment with us.
We
developed our online platform “King Eagle Mall”, of which we own the copyright. The software platform was placed in service
in September 2020 and offers a variety of preventive health care products and services to our members. The platform provides upstream
supply chain of the preventive health care products and downstream health care analysis and advice to our members.
We
also developed our business trademarks. In order to protect our intellectual property rights, we have submitted applications to register
our trademarks in the PRC, including without limitation the following:
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Trademark
|
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Country/Area
|
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Trademark
|
|
number
|
|
Classes
|
|
PRC
|
|
金嗨购
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|
50368216
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|
9
|
|
PRC
|
|
金嗨购
|
|
50374979
|
|
16
|
|
PRC
|
|
金嗨购
|
|
50375007
|
|
37
|
|
PRC
|
|
金嗨购
|
|
50377397
|
|
39
|
|
PRC
|
|
金嗨购
|
|
50382061
|
|
41
|
|
PRC
|
|
金嗨购
|
|
50382076
|
|
42
|
|
PRC
|
|
金嗨购
|
|
50392663
|
|
43
|
|
PRC
|
|
金嗨购
|
|
50375312
|
|
45
|
|
PRC
|
|
|
|
50374965
|
|
9
|
|
PRC
|
|
|
|
50371272
|
|
16
|
|
PRC
|
|
|
|
50373087
|
|
37
|
|
PRC
|
|
|
|
50387468
|
|
39
|
|
PRC
|
|
|
|
50369532
|
|
41
|
|
PRC
|
|
|
|
50380120
|
|
42
|
|
PRC
|
|
|
|
50392663
|
|
43
|
|
PRC
|
|
|
|
50387165
|
|
45
|
|
PRC
|
|
|
|
50366519
|
|
43
|
|
PRC
|
|
|
|
55127695
|
|
1
|
|
PRC
|
|
|
|
55146919
|
|
3
|
|
PRC
|
|
|
|
55139610
|
|
9
|
|
PRC
|
|
|
|
55134787
|
|
10
|
|
PRC
|
|
|
|
55132744
|
|
35
|
|
PRC
|
|
|
|
55140311
|
|
41
|
|
PRC
|
|
|
|
55141993
|
|
43
|
We
regard our patents and software copyrights important to our success and our competitive position.
We
did not incur any research and development expenses for the years ended September 30, 2021 and 2020.
Regulations
Because
all of our operating entities are located in the PRC, we are regulated by the national and local laws of the PRC. This section summarizes
the major PRC regulations relating to our business. See “Risk Factors – Risks Related to Doing Business in China.”
Regulations
Regarding Foreign Investment
The
Catalogue of Industries for Encouraged Foreign Investment (2020 Edition) (the “Encouraging Catalogue”) was jointly promulgated
by the NDRC and the MOFCOM on 27 December 2020, and it came into effect on 27 January 2021. The Special Administrative Measures for Access
of Foreign Investment (Negative List) (2020 Edition) (the”2020 Negative List”) was jointly promulgated on 23 June 2020 and
took effect on 23 July 2020. The Encouraging Catalogue and the 2020 Negative List categorizes the industries into three categories, including
“encouraged”, “restricted” and “prohibited”. All industries that are not listed under one of “encouraged”,
“restricted” or “prohibited” categories are deemed to be “permitted”. The Encouraging Catalogue and
the 2020 Negative List are subject to review and update by the Chinese government from time to time.
Regulation
Regarding Foreign Exchange Registration of Offshore Investment by PRC
Circular
on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment
Through Special Purpose Vehicles, or Circular 37, issued by SAFE and effective in July 4, 2014, regulates foreign exchange matters in
relation to the use of special purpose vehicles, or SPVs, by PRC residents or entities to seek offshore investment and financing and
conduct round trip investment in China.
Circular
37 and other SAFE rules require PRC residents, including both legal and natural persons, to register with the local banks before making
capital contribution to any company outside of China (an “offshore SPV”) with onshore or offshore assets and equity interests
legally owned by PRC residents. In addition, any PRC individual resident who is the stockholder of an offshore SPV is required to update
its registration with the local banks with respect to that offshore SPV in connection with change of basic information of the offshore
SPV such as its company name, business term, the shareholding by individual PRC resident, merger, division and with respect to the individual
PRC resident in case of any increase or decrease of capital in the offshore SPV, transfer of shares or swap of shares by the individual
PRC resident. Failure to comply with the required SAFE registration and updating requirements described above may result in restrictions
being imposed on the foreign exchange activities of the PRC subsidiaries of such offshore SPV, including increasing the registered capital
of payment of dividends and other distributions to, and receiving capital injections from the offshore SPV. Failure to comply with Circular
37 may also subject the relevant PRC residents or the PRC subsidiaries of such offshore SPV to penalties under PRC foreign exchange administration
regulations for evasion of applicable foreign exchange restrictions.
Regulations
Regarding Foreign Exchange
Under
the Foreign Currency Administration Rules promulgated in 1996 and revised in 1997 and 2008 and various regulations issued by SAFE and
other relevant PRC government authorities, RMB is convertible into other currencies without prior approval from SAFE only to the extent
of current account items, such as trade related receipts and payments, interest, and dividends and after complying with certain procedural
requirements. The conversion of RMB into other currencies and remittance of the converted foreign currency outside PRC for the purpose
of capital account items, such as direct equity investments, loans and repatriation of investment, requires the prior approval from SAFE
or its local office. Payments for transactions that take place within China must be made in RMB. Unless otherwise approved, PRC companies
must repatriate foreign currency payments received from abroad. Foreign-invested enterprises may retain foreign exchange in accounts
with designated foreign exchange banks subject to a cap set by SAFE or its local office. Unless otherwise approved, domestic enterprises
must convert all of their foreign currency proceeds into RMB.
On
August 29, 2008, SAFE promulgated Circular 142 which regulates the conversion by a foreign-funded enterprise of foreign currency into
RMB by restricting how the converted RMB may be used. In addition, SAFE promulgated Circular 45 on November 9, 2011, in order to clarify
the application of Circular 142. Under Circular 142 and Circular 45, the RMB capital converted from foreign currency registered capital
of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable government authority
and may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the RMB
capital converted from foreign currency registered capital of foreign-invested enterprises. The use of such RMB capital may not be changed
without SAFE’s approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have
not been used. Violations of Circular 142 and Circular 45 could result in severe penalties, such as heavy fines as set out in the relevant
foreign exchange control regulations. On July 4, 2014, SAFE promulgated SAFE Circular 36, which launched a pilot reform of the administration
of the settlement of the foreign exchange capitals of foreign-invested enterprises in certain designated areas from August 4, 2014. However,
SAFE Circular 36 continues to prohibit foreign-invested enterprises from directly or indirectly using the Renminbi converted from their
foreign exchange capitals for purposes beyond its business scope. On March 30, 2015, SAFE promulgated Circular 19, to expand the reform
nationwide. Circular 19 came into force and replace both Circular 142 and Circular 36 on June 1, 2015. Circular 36 allows enterprises
established within the pilot areas to use their foreign exchange capitals to make equity investment and removes certain other restrictions
provided under Circular 142 for these enterprises. Circular 19 will remove those restrictions for all foreign-invested enterprises established
in the PRC. However, both Circular 36 and Circular 19 continue to prohibit foreign-invested enterprises from, among other things, using
the Renminbi fund converted from its foreign exchange capitals for expenditure beyond its business scope, providing entrusted loans or
repaying loans between non-financial enterprises.
On
June 9, 2016, SAFE promulgated Circular 16, which provides an integrated standard for converting foreign exchange under capital account
items (including but not limited to foreign exchange capital and foreign debts) on a discretionary basis which applies to all enterprises
registered in the PRC. The Circular 16 reiterates the principle that Renminbi converted from foreign currency-denominated capital of
a company may not be directly or indirectly used for purposes beyond its business scope or prohibited by PRC laws or regulations, and
such converted Renminbi shall not be provided as loans to its non-affiliated entities, except where it is expressly permitted in the
business license.
Regulations
regarding privacy and data protection
Regulatory
authorities in China have implemented and are considering further legislative and regulatory proposals concerning data protection. New
laws and regulations that govern new areas of data protection or impose more stringent requirements may be introduced in China. In addition,
the interpretation and application of consumer and data protection laws in China are often uncertain, in flux and complicated, including
differentiated requirements for different groups of people or different types of data.
The
PRC regulatory and enforcement regime with regard to privacy and data security is evolving. The PRC Cybersecurity Law provides that personal
information and important data collected and generated by operators of critical information infrastructure in the course of their operations
in the PRC should be stored in the PRC, and the law imposes heightened regulation and additional security obligations on operators of
critical information infrastructure. According to the Cybersecurity Review Measures promulgated by the Cyberspace Administration of China
and certain other PRC regulatory authorities in April 2020, which became effective in June 2020, operators of critical information infrastructure
must pass a cybersecurity review when purchasing network products and services which do or may affect national security. We do not believe
that our company constitutes a critical information infrastructure operator pursuant to the Cybersecurity Review Measures that became
effective in April 2020. 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.
On
July 10, 2021, the Cyberspace Administration of China issued the Measures for Cybersecurity Review (Revision Draft for Comments) for
public comments, which proposes to authorize the relevant government authorities to conduct cybersecurity review on a range of activities
that affect or may affect national security, including listings in foreign countries by companies that possess the personal data of more
than one million users. The PRC National Security Law defines various types of national security, including technology security and information
security.
On
November 14, 2021, the Cyberspace Administration of China released the Regulations on Network Data Security (draft for public comments)
and will accept public comments until December 13, 2021. The draft Regulations on Network Data Security provide that data processors
refer to individuals or organizations that autonomously determine the purpose and the manner of processing data. If a data processor
that processes personal data of more than one million users intends to list overseas, it shall apply for a cybersecurity review. In addition,
data processors that process important data or are listed overseas shall carry out an annual data security assessment on their own or
by engaging a data security services institution, and the data security assessment report for the prior year should be submitted to the
local cyberspace affairs administration department before January 31 of each year.
We
currently have less than one million registered users on our digital and only require and obtain user information after users register
with it. Given that we sell and service products through our digital platform, we may constitute a “data processor,” but
the number of our online registered users is far less than one million. As a result, even if enacted, we would not be required to apply
for a cybersecurity review under the Measures for Cybersecurity Review (Revision Draft for Comments) or the Regulations on Network Data
Security (draft for public comments). Nevertheless, the Measures for Cybersecurity Review (Revision Draft for Comments) or the Regulations
on Network Data Security (draft for public comments) are still being formulated and subject to further changes Although we believe we
currently are not required to obtain clearance from the Cyberspace Administration of China under the Measures for Cybersecurity Review
(Revision Draft for Comments), the Regulations on Network Data Security (draft for public comments), or the Opinions on Strictly Cracking
Down on Illegal Securities Activities, we face uncertainties as to the interpretation or implementation of such regulations or rules
and we may in the future be required to perform a data security assessment annually either by ourselves or by retaining a third party
data security service provider and submitting such data security assessment report to the local agency every year under the draft Regulations
on Network Data Security
On
June 10, 2021, the Standing Committee of the National People’s Congress of China promulgated the Data Security Law which took effect
on September 1, 2021. The Data Security Law provides for data security and privacy obligations of entities and individuals carrying out
data activities, prohibits entities and individuals in China from providing any foreign judicial or law enforcement authority with any
data stored in China without approval from competent PRC authority, and sets forth the legal liabilities of entities and individuals
found to be in violation of their data protection obligations, including rectification order, warning, fines of up to RMB10 million,
suspension of relevant business, and revocation of business permits or licenses.
