The accompanying notes are an integral part of these unaudited consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
NOTE 1 - ORGANIZATION & SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview and Organization
The Company was incorporated on April 16, 2020 under the laws of the State of Nevada, as KeyStar Corp. The wholly owned subsidiary was formed on December 21, 2021 under the State of Nevada, as UG Acquisition Sub, Inc.
Our business has two major segments: e-commerce and convention services.
We sell KN95 facemasks, disposable facemasks, and disinfectant wipes through an on line store in the United States of America.
We also offer convention services, which connect US buyers to Chinese manufacturers. Due to the COVID-19 pandemic, many traditional conventions were postponed in the United States. Accordingly, our convention services segment had been intended to offer online (or virtual) convention services to potential customers. However, as a result of the commencement of lifting of many travel restrictions, we adjusted our convention services from coordinating virtual conventions to focusing on certain traditional on-site convention services. Through our KeyStarCorp.com website, we now offer trade show booth staffing, trade show booth design and manufacturing, turn-key trade show booths.
Basis of Presentation
The foregoing unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, these financial statements do not include all of the disclosures required by generally accepted accounting principles in the United States of America for complete financial statements. These unaudited interim consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included on Form 10-K for the year ended June 30, 2021, filed on September 28, 2021. In the opinion of management, the unaudited interim consolidated financial statements furnished herein include all adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim period presented.
Operating results for the nine-month period ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending June 30, 2022. The condensed consolidated balance sheet at March 31, 2022 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles in the U.S. for complete financial statements.
The consolidated financial statements presented in this report are of KeyStar Corp. The Company maintains its accounting records on accrual basis in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP").
The consolidated financial statement presents the Balance Sheet, Statement of Operations, Stockholders' Equity and Cash Flows of the Company. These financial statements are presented in United States dollars. The accompanying financial statements have been prepared in accordance with U.S. GAAP.
Principals of Consolidation
The consolidated financial statements represent the results of Keystar Corp. (“KEYR”) and UG Acquisition Sub, Inc.; it’s wholly owned subsidiary. All intercompany transactions and balances have been eliminated.
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Year End
The Company’s year-end is June 30.
Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
Going Concern
The Company's financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America, and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company has an accumulated deficit of $968,236 as of March 31, 2022. The Company had a net loss of $909,005 and negative cash flows of $56,889 from operations for the nine months ended March 31, 2022. These conditions raise substantial doubt about the entity's ability to continue as a going concern for a period of one year from the issuance of these financial statements.
The Company will be dependent upon the raising of additional capital through placement of our common stock in order to implement its business plan. There can be no assurance that the Company will be successful in order to continue as a going concern. The Company is funding its initial operations by issuing notes and continuing to have related party pay for company expenses. We cannot be certain that capital will be provided when it is required.
Cash and Equivalents
Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, are cash and cash equivalents. Cash and cash equivalents include cash in hand and cash in time deposits, certificates of deposits and all highly liquid debt instruments with original maturities of three months or less.
Inventory
Inventory is carried at the lower of cost and estimated net realizable value, with cost being determined using the first-in, first-out (FIFO) method. The Company establishes reserves for estimated excess and obsolete inventory equal to the difference between the cost of inventory and estimated net realizable value of the inventory based on estimated reserve percentage, which considers historical usage, known trends, inventory age and market conditions. When the Company disposes excess and obsolete inventories, the related disposals are charged against the inventory reserve. See Note 2 for additional information.
Lease Commitments
The Company has no lease commitments. The Company leases a storage facility with terms of month to month for its products.
Fair Value of Financial Instruments
The Company recognized the fair value of financial instruments in accordance with FASB ASC 820, Fair Value Measurements and Disclosures, “Fair Value Measurements”, which provides a framework for measuring fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The standard also expands disclosures about instruments measured at fair value and establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
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Level 1 - Quoted prices for identical assets and liabilities in active markets;
Level 2 - Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Cash reported on the balance sheet is estimated by management to approximate fair market value due to their short-term nature.
The Company has had no transfers between levels of its assets or liabilities as of March 31, 2022.
Revenue Recognition
The Company recognizes revenue in accordance with generally accepted accounting principles as outlined in the Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue From Contracts with Customers, which consists of five steps to evaluating contracts with customers for revenue recognition: (i) identify the contract with the customer; (ii) identity the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price; and (v) recognize revenue when or as the entity satisfied a performance obligation.
Revenue recognition occurs at the time we satisfy a performance obligation to our customers, when control transfers to customers upon shipment, provided there are no material remaining performance obligations required of the Company or any matters of customer acceptance. We only record revenue when collectability is probable.
