NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2022
(UNAUDITED)
NOTE
1. DESCRIPTION OF THE BUSINESS AND ORGANIZATION
Kun
Peng International Limited (“the Company”, “KPIL”, “CXKJ”, “we”, “us”, “our”),
a Nevada corporation (formerly known as CX Network Group, Inc.), through its subsidiaries and VIE, currently engages in the sale of health
care and health related household products through its online platform, King Eagle Mall.
Reverse
Merger
On
May 17, 2021, the Company entered into a share exchange agreement (“Share Exchange Agreement”) with (i) Kun Peng International
Holding Limited (“KP International”), a limited liability company incorporated in British Virgin Islands on April 20, 2021,
and (ii) the five members of KP International to acquire all the issued and outstanding capital stock of KP International in exchange
for the issuance to those members of an aggregate of 34,158,391 shares of our common stock (“Reverse Acquisition”). Pursuant
to the terms of the Exchange Agreement, and as a condition to the completion of the transactions contemplated by the Share Exchange Agreement,
the Company also agreed to enter into an agreement with Wenhai Xia (“the Stockholder”), to cancel an aggregate of 15,535,309
shares of the Company’s Common Stock owned by the Stockholder. The Reverse Acquisition was closed on May 17, 2021.
For
accounting purpose, the transaction with KP International was treated as a reverse acquisition and KP International is deemed to be the
acquirer and the Company as the acquired party. Consequently, the assets and liabilities and the historical operations that will be reflected
in the accompanying consolidated financial statements prior to the Reverse Acquisition will be those of KP International and its consolidated
subsidiaries and will be recorded at the historical cost basis of KP International, and the accompanying consolidated financial statements
after consummation of the reverse acquisition will include the assets and liabilities of KP International and its subsidiaries and VIE,
historical operations of KP International and its subsidiaries and VIE, and operations of the Company from the Closing Date of the Reverse
Acquisition. The accompanying consolidated financial statements share and per share information has been retroactively adjusted to reflect
the exchanged shares in the Acquisition. The equity structure of the Company was retrospectively adjusted under ASC Topic 805-40. As
of September 30, 2021, there were 40,000,000 shares issued and outstanding.
Authorized
Shares and Name Change
Effective
as of September 9, 2021, the Company’s Articles of Incorporation were amended to change the name of the Company from CX Network
Group, Inc. to Kun Peng International Ltd. (“KPIL”) and to increase the Company’s authorized capital to 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.
Kun
Peng International Holding Limited
Kun
Peng International Holding Limited (“KP International”) was incorporated in the British Virgin Islands on April 20, 2021.
KP International is a holding company and entered into a Bought and Sold Note with Kunpeng (China) Industrial Development Company Limited
(“KP Industrial”), incorporated in Hong Kong on August 11, 2017, at a cash consideration of $0.129 (HK$1) on May 3, 2021.
After the ownership transfer, it became a sole shareholder of KP Industrial.
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 on May 3, 2021.
Kun
Peng (Hong Kong) Industrial Development Limited
Kun
Peng (Hong Kong) Industrial Development Limited (“KP (Hong Kong)”) was incorporated as a limited liability company in Hong
Kong on June 21, 2021. It is a holding company and is wholly owned by Kun Peng International Holding Limited. The share capital of this
entity upon formation is $0.13 (HK$1).
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.
On
July 18, 2022, King Eagle (China) and KP Industrial entered into an equity transfer agreement with both Guoxin Ruilian Group Co.,
Ltd and Guoxin Zhengye pursuant to which Guoxin Zhengye transferred its 8%
ownership in King Eagle (China) to KP Industrial (Guoxin Zhengye became a wholly-owned subsidiary of Guoxin Ruilian Group Co., Ltd on November 5, 2021). After the transfer, King Eagle (China) became a wholly owned subsidiary of KP
Industrial. Such transfer was approved and effective on August 5, 2022.
Some
of the business engaged in by King Eagle (Tianjin) is restricted or prohibited for foreign investment under PRC regulations. As such,
King Eagle (China) has entered into the VIE Agreements with King Eagle (Tianjin) and their shareholders. We do not own any equity interests
in King Eagle (Tianjin), but control and receive the economic benefits of their respective business operations through the VIE Agreements.
The VIE Agreements enable us to provide King Eagle (Tianjin) with consulting services on an exclusive basis, in exchange for all of its
annual profits, if any. In addition, we are able to appoint its senior executives and approve all matters requiring approval of its shareholders.
The VIE Agreements are comprised of a Consulting Service Agreement, Business Operation Agreement, Proxy Agreement, Equity Disposal Agreement,
and Equity Pledge Agreement.
Under
current Chinese laws and regulations, the Company believes that the VIE Agreements are not subject to any government approval. The shareholders
of King Eagle (Tianjin) were required to register with SAFE when they established offshore vehicles to hold KP International, and such
SAFE registration was effected on May 14, 2021. These shareholders of King Eagle (Tianjin) will have to register their equity pledge
arrangement as required under the Equity Pledge Agreement with King Eagle (China). The Company faces uncertainty with respect to future
actions by the PRC government that could significantly affect King Eagle (Tianjin)’s financial performance and the enforceability
of the VIE Agreements.
King
Eagle (Tianjin) Technology Co., Ltd.
King
Eagle (Tianjin) Technology Co., Ltd. (“King Eagle (Tianjin)”) was incorporated as a limited liability company in Tianjin
Pilot Free Trade Zone in the People’s Republic of China on September 2, 2020, with a registered capital of approximately $1.5 million
(RMB 10 million).
On
March 23, 2022, the board of directors of King Eagle (Tianjin) approved the transfer by Xiangyi Mao of her entire ownership (5%) in King
Eagle (Tianjin) to Yuanyuan Zhang. After the transfer, Yuanyuan Zhang became a 10% shareholder of King Eagle (Tianjin). The ownership
percentage of other King Eagle (Tianjin)’s shareholders remained identical. The ownership transfer was completed on March 29, 2022.
On
June 6, 2022, the
board of directors of King Eagle (Tianjin) approved the transfer of the 5% ownership by Yanlu Li to Chengyuan Li. The ownership
transfer was completed on June 9, 2022. As a result of the equity transfer, the ownership percentage of Chengyuan Li changed from
40.5% to 45.5%. The ownership percentage of other King Eagle (Tianjin)’s shareholders remained identical.
After
the ownership transfers, King Eagle (Tianjin) is owned by multiple individuals: (i) Chengyuan Li, 45.5%, (ii) Xiujin Wang, 10.5%, (iii)
Jinjing Zhang, 6%, (iv) Wanfeng Hu, 6%, (v) Cuilian Liu, 6%. (vi) Zhizhong Wang, 6%. (vii) Zhandong Fan, 5%, (viii) Yuanyuan Zhang, 10%,
and (ix) Hui Teng, 5%.
Those
shareholders also indirectly own the Company through two British Virgin Islands entities: Kunpeng Tech Limited and Kunpeng TJ Limited.