On
August 20, 2021, the Standing Committee of the National People’s Congress of China promulgated the Personal Information Protection
Law which took effect on November 1, 2021. In addition to other rules and principles of personal information processing, the Personal
Information Protection Law specifically provides rules for processing sensitive personal information. Sensitive personal information
refers to personal information that, once leaked or illegally used, could easily lead to the infringement of human dignity or harm to
the personal or property safety of an individual, including biometric recognition, religious belief, specific identity, medical and health,
financial account, personal whereabouts, and other information of an individual, as well as any personal information of a minor under
the age of 14. Only where there is a specific purpose and sufficient necessity, and under circumstances where strict protection measures
are taken, may personal information processors process sensitive personal information. A personal information processor shall inform
the individual of the necessity of processing such sensitive personal information and the impact thereof on the individual’s rights
and interests. As uncertainties remain regarding the interpretation and implementation of the Personal Information Protection Law, we
cannot assure you that we will comply with the Personal Information Protection Law in all respects and regulatory authorities may order
us to rectify or terminate our current practice of collecting and processing sensitive personal information.
Compliance
with the PRC Cybersecurity Law, the PRC National Security Law, the Data Security Law, the Cybersecurity Review Measures, the Personal
Information Protection Law, as well as additional laws and regulations that PRC regulatory bodies may enact in the future, may result
in additional expenses to us and subject us to negative publicity, which could harm our reputation among users and negatively affect
the trading price of our common stock in the future. PRC regulators, including the Department of Public Security, the MIIT, the SAMR
and the CAC, have been increasingly focused on regulation in the areas of data security and data protection, and are enhancing the protection
of privacy and data security by rulemaking and enforcement actions at central and local levels. We expect that these areas will receive
greater and continued attention and scrutiny from regulators and the public going forward, which could increase our compliance costs
and subject us to heightened risks and challenges associated with data security and protection. If we are unable to manage these risks,
we could become subject to penalties, including fines, suspension of business, prohibition against new user registration (even for a
short period of time) and revocation of required licenses, and our reputation and results of operations could be materially and adversely
affected.
Any
failure, or perceived failure, by us to comply with the above and other regulatory requirements or privacy protection-related laws, rules
and regulations could result in reputational damages or proceedings or actions against us by governmental entities, consumers, or others.
These proceedings or actions could subject us to significant penalties and negative publicity, require us to change our data and other
business practices, increase our costs and severely disrupt our business, or negatively affect the trading price of our common stock.
Taxation
PRC
Enterprise Income Tax
The
PRC Enterprise Income Tax Law, or EIT Law, and its implementation rules provide that from January 1, 2008, a uniform income tax rate
of 25% is applied equally to domestic enterprises as well as foreign investment enterprises.
The
EIT Law and its implementation rules provide that a withholding tax at the rate of 10% is applicable to dividends and other distributions
payable by a PRC resident enterprise to investors who are “non-resident enterprises” (that do not have an establishment or
place of business in the PRC, or that have such establishment or place of business but the relevant dividend or other distribution is
not effectively connected with the establishment or place of business). However, pursuant to the Arrangement between the Mainland and
Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes
on Income effective on December 8, 2006, the withholding tax rate for dividends paid by a PRC resident enterprise is 5% if the Hong Kong
enterprise is determined by the competent tax authority in the PRC to have satisfies the relevant conditions and requirements under the
applicable laws ; otherwise, the dividend withholding tax rate is 10%. According to the Notice of the PRC State Administration of Taxation
on Issues relating to the Administration of the Dividend Provision in Tax Treaties promulgated on February 20, 2009, and effective on
the same day, the corporate recipient of dividends distributed by PRC enterprises must satisfy the direct ownership thresholds at all
times during the 12 consecutive months preceding the receipt of the dividends. However, if a company is deemed to be a pass-through entity
rather than a qualified owner of benefits, it cannot enjoy the favorable tax treatments provided in the tax arrangement. In addition,
if transactions or arrangements are deemed by the relevant tax authorities to be entered into mainly for the purpose of enjoying favorable
tax treatments under the tax arrangement, such favorable tax treatments may be subject to adjustment by the relevant tax authorities
in the future.
Business
Tax and Value-added Tax
Pursuant
to the Temporary Regulations on Business Tax, which were promulgated by the State Council on December 13, 1993, and effective on January
1, 1994, as amended on November 10, 2008, and effective January 1, 2009, any entity or individual conducting business in a service industry
is generally required to pay business tax at the rate of 5% on the revenues generated from providing such services.
In
March 2016, the Ministry of Finance and SAT jointly issued the Pilot Program of Replacing Business Tax with Value-Added Tax (“VAT”)
in an All-round Manner, or Circular 36, effective from May 2016, according to which PRC tax authorities have started imposing VAT on
revenues from various service sectors, including real estate, construction, financial services and insurance, as well as other lifestyle
service sectors, replacing the business tax replacing the business tax that co-existed with VAT for over 20 years. According to Provisional
Regulations on VAT of the PRC and its detailed rules for the Implementation, organizations and individuals engaging in the sale of goods
or processing, repair and assembly services, the sale of services, intangible assets, immovables, and importation of goods in the PRC
shall be taxpayers of VAT and shall pay VAT pursuant to these regulations.
Business
License
Any
company that conducts business in the PRC must have a business license that covers a particular type of work. Other than regular business
licenses that we have already obtained, there is no special license or permit required for us to engage in the current businesses under
PRC laws and regulations.
Any
company that conducts business in the PRC must have a business license that covers the scope of the business in which such company is
engaged. Following the Share Exchange, we conduct our business through our control of KP International Holdings. Each of King Eagle (China)
and King Eagle VIE holds a business license that covers its present business.
The
business license of King Eagle (China) was issued on April 20, 2021. The scope of registered business of King Eagle (China) includes
technology development, technology promotion, technology transfer, technology consulting, technical services; real estate development;
organizing cultural and artistic exchange activities (excluding performances); renting commercial houses; catering management; undertaking
exhibition activities; literary creation; design, production, and agency, advertising; economic and trade consulting; business management
consulting; corporate planning; conference services; photography services; etiquette services; translation services; product design;
computer animation design; packaging and decoration design; computer graphic design and production; wholesale and retail daily necessities,
computers, software and auxiliary equipment, stationery, handicrafts, electronic products; sales of medical equipment class I, medical
equipment class II; goods import and export, technology import and export, agent import and export (involving quota license management,
special regulations relevant national regulations); wholesale and retail food; road cargo transportation; sales of Class III medical
devices.
The
business license of King Eagle VIE was issued on April 16, 2021, and an amendment to the business license was filed on November 5, 2021.
The expanded scope of registered business of King Eagle VIE includes (i) General items: technical services, technology development, technology
consulting, technology exchanges, technology transfer, technology promotion; data processing services; software development; conference
and exhibition services; advertising production; advertising design, agency; advertising publishing; information consulting services
(excluding licensing information Consulting services); information technology consulting services; marketing planning; etiquette services;
professional design services; camera and video production services; graphic design and production; daily necessities sales; computer
software and hardware and auxiliary equipment retail; stationery retail; arts and crafts and collectibles retail (except ivory and its
products); electronic product sales; food sales (only pre-packaged foods); second-class medical equipment sales; edible agricultural
products retail; cosmetics retail; clothing and apparel retail; knitwear sales; sales of electric bicycles; sales of household appliances;
retail of jewelry; sales of daily sundries; sales of plastic products; sales of car decoration products; sales of daily wooden products;
sales of personal hygiene products; sales of paper products; sales of maternal and child products; hygiene products and one-time Sales
of sexually-used medical supplies; sales of hairdressing accessories; sales of daily necessities; sales of rubber products; sales of
knitting textiles and raw materials; sales of labor protection products; retail of shoes and hats; sales of sanitary ware; retail of
kitchenware and sanitary ware and daily sundries; daily chemical Product sales; sales of sanitary ceramics; sales of watches and timing
instruments; sales of glasses (excluding contact lenses); sales of metal tools; sales of arts and crafts and etiquette supplies (except
ivory and its products); Sales of food detergents; sales of gifts and flowers; sales of daily masks (non-medical); sales of household
products; sales of enamel products; sales of household appliances; sales of non-electric household appliances; sales of bamboo products;
sales of plastic packaging containers and tools for food ; office supplies sales; hardware product retail; household audio-visual equipment
sales; furniture sales; adult sex toys sales (excluding drugs, medical equipment). (except for items subject to approval in accordance
with the law, carry out business activities independently according to the business license); ii) Licensed items: first type value-added
telecommunications business; second type value-added telecommunications business; third type medical device operation; pharmaceutical
retail (projects that are subject to approval in accordance with the law can only be carried out after the approval of the relevant departments).
The specific operation projects are subject to the approval documents or permits of the relevant departments.
Dividend
Distributions
Under
applicable PRC regulations, FIEs in China may pay dividends only out of their accumulated profits, if any, determined in accordance with
PRC accounting standards and regulations. In addition, a FIE in China is required to set aside at least 10% of its after-tax profit based
on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reach 50% of its registered
capital. These reserves are not distributable as cash dividends. The board of directors of a FIE has the discretion to allocate a portion
of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation.
After-tax
profits/losses with respect to the payment of dividends out of accumulated profits and the annual appropriation of after-tax profits
as calculated pursuant to PRC accounting standards and regulations do not result in significant differences as compared to after-tax
earnings as presented in our financial statements. However, there are certain differences between PRC accounting standards and regulations
and U.S. generally accepted accounting principles, arising from different treatment of items such as amortization of intangible assets
and change in fair value of contingent consideration rising from business combinations.
In
addition, under the EIT Law, the Notice of the State Administration of Taxation on Negotiated Reduction of Dividends and Interest Rates,
which was issued on January 29, 2008, the Arrangement between the PRC and the Hong Kong Special Administrative Region on the Avoidance
of Double Taxation and Prevention of Fiscal Evasion, which became effective on December 8, 2006, and the Announcement of the State Administration
of Taxation on Issues Relating to “Beneficial Owner” in Tax Treaties, which became effective on April 1, 2018, dividends
from our PRC operating subsidiaries paid to us through our Hong Kong subsidiary may be subject to a withholding tax at a rate of 10%,
or at a rate of 5% if our Hong Kong subsidiary is considered a “beneficial owner” that is generally engaged in substantial
business activities and entitled to treaty benefits under the Arrangement between the PRC and the Hong Kong Special Administrative Region
on the Avoidance of Double Taxation and Prevention of Fiscal Evasion.
Laws
and Regulations Related to Employment and Labor Protection
On
June 29, 2007, the National People’s Congress promulgated the Employment Contract Law of PRC (“Employment Contract Law”),
which became effective as of January 1, 2008, and amended on December 28, 2012. The Employment Contract Law requires employers to provide
written contracts to their employees, restricts the use of temporary workers and aims to give employees long-term job security.
Pursuant
to the Employment Contract Law, employment contracts lawfully concluded prior to the implementation of the Employment Contract Law and
continuing as of the date of its implementation shall continue to be performed. Where an employment relationship was established prior
to the implementation of the Employment Contract Law but no written employment contract was concluded, a contract must be concluded within
one month after its implementation.