The Company provides quality merchandise through our online store in the United States of America. Due to COVID-19 pandemic, the Company is focusing on providing disposable face masks and KN-95 face masks at affordable price. Customers order and pay for the products through our online store. Once when the Company confirms the order and payment, the Company delivers the product through common carriers, at which point the Company recognizes the revenue, as this is when our performance obligation is satisfied. The Company records actual sales returns when the customers return the products. The transaction price has not been affected by returns based on the Company not having significant returns.
As the date of filing, the Company has recognized convention services revenue $35,316.
For the three months ended March 31, 2022 and 2021, the Company recognized $1,295 and $14,263 in revenue, respectively. For the nine months ended March 31, 2022 and 2021, the Company recognized $46,357 and $40,375 in revenue, respectively.
Income Taxes
The Company accounts for income taxes under an asset and liability approach. This process involves calculating the temporary and permanent differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The temporary differences result in deferred tax assets and liabilities, which would be recorded on the Company’s balance sheet in accordance with ASC 740, which established financial accounting and reporting standards for the effect of income taxes. The Company must assess the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent the Company believes that recovery is not likely, the Company must establish a valuation allowance. Changes in the Company’s valuation allowance in a period are recorded through the income tax provision on the statements of operations.
ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return.
Under ASC 740-10, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant
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taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, ASC 740-10 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the implementation of ASC 740-10, the Company recognized no material adjustment in the liability for unrecognized income tax benefits.
Earnings per Share
Basic earnings per share (“EPS”) are determined by dividing the net earnings by the weighted-average number of shares of common shares outstanding during the period. Diluted EPS is determined by dividing net earnings by the weighted average number of common shares used in the basic EPS calculation plus the number of common shares that would be issued assuming conversion of all potentially dilutive securities outstanding under the treasury stock method. As of March 31, 2022, there were 200,000,000 potentially dilutive shares that need to be considered as common share equivalents and because of the net loss, the effect of these potential common shares is anti-dilutive.
Recent Accounting Pronouncements
The Company does not expect the adoption of recently issued accounting pronouncements to have a potential impact on the Company’s results of operations, financial position or cash flow.
NOTE 2 - INVENTORY
As of March 31, 2022 and June 30, 2021, the value of inventory was $1,251 and $8,341, respectively.
Inventory reserves are established for estimated excess and obsolete inventory equal to the difference between the cost of the inventory and the estimated net realizable value of the inventory on estimated reserve percentage, which consider historical usage, known trends, inventory age and market conditions. As of March 31, 2022 and June 30, 2021, Inventory reserve was $221 and $1,472, respectively.
| March 31, 2022
|
| June 30, 2021
|
Disinfectant Wipes
| $
| -
|
| $
| -
|
Disposable Face Masks
|
| -
|
|
| 3,179
|
KN-95 Face Masks
|
| 1,472
|
|
| 6,634
|
Total inventory
|
| 1,472
|
|
| 9,813
|
Less: inventory reserve
|
| (221)
|
|
| (1,472)
|
Inventory, net
| $
| 1,251
|
| $
| 8,341
|
NOTE 3 - NOTES PAYABLE - RELATED PARTY
On April 27, 2020, the Company executed a promissory note with a related party for $35,000. The note bears interest at 10% per annum and is due in two business days after demand for payment. As of March 31, 2022, the principal balance is $35,000 and accrued interest is $6,741. The interest expense for the nine months ended March 31, 2022 was $2,627.
On December 30, 2020, the Company executed a promissory note with a related party for cash proceeds of $30,000. The note bears interest at 10% per annum and is due in two business days after demand for payment. On December 17, 2021, the promissory note was purchased by Eagle Investment Group, LLC. Mr. Bruce Cassidy, our Chief Executive Officer is the manager of Eagle Investment Group, LLC. As of March 31, 2022, the principal balance is $30,000 and accrued interest is $3,748. The interest expense for the nine months ended March 31, 202 was $2,252.
On December 28, 2021, in connection with the assignment of that certain Demand Promissory Note dated April 20, 2020 in the principal amount of $10,000 (the “Demand Note”) that was initially in favor of Zixiao Chen (our Chief Financial Officer at the time of the Demand Note’s issuance) to Eagle Investment Group, LLC, we amended and restated the demand note (the “Demand Note”) that is now in favor of Eagle Investment Group, LLC.
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NOTE 4 - CONVERTIBLE DEBT - RELATED PARTY
On April 20, 2020, the Company executed a convertible promissory note with a related party for $10,000. The note bears interest at 10% per annum and is due in two business days after demand for payment. This note is convertible at $0.001 per common share and can be converted by Notice of Conversion at the option of the holder.
On December 17, 2021, the noteholder transferred the loan to Eagle Investment Group, LLC, which is controlled by an officer of the Company. The Company and the new noteholder mutually agreed to allow the note to be converted into Series B Convertible Preferred Stock and the conversion price of $1.00 per share. The principal balance and accrued interest was converted into 11,693 shares of Series B Convertible Preferred Stock. The fair value of the stock was $833,000 and the Company recorded loss on extinguishment of debt of $821,307.