Currently, Cuilian Liu, Zhizhong Wang, Jinjing Zhang and Hui Teng owned 26%, 26%, 26% and 22%, respectively, equity interest in Kunpeng
Tech Limited. Zhizhong Wang is a sole director of Kunpeng Tech Limited. Chengyuan Li, Wanfeng Hu, Yuanyuan Zhang and Zhandong Fan owned
66.2%, 7.8%, 6.5% and 6.5%, respectively, equity interest in Kunpeng TJ Limited. Chengyuan Li is a sole director of Kunpeng TJ Limited.
Yuanyuan Zhang is the Chief Financial Officer of the Company.
Kun
Peng Tian Yu Health Technology (Tianjin) Co., Ltd.
Kun
Peng Tian Yu Health Technology Co., Ltd. (“KP Tian Yu”) was incorporated as a limited liability company in Tianjin Pilot
Free Trade Zone in the People’s Republic of China on August 10, 2021 with a registered capital of $5 million. It’s wholly
owned by KP (Hong Kong).
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) applicable
to quarterly financial information and the requirements of Form 10-Q and Rule 8-03 of Regulation S-X of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and disclosure required by accounting principles generally accepted in the United
States of America for complete financial statements. Quarterly results are not necessarily indicative of results for a full year. In
the opinion of management, all adjustments considered necessary for a fair presentation of the financial position and the results of
operations and cash flows for the quarterly periods have been included.
These
condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements
and notes thereto for the year ended September 30, 2021 included in the Form 10-K/A filed with the SEC on February 8, 2022.
The
condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United
States of America. This basis of accounting involves the application of accrual accounting and consequently, revenues and gains are recognized
when earned, and expenses and losses are recognized when incurred. The condensed consolidated financial statements are expressed in U.S.
dollars.
Basis
of Consolidation
The
condensed consolidated financial statements include the financial statements of the Company, its subsidiaries and variable interest entity
(“VIE”). All significant intercompany transactions and balances within the Company have been eliminated upon consolidation.
Use
of Estimates and Assumptions
The
preparation of the condensed consolidated financial statements in conformity with generally accepted accounting principles requires management
to make estimate and assumptions that impact the presented amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the presented amounts of revenues and expenses during the period. Actual results
may differ from those estimates. Significant estimates during the nine months ended June 30, 2022 and 2021 include the collectability
of receivables, the useful lives of long-lived assets and intangibles, assumptions used in assessing impairment of long-lived assets,
valuation of accruals for expenses and tax due.
Reclassification
Certain
amounts in the prior period financial statements have been reclassified to conform to the current period presentation.
Going
Concern
The
accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted
in the United States of America which contemplate continuation of the Company as a going concern basis. The going-concern basis assures
that assets are realized and liabilities are extinguished in the ordinary course of business at amounts disclosed on the financial statements.
The Company’s ability to continue as a going concern depends on the liquidation of its current assets and business developments.
In assessing the Company’s liquidity, the Company monitors and analyzes its cash and cash equivalents and its operating and capital
expenditure commitments. The Company’s liquidity needs are to meet its working capital requirements, operating expenses and capital
expenditure obligations. For the nine months ended June 30, 2022, the Company incurred cash outflows from operating activities of $1,689,741,
a net loss of $966,818, and negative working capital of $3,326,133. Moreover, as the COVID-19 outbreak continues, there is a delay in
the progress of the planning of smart kiosk due to the lockdown of the affected areas in the
PRC. These conditions raise substantial doubt about the ability of the Company
to continue as a going concern.
The
Company continues to monitor its operations to help refine the Company’s financial liquidity. The financial liquidity of the
Company has declined to very unhealthy level in this quarter due to the decline in the balance of cash and cash equivalent. Options
under consideration in the review process include, but not limited to, increase of sales on its online business, reduction of
overhead costs, fund advance from the Company’s stockholders and directors, or financing through issuance of shares. Since the
first quarter of 2022, the Company has been focusing on increasing its revenue through its online platform and slimming its overhead
costs. For example, we reduced the compensation and benefits of our executives, decreased office supplies expense, trimmed staff
meeting expense and terminated the lease arrangements of employee accommodations. Additionally, the Company obtained a fund advance
of approximately $0.3
million from one of the shareholders of King Eagle (Tianjin) to meet its working capital requirements.
In
order to continue as a going concern for the next 12 months, the Company continues to focus on increasing its revenue through the sale
of health care products on its online platform, King Eagle Mall, streamlining its overhead costs or obtaining a financing from its stockholders
or directors. However, the Company cannot provide any assurance that it will be able to increase revenue, that it will be able to successfully
implement its business plan, or that financing that will be available to it on commercially acceptable terms, if at all. The financial
statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or
the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern. The directors
will continue to support the group by providing adequate financial assistance to enable the group to continue its business operations
for the foreseeable future.
COVID-19
Outbreak
The
ongoing and evolving COVID-19 pandemic continues to spread throughout the world and outbreak prompted governments and business to take
a widespread of quarantines, lockdowns, site closures. It has negatively impacted the global economy, workforces, customers, and created
significant volatility and disruption of economic activities.
During
the third quarter of 2022, as the PRC central and local government strived to combat the rising COVID-19 cases, the COVID-19 strict control
measures remained effective in major cities in the PRC. The Company continues
to focus its business through its online platform, King Eagle Mall, to mitigate the adverse impacts by COVID-19 . In fact, the pandemic increased
the overall public health consciousness in the PRC and the Company continued to incur a significant growth in its average monthly online
sales revenue by $522,794, or 179.2%, from $291,736 for the nine months ended June 30, 2021 to $814,530 for the nine months ended June
30, 2022 and by $63,523, or 42.2%, from $150,676 for the three months ended June 30, 2021 to $214,199 for the three months ended June
30, 2022.
The
Company does not expect that the coronavirus COVID-19 will have a material adverse effect on its online business or financial results
at this time. Still, it is not possible to predict the unanticipated consequence of the pandemic on our future business performance and
liquidity due to the severity of the COVID-19 situation in the PRC. The Company continues to monitor and assess the evolving situation
closely and evaluate its potential exposure.
Earnings
(loss) Per Share
Basic
income (loss) per share is computed by dividing net income (loss) attributable to the holders of ordinary shares by the weighted average
number of ordinary shares outstanding during the year. Diluted income (loss) per share is calculated by dividing net income (loss) attributable
to the holders of ordinary shares as adjusted for the effect of dilutive ordinary share equivalents, if any, by the weighted average
number of ordinary shares and dilutive ordinary share equivalents outstanding during the period. However, ordinary share equivalents
are not included in the denominator of the diluted earnings per share calculation when inclusion of such shares would be anti-dilutive,
such as in a period in which a net loss is recorded.
Cash
and Cash Equivalents
We
consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. We maintain
with various financial institutions in PRC. As of June 30, 2022 and September 30, 2021, cash balances held in PRC banks are uninsured.
We have not experienced any losses in bank accounts and believes we are not exposed to any risks on our cash in bank accounts.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation and impairment losses. Gains and losses on dispositions of property and
equipment are included in operating income (loss). Major additions, renewals and improvements are capitalized while maintenance and repairs
are recognized as expense as incurred. Construction-in-progress represents labor costs, materials and capitalized interest incurred in
connection with the construction. All other interest is expensed as incurred. No depreciation is provided for construction in progress
until it is completed and placed into service.