On
September 18, 2008, the State Council promulgated the Implementing Regulations for the PRC Employment Contract Law which came into effect
immediately. These regulations interpret and supplement the provisions of the Employment Contract Law.
Our
standard employment contract complies with the requirements of the Employment Contract Law and its implementing regulations. We have
entered into written employment contracts with all of our employees.
Pursuant
to the PRC Labor Law and the PRC Labor Contract Law, employers must execute written labor contracts with full-time employees. All employers
must comply with local minimum wage standards. Violations of the PRC Labor Contract Law and the PRC Labor Law may result in the imposition
of fines and other administrative and criminal liability in the case of serious violations.
In
addition, according to the PRC Social Insurance Law and Administration Measures on Housing Fund, employers like our PRC subsidiaries
in China must provide employees with welfare schemes covering pension insurance, unemployment insurance, maternity insurance, work-related
injury insurance, medical insurance, and housing funds.
Employees
Currently
we have a total of 38 full-time employees and one trainee. The following table sets forth the number of our full-time employees by function.
|
Function
|
|
Number of Employees
|
|
IT
|
|
|
7
|
|
|
Finance
|
|
|
4
|
|
|
Sales and Marketing
|
|
|
7
|
|
|
Human Resources
|
|
|
3
|
|
|
Operations
|
|
|
3
|
|
|
Planning
|
|
|
5
|
|
|
Client Services
|
|
|
2
|
|
|
General and Administrative
|
|
|
8
|
|
|
Total
|
|
|
39
|
|
None
of our employees belong to a union or are a party to any collective bargaining or similar agreement. We consider our relationships with
our employees to be good.
ITEM
1A. RISK FACTORS
As
a smaller reporting company, we are not required to include risk factors in this Report. However, below is a partial list of material
risks, uncertainties and other factors that could have a material effect on the Company and its operations:
Risks
Related to Our Business
The
ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement
its business plan.
The
audited consolidated financial statements of KPIL included in this report include a paragraph that indicates that they were prepared
assuming that we would continue as a going concern. As of September 30, 2021, although KPIL generated a positive operating cash flow
in an amount of $1,913,858, it incurred a working capital deficit was $2,318,784 and a comprehensive loss of $1,802,495. These conditions
raise substantial doubt about the ability of the Company to continue as a going concern. The ability to continue as a going concern is
dependent upon generating profitable operations in the future and/or obtaining the necessary financing to meet our obligations and repay
our liabilities arising from normal business operations when they become due. Management is currently seeking additional funds, primarily
through the issuance of equity securities for cash or loans from our offices and controlling stockholders to operate our business and
estimates that additional capital will be necessary to support our operations and growth.
We
may continue to incur losses in the future, and may not be able to return to profitability, which may cause the market price of our shares
to decline.
KPIL
incurred a net loss of $1,774,734 and $208,771, for the years ended September 30, 2021, and 2020, respectively. We have generated very
limited revenue. Our current operations are small with a short history. We may be unable to achieve our performance targets, which will
impact the Company’s operating results. Our ability to achieve profitability depends on the competitiveness of our products and
services as well as our ability to control costs and to provide new products and services to meet the market demands and attract new
customers. Due to the numerous risks and uncertainties associated with the development of our business, we cannot guarantee that we may
be able to achieve profitability in the short-term or long-term. Management is currently seeking additional funds, primarily through
the issuance of equity securities for cash and loans from our offices and controlling stockholders to operate our business and estimates
that additional capital will be necessary to support our operations and growth.
We
have a limited operating history and face many of the risks and difficulties frequently encountered by development stage companies.
Our
operating entity and VIE, King Eagle (China) and King Eagle VIE commenced their operations in June 2020 and September 2020, respectively.
As a result of our limited operating history, our ability to accurately forecast our future operating results is limited and subject
to a number of uncertainties. We have encountered, and will continue to encounter, risks and uncertainties frequently experienced by
growing companies in rapidly changing industries, such as the risks and uncertainties described herein. If our assumptions regarding
these risks and uncertainties (which we use to plan our business) are incorrect or changed due to changes in our markets, or if we do
not address these risks and uncertainties successfully, our operating and financial results could differ materially from our expectations,
and our business could suffer.
The
market in which we participate is intensely competitive, and if we do not compete effectively, our operating results could be harmed.
The
market for health care and household products and services is fragmented, rapidly evolving and highly competitive, with relatively low
barriers to entry for certain applications and services. Some of our competitors may enjoy better competitive positions in certain geographical
regions or user demographics that we currently serve or may serve in the future. We expect competition in the online personals business
to continue to increase because there are no substantial barriers to entry. We believe our ability to compete depends upon many factors
both within and beyond our control, including the following:
|
|
●
|
the
size and diversity of our member and paying subscriber bases;
|
|
|
|
|
|
|
●
|
the
timing and market acceptance of our apps, including the developments and enhancements to those apps and features relative to those
offered by our competitors;
|
|
|
|
|
|
|
●
|
customer
service and support efforts;
|
|
|
|
|
|
|
●
|
selling
and marketing efforts; and
|
|
|
|
|
|
|
●
|
our
brand strength in the marketplace relative to our competitors.
|
We
compete with traditional health care and household product retailers. We also compete with a number of large and small companies, including
internet portals and specialty-focused media companies that provide online and offline products and services to the markets we serve.
Our principal mobile-based social e-commerce competitors include Pinduoduo (based on the group buying model), Weimeng (providing services
for micro-businesses), Taobao, JD. Many of our current and potential competitors have longer operating histories, significantly greater
financial, technical, marketing, and other resources, and larger customer bases than we do. These factors may allow our competitors to
respond more quickly than we can to new or emerging technologies and changes in customer preferences. These competitors may engage in
more extensive research and development efforts, undertake more far-reaching marketing campaigns, and adopt more aggressive pricing policies
that may allow them to build larger member and paying subscriber bases than ours. Our competitors may develop products or services that
are equal or superior to our products and services or that achieve greater market acceptance than our products and services. These activities
could attract members and paying subscribers away from our websites and reduce our market share.
In
addition, current and potential competitors are making, and are expected to continue to make, strategic acquisitions or establishing
cooperatives and, in some cases, establishing exclusive relationships with significant companies or competitors to expand their businesses
or to offer more comprehensive products and services. To the extent that these competitors or potential competitors establish exclusive
relationships with major portals, search engines and Internet Service Providers, or ISPs, our ability to reach potential members through
online advertising may be restricted. Any of these competitors could cause us difficulty in attracting and retaining members and converting
members into paying subscribers and could jeopardize our existing affiliate program and relationships with portals, search engines, ISPs,
and other online properties.
If
we fail to stay current with new technologies and trends in social e-commerce platforms and preventive health care and household products
and services, our applications could become obsolete
We
incur significant costs for research and development not only for the creation of new applications, but also for ensuring that our current
applications will be compatible with new technologies. If our research and development team fail to upgrade our applications to stay
current with new technologies or add new features that are popular for preventative healthcare and household uses, our applications could
become obsolete, which could result in a material adverse impact on our business and results of operations.
We
depend heavily on key personnel, and turnover of key employees and senior management could harm our business.
Our
future business and results of operations depend in significant part upon the continued contributions of our management, marketing, and
technical personnel. They also depend in significant part upon our ability to attract and retain additional qualified management, technical,
marketing and sales and support personnel for our operations. As China is building its powerful technology industry and enhancing its
market-oriented economic system, competition for talents becomes increasingly fierce. Many of our potential competitors have greater
financial, personnel, technical, manufacturing, marketing, sales, and other resources than we do. If we lose a key employee or if a key
employee fails to perform in his or her current position, or if we are not able to attract and retain skilled employees as needed, our
business could suffer. We depend on the skills and abilities of these key employees in managing the technical, marketing and sales aspects
of our business, any part of which could be harmed by further turnover.
We
may not be able to manage our expansion of operations effectively.
We
are in the process of developing our business in order to meet the potentially increasing demand for our future products, as well as
capture new market opportunities. Our current business operations are small with a short history. We may be unable to achieve our performance
targets, which will impact the Company’s operating results. As we continue to grow, we must continue to improve our operational
and financial systems, procedures, and controls, increase service capacity, and output, and expand, train, and manage our growing employee
base. In order to fund our on-going operations and our future growth, we need to have sufficient internal sources of liquidity or access
to additional financing from external sources. Furthermore, our management will be required to maintain and strengthen our relationships
with our customers and other third parties. Currently, we only have thirty-eight full time employees and one trainee. As a result, our
continued expansion has placed, and will continue to place, significant strains on our management personnel, systems, and resources.
We also will need to further strengthen our internal control and compliance functions to ensure that we will be able to comply with our
legal and contractual obligations and minimize our operational and compliance risks. Our current and planned operations, personnel, systems,
internal procedures, and controls may not be adequate to support our future growth. If we are unable to manage our growth effectively,
we may not be able to take advantage of market opportunities, execute our business strategies or respond to competitive pressures.
The
spread of Covid-19 may cause delays or limit lur ability to expand our business
In
March 2020 the World Health Organization declared coronavirus COVID-19 a global pandemic. The ongoing and evolving COVID-19 pandemic
continues to spread throughout the world and outbreak caused a widespread of quarantines, lockdowns, site closures. It has negatively
impacted the global economy, workforces, customers, and created significant volatility and disruption of economic activities. Due to
restrictions, quarantines and closures in certain affected areas and government agencies in the PRC, the approval process of our applications
for the construction permits of smart kiosks was delayed by the local governmental agencies and the construction project of smart kiosks
was also postponed. The Company continues to focus its business through its online platform, King Eagle Mall, to mitigate the adverse
impacts by COVID-19 and follows up closely with the local governmental agencies for the application for the construction permits of smart
kiosks. In fact, the pandemic increased the overall public health consciousness in the PRC, with the Company experiencing a growth in
its average monthly online sale revenue by $0.19 million or 70.5% from $0.27 million for the year ended September 30, 2020 to
$0.46 million for the year ended September 30, 2021.
Although
it does not expect that the virus will have a material adverse effect on its online business or financial results at this time, it is
not possible to predict the unanticipated consequence of the pandemic on our future business performance and liquidity due to the severity
of global situation of COVID-19. The Company continues to monitor and assess the evolving situation closely and evaluate its potential
exposure.
Our
holding company structure may limit the payment of dividends.
We
have no direct business operations, other than our ownership of our subsidiaries. While we have no current intention of paying dividends,
should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations depends upon the
receipt of dividends or other payments from our operating subsidiaries and other holdings and investment. In addition, our operating
subsidiaries, from time to time, may be subject to restrictions on their ability to make distributions to us, including as a result of
restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or other hard currency and
other regulatory restrictions as discussed below. If future dividends are paid in RMB, fluctuations in the exchange rate for the conversion
of RMB into U.S. dollars may reduce the amount received by U.S. stockholders upon conversion of the dividend payment into U.S. dollars.
Chinese
regulations currently permit the payment of dividends only out of accumulated profits as determined in accordance with Chinese accounting
standards and regulations. Our subsidiaries in China are also required to set aside a portion of their after-tax profits according to
Chinese accounting standards and regulations to fund certain reserve funds. Currently, our subsidiaries in China are the only sources
of revenues or investment holdings for the payment of dividends. If they do not accumulate sufficient profits under Chinese accounting
standards and regulations to first fund certain reserve funds as required by Chinese accounting standards, we will be unable to pay any
dividends.
After-tax
profits/losses with respect to the payment of dividends out of accumulated profits and the annual appropriation of after-tax profits
as calculated pursuant to PRC accounting standards and regulations do not result in significant differences as compared to after-tax
earnings as presented in our financial statements. However, there are certain differences between PRC accounting standards and regulations
and U.S. GAAP, arising from different treatment of items such as amortization of intangible assets and change in fair value of contingent
consideration rising from business combinations.
Risks
Relating to our Commercial Relationship with VIE
PRC
laws and regulations governing our businesses and the validity of certain of our Contractual Arrangements are uncertain. If we are found
to be in violation of such PRC laws and regulations, our business may be negatively affected, and we may be forced to relinquish our
interests in those operations.
PRC
laws and regulations prohibit or restrict foreign ownership of companies that operate Internet information and content, value added telecommunications
and certain other businesses in which we are engaged or could be deemed to be engaged. Consequently, we conduct certain of our operations
and businesses in the PRC through our VIE. The Contractual Arrangements give us effective control over King Eagle VIE and enable us to
obtain substantially all of the economic benefits arising from it as well as consolidate its financial results in our results of operations.
Although the structure we have adopted is s commonly adopted by comparable companies in China, the PRC government may not agree that
these arrangements comply with PRC licensing, registration, or other regulatory requirements, with existing policies or with requirements
or policies that may be adopted in the future.
We
have been advised by our PRC counsel that the ownership structures of our PRC subsidiary and our VIE in China does not violate any applicable
PRC law, regulation, or rule currently in effect; and the contractual arrangements between King Eagle (China), King Eagle VIE, and its
equity holders governed by PRC law are valid, binding, and enforceable in accordance with their terms and applicable PRC laws and regulations
currently in effect. However, our PRC counsel has also advised us that there are substantial uncertainties regarding the interpretation
and application of current PRC laws, rules, and regulations. Accordingly, the PRC regulatory authorities and PRC courts may in the future
take a view that is contrary to the opinion of our PRC legal counsel.
KPIL,
KP International Holdings, KP Industrial are considered foreign investors or foreign invested enterprises under PRC law. As a result,
KPIL, KP International Holdings and KP Industrial are subject to certain limitations under PRC law on foreign ownership of Chinese companies.
These laws and regulations are relatively new and may be subject to change, and their official interpretation and enforcement may involve
substantial uncertainty. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental
reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.
The
PRC government has broad discretion in dealing with violations of laws and regulations, including levying fines, revoking business and
other licenses, and requiring actions necessary for compliance. In particular, licenses and permits issued or granted to us by relevant
governmental bodies may be revoked at a later time by higher regulatory bodies. We cannot predict the effect of the interpretation of
existing or new PRC laws or regulations on our businesses. We cannot assure you that our current ownership and operating structure would
not be found in violation of any current or future PRC laws or regulations. As a result, we may be subject to sanctions, including fines,
and could be required to restructure our operations or cease to provide certain services. In addition, any litigation in China may be
protracted and result in substantial costs and diversion of resources and management attention. If the imposition of any of these government
actions causes us to lose our right to direct the activities of any of our VIE(s) or otherwise separate from them and if we are not able
to restructure our ownership structure and operations in a satisfactory manner, we would no longer be able to consolidate the financial
results of our VIE(s) in our consolidated financial statements. Any of these or similar actions could significantly disrupt our business
operations or restrict us from conducting a substantial portion of our business operations, which could materially and adversely affect
our business, financial condition, and results of operations.
Our
arrangements with the VIE and their shareholders may be subject to scrutiny by the PRC tax authorities. Any adjustment of related party
transaction pricing could lead to additional taxes, and therefore which could have an adverse effect on our income and expenses.
The
tax regime in China is rapidly evolving and there is significant uncertainty for taxpayers in China as PRC tax laws may be interpreted
in significantly different ways. The PRC tax authorities may assert that we or our subsidiaries or VIE or their equity holders owe and/or
are required to pay additional taxes on previous or future revenue or income. In particular, under applicable PRC laws, rules and regulations,
arrangements and transactions among related parties, such as the contractual arrangements with our VIE, may be subject to audit or challenge
by the PRC tax authorities. We could face material and adverse tax consequences if the PRC tax authorities determine that our agreements
with the VIE and their shareholders were not entered into based on arm’s length negotiations. As a result, they may adjust our
income and expenses for PRC tax purposes in the form of a transfer pricing adjustment. Such an adjustment may require that we pay additional
PRC taxes plus applicable penalties and interest, if any.
Our
current corporate structure and business operations may be substantially affected by the newly enacted Foreign Investment Law.
On
March 15, 2019, the National People’s Congress promulgated the Foreign Investment Law, which took effect on January 1, 2020. Since
it is relatively new, substantially uncertainties exist in relation to its interpretation and implementation. The Foreign Investment
Law does not explicitly classify whether variable interest entities that are controlled through contractual arrangements would be deemed
as foreign invested enterprises if they are ultimately “controlled” by foreign investors. However, it has a catch-all provision
under definition of “foreign investment” that includes investments made by foreign investors in China through other means
as provided by laws, administrative regulations, or the State Council. Therefore, it still leaves leeway for future laws, administrative
regulations, or provisions of the State Council to provide for contractual arrangements as a form of foreign investment, at which time
it will be uncertain whether our contractual arrangements will be deemed to be in violation of the market access requirements for foreign
investment in the PRC and if yes, how our contractual arrangements should be dealt with.
The
Foreign Investment Law grants national treatment to foreign-invested entities, except for those foreign-invested entities that operate
in industries specified as either “restricted” or “prohibited” from foreign investment in the Special Administrative
Measures (Negative List) for Foreign Investment Access jointly promulgated by MOFCOM and the NDRC and took effect in July 2020. The Foreign
Investment Law provides that foreign-invested entities operating in “restricted” or “prohibited” industries will
require market entry clearance and other approvals from relevant PRC government authorities. If our control over our VIE through contractual
arrangements are deemed as foreign investment in the future, and any business of our VIE is “restricted” or “prohibited”
from foreign investment under the “negative list” effective at the time, we may be deemed to be in violation of the Foreign
Investment Law, the contractual arrangements that allow us to have control over our VIE may be deemed as invalid and illegal, and we
may be required to unwind such contractual arrangements and/or restructure our business operations, any of which may have a material
adverse effect on our business operation.
Furthermore,
if future laws, administrative regulations, or provisions mandate further actions to be taken by companies with respect to existing contractual
arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure
to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely
affect our current corporate structure and business operations.
Our
contractual arrangements may not be as effective in providing control over the variable interest entities as direct ownership.
We
rely on contractual arrangements with our VIE to operate our electronic platform in China and other businesses in which foreign investment
is restricted or prohibited. These contractual arrangements may not be as effective as direct ownership in providing us with control
over our VIE.
If
we had direct ownership of the VIE, we would be able to exercise our rights as an equity holder directly to effect changes in the boards
of directors of the entity, which could effect changes at the management and operational level. Under our contractual arrangements, we
would be able to change the members of the boards of directors of the entity only by exclusively exercising the equity holders’
voting rights and would have to rely on the variable interest entity and the variable interest entity equity holders to perform their
obligations in the contractual arrangements in order to exercise our control over the variable interest entity. The variable interest
entity equity holders may have conflicts of interest with us or our shareholders, and they may not act in the best interests of our company
or may not perform their obligations under these contracts. For example, our VIE and their equity holders could breach their contractual
arrangements with us by, among other things, failing to conduct their operations, including maintaining our website and using our domain
names and trademarks which the relevant variable interest entity has exclusive rights to use, in an acceptable manner or taking other
actions that are detrimental to our interests. Pursuant to the call option, we may replace the equity holders of the VIE at any time
pursuant to the contractual arrangements. However, if any equity holder is uncooperative and any dispute relating to these contracts
or the replacement of the equity holders remains unresolved, we will have to enforce our rights under the contractual arrangements through
the operations of PRC law and arbitral or judicial agencies, which may be costly and time-consuming and will be subject to uncertainties
in the PRC legal system. Consequently, the contractual arrangements may not be as effective in ensuring our control over the relevant
portion of our business operations as direct ownership.
Any
failure by our VIE or their equity holders to perform their obligations under the contractual arrangements would have a material adverse
effect on our business, financial condition, and results of operations.
If
our VIE or its equity holders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial
costs and expend additional resources to enforce such arrangements. Although we have entered into an option agreement in relation to
our variable interest entity, which provides that we may exercise an option to acquire, or nominate a person to acquire, ownership of
the equity in that entity or, in some cases, its assets, to the extent permitted by applicable PRC laws, rules and regulations, the exercise
of the option is subject to the review and approval of the relevant PRC governmental authorities. We have also entered into an equity
interest pledge agreement with respect to the variable interest entity to secure certain obligations of such VIE or its equity holders
to us under the contractual arrangements. However, the enforcement of such agreement through arbitral or judicial agencies may be costly
and time-consuming and will be subject to uncertainties in the PRC legal system. Moreover, our remedies under the equity pledge agreement
are primarily intended to help us collect debts owed to us by the variable interest entity equity holders under the contractual arrangements
and may not help us in acquiring the assets or equity of the variable interest entity.
The
contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration or court proceedings
in China. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance
with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States.
Moreover, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a variable interest
entity should be interpreted or enforced under PRC law, and as a result it may be difficult to predict how an arbitration panel or court
would view such contractual arrangements. As a result, uncertainties in the PRC legal system could limit our ability to enforce the contractual
arrangements. Under PRC law, if the losing parties fail to carry out the arbitration awards or court judgments within a prescribed time
limit, the prevailing parties may only enforce the arbitration awards or court judgments in PRC courts, which would require additional
expense and delay. In the event we are unable to enforce the contractual arrangements, we may not be able to exert effective control
over the variable interest entities, and our ability to conduct our business, as well as our financial condition and results of operations,
may be materially and adversely affected.
Risk
Related to Doing Business in China
Changes
in international trade or investment policies and barriers to trade or investment, and the ongoing geopolitical conflict, may have an
adverse effect on our business and expansion plans, and could lead to the delisting of our securities from U.S. exchanges and/or other
restrictions or prohibitions on investing in our securities.
In
recent years, international market conditions and the international regulatory environment have been increasingly affected by competition
among countries and geopolitical frictions. In particular, the U.S. administration has advocated for and taken steps toward restricting
trade in certain goods, particularly from China. From 2018 to late 2019, the United States announced several tariff increases that applied
to products imported from China, totaling over US$550 billion. By the end of 2019, the two countries had reached a phase one trade deal
to roll back tariffs and suspend certain tariff increases by the United States that were scheduled to take effect from December 2019,
and in January 2020, the two sides entered into a formal phase one agreement on trade. The progress of trade talks between China and
the United States is subject to uncertainties, and there can be no assurance as to whether the United States will maintain or reduce
tariffs or impose additional tariffs on Chinese products in the near future. Furthermore, in August 2019, the U.S. Treasury Department
labelled China as a currency manipulator, which label was officially dropped by the U.S. Treasury Department in January 2020. However,
it is uncertain whether the U.S. government may issue any similar announcement in the future. As a result of such announcement, the United
States may take further actions to eliminate perceived unfair competitive advantages created by alleged manipulating actions. Changes
to national trade or investment policies, treaties and tariffs, fluctuations in exchange rates or the perception that these changes could
occur, could adversely affect the financial and economic conditions in China, as well as our future international and cross-border operations,
our financial condition, and results of operations.