Depreciation
is provided over the estimated useful life of each class of depreciable assets and is computed using the straight-line method over the
useful lives of the assets are as follows:
SCHEDULE OF PROPERTY PLANT AND EQUIPMENT USEFUL LIVES
Classification |
|
Estimated
useful life |
Leasehold
improvements |
|
Shorter
of 5 years or lease term |
Office
equipment |
|
3
years |
Computer
equipment |
|
3
years |
Computer
software |
|
5
years |
Revenue
Recognition
Revenue
is comprised of sales of goods and represents the amount of consideration the Company is entitled to upon the transfer of goods. Revenue
was recorded on a gross basis, net of surcharges and value added tax (“VAT”) of gross sales. The Company recorded revenue
on a gross basis because the Company is the primary obligor of the sales arrangements has latitude in establishing prices, has discretion
in suppliers’ selection and assumes credit risks on receivables on gross sales from customers.
Deferred
Revenue
Deferred
revenue results from transactions where the Company has received the payments from the customers but revenue recognition criteria
under the five-step model of ASC Topic 606 have yet to be met. Once all revenue recognition criteria have been satisfied, the
revenues will be recognized upon meeting the performance obligations which includes the transfer of risk and rewards to the
customers in the condensed consolidated statements of operations.
Lease
Under
ASC Topic 842, the Company determines if an arrangement is a lease at inception. Lease assets and liabilities are recognized at the
present value of the future lease payments at the lease commencement date. The interest rate used to determine the present value of
the future lease payments is the Company’s incremental borrowing rate based on the information available at the lease
commencement date. The Company generally uses the base, non-cancelable lease term in calculating the right-of-use assets and lease
liabilities.
The
Company may recognize the lease payments in the condensed consolidated statements of operation on a straight-line basis over the lease
terms and variable lease payments in the periods in which the obligations for those payments are incurred, if any. The lease payments
under the lease arrangements are fixed.
The
Company elected the package of practical expedients which allow the Company to carryforward its historical lease classification, its
assessment on whether a contract is or contains a lease, and its initial direct costs for any lease that exists prior to adoption of
the new standard.
The
Company also elected to apply the short-term lease exception for lease arrangements with a lease term of 12 months or less at commencement.
Lease terms used to compute the present value of lease payments do not include any option to extend, renew, or terminate the lease that
the Company is not reasonably certain to exercise upon the lease inception. Accordingly, operating lease right-of-use assets and liabilities
do not include leases with a lease term of 12 months or less.
Recently
Adopted Accounting Standards
Income
Taxes. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which
modifies and eliminates certain exceptions to the general principles of ASC 740, Income Taxes. This standard was effective for KPIL after
September 30, 2021. The Company evaluated that this new guidance does not have significant impact on its condensed consolidated financial
statements.
Accounting
Pronouncements Issued But Not Yet Adopted
Financial
Instruments. In June 2016, the FASB issued Accounting Standards Update No. 2016-13,”Financial Instruments - Credit Losses (Topic
326)” (“ASU 2016-13”). ASU 2016-13 revises the methodology for measuring credit losses on financial instruments and
the timing of when such losses are recorded. Originally, ASU 2016-13 was effective for fiscal years, and for interim periods within those
fiscal years, beginning after December 15, 2019, with early adoption permitted. In November 2019, FASB issued ASU 2019-10, “Financial
Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842).” This ASU defers the effective
date of ASU 2016-13 for public companies that are considered smaller reporting companies as defined by the SEC to fiscal years beginning
after December 15, 2022, including interim periods within those fiscal years. The Company is planning to adopt this standard in the first
quarter of fiscal 2023.The Company is currently evaluating the potential effects of adopting the provisions of ASU No. 2016-13 on its
condensed consolidated financial statements.
In
the period from July 2022 through August 2022, the FASB has not issued any additional accounting standards updates that have a significant
impact on the Company.
NOTE
3 - VARIABLE INTEREST ENTITY “VIE” ARRANGEMENTS
On
May 15, 2021, King Eagle (China) entered into a series of contractual arrangements with King Eagle (Tianjin) and its shareholders. As
a result of the contractual arrangements, the Company classified King Eagle (Tianjin) as a Variable Interest Entity “VIE.”
King
Eagle (Tianjin) Technology Co., Ltd. (“King Eagle (Tianjin)”) was incorporated as a limited liability company in Tianjin
Pilot Free Trade Zone in the People’s Republic of China on September 2, 2020, with a registered capital of approximately $1.5 million
(RMB 10 million).
On
March 23, 2022, the board of directors of King Eagle (Tianjin) approved that Xiangyi Mao transferred her entire ownership (5%) in King
Eagle (Tianjin) to Yuanyuan Zhang. After the transfer, Yuanyuan Zhang became a 10% shareholder of King Eagle (Tianjin). The ownership
percentage of King Eagle (Tianjin)’s other shareholders remained identical. The ownership transfer was completed on March 29, 2022.
On
June 6, 2022, the
board of directors of King Eagle (Tianjin) approved the transfer of the 5% ownership by Yanlu Li to Chengyuan Li. The ownership
transfer was completed on June 9, 2022. As a result of the equity transfer, the ownership percentage of Chengyuan Li changed from
40.5% to 45.5%. The ownership percentage of other King Eagle (Tianjin)’s shareholders remained identical.
After
the ownership transfers, King Eagle (Tianjin) is owned by the following individuals: (i) Chengyuan Li, 45.5%, (ii) Xiujin Wang,
10.5%, (iii) Jinjing Zhang, 6%, (iv) Wanfeng Hu, 6%, (v) Cuilian Liu, 6%. (vi) Zhizhong Wang. 6%. (vii) Zhandong Fan, 5%, (viii)
Yuanyuan Zhang, 10%, and (ix) Hui Teng, 5%.
Those
shareholders also indirectly own the Company through two British Virgin Islands entities: Kunpeng Tech Limited and Kunpeng TJ Limited.
Currently, Cuilian Liu, Zhizhong Wang, Jinjing Zhang and Hui Teng owned 26%, 26%, 26% and 22%, respectively, equity interest in Kunpeng
Tech Limited. Zhizhong Wang is a sole director of Kunpeng Tech Limited. Chengyuan Li, Wanfeng Hu, Yuanyuan Zhang and Zhandong Fan owned
66.2%, 7.8%, 6.5% and 6.5%, respectively, equity interest in Kunpeng TJ Limited. Chengyuan Li is a sole director of Kunpeng TJ Limited.
Yuanyuan Zhang is the Chief Financial Officer of the Company.