In
addition, the United States is considering ways to limit U.S. investment portfolio flows into China. For example, in May 2020, under
pressure from U.S. administration officials, the independent Federal Retirement Thrift Investment Board suspended its implementation
of plans to change the benchmark of one of its retirement asset funds to an international index that includes companies in emerging markets,
including China. China-based companies, including us, may become subject to executive orders or other regulatory actions that may, among
other things, prohibit U.S. investors from investing in these companies and delist the securities of these companies from U.S. exchanges.
As a result, U.S. and certain other persons may be prohibited from investing in the securities of our company, whether or not they are
listed on U.S. exchanges. For example, in November 2020, the U.S. administration issued U.S. Executive Order 13959, prohibiting investments
by any U.S. persons in publicly traded securities of certain Chinese companies that are deemed owned or controlled by the Chinese military.
In May 2021, the American depositary shares of China Telecom, China Mobile and China Unicom were delisted from the NYSE to comply with
this executive order. In June 2021, the U.S. administration expanded the scope of the executive order to Chinese defense and surveillance
technology companies. Geopolitical tensions between China and the United States may intensify and the United States may adopt even more
drastic measures in the future.
China
and other countries have retaliated and may further retaliate in response to new trade policies, treaties and tariffs implemented by
the United States. For instance, in response to the tariffs announced by the United States, in 2018 and 2019, China announced it would
stop buying U.S. agricultural products and imposed tariffs on over US$185 billion worth of U.S. goods. Although China subsequently granted
tariff exemptions for certain U.S. products as a result of trade talks and the phase one trade deal with the United States, it is uncertain
whether there will be any further material changes to China’s tariff policies. Any further actions to increase existing tariffs
or impose additional tariffs could result in an escalation of the trade conflict, which would have an adverse effect on manufacturing,
trade and a wide range of industries that rely on trade, including logistics, retail sales and other businesses and services, which could
adversely affect our business operations and financial results.
Additionally,
China has issued regulations to give itself the ability to unilaterally nullify the effects of certain foreign restrictions that are
deemed to be unjustified to Chinese individuals and entities. The Rules on Counteracting Unjustified Extra-territorial Application of
Foreign Legislation and Other Measures promulgated by the Ministry of Commerce (“MOFCOM”) on January 9, 2021 with immediate
effect, provide that, among other things, Chinese individuals or entities are required to report to the MOFCOM within 30 days if they
are prohibited or restricted from engaging in normal business activities with third-party countries or their nationals or entities due
to non-Chinese laws or measures; and the MOFCOM, following the decision of the relevant Chinese authorities, may issue prohibition orders
contravening such non-Chinese laws or measures. Furthermore, on June 10, 2021, the Standing Committee of the National People’s
Congress of China promulgated the Anti-foreign Sanctions Law, which came into effect on the same day. The Anti-foreign Sanctions Law
prohibits any organization or individual from implementing or providing assistance in implementation of discriminatory restrictive measures
taken by any foreign state against the citizens or organizations of China. In addition, all organizations and individuals in China are
required to implement the retaliatory measures taken by relevant departments of the State Council. Since the aforesaid laws and rules
were newly promulgated, there exist high uncertainties as to how such regulations will be interpreted and implemented and how they would
affect our business and results of operations or the trading prices of our Shares.
The
institution of trade tariffs both globally and between the U.S. and China specifically carries the risk of negatively affecting China’s
overall economic condition, which could have a negative impact on us.
Trade
tensions and policy changes have also led to measures that could have adverse effects on China-based issuers, including proposed legislation
in the United States that would require listed companies whose audit reports and/or auditors who are subject to review by PCAOB to be
subject to enhanced disclosure obligations and be subject to delisting if they do not comply with the requirements.
The
market price for our shares could be adversely affected by increased tensions between the United States and China.
Recently
there have been heightened tensions in the economic and political relations between the United States and China. On June 30, 2020, the
Standing Committee of the PRC National People’s Congress issued the Law of the People’s Republic of China on Safeguarding
National Security in the Hong Kong Special Administrative Region (HKSAR). This law defines the duties and government bodies of the HKSAR
for safeguarding national security and four categories of offences—secession, subversion, terrorist activities and collusion with
a foreign country or external elements to endanger national security—and their corresponding penalties. On July 14, 2020, U.S.
President Donald Trump signed the Hong Kong Autonomy Act, or HKAA, into law, authorizing the U.S. administration to impose blocking sanctions
against individuals and entities who are determined to have materially contributed to the erosion of Hong Kong’s autonomy. On August
7, 2020, the U.S. government imposed HKAA-authorized sanctions on eleven individuals, including HKSAR chief executive Carrie Lam. The
HKAA further authorizes secondary sanctions, including the imposition of blocking sanctions, against foreign financial institutions that
knowingly conduct a significant transaction with foreign persons sanctioned under this authority. The imposition of sanctions such as
those provided in the HKAA is in practice discretionary and highly political, especially in a relationship as extensive and complex as
that between the United States and China. It is difficult to predict the full impact of the HKAA on Hong Kong and companies like the
Company. Furthermore, legislative, or administrative actions in respect of Sino-U.S. relations could cause investor uncertainty for affected
issuers, including us, and the market price of our Shares could be adversely affected.
The
Chinese government may exert substantial influence over the way we conduct our business operations in China.
The
Chinese government has exercised, and continues to exercise, substantial control over virtually every sector of the Chinese economy through
regulation and state ownership. Our ability to conduct our operations in China may be harmed by changes in its laws and regulations,
including those relating to regulation of the health product industry, taxation, import and export tariffs, environmental regulations,
land use rights, property ownership and other matters. We believe that our operations in China are in material compliance with all applicable
legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new,
stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to
ensure our compliance with such regulations or interpretations. Accordingly, government actions in the future could have a significant
effect on us and our business.
Changes
in China’s economic, political, or social conditions or government policies could have a material adverse effect on our business
and results of operations and could significantly limit or completely hinder our ability to offer or continue to offer securities to
investors and cause the value of such securities to significantly decline or be worthless.
Substantially
all of our operations are conducted in the PRC. Accordingly, our financial condition and results of operations are affected to a significant
extent by economic, political, and legal developments in the PRC or changes in government relations between China and the United States
or other governments. There is significant uncertainty about the future relationship between the United States and China with respect
to trade policies, treaties, government regulations and tariffs.
The
PRC economy differs from the economies of most developed countries in many respects, including the extent of government involvement,
level of development, growth rate, control of foreign exchange and allocation of resources. Although the PRC government has implemented
measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and
the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still
owned by the government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing
industrial policies.
The
PRC government also exercises significant control over China’s economic growth by allocating resources, controlling payment of
foreign currency-denominated obligations, setting monetary policy, regulating financial services and institutions, and providing preferential
treatment to particular industries or companies.
While
the PRC economy has experienced significant growth in the past four decades, growth has been uneven, both geographically and among various
sectors of the economy. Since 2020 due to the global pandemic, growth of the Chinese economy has slowed down. The PRC government has
implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the
overall PRC economy but may also have a negative effect on us. Our financial condition and results of operation could be materially and
adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. In addition,
the PRC government has implemented in the past certain measures, including interest rate increases, to control the pace of economic growth.
These measures may cause decreased economic activity.
We
cannot assure you that the PRC’s economy will continue to grow, or that if there is growth, such growth will be steady and uniform,
or that if there is a slowdown, such slowdown will not have a negative effect on its business and results of operations.
In July 2021, the Chinese
government provided new guidance on China-based companies raising capital outside of China, including through VIE arrangements. In light
of such developments, the SEC has imposed enhanced disclosure requirements on China-based companies seeking to register securities with
the SEC. As substantially all of our operations are based in China, any future Chinese, U.S. or other rules and regulations that place
restrictions on capital raising or other activities by China based companies could adversely affect our business and results of operations.
If the business environment in China deteriorates from the perspective of domestic or international investment, or if relations between
China and the United States or other governments deteriorate, the Chinese government may intervene with our operations and our business
in China and in the United States.
Uncertainties
with respect to the PRC legal system could limit the legal protections available to you and us.
We
conduct substantially all of business through our operating subsidiary in the PRC. Our PRC subsidiary, the VIE and subsidiaries of the
VIE are subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to FIEs as well
as various PRC laws and regulations generally applicable to companies incorporated in China. The PRC legal system is based on written
statutes, and prior court decisions may be cited for reference but have limited precedential value. Since 1979, a series of new PRC laws
and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since
these laws and regulations are relatively new and the PRC legal system continues to evolve rapidly, the interpretations of many laws,
regulations, and rules are not always uniform, and enforcement of these laws, regulations, and rules involve uncertainties, which may
limit legal protections available to you and us.
From
time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. Any administrative and court
proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Since PRC
administrative and court authorities have significant discretion in interpreting and implementing statutory provisions and contractual
terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we
enjoy than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into
and could materially and adversely affect our business and results of operations.
Furthermore,
the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or
at all and may have retroactive effect. As a result, we may not be aware of our violation of any of these policies and rules until sometime
after the violation. Such unpredictability towards our contractual, property (including intellectual property) and procedural rights
could adversely affect our business and impede our ability to continue our operations.
In
addition, the PRC government has recently announced its plans to enhance its regulatory oversight of Chinese companies listing overseas.
The Opinions on Strictly Cracking Down on Illegal Securities Activities issued on July 6, 2021, called for:
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tightening
oversight of data security, cross-border data flow and administration of classified information, as well as amendments to relevant
regulation to specify responsibilities of overseas listed Chinese companies with respect to data security and information
security;
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enhanced
oversight of overseas listed companies as well as overseas equity fundraising and listing by Chinese companies; and
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extraterritorial
application of China’s securities laws.
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On
July 10, 2021, the Cyberspace Administration of China issued a revised draft of the Measures for Cybersecurity Review for public comments,
which proposes to authorize the relevant government authorities to conduct cybersecurity review on a range of activities that affect
or may affect national security, including listings in foreign countries by companies that possess the personal data of more than one
million users.
The
aforementioned policies and any related implementation rules to be enacted may subject us to additional compliance requirement in the
future. As these opinions were recently issued, official guidance and interpretation of the opinions remain unclear in several respects
at this time. Therefore, we cannot assure you that we will remain fully compliant with all new regulatory requirements of these opinions
or any future implementation rules on a timely basis, or at all. The Chinese government may promulgate relevant laws, rules and regulations
that may impose additional and significant obligations and liabilities on overseas listed Chinese companies regarding data security,
cross-border data flow, and compliance with China’s securities laws. These laws and regulations can be complex and stringent, and
many are subject to change and uncertain interpretation, which could result in claims, change to our data and other business practices,
regulatory investigations, penalties, increased cost of operations, or declines in user growth or engagement, or otherwise affect our
business.
We
may face obstacles from the communist system in the PRC.
Foreign
companies conducting operations in the PRC face significant political, economic, and legal risks. The communist regime in the PRC may
hinder Western investment in the Company.
We
may have difficulty establishing adequate management, legal and financial controls in the PRC.
The
PRC historically has been deficient in Western style management and financial reporting concepts and practices, as well as in modern
banking, computer, and other control systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees
to work in the PRC. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls,
collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices
that meet Western standards.
Our
business is subject to complex and evolving laws and regulations regarding privacy and data protection. These laws and regulations can
be complex and stringent, and many are subject to change and uncertain interpretation, which could result in claims, changes to its data
and other business practices, regulatory investigations, penalties, increased cost of operations, or declines in user growth or engagement,
or otherwise affect its business. Although we believe we currently are not required to obtain clearance from the Cyberspace Administration
of China under the recently enacted or proposed regulations or rules, we face uncertainties as to the interpretation or implementation
of such regulations or rules, and if required, whether such clearance can be timely obtained, or at all.
Regulatory
authorities in China have implemented and are considering further legislative and regulatory proposals concerning data protection. New
laws and regulations that govern new areas of data protection or impose more stringent requirements may be introduced in China. In addition,
the interpretation and application of consumer and data protection laws in China are often uncertain, in flux and complicated, including
differentiated requirements for different groups of people or different types of data.
The
PRC regulatory and enforcement regime with regard to privacy and data security is evolving. The PRC Cybersecurity Law provides that personal
information and important data collected and generated by operators of critical information infrastructure in the course of their operations
in the PRC should be stored in the PRC, and the law imposes heightened regulation and additional security obligations on operators of
critical information infrastructure. According to the Cybersecurity Review Measures promulgated by the Cyberspace Administration of China
and certain other PRC regulatory authorities in April 2020, which became effective in June 2020, operators of critical information infrastructure
must pass a cybersecurity review when purchasing network products and services which do or may affect national security. We do not believe
that our company constitutes a critical information infrastructure operator pursuant to the Cybersecurity Review Measures that became
effective in April 2020. 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.
On
July 10, 2021, the Cyberspace Administration of China issued the Measures for Cybersecurity Review (Revision Draft for Comments) for
public comments, which proposes to authorize the relevant government authorities to conduct cybersecurity review on a range of activities
that affect or may affect national security, including listings in foreign countries by companies that possess the personal data of more
than one million users. The PRC National Security Law defines various types of national security, including technology security and information
security.
On
November 14, 2021, the Cyberspace Administration of China released the Regulations on Network Data Security (draft for public comments)
and will accept public comments until December 13, 2021. The draft Regulations on Network Data Security provide that data processors
refer to individuals or organizations that autonomously determine the purpose and the manner of processing data. If a data processor
that processes personal data of more than one million users intends to list overseas, it shall apply for a cybersecurity review. In addition,
data processors that process important data or are listed overseas shall carry out an annual data security assessment on their own or
by engaging a data security services institution, and the data security assessment report for the prior year should be submitted to the
local cyberspace affairs administration department before January 31 of each year.
We
currently have less than one million registered users on our digital and only require and obtain user information after users register
with it. Given that we sell and service products through our digital platform, we may constitute a “data processor,” but
the number of our online registered users is far less than one million. As a result, even if enacted, we would not be required to apply
for a cybersecurity review under the Measures for Cybersecurity Review (Revision Draft for Comments) or the Regulations on Network DataSecurity
(draft for public comments). Nevertheless, the Measures for Cybersecurity Review (Revision Draft for Comments) or the Regulations on
Network Data Security (draft for public comments) are still being formulated and subject to further changes Although we believe we currently
are not required to obtain clearance from the Cyberspace Administration of China under the Measures for Cybersecurity Review (Revision
Draft for Comments), the Regulations on Network Data Security (draft for public comments), or the Opinions on Strictly Cracking Down
on Illegal Securities Activities, we face uncertainties as to the interpretation or implementation of such regulations or rules and we
may in the future be required to perform a data security assessment annually either by ourselves or by retaining a third party data security
service provider and submitting such data security assessment report to the local agency every year under the draft Regulations on Network
Data Security
On
June 10, 2021, the Standing Committee of the National People’s Congress of China promulgated the Data Security Law which took effect
on September 1, 2021. The Data Security Law provides for data security and privacy obligations of entities and individuals carrying out
data activities, prohibits entities and individuals in China from providing any foreign judicial or law enforcement authority with any
data stored in China without approval from competent PRC authority, and sets forth the legal liabilities of entities and individuals
found to be in violation of their data protection obligations, including rectification order, warning, fines of up to RMB10 million,
suspension of relevant business, and revocation of business permits or licenses.
On
August 20, 2021, the Standing Committee of the National People’s Congress of China promulgated the Personal Information Protection
Law which took effect on November 1, 2021. In addition to other rules and principles of personal information processing, the Personal
Information Protection Law specifically provides rules for processing sensitive personal information. Sensitive personal information
refers to personal information that, once leaked or illegally used, could easily lead to the infringement of human dignity or harm to
the personal or property safety of an individual, including biometric recognition, religious belief, specific identity, medical and health,
financial account, personal whereabouts, and other information of an individual, as well as any personal information of a minor under
the age of 14. Only where there is a specific purpose and sufficient necessity, and under circumstances where strict protection measures
are taken, may personal information processors process sensitive personal information. A personal information processor shall inform
the individual of the necessity of processing such sensitive personal information and the impact thereof on the individual’s rights
and interests. As uncertainties remain regarding the interpretation and implementation of the Personal Information Protection Law, we
cannot assure you that we will comply with the Personal Information Protection Law in all respects and regulatory authorities may order
us to rectify or terminate our current practice of collecting and processing sensitive personal information.
Compliance
with the PRC Cybersecurity Law, the PRC National Security Law, the Data Security Law, the Cybersecurity Review Measures, the Personal
Information Protection Law, as well as additional laws and regulations that PRC regulatory bodies may enact in the future, may result
in additional expenses to us and subject us to negative publicity, which could harm our reputation among users and negatively affect
the trading price of our common stock in the future. PRC regulators, including the Department of Public Security, the MIIT, the SAMR
and the CAC, have been increasingly focused on regulation in the areas of data security and data protection, and are enhancing the protection
of privacy and data security by rulemaking and enforcement actions at central and local levels. We expect that these areas will receive
greater and continued attention and scrutiny from regulators and the public going forward, which could increase our compliance costs
and subject us to heightened risks and challenges associated with data security and protection. If we are unable to manage these risks,
we could become subject to penalties, including fines, suspension of business, prohibition against new user registration (even for a
short period of time) and revocation of required licenses, and our reputation and results of operations could be materially and adversely
affected.
Any
failure, or perceived failure, by us to comply with the above and other regulatory requirements or privacy protection-related laws, rules
and regulations could result in reputational damages or proceedings or actions against us by governmental entities, consumers, or others.
These proceedings or actions could subject us to significant penalties and negative publicity, require us to change our data and other
business practices, increase our costs and severely disrupt our business, or negatively affect the trading price of our common stock.
You
may have difficulty enforcing judgments against us.
Most
of our assets are located outside of the United States and most of our current operations are conducted in the PRC. In addition, all
of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets
of these persons is located outside the United States. As a result, it may be difficult for you to effect service of process within the
United States upon these persons. It may also be difficult for you to enforce in U.S. courts judgments on the civil liability provisions
of the U.S. federal securities laws against us and our officers and directors, most of whom are not residents in the United States and
the substantial majority of whose assets are located outside of the United States. In addition, there is uncertainty as to whether the
courts of the PRC would recognize or enforce judgments of U.S. courts. Our counsel as to PRC law has advised us that the recognition
and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. Courts in China may recognize and enforce foreign
judgments in accordance with the requirements of the PRC Civil Procedures Law based on treaties between China and the country where the
judgment is made or on reciprocity between jurisdictions. China does not have any treaties or other arrangements that provide for the
reciprocal recognition and enforcement of foreign judgments with the United States. In addition, according to the PRC Civil Procedures
Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment
violates basic principles of PRC law or national sovereignty, security, or the public interest. So, it is uncertain whether a PRC court
would enforce a judgment rendered by a court in the United States.
The
PRC government exerts substantial influence over the manner in which we must conduct our business activities.
The
PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through
regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those
relating to taxation, import and export tariffs, environmental regulations, land use rights, property, and other matters. We believe
that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or
local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations
that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.
Accordingly,
government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally
planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic
conditions in China or particular regions thereof and could require us to divest ourselves of any interest we then hold in Chinese properties
or joint ventures.
The
PRC legal system embodies uncertainties, which could limit law enforcement availability.
The
PRC legal system is a civil law system based on written statutes. Unlike common law systems, decided legal cases have little precedence.
In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general.
The overall effect of legislation over the past several decades has significantly enhanced the protections afforded to various forms
of foreign investment in China. Our PRC operating subsidiary and affiliate is subject to PRC laws and regulations. However, these laws
and regulations change frequently, and the interpretation and enforcement involve uncertainties. For instance, we may have to resort
to administrative and court proceedings to enforce the legal protection that we are entitled to by law or contract. However, since PRC
administrative and court authorities have significant discretion in interpreting statutory and contractual terms, it may be difficult
to evaluate the outcome of administrative court proceedings and the level of law enforcement that we would receive in more developed
legal systems. Such uncertainties, including the inability to enforce our contracts, could affect our business and operations. In addition,
confidentiality protections in China may not be as effective as in the United States or other countries. Accordingly, we cannot predict
the effect of future developments in the PRC legal system, particularly with regard to our business, including the promulgation of new
laws. This may include changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations
by national laws. These uncertainties could limit the availability of law enforcement, including our ability to enforce our agreements.
Our
shares may be delisted under the Holding Foreign Companies Accountable Act if the PCAOB is unable to inspect our auditors. The delisting
of our shares, or the threat of their being delisted, may materially and adversely affect the value of your investment. Furthermore,
on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which, if enacted, would amend the
HFCA Act and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not
subject to PCAOB inspections for two consecutive years instead of three.
On
June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which, if enacted, would amend the
HFCA Act and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not
subject to PCAOB inspections for two consecutive years instead of three. On September 22, 2021, the PCAOB adopted a final rule implementing
the HFCAA, which provides a framework for the PCAOB to use when determining, as contemplated under the HFCAA, whether the PCAOB is unable
to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken
by one or more authorities in that jurisdiction.
Furthermore,
various equity-based research organizations have recently published reports on China-based companies after examining their corporate
governance practices, related party transactions, sales practices and financial statements, and these reports have led to special investigations
and listing suspensions on U.S. national exchanges. Any similar scrutiny on us, regardless of its lack of merit, could cause the market
price of our ordinary shares to fall, divert management resources and energy, cause us to incur expenses in defending ourselves against
rumors, and increase the premiums we pay for director and officer insurance.
The
SEC may propose additional rules or guidance that could impact us if our auditor is not subject to PCAOB inspection. For example, on
August 6, 2020, the President’s Working Group on Financial Markets, or the PWG, issued the Report on Protecting United States Investors
from Significant Risks from Chinese Companies to the then President of the United States. This report recommended the SEC implement five
recommendations to address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfil its statutory
mandate. Some of the concepts of these recommendations were implemented with the enactment of the HFCA Act. However, some of the recommendations
were more stringent than the HFCA Act. For example, if a company’s auditor was not subject to PCAOB inspection, the report recommended
that the transition period before a company would be delisted would end on January 1, 2022.
On
March 24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and documentation requirements
of the HFCAA. We will be required to comply with these rules if the SEC identifies us as having a “non-inspection” year under
a process to be subsequently established by the SEC. The SEC is assessing how to implement other requirements of the HFCAA, including
the listing and trading prohibition requirements described above
The
implications of the requirements of the HFCAA are uncertain. While we understand that there has been dialogue among the CSRC, the SEC
and the PCAOB regarding the inspection of PCAOB-registered accounting firms in China, there can be no assurance that we will be able
to comply with requirements imposed by U.S. regulators. Such uncertainty could cause the market price of our Shares to be materially
and adversely affected, and our securities could be delisted and prohibited from being traded on the national securities exchange earlier
than would be required by the HFCAA. If our securities are unable to be listed on another securities exchange by then, such a delisting
would substantially impair your ability to sell or purchase our Shares when you wish to do so, and the risk and uncertainty associated
with a potential delisting would have a negative impact on the price of our Shares.