The
VIE Agreements are as follows:
(1) |
Consulting
Service Agreement |
(2) |
Business
Operation Agreement |
(3) |
Proxy
Agreement |
(4) |
Equity
Disposal Agreement |
(5) |
Equity
Pledge Agreement |
Consulting
Service Agreement
Pursuant
to the terms of the Exclusive Consulting Service Agreement dated May 15, 2021 between King Eagle (China) and King Eagle (Tianjin) (the
“Consulting Service Agreement”), King Eagle (China) is the exclusive consulting service provider to King Eagle (Tianjin)
to provide business-related software research and development services; design, installation, and testing services; network equipment
support, upgrade, maintenance, monitor, and problem-solving services; employee technical training services; technology development and
sublicensing services; public relations services; market investigation, research, and consultation services; short to medium term marketing
plan-making services; compliance consultation services; marketing events and membership related activities organizing services; intellectual
property permits; equipment and rental services; and business-related management consulting services. Pursuant to the Consulting Service
Agreement, the service fee is the remaining amount of King Eagle (Tianjin)’s profit before tax in the corresponding year after
deducting King Eagle (Tianjin)’s losses, if any, in the previous year, the necessary costs, expenses, taxes, and fees incurred
in the corresponding year, and the withdrawal of the statutory provident fund. King Eagle (Tianjin) agreed not to transfer its rights
and obligations under the Consulting Service Agreement to any third party without prior written consent from King Eagle (China). In addition,
King Eagle (China) may transfer its rights and obligations under the Consulting Service Agreement to King Eagle (China)’s affiliates
without King Eagle (Tianjin)’s consent, but King Eagle (China) shall notify King Eagle (Tianjin) of such transfer. This Agreement
is valid for a term of 10 years subject to any extension requested by King Eagle (China) unless terminated by King Eagle (China) unilaterally
prior to the expiration.
Business
Operation Agreement
Pursuant
to the terms of the Business Operation Agreement dated May 15, 2021 among King Eagle (China), King Eagle (Tianjin) and the shareholders
of King Eagle (Tianjin) (the “Business Operation Agreement”), King Eagle (Tianjin) has agreed to subject the operations
and management of its business to the control of King Eagle (China). According to the Business Operation Agreement, King Eagle (Tianjin)
is not allowed to conduct any transaction that has a substantial impact upon its operations, assets, rights, obligations, and personnel
without King Eagle (China)’s written approval. The shareholders of King Eagle (Tianjin) and King Eagle (Tianjin) will take King
Eagle (China)’ s advice on the appointment or dismissal of directors, employment of King Eagle (Tianjin)’s employees, and
regular operation and financial management of King Eagle (Tianjin). The shareholders of King Eagle (Tianjin) have agreed to transfer
any dividends, distributions, or other profits that they receive as the shareholders of King Eagle (Tianjin) to King Eagle (China) without
consideration. The Business Operation Agreement is valid for a term of 10 years or longer upon the request of King Eagle (China) prior
to the expiration thereof. The Business Operation Agreement might be terminated earlier by King Eagle (China) with a 30-day written notice.
Proxy
Agreement
Pursuant
to the terms of the Proxy Agreement dated May 15, 2021 among King Eagle (China) and the shareholders of King Eagle (Tianjin) (the “Proxy
Agreement”), the shareholders of King Eagle (Tianjin) have entrusted their voting rights as King Eagle (Tianjin)’s shareholders
to King Eagle (China) for the longest duration permitted by PRC law. The Proxy Agreement can be terminated by mutual consent of the King
Eagle (Tianjin) shareholders and King Eagle (China) or upon 30-day notice by King Eagle (China).
Equity
Disposal Agreement
Pursuant
to the terms of the Equity Disposal Agreement dated May 15, 2021 among King Eagle (China), King Eagle (Tianjin), and the shareholders
of King Eagle (Tianjin) (the “Equity Disposal Agreement”), the shareholders of King Eagle (Tianjin) granted King Eagle
(China) or its designees an irrevocable and exclusive purchase option (the “Option”) to purchase all or any portion of King
Eagle (Tianjin)’s equity interests and/or assets at the lowest purchase price permitted by PRC law and regulations. The Option
is exercisable at any time at King Eagle (China)’s discretion, in whole or in part, to the extent permitted by PRC law. The shareholders
of King Eagle (Tianjin) agreed to give King Eagle (Tianjin) the total amount of the exercise price as a capital contribution or otherwise
upon King Eagle (China)’s written consent to the transfer. The Equity Disposal Agreement is valid for a term of 10 years or longer
upon the request of King Eagle (China).
Equity
Pledge Agreement
Pursuant
to the terms of the Equity Pledge Agreement dated May 15, 2021 among King Eagle (China) and the shareholders of King Eagle (Tianjin)
(the “Pledge Agreement”), the shareholders of King Eagle (Tianjin) pledged all of their equity interests in King Eagle
(Tianjin) to King Eagle (China), including the proceeds thereof, to guarantee King Eagle (Tianjin)’s performance of its obligations
under the Business Operation Agreement, the Consulting Service Agreement, and the Equity Disposal Agreement (each, an “Agreement”
and, collectively, the “Agreements”). If King Eagle (Tianjin) or its shareholders breach their respective contractual
obligations under any Agreement, or cause to occur one of the events constituting an event of default under any Agreement, King Eagle
(China), as pledgee, will be entitled to certain rights, including the right to dispose of the pledged equity interest in King Eagle
(Tianjin). During the term of the Pledge Agreement, the pledged equity interests cannot be transferred without King Eagle (China)’s
prior written consent. The Pledge Agreement is valid until all the obligations due under the Agreements have been fulfilled.
A
VIE is an entity that has either a total equity investment that is insufficient to permit the entity to finance its activities without
additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest, such
as voting rights and the right to receive the expected residual returns of the entity or the obligation to absorb the expected losses
of the entity. The variable interest holder, if any, that has a controlling financial interest in a VIE is deemed to be the primary beneficiary
and must consolidate the VIE. King Eagle (China) is deemed to have a controlling financial interest and be the primary beneficiary of
King Eagle (Tianjin) because it has both of the following characteristics:
|
(1) |
The
power to direct the activities of King Eagle (Tianjin) that most significantly impact such entity’s economic performance, and |
|
|
|
|
(2) |
The
obligation to absorb losses of, or the right to receive benefits from, King Eagle (Tianjin) that could potentially be significant
to such entity. |
Pursuant
to the Contractual Arrangements, the shareholders of King Eagle (Tianjin) have agreed to transfer any dividends, distributions or
any other profits that they receive to King Eagle (China). King Eagle (Tianjin) pays service fees equal to all of its net profit
after tax to King Eagle (China). The Contractual Arrangements are designed so that King Eagle (Tianjin) operates for the benefit of King Eagle (China) and
ultimately the Company.
Moreover,
King Eagle (Tianijn) has agreed to subject the operations and management of its business to the full control under King Eagle
(China) and King Eagle (Tianjin) will take King Eagle (China)’s advice on the appointment of dismissal of directors and
employment, regular operation and financial management . Accordingly, the Company consolidates the accounts of King Eagle (Tianjin)
and its subsidiaries for the periods presented herein, in accordance with Accounting Standards Codification, or ASC, 810-10,
Consolidation.
Accordingly,
the accounts of King Eagle (Tianjin) are consolidated in the accompanying financial statements pursuant to ASC 810-10, Consolidation.
In addition, their financial positions and results of operations are included in the Company’s financial statements.