To
the extent that our independent registered public accounting firm’s audit documentation related to their audit reports for the
Company are located in China, the PCAOB may not be able to inspect such audit documentation and, as a result, you may be deprived of
the benefits of such inspection.
Our
independent registered public accounting firm issued audit opinions on the financial statements included in this Annual Report and will
issue audit reports related to the Company in the future. As the auditor of a company filing reports with the SEC and as a firm registered
with the PCAOB, our auditor is required by the laws of the United States to undergo regular inspections by the PCAOB. Our auditor is
located in Kuala Lumpur, Malaysia and is keeping and safeguarding the working papers of the relevant years in their office in Malaysia.
However, to the extent that our auditor’s work papers are or become located in China, such work papers will not be subject
to inspection by the PCAOB because the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities.
Recent developments with respect to audits of companies of which the major operations are in China, such as us, create uncertainty about
the ability of our auditor to fully cooperate with the PCAOB’s request for audit work papers without the approval of the Chinese
authorities. As a result, our investors may be deprived of the benefits of PCAOB’s oversight of our auditors through such inspections.
Should
the PCAOB be unable to fully conduct inspections of our auditors’ work papers due to a position taken by one or more authorities
in the foreign jurisdiction, it will make it more difficult to evaluate the effectiveness of our auditor’s audit procedures or
quality control procedures. Shareholders may consequently lose confidence in our reported financial information and procedures and the
quality of our financial statements, which would adversely affect the market price of Shares.
In
addition, trade tensions and policy changes between China and the United States have also led to measures that could have adverse effects
on China-based issuers. The Holding Foreign Companies Accountable Act, or the HFCAA, was enacted on December 18, 2020. The HFCAA states
that, if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject
to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our Shares from being traded on a national
securities exchange or in the over-the-counter trading market in the U.S. On March 24, 2021, the SEC adopted interim final rules relating
to the implementation of certain disclosure and documentation requirements of the HFCAA. We will be required to comply with these rules
if the SEC identifies us as having a “non-inspection” year under a process to be subsequently established by the SEC. The
SEC is assessing how to implement other requirements of the HFCAA, including the listing and trading prohibition requirements described
above. Further, the United States Senate passed the Accelerated Holding Foreign Companies Accountable Act, which, if enacted, would amend
the HFCAAA to require the SEC to prohibit and issuer’s securities from trading on any U.S, stock exchanges if its auditor is not
subject to PCAOB inspections for two consecutive years instead of three.
If
our auditor is sanctioned or otherwise penalized by the PCAOB or the SEC as a result of failure to comply with inspection or investigation
requirements, our financial statements could be determined to be not in compliance with the requirements of the U.S. Securities Exchange
Act of 1934 (the “Exchange Act”) or other laws or rules in the United States, which could ultimately result in our Shares
being delisted from whatever exchange they may become listed on.
The
enforcement of the PRC labor contract law may materially increase our costs and decrease our net income.
China
adopted a new Labor Contract Law, effective on January 1, 2008, and issued its implementation rules, effective on September 18, 2008.
The Labor Contract Law and related rules and regulations impose more stringent requirements on employers with regard to, among others,
minimum wages, severance payment and non-fixed-term employment contracts, time limits for probation periods, as well as the duration
and the times that an employee can be placed on a fixed-term employment contract. Due to the limited period of effectiveness of the Labor
Contract Law and its implementation rules and regulations, and the lack of clarity with respect to their implementation and potential
penalties and fines, it is uncertain how they will impact our current employment policies and practices. In particular, compliance with
the Labor Contract Law and its implementation rules and regulations may increase our operating expenses. In the event that we decide
to terminate some of our employees or otherwise change our employment or labor practices, the Labor Contract Law and its implementation
rules and regulations may also limit our ability to effect those changes in a manner that we believe to be cost-effective or desirable
and could result in a material decrease in our profitability.
Future
inflation in China may inhibit our ability to conduct business in China.
In
recent years, the Chinese economy has experienced periods of rapid expansion and highly fluctuating rates of inflation. During the past
ten years, the rate of inflation in China has been as high as 5.9% and as low as -0.8%. These factors have led to the adoption by the
Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth
and contain inflation. High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to
take other action, which could inhibit economic activity in China, and thereby harm the market for our products and our company.
Restrictions
on currency exchange may limit our ability to receive and use our sales effectively.
Currently,
all of our revenues are settled in RMB, and any future restrictions on currency exchanges may limit our ability to use revenue generated
in RMB to fund any future business activities outside China or to make dividend or other payments in U.S. dollars. Although the Chinese
government introduced regulations in 1996 to allow greater convertibility of the RMB for current account transactions, significant restrictions
still remain, including primarily the restriction that FIEs may only buy, sell or remit foreign currencies after providing valid commercial
documents, at those banks in China authorized to conduct foreign exchange business. In addition, conversion of RMB for capital account
items, including direct investment and loans, is subject to governmental approval in China, and companies are required to open and maintain
separate foreign exchange accounts for capital account items. We cannot be certain that the Chinese regulatory authorities will not impose
more stringent restrictions on the convertibility of the RMB.
Fluctuations
in exchange rates could adversely affect our business and the value of our securities.
The
value of our Shares will be indirectly affected by the foreign exchange rate between the U.S. dollar and RMB and between those currencies
and other currencies in which our sales may be denominated. Appreciation or depreciation in the value of the RMB relative to the U.S.
dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business
or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend we issue that will be
exchanged into U.S. dollars, as well as earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.
Since
July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the
foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly
in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions
on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.
Very
limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered
into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness of these
transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange
losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.
Restrictions
under PRC law on our PRC subsidiaries’ ability to make dividends and other distributions could materially and adversely affect
our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise fund and conduct
our business.
Substantially
all of our sales are earned by our PRC subsidiaries. However, PRC regulations restrict the ability of our PRC subsidiaries to make dividends
and other payments to their offshore parent companies. PRC legal restrictions permit payments of dividends by our PRC subsidiaries only
out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries
are also required under PRC laws and regulations to allocate at least 10% of their annual after-tax profits determined in accordance
with PRC generally accepted accounting principles to a statutory general reserve fund until the amount in said fund reaches 50% of their
registered capital. Allocations to these statutory reserve funds can only be used for specific purposes and are not transferable to us
in the form of loans, advances, or cash dividends. Any limitations on the ability of our PRC subsidiaries to transfer funds to us could
materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends
and otherwise fund and conduct our business.
The
PRC government may issue further restrictive measures in the future.
We
cannot assure you that the PRC’s government will not issue further restrictive measures in the future. The PRC government’s
restrictive regulations and measures could increase our operating costs in adapting to these regulations and measures, limit our access
to capital resources or even restrict our business operations, which could further adversely affect our business and prospects.
If
our PRC subsidiary or consolidated affiliated entity are found incompliant with the employment and social security, taxation, marketing,
tele-communication, or other rules of China, they may face penalties imposed by the PRC government.
Our
PRC subsidiary and consolidated affiliated entity failed to strictly comply with PRC laws and regulations to contribute towards social
insurance premium and housing fund on behalf of their employees, as required by the applicable laws and regulations. We may be required
by relevant authorities to make up the shortfall of social insurance premium and housing fund. Although we have made efforts to settle
tax payables and take compliance measures, if any PRC government authority takes the position that there is non-compliance with the taxation,
marketing, tele-communication, or other rules by our PRC subsidiary or consolidated affiliated entity, they may be exposed to penalties
from PRC government authorities, in which case the operation and financial conditions of our PRC subsidiary or consolidated affiliated
entity may be adversely affected.
Under
the Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China. Such classification will likely
result in unfavorable tax consequences to us and our non-PRC stockholders.
On
March 16, 2007, the National People’s Congress of China passed the EIT Law, and on November 28, 2007, the State Council of China
passed its implementing rules, which took effect on January 1, 2008. Under the EIT Law, an enterprise established outside of China with
“de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated
in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define de facto
management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties”
of the enterprise.
On April 22, 2009,
the State Administration of Taxation issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled
Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the Notice, further
interpreting the application of the EIT Law and its implementation non-Chinese enterprise or group controlled offshore entities. Pursuant
to the Notice, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or group will be classified
as a “non-domestically incorporated resident enterprise” if (i) its senior management in charge of daily operations reside
or perform their duties mainly in China; (ii) its financial or personnel decisions are made or approved by bodies or persons in China;
(iii) its substantial assets and properties, accounting books, corporate chops, board and shareholder minutes are kept in China; and
(iv) at least half of its directors with voting rights or senior management often resident in China. A resident enterprise would be subject
to an enterprise income tax rate of 25% on its worldwide income and must pay a withholding tax at a rate of 10% when paying dividends
to its non-PRC shareholders. However, it remains unclear as to whether the Notice is applicable to an offshore enterprise incorporated
by a Chinese natural person. Nor are detailed measures on imposition of tax from non-domestically incorporated resident enterprises are
available. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case.
We
may be deemed to be a resident enterprise by Chinese tax authorities. If the PRC tax authorities determine that we are a “resident
enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be
subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting
obligations. In our case, this would mean that income such as interest on financing proceeds and non-China source income would be subject
to PRC enterprise income tax at a rate of 25%. Second, although under the EIT Law and its implementing rules dividends paid to us from
our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to
a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance
with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income
tax purposes. Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification
could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC stockholders and with respect
to gains derived by our non-PRC stockholders from transferring our shares.
If
we were treated as a “resident enterprise” by PRC tax authorities, we would be subject to taxation in both the U.S. and China,
and our PRC tax may not be creditable against our U.S. tax.
We
face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.
On
February 3, 2015, the SAT issued the Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties
by Non-Tax Resident Enterprises, or SAT Bulletin 7, which came into effect on the same day, revised in October 2017 and December 2017.
SAT Bulletin 7 extends its tax jurisdiction to transactions involving the transfer of taxable assets through offshore transfer of a foreign
intermediate holding company. In addition, SAT Bulletin 7 has introduced safe harbors for internal group restructurings and the purchase
and sale of equity through a public securities market. SAT Bulletin 7 also brings challenges to both foreign transferor and transferee
(or other person who is obligated to pay for the transfer) of taxable assets, as such persons need to determine whether their transactions
are subject to these rules and whether any withholding obligation applies.
On
October 17, 2017, the SAT issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Non-Resident
Enterprise Income Tax at Source, or SAT Bulletin 37, which came into effect on December 1, 2017, and revised in June 2018. The SAT Bulletin
37 further clarifies the practice and procedure of the withholding of non-resident enterprise income tax.
Where
a non-resident enterprise transfers taxable assets indirectly by disposing of the equity interests of an overseas holding company, which
is an Indirect Transfer, the non-resident enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable
assets, may report such. Indirect Transfer to the relevant tax authority. Using a “substance over form” principle, the PRC
tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established
for the purpose of reducing, avoiding, or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to
PRC enterprise income tax, and the transferee or other person who pays for the transfer is obligated to withhold the applicable taxes
currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee
may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.