The
Company consolidated its VIE as of June 30, 2022 and September 30, 2021. The carrying amounts and classification of the VIE’s assets
and liabilities included in the consolidated balance sheets are as follows:
SCHEDULE
OF VIE’S ASSETS AND LIABILITIES INCLUDED IN THE CONSOLIDATED BALANCE SHEETS
| |
June
30, | | |
September
30, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Current
assets | |
$ | 2,560,036 | | |
$ | 3,712,560 | |
Noncurrent
assets | |
| 109,356 | | |
| 145,935 | |
Total
assets | |
| 2,669,392 | | |
| 3,858,495 | |
Total
liabilities | |
| 3,798,622 | | |
| 4,525,808 | |
Net
liabilities | |
$ | (1,129,230 | ) | |
$ | (667,313 | ) |
The
VIE’s liabilities consisted of the following as of June 30, 2022 and September 30, 2021:
| |
June
30, | | |
September
30, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Current
liabilities | |
| | | |
| | |
Trade
and other payable | |
$ | 512,396 | | |
$ | 1,024,064 | |
Amount
due to a related party | |
| 283,904 | | |
| - | |
Deferred
revenue | |
| 2,865,467 | | |
| 3,122,705 | |
Payroll
payable | |
| 5,074 | | |
| 14,802 | |
Tax
payable | |
| 33,122 | | |
| 218,301 | |
Operating
lease obligations-current portion | |
| 75,853 | | |
| 92,807 | |
Total
current liabilities | |
| 3,775,816 | | |
| 4,472,679 | |
Total
noncurrent liabilities | |
| | | |
| - | |
Operating
lease obligations-net of current portion | |
| 22,806 | | |
| 53,129 | |
Total
noncurrent liabilities | |
| 22,806 | | |
| 53,129 | |
Total
liabilities | |
$ | 3,798,622 | | |
$ | 4,525,808 | |
The
operating results of the VIE were as follows:
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
Nine
Months Ended June 30 | | |
Three
Months Ended June 30 | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
| | |
| | |
| | |
| |
Revenue | |
$ | 7,330,768 | | |
$ | 2,625,621 | | |
$ | 642,596 | | |
$ | 452,027 | |
Gross
profit | |
| 6,148,363 | | |
| 2,104,793 | | |
| 539,709 | | |
| 246,586 | |
Loss
from operations | |
| (535,144 | ) | |
| (1,389,906 | ) | |
| (866,744 | ) | |
| (1,389,854 | ) |
Other
income | |
| 29,122 | | |
| 420 | | |
| 2,693 | | |
| 303 | |
Net
loss | |
$ | (506,022 | ) | |
$ | (1,389,486 | ) | |
$ | (864,051 | ) | |
$ | (1,389,551 | ) |
NOTE
4 - ADVANCE AND PREPAYMENTS
Prepayments
consisted of the following:
SCHEDULE OF PREPAYMENTS
| |
June
30, | | |
September
30, | |
| |
2022 | | |
2021 | |
Prepaid
rent and building management and utilities | |
$ | 47,709 | | |
$ | 85,474 | |
Prepaid
supplies(1) | |
| 146,192 | | |
| 78,248 | |
Prepaid
system maintenance services | |
| - | | |
| 5,209 | |
Prepaid
income tax | |
| 5,474 | | |
| 5,689 | |
Prepaid
professional services(2) | |
| 18,228 | | |
| 148,708 | |
Prepaid
others | |
| 12,589 | | |
| 15,301 | |
Total
prepayments | |
$ | 230,192 | | |
$ | 338,629 | |
|
(1) |
As
of June 30, 2022, and September 30, 2021, the Company had prepared the supplies of $146,192 and $78,248, respectively. The prepayment
will be recognized in cost of goods sold in its unaudited condensed consolidated statement of operations and comprehensive loss when
the corresponding deferred revenue is recognized. |
|
|
|
|
(2) |
As
of June 30, 2022, the ending balance of prepaid professional services included three types
of prepayments, $9,951, for the legal service fee for our PRC entities, $7,041 for the promotional
and marketing fee and $1,236 for the company secretarial services. The legal service fee
will be amortized to general and administrative expenses using the straight-line method,
over the service periods of July and August 2022. The promotional and marketing fee will
be amortized to selling expense using a straight-line method over the service periods from
July 2022 through January 2023. The Company secretarial services will be amortized to general
and administrative expenses in the fourth quarter of the fiscal year 2022.
As
of September 30, 2021, the ending balance of our prepaid professional service fee was $148,708. We amortized the legal service fee,
$10,341, to general and administrative expenses by a straight-line method in October and November 2021. The remaining amount, $138,367,
related to a prepayment for a planned marketing campaign but cancelled, was fully refunded to us on December 14, 2021. |
These
amounts are expected to be recoverable or charged to the consolidated statements of operations within twelve (12) months.
NOTE
5 - OTHER RECEIVABLES
Other
receivables included the following:
SCHEDULE
OF OTHER RECEIVABLES
| |
June
30, | | |
September
30, | |
| |
2022 | | |
2021 | |
Rental
deposits | |
$ | 89,364 | | |
$ | 93,583 | |
Advance
to employees | |
| 48,064 | | |
| 30,241 | |
Others | |
| 4,313 | | |
| - | |
Total
other receivables, net | |
$ | 141,741 | | |
$ | 123,824 | |
Advance
to employees represents funds provided to our officers and employees for the business expenses, such as travel, parking, gasoline, membership,
meals, that are anticipated to be incurred by our officers and employees on behalf of the Company. Advances to employees are required
to be repaid by cash within a year or employees are required to submit expense receipts for business expenses within three months.
NOTE
6 - PROPERTY AND EQUIPMENT, NET
Property
and equipment consisted of the following:
SCHEDULE
OF PROPERTY AND EQUIPMENT
| |
June
30, | | |
September
30, | |
| |
2022 | | |
2021 | |
Leasehold
improvements | |
$ | - | | |
$ | 29,886 | |
Furniture
and fixtures | |
| 1,312 | | |
| 9,534 | |
Computer
equipment | |
| 42,593 | | |
| 43,452 | |
Office
equipment | |
| 1,572 | | |
| 1,633 | |
Computer
software | |
| - | | |
| 11,971 | |
Construction-in-progress | |
| 91,568 | | |
| - | |
Subtotal | |
| 137,045 | | |
| 96,476 | |
Less:
accumulated depreciation | |
| (25,993 | ) | |
| (27,751 | ) |
Total
property and equipment, net | |
$ | 111,052 | | |
$ | 68,725 | |
The
depreciation expense was $8,069
and $4,123 for the
three months ended June 30, 2022 and 2021, respectively and $43,689
and $15,834 for the
nine months ended June 30, 2022 and 2021, respectively. On February 28, 2022, King Eagle (China) entered into a lease agreement for
our new office in Beijing. As we planned to move to a new office premise in May 2022, we removed the leasehold improvement in May
2022 and the estimated useful life of the leasehold improvements of our previous office in Beijing changed from 60 months to 22
months. Accordingly, an additional amount of depreciation expense of the relative leasehold improvements, $17,924,
was recognized for the months of March 2022 through May 2022. We also terminated the software services setup in our old office by
the end of May 2022 and were eligible for the refund of the cost of the unused services in an amount of $3,906,
which was reclassified to other receivables. We also removed the furniture and fixture in our old office. While we received a sale
proceeds for the disposal in an amount of $299,
we incurred a loss of disposal of in an amount of $3,809.
Construction-in-progress
represents labor costs and materials incurred in connection with the renovation of our new office facility of KP China. No depreciation
is provided for construction-in-progress until it is completed and placed in services. Total budget for the renovation of the new office
facility is approximately $142,251. As of June 30, 2022, the cost of the construction-in-progress was $91,568. The estimated additional
cost to be incurred is approximately $50,000. The renovation is expected to be completed by the end of August 2022.
NOTE
7 - INTANGIBLE ASSETS
SCHEDULE
OF INTANGIBLE ASSET
| |
June
30, | | |
September
30, | |
| |
2022 | | |
2021 | |
Trademarks | |
$ | 2,601 | | |
$ | 2,703 | |
Subtotal | |
| 2,601 | | |
| 2,703 | |
Less:
accumulated amortization | |
| (325 | ) | |
| (135 | ) |
Total
intangible assets, net | |
$ | 2,276 | | |
$ | 2,568 | |
Intangible
assets consist of the Company’s trademarks of King Eagle Mall with the useful life of ten years commencing from 2021.
Amortization
expense was $203 and $67 for the nine months ended June 30, 2022 and 2021, respectively and $67 and $67 for the three months ended June
30, 2022 and 2021, respectively.
NOTE
8 - DEFERRED REVENUE
SCHEDULE
OF DEFERRED REVENUE
| |
June
30, | | |
September
30, | |
| |
2022 | | |
2021 | |
Advance
payments from customers | |
$ | 2,865,467 | | |
$ | 3,122,705 | |
Total
deferred revenue | |
$ | 2,865,467 | | |
$ | 3,122,705 | |
Deferred
revenue resulted from transactions where the Company received the advanced payments from the customers but revenue recognition
criteria under the five-step model have yet to be met. As of June 30, 2022, and September 30, 2021, the Company had a total deferred
revenue of $2,865,467
and $3,122,705,
respectively. The amounts are not refundable to the customers. Once the five-step model criteria have been satisfied, revenues will
be recognized upon the transfer of risk and rewards to the customers.
NOTE
9 - RELATED PARTY BALANCES AND TRANSACTIONS
Amount due from a related party
represented the prepaid service fee remitted to Guoxin Star Network Co., Ltd. by our VIE, King Eagle (Tianjin). On March 31, 2021, King
Eagle (Tianjin) entered into a Cooperation Agreement with a related party, Guoxin Star Network Co., Ltd, a wholly owned subsidiary of
Guoxin Rulian Group Co. Ltd. Under the Cooperation Agreement, King Eagle (Tianjin) is required to pay Guoxin Star Network Co., Ltd. in
an amount of approximately $1.14 million (RMB 7.5 million) for the franchise of the operation of smart kiosks. Both parties are entitled
to exercise the Force Majeure Clause of the contract signed between both parties. As such, this prepaid service fee may or may not be
recoverable. In April 2021, King Eagle (Tianjin) remitted $0.34 million (RMB2,250,000) to Guoxin Star Network Co., Ltd. The remaining
obligation, approximately $0.8 million (RMB5.3 million), is payable upon the completion of the construction of smart kiosks.
SCHEDULE OF AMOUNTS DUE TO RELATED PARTIES
| |
| |
| |
June 30, | | |
September 30, | |
Name of related party | |
Relationship | |
Nature of transactions | |
2022 | | |
2021 | |
| |
| |
| |
| | |
| |
Guoxin Star Network Co., Ltd | |
It is wholly owned by Guoxin Ruilian Group Co., Ltd, the common shareholder of our 8% noncontrolling interest entity, Guoxin Zhengye | |
Prepaid services for the operation of the smart kiosk | |
$ | 335,849 | | |
$ | 349,019 | |
| |
| |
| |
| | | |
| | |
Total | |
| |
| |
$ | 335,849 | | |
$ | 349,019 | |
Amounts
due to related parties are payables arising from transactions between the Company and related parties, such as payments of operating
expenses by such related party on behalf of our entities in PRC and funding to meet working capital requirements. The payables owed to
the related parties are interest free, unsecured, and repayable on demand.
Amounts
due to related parties consisted of the following:
| |
| |
| |
June
30, | | |
September
30, | |
Name
of related party | |
Relationship | |
Nature
of transactions | |
2022 | | |
2021 | |
| |
| |
| |
| | |
| |
Mr.
Yihe Pang | |
Director | |
Payments
made to the lessors on behalf of King Eagle (China). The balance was paid off in December 2021. | |
$ | - | | |
$ | 39,629 | |
Ms.
Xiujin Wang | |
One
of the shareholders of King Eagle (Tianjin) | |
Operational
support to King Eagle (Tianjin) to meet its working capital requirement. | |
| 283,904 | | |
| - | |
| |
| |
| |
| | | |
| | |
Total | |
| |
| |
$ | 283,904 | | |
$ | 39,629 | |
NOTE
10 - EQUITY
Effective
as of September 9, 2021, the Company’s Articles of Incorporation were amended to increase the Company’s authorized capital
to 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.
Preferred
stock
The
Company’s authorized shares of preferred stock were 10,000,000 shares, with a par value of $0.0001, which may be issued in series
and with such voting powers, designations, preferences, limitations, restrictions, and relative rights as the Board of Directors shall
determine in its sole discretion shall remain authorized. No shares of preferred stock were issued and outstanding as of June 30, 2022
and September 30, 2021.
Common
stock
The
Company’s authorized shares of common stock were 200,000,000 shares, with a par value of $0.0001. The issued and outstanding shares
of common stock were 40,000,000 as of June 30, 2022 and September 30, 2021, respectively.
Reverse
acquisition
On
May 17, 2021, the Company entered into a share exchange agreement (“Share Exchange Agreement”) with (i) Kun Peng International
Holding Limited (“KP International”), a limited liability company incorporated in British Virgin Islands on April 20, 2021,
and (ii) the five members of KP International to acquire all the issued and outstanding capital stock of KP International in exchange
for the issuance to those members of an aggregate of 34,158,391 shares of our common stock (“Reverse Acquisition”). Pursuant
to the terms of the Exchange Agreement, and as a condition to the completion of the transactions contemplated by the Share Exchange Agreement,
the Company also agreed to enter into an agreement with Wenhai Xia (“the Stockholder”), to cancel an aggregate of 15,535,309
shares of the Company’s Common Stock owned by the Stockholder. The Reverse Acquisition was completed on May 17, 2021.