We
face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved,
such as offshore restructuring, sale of the shares in our offshore subsidiaries and investments. Our company may be subject to filing
obligations or may be taxed if our company is transferor in such transactions and may be subject to withholding obligations if our company
is transferee in such transactions, under SAT Bulletin 7 and/or SAT Bulletin 37. For transfers of shares of our company by investors
who are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing under SAT Bulletin 7 and/or SAT Bulletin
37. As a result, we may be required to expend valuable resources to comply with SAT Bulletin 7 and/or SAT Bulletin 37 or to request the
relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our company should not
be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.
PRC
regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders
to penalties and limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute
profits to us, or otherwise adversely affect us.
The
SAFE promulgated the notice on relevant issues relating to domestic resident’s investment and financing and roundtrip investment
through special purpose vehicles (“SPV(s)”), or Notice 37, in July 2014 that requires PRC residents or entities to register
with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of
overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations when the offshore
SPV undergoes material events relating to material change of capitalization or structure of the PRC resident itself (such as capital
increase, capital reduction, share transfer or exchange, merger or spin off).On February 28, 2015, SAFE issued a notice according to
which the aforesaid PRC residents or entities are no longer required to register with SAFE or its local branch, instead the aforesaid
PRC residents or entities need to register with local banks. We have notified substantial beneficial owners of our ordinary shares who
we know are PRC residents of their filing obligation, and to the best of our knowledge, most of those shareholders whom we know are PRC
residents have completed the registration. However, we may not be aware of the identities of all our beneficial owners who are PRC residents.
In addition, we do not have control over our beneficial owners and cannot assure you that all of our PRC resident beneficial owners will
comply with SAFE Circular 37. Failure by an individual to comply with the required SAFE registration and updating requirements described
above may result in penalties up to RMB50, 000 imposed on such individual and restrictions being imposed on the foreign exchange activities
of the PRC subsidiaries of such offshore SPV, including increasing the registered capital of payment of dividends and other distributions
to, and receiving capital injections for the offshore SPV. Failure to comply with Notice 37 may also subject relevant PRC resident beneficial
owners or the PRC subsidiaries of such offshore SPV to penalties under PRC foreign exchange administration regulations for evasion of
applicable foreign exchange restrictions.
Failure
to comply with the individual foreign exchange rules relating to the overseas direct investment or the engagement in the issuance or
trading of securities overseas by our PRC resident stockholders may subject such stockholders to fines or other liabilities.
Other
than Notice 37, our ability to conduct foreign exchange activities in the PRC may be subject to the interpretation and enforcement of
the implementation rules of the administrative measures for individual foreign exchange promulgated by SAFE in January 2007 (as amended
and supplemented, the “Individual Foreign Exchange Rules”). Under the individual foreign exchange rules, any PRC individual
seeking to make a direct investment overseas or engage in the issuance or trading of negotiable securities or derivatives overseas must
make the appropriate registrations in accordance with SAFE provisions. PRC individuals who fail to make such registrations may be subject
to warnings, fines or other liabilities.
We
may not be fully informed of the identities of all our beneficial owners who are PRC residents. For example, because the investment in
or trading of our shares will happen in an overseas public or secondary market where shares are often held with brokers in brokerage
accounts, it is unlikely that we will know the identity of all of our beneficial owners who are PRC residents. Furthermore, we have no
control over any of our future beneficial owners and we cannot assure you that such PRC residents will be able to complete the necessary
approval and registration procedures required by the individual foreign exchange rules.
It
is uncertain how the individual foreign exchange rules will be interpreted or enforced and whether such interpretation or enforcement
will affect our ability to conduct foreign exchange transactions. Because of this uncertainty, we cannot be sure whether the failure
by any of our PRC resident stockholders to make the required registration will subject our PRC subsidiaries to fines or legal sanctions
on their operations, delay or restriction on repatriation of proceeds of this offering into the PRC, restriction on remittance of dividends
or other punitive actions that would have a material adverse effect on our business, results of operations and financial condition.
We
may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination that we
violated these laws could have a material adverse effect on our business.
We
are subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign
governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining
or retaining business. We have operations, agreements with third parties, and make most of our sales in China. The PRC also strictly
prohibits bribery of government officials. Our activities in China create the risk of unauthorized payments or offers of payments by
the employees, consultants, sales agents, or distributors of our Company, even though they may not always be subject to our control.
It is our policy to implement safeguards to discourage these practices by our employees. However, our existing safeguards and any future
improvements may prove to be less than effective, and the employees, consultants, sales agents, or distributors of our Company may engage
in conduct for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption laws may result in severe criminal
or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results, and financial
condition. In addition, the U.S. government may seek to hold our Company liable for successor liability FCPA violations committed by
companies in which we invest or that we acquire.
If
we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have
to expend significant resources to investigate and resolve the matter which could harm our business operations, stock price and reputation
and could result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.
Recently,
U.S. public companies that have substantially all of their operations in China, particularly companies like us which have completed so-called
reverse merger transactions, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators
and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting
irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies
or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity,
the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually
worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal and
external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity
will have on our Company, our business and our stock price. If we become the subject of any unfavorable allegations, whether such allegations
are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our company.
This situation will be costly and time consuming and distract our management from growing our company.
The
disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any
regulatory bodies in the PRC. Accordingly, our public disclosure should be reviewed in light of the fact that no governmental agency
that is located in China where substantially all of our operations and business are located have conducted any due diligence on our operations
or reviewed or cleared any of our disclosure.
We
are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations
promulgated by the SEC under the Securities Act and the Exchange Act. Unlike public reporting companies whose operations are located
primarily in the United States, however, substantially all of our operations are located in China. Since substantially all of our operations
and business takes place in China, it may be more difficult for the staff of the SEC to overcome the geographic and cultural obstacles
that are present when reviewing our disclosure. These same obstacles are not present for similar companies whose operations or business
take place entirely or primarily in the United States. Furthermore, our SEC reports and other disclosure and public pronouncements are
not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings
are not subject to the review of the China Securities Regulatory Commission, a PRC regulator that is tasked with oversight of the capital
markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding
that no local regulator has done any due diligence on our company and with the understanding that none of our SEC reports, other filings
or any of our other public pronouncements has been reviewed or otherwise been scrutinized by any local regulator.
Risks
Related to the Market for Our Securities
Our
common stock is quoted on the OTC market, which may have an unfavorable impact on our stock price and liquidity.
Our
common stock is quoted on the OTC market. The OTC market is a significantly more limited market than the New York Stock Exchange or NASDAQ.
The quotation of our shares on the OTC market may result in a less liquid market available for existing and potential stockholders to
trade shares of our common stock, could depress the trading price of our common stock and could have a long-term adverse impact on our
ability to raise capital in the future. We plan to list our common stock as soon as practicable. However, we cannot assure you that we
will be able to meet the initial listing standards of any stock exchange, or that we will be able to maintain any such listing.
We
are subject to penny stock regulations and restrictions, and you may have difficulty selling shares of our common stock.
The
SEC has adopted regulations which generally define so-called “penny stocks” to be an equity security that has a market price
less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. Our common stock is a “penny
stock” and is subject to Rule 15g-9 under the Exchange Act, or the Penny Stock Rule. This rule imposes additional sales practice
requirements on broker-dealers that sell such securities to persons other than established customers and “accredited investors”
(generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their
spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and
have received the purchaser’s written consent to the transaction prior to sale. As a result, this rule may affect the ability of
broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our securities in the secondary market,
thus possibly making it more difficult for us to raise additional capital.
For
any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in penny stock, of a disclosure
schedule prepared by the SEC relating to the penny stock market. Disclosure is also required to be made about sales commissions payable
to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are
required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market
in penny stock.
There
can be no assurance that our common stock will qualify for exemption from the Penny Stock Rule. In any event, even if our common stock
were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority
to restrict any person from participating in a distribution of penny stock, if the SEC finds that such a restriction would be in the
public interest.
We
are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to “emerging
growth companies” will make our common shares less attractive to investors.
We
are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an “emerging growth
company,” we may take advantage of exemptions from various reporting requirements that are applicable to other public companies
that are not “emerging growth companies,” including not being required to comply with the auditor attestation requirements
of Section 404 of the Sarbanes-Oxley Act of 2002, exemptions from the requirements of holding a nonbinding advisory vote on executive
compensation and shareholder approval of any golden parachute payments not previously approved. We could be an “emerging growth
company” until 2020, although circumstances could cause us to lose that status earlier, including if we become a large accelerated
filer or if we have issued an aggregate of $1 billion in non-convertible debt during the preceding 3 years. We cannot predict if investors
will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive
as a result, there may be a less active trading market for our common stock and the price of our common stock may be more volatile.
We
do not intend to pay dividends for the foreseeable future.
For
the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate
paying any cash dividends on our common stock. Accordingly, investors must be prepared to rely on sales of their common stock after price
appreciation to earn an investment return, which may never occur. Investors seeking cash dividends should not purchase our common stock.
Any determination to pay dividends in the future will be made at the discretion of our board of directors and will depend on our results
of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board deems
relevant.
Fulfilling
our obligations incident to being a public company, including with respect to the requirements of and related rules under the Sarbanes-Oxley
Act of 2002, is expensive and time-consuming, and any delays or difficulties in satisfying these obligations could have a material adverse
effect on our future results of operations and our stock price.
As
a public company, the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC require us to implement various corporate
governance practices and adhere to a variety of reporting requirements and complex accounting rules. Compliance with these public company
obligations requires us to devote significant time and resources and places significant additional demands on our finance and accounting
staff and on our financial accounting and information systems. We plan to hire additional accounting and financial staff with appropriate
public company reporting experience and technical accounting knowledge. Other expenses associated with being a public company include
increased auditing, accounting and legal fees and expenses, investor relations expenses, increased directors’ fees and director
and officer liability insurance costs, registrar and transfer agent fees and listing fees, as well as other expenses.
We
are required under the Sarbanes-Oxley Act of 2002 to document and test the effectiveness of our internal control over financial reporting.
In addition, we are required under the Exchange Act to maintain disclosure controls and procedures and internal control over financial
reporting. Any failure to maintain effective controls or implement required new or improved controls, or difficulties encountered in
their implementation, could harm our operating results, or cause us to fail to meet our reporting obligations. If we are unable to conclude
that we have effective internal control over financial reporting, investors could lose confidence in the reliability of our financial
statements. This could result in a decrease in the value of our common stock. Failure to comply with the Sarbanes-Oxley Act of 2002 could
potentially subject us to sanctions or investigations by the SEC or other regulatory authorities.
Compliance
with changing regulation of corporate governance and public disclosure will result in additional expenses.
Changing
laws, regulations and standards relating to corporate governance and public disclosure, including SOX and related SEC regulations, have
created uncertainty for public companies and significantly increased the costs and risks associated with accessing the public markets
and public reporting. Our management team will need to invest significant management time and financial resources to comply with both
existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion
of management time and attention from revenue generating activities to compliance activities.
Provisions
in our charter documents and under Nevada law could discourage a takeover that stockholders may consider favorable.
Provisions
in our articles of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management.
Our board of directors has the right to determine the authorized number of directors and to elect directors to fill a vacancy created
by the expansion of the board of directors or the resignation, death, or removal of a director, which prevents stockholders from being
able to control the size of or fill vacancies on our board of directors. In addition, we are authorized to issue up to 40,000,000 shares
of common stock, in one or more classes or series as may be determined by our board of directors. The issuance of shares of common stock,
while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of our outstanding
voting stock.