For
accounting purpose, the transaction with KP International was treated as a reverse acquisition and KP International is deemed to be the
acquirer and the Company as the acquired party. Consequently, the assets and liabilities and the historical operations that will be reflected
in the accompanying consolidated financial statements prior to the Reverse Acquisition will be those of KP International and its consolidated
subsidiaries and will be recorded at the historical cost basis of KP International, and the accompanying unaudited condensed consolidated
financial statements after consummation of the reverse acquisition will include the assets and liabilities of KP International and its
subsidiaries and VIE, historical operations of KP International and its subsidiaries and VIE, and operations of the Company from the
Closing Date of the Reverse Acquisition. The accompanying unaudited condensed consolidated financial statements share and per share information
has been retroactively adjusted to reflect the exchanged shares in the Acquisition. The equity structure of the Company was retrospectively
adjusted under ASC Topic 805-40.
As
of June 30, 2022, there were 40,000,000 shares of common stock issued and outstanding.
Restricted
net assets:
Our
ability to pay dividends is primarily dependent on us receiving distributions of funds from its subsidiary or VIE. Relevant PRC statutory
laws and regulations permit payments of dividends by only out of its retained earnings, if any, as determined in accordance with PRC
accounting standards and regulations and after it has met the PRC requirements for appropriation to statutory reserves. Share capital
of the PRC subsidiary and VIE included in the Company’s consolidated net assets are also non-distributable for dividend purposes.
The results of operations reflected in the accompanying consolidated financial statements prepared in accordance with U.S. GAAP differ
from those reflected in the statutory financial statements of King Eagle (China), the foreign-invested enterprise, King Eagle (Tianjin),
the VIE and KP Tian Yu. The Company is required to set aside at least 10% of their after-tax profits each year, if any, to fund certain
statutory reserve funds until such reserve funds reach 50% of its registered capital. In addition, the Company may allocate a portion
of its after-tax profits based on PRC accounting standards to enterprise expansion fund and staff bonus and welfare fund at its discretion.
The statutory reserve funds and the discretionary funds are not distributable as cash dividends.
As
a result of the foregoing restrictions, King Eagle (China), King Eagle (Tianjin) and KP Tian Yu are restricted in their ability to transfer
their net assets to the Company. Foreign exchange and other regulation in the PRC may further restrict these two entities from transferring
funds to the Company in the form of dividends, loans and advances. As of June 30, 2022 and September 30, 2021, the Company had negative
net assets which included common stock, additional paid-in capital, accumulated deficit and foreign exchange translation adjustment of
its subsidiaries in BVI, Hong Kong and the PRC and the VIE that are included in the Company’s consolidated financial statements.
As of June 30, 2022, King Eagle (China), King Eagle (Tianjin) and KP Tian Yu had negative net assets which amounted to $1,287,470, $1,129,230
and $nil, respectively As of September 30, 2021, King Eagle (China), King Eagle (Tianjin) and KP Tian Yu incurred negative net assets
which amounted to $1,094,230, $211,374 and $nil, respectively. Accordingly, the Company did not accrue statutory reserve funds as of
June 30, 2022, and September 30, 2021.
NOTE
11- INCOME TAXES
The
Company accounts for income taxes pursuant to the accounting standards that requires the recognition of deferred tax assets and liabilities
for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the
expected future tax benefit to be derived from tax losses and tax credit carryforwards. Additionally, the accounting standards require
the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. The Company and its subsidiaries
file separate income tax returns.
United
States
Kun
Peng International Ltd is incorporated in the State of Nevada and is subject to the United States federal corporate income. No provision
for income taxes in the U.S. has been made as the Company has no U.S. taxable income for the three months ended June 30, 2022 and 2021
and for the nine months ended June 30, 2022 and 2021.
British
Virgin Islands
KP
International is a holding corporation organized as an International Business Company under the laws of the British Virgin Islands (“BVI”),
and its principal operating subsidiaries are organized under the laws of Hong Kong and the laws of the PRC. KP International and its
subsidiaries are not subject to income taxes in the BVI.
Hong
Kong
The
two-tier profits tax rates system was introduced under the Inland Revenue (Amendment)(No.3) Ordinance 2018 (“the Ordinance”)
of Hong Kong became effective for the assessment year 2018/2019. Under the two-tier profit tax rates regime, the profits tax rate for
the first $0.26 million (HKD 2 million) of assessable profits of a corporation will be subject to the lowered tax rate, 8.25% while the
remaining assessable profits will be subject to the legacy tax rate, 16.5%. The Ordinance only allows one entity within a group of “connected
entities” is eligible for the two-tier tax rate benefit. An entity is a connected entity of another entity if (1) one of them has
control over the other; (2) both of them are under the control (more than 50% of the issued share capital) of the same entity; (3) in
the case of the first entity being a natural person carrying on a sole proprietorship business-the other entity is the same person carrying
on another sole proprietorship business.
Since
KP Industrial and KP (Hong Kong) are wholly owned and under the control of KP International, these entities are connected entities. Under
the Ordinance, it is an entity’s election to nominate the entity that will be subject to the two-tier profits tax rates on its
profits tax return. The election is irrevocable. The Company elected KP (Hong Kong) to be subject to the two-tier profits tax rates.
KP Industrial and KP (Hong Kong) did not earn any income that was derived in Hong Kong for three months ended June 30, 2022 and 2021
and for the nine months ended June 30, 2022 and 2021; therefore, KP Industrial and KP (Hong Kong) were not subject to Hong Kong profits
tax for the periods reported.
Since
the two-tier profit tax rates regime is tentative, we applied the original profits tax rate, 16.5%, for the calculation of deferred taxes
for our subsidiaries in Hong Kong.
PRC
The
PRC’s statutory income tax rate is 25%. The Company’s subsidiary and VIE registered in PRC are subject to income tax rate
of 25%, unless otherwise specified.
Income
tax expense was comprised of the following:
SCHEDULE
OF COMPONENTS OF INCOME TAX EXPENSE BENEFIT
- | |
| - | | |
| - | | |
| - | | |
| - | |
| |
Three Months Ended
June 30 | | |
Nine Months Ended
June 30 | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Current | |
$ | | | |
$ | | | |
$ | | | |
$ | | |
Federal | |
| - | | |
| - | | |
| - | | |
| - | |
State | |
| - | | |
| - | | |
| - | | |
| - | |
Foreign | |
| - | | |
| - | | |
| - | | |
| - | |
Total current | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Deferred | |
| | | |
| | | |
| | | |
| | |
Federal | |
| - | | |
| - | | |
| - | | |
| - | |
State | |
| - | | |
| - | | |
| - | | |
| - | |
Foreign | |
| - | | |
| - | | |
| - | | |
| - | |
Total deferred | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Total income tax expense | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
A
reconciliation between the Company’s actual provision for income taxes and the provision at the statutory rate is as follow:
SCHEDULE
OF RECONCILIATION OF PROVISION OF INCOME TAX
- | |
| - | | |
| - | | |
| - | | |
| - | |
| |
Three
Months Ended June
30, | | |
Nine
Months Ended June
30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Loss
before income tax expense | |
$ | (689,999 | ) | |
$ | (1,627,187 | ) | |
$ | (966,818 | ) | |
$ | (2,272,265 | ) |
Computed
tax expense (benefit) with statutory tax rate | |
| 21.0 | % | |
| 21.0 | % | |
| 21.0 | % | |
| 21.0 | % |
Impact
of different tax rates in other jurisdictions | |
| 3.5 | % | |
| 3.5 | % | |
| 3.2 | % | |
| 3.6 | % |
Tax
effect of non-deductible expenses | |
| (0.1 | )% | |
| (0.1 | )% | |
| (0.6 | )% | |
| (0.2 | )% |
Change
in valuation allowance | |
| (24.4 | )% | |
| (24.4 | )% | |
| (23.6 | )% | |
| (24.4 | )% |
Effective
tax rate | |
| 0.0 | % | |
| 0.0 | % | |
| 0.0 | % | |
| 0.0 | % |
Uncertain
tax positions
The
Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business,
the Company is subject to examination by the respective jurisdictions, where applicable. The statute of limitations for the tax returns
varies by jurisdictions.
The
statute of limitations for the Internal Revenue Services to assess the income tax returns on a taxpayer expires three years from the
due date of the income tax return or the date on which it was filed, whichever is later.
In
accordance with the Hong Kong profits tax regulations, a tax assessment by the IRD may be initiated within six years after the relevant
year of assessment, but extendable to 10 years in the case of potential willful underpayment or evasion.
In
accordance with PRC Tax Administration Law on the Levying and Collection of Taxes, the PRC tax authorities generally have up to five
years to assess underpaid tax plus penalties and interest for PRC entities’ tax filings. In the case of tax evasion, which is not
clearly defined in the law, there is no limitation on the tax years open for investigation. Accordingly, the PRC entities remain subject
to examination by the tax authorities based on the above.
As
of June 30, 2022 and September 30, 2021, the Company did not accrue any liability, interest or penalties related to uncertain tax positions
in the provision for income taxes in its consolidated financial statements. The Company does not expect that its assessment regarding
unrecognized tax positions will materially change over the next 12 months.
NOTE
12 - RIGHT-OF-USE ASSETS AND LEASE
The
Company has operating leases for its office facilities and employee accommodation. Leases with an initial term of 12 months or less are
not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term.
The
following table provides a summary of leases as of June 30, 2022 and September 30, 2021:
SUMMARY
OF OPERATING LEASE ASSETS AND LIABILITIES
Assets/liabilities | |
Classification | |
June
30, 2022 | | |
September
30, 2021 | |
Assets | |
| |
| | | |
| | |
Operating
lease right-of-use assets | |
Operating
lease assets | |
$ | 609,122 | | |
$ | 282,466 | |
| |
| |
| | | |
| | |
Liabilities | |
| |
| | | |
| | |
Current | |
| |
| | | |
| | |
Operating
lease liabilities - current | |
Current
operating lease liabilities | |
$ | 240,062 | | |
$ | 229,337 | |
| |
| |
| | | |
| | |
Long-term | |
| |
| | | |
| | |
Operating
lease liabilities – net of current portion | |
Long-term
operating lease liabilities | |
$ | 320,846 | | |
$ | 53,129 | |
| |
| |
| | | |
| | |
Total
lease liabilities | |
| |
$ | 560,908 | | |
$ | 282,466 | |
The
operating lease expense for the nine months ended June 30, 2022 was as follows:
SUMMARY
OF OPERATING LEASE EXPENSE
| |
| |
| | | |
| | | |
| | | |
| | |
| |
| |
Nine
Months Ended June 30 | | |
Three
Months Ended June 30 | |
Lease
Cost | |
Classification | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Operating
lease cost | |
General
and administrative | |
$ | 311,190 | | |
$ | 227,132 | | |
$ | 118,486 | | |
$ | 79,483 | |
Total
lease cost | |
| |
$ | 311,190 | | |
$ | 227,132 | | |
$ | 118,486 | | |
$ | 79,483 | |
Maturities
of operating lease liabilities as of June 30, 2022 were as follow:
SCHEDULE
OF MATURITY OF OPERATING LEASE LIABILITIES
| |
| - | |
Maturity
of Lease Liabilities | |
Operating Leases | |
2022
(remaining) | |
$ | 150,688 | |
2023 | |
| 324,961 | |
2024 | |
| 275,937 | |
Thereafter | |
| - | |
Total
lease payments | |
$ | 751,586 | |
Less:
interest | |
| (190,678 | ) |
Present
value of lease payments | |
$ | 560,908 | |
Supplemental
information related to operating leases was as follows:
SCHEDULE
OF OPERATING LEASES
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
Three
Months Ended June
30, | | |
Nine
Months Ended June
30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Cash
paid for amounts included in the measurement of lease liabilities | |
$ | 64,218 | | |
$ | 70,862 | | |
$ | 338,706 | | |
$ | 218,511 | |
New
operating lease assets obtained in exchange for operating lease liabilities | |
$ | 33,221 | | |
$ | - | | |
$ | 608,762 | | |
$ | 71,045 | |
| |
June
30,
2022 | | |
September
30,
2021 | |
Weighted
average remaining lease term | |
| 2.51
years | | |
| 1.1
years | |
Weighted
average discount rate | |
| 4.75 | % | |
| 4.75 | % |
The
amortization expense was $127,369 and $66,314 for the three months ended June 30, 2022 and 2021 and $305,054 and $213,963 for the nine
months ended June 30, 2022 and 2021, respectively.
NOTE
13 - COMMITMENTS AND CONTINGENCIES
On
March 31, 2021, King Eagle (Tianjin) entered into a Cooperation Agreement with a related party, Guoxin Star Network Co., Ltd who
assigned and franchised the operation of 50 Smart Kiosks to King Eagle (Tianjin) for five
years. Total franchise fee payable by King Eagle (Tianjin) to Guoxin Star Network Co., Ltd is approximately $1.14
million (RMB 7,500,000).
In April 2021, King Eagle (Tianjin) paid approximately $0.34
million (RMB2,250,000)
to Guoxin Star Network Co. Ltd. The remaining balance, approximately $0.8
million (RMB5,250,000),
is payable upon the completion of the implementation of Smart Kiosks. Both parties are entitled to exercise the Force Majeure Clause
of the contract signed between both parties and have expressed the intention to progress with the development of the Smart Kiosks,
and thereafter, with the construction and operation of the same as soon as the circumstances allow.
In
April 2022, we entered into construction contracts with two contractors for the renovation of our new office in Beijing. Total contract
amount for these two construction services is approximately $142,251. As of June 30, 2022, we had paid a total amount of $91,568. The
remaining balance approximately $50,000 will be payable upon the completion of the renovation. We expected the renovation of our new
office to be completed by the end of August 2022.
NOTE
14 - SUBSEQUENT EVENT
On
July 18, 2022, King Eagle (China) and KP Industrial entered into an equity transfer agreement with both Guoxin Ruilian Group Co., Ltd
and Guoxin Zhengye that Guoxin Zhengye transferred its 8% ownership in King Eagle (China) to KP Industrial. After the transfer, King
Eagle (China) became a wholly owned subsidiary of KP Industrial. Such transfer was approved and effective on August 5, 2022.
As
of June 30, 2022, other than the described above, the Company evaluated and concluded that there are no other subsequent events that
have occurred that would require recognition or disclosure in the financial statements other than as disclosed above.