As of March 31, 2022, the principal balance is $0 and accrued interest is $0. The interest expense for the nine months ended March 31, 2022 was $499.
NOTE 5 - LINE OF CREDIT - RELATED PARTY
On February 22, 2022, the Company executed a non-revolving line of credit demand note for $250,000 with a related party. The note bears interest at 5% per annum. As of March 31, 2022, the current balance of the line of credit is $39,445 and there is a highly probable chance the line of credit balance will increase up to $250,000.
NOTE 6 - STOCKHOLDERS’ EQUITY (DEFICIT)
The Company is authorized to issue 475,000,000 shares of its $0.0001 par value common stock, 25,000,000 shares of its $0.0001 par value Series A preferred stock, and 2,000,000 shares of its $0.0001 par value Series B preferred stock.
The Series A convertible preferred stock has a liquidation preference of $0.10 per share, have super voting rights of 100 votes per share, and each share of Series A may be converted into 100 shares of common stock.
The Series B convertible preferred stock has a liquidation preference of $1.00 per share, have super voting rights of and votes are determined by multiplying (a) the number of shares of Series B Convertible Preferred Stock held by such holder and (b) the Conversion Ratio, and each share of Series B may be converted into 100 shares of common stock. The Series B preferred shares authorized were increased from 0 to 2,000,000 shares during the year.
Series A Preferred Stock
During the three months ended March 31, 2022, there were no issuances of Series A Preferred Stock.
Series B Preferred Stock
On December 28, 2021, the Company issued 11,693 shares of Series B Convertible Preferred Stock in exchange for extinguishment of debt. The loss from extinguish of debt is $821,307.
Common Stock
During the three months ended March 31, 2022, there were no issuances of common stock.
NOTE 7 - STOCK OPTIONS
During December 2021, the Company created a 2021 stock plan and reserved 5,960,000 shares of common stock for the option plan. As of March 31, 2022, no stock options have been issued.
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NOTE 8 - COMMITMENTS AND CONTINGENCIES
As of March 31, 2022 and 2021, the Company did not have any known commitments or contingencies.
Legal matter contingencies
The Company believes, based on current knowledge and after consultation with counsel, that it is not currently party to any material pending proceedings, individually or in the aggregate, the resolution of which would have a material effect on the Company. Provisions for losses are established in accordance with ASC 450, “Contingencies” when warranted. Once established, such provisions are adjusted when there is more information available about an event occurs requiring a change.
NOTE 9 - RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2022, the Company officer paid $4,448 of expenses on behalf of the Company and demanded repayment of $4,938 leaving a balance due to related party of $28,065 as of March 31, 2022.
As of March 31, 2022, the balance of accounts payable and accrued expenses due to a related party was $28,065.
The Company has a note payable, convertible note payable, and line of credit with a related party, see Notes 3, 4 and 5 for further discussion.
NOTE 10 - SUBSEQUENT EVENTS
In accordance with ASC 855-10, the Company has analyzed its operations subsequent to March 31, 2022 to the date these financial statements were issued, and there were no other material subsequent events to disclose in these financial statements.
During April 2022, the Company utilized an additional draw of approximately $125,000 on the line of credit.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.
Overview
Keystar Corp. was incorporated in the State of Nevada was formed on April 16, 2020. Our business has two segments: e-commerce and convention services.
We sell KN95 facemasks, disposable facemasks, and disinfectant wipes through an on line store in the United States of America.
We also offer convention services, which connect US buyers to Chinese manufacturers. Due to the COVID-19 pandemic, many traditional conventions were postponed in the United States. Accordingly, our convention services segment had been intended to offer online (or virtual) convention services to potential customers. However, as a result of the commencement of lifting of many travel restrictions, we adjusted our convention services from coordinating virtual conventions to focusing on certain traditional on-site convention services. Through our KeyStarCorp.com website, we now offer trade show booth staffing, trade show booth design and manufacturing, turn-key trade show booths.
Results of Operations for the Three and Nine Months Ended March 31, 2022 and 2021
We generated $1,295 and $14,263 in revenues for the three months ended March 31, 2022 and 2021, respectively. We generated $46,357 and $40,375 in revenues for the nine months ended March 31, 2022 and 2021, respectively. The significant decrease of the revenue for the three months ended March 31, 2022 was due to the fact that pandemic is eased in recent months and fewer people are wearing masks in public places.
Our gross profit (loss) after payment for cost of goods and inventory reserve was $669 and $2,225 for the three months ended March 31, 2022 and 2021, respectively. Our gross profit (loss) after payment for cost of goods and inventory reserve was $6,753 and 239 for the nine months ended March 31, 2022 and 2021, respectively.
Our gross profit was small for each period discussed above as a result of the high cost of PPE products and courier pricing, as well as inventory reserve per U.S. GAAP guidance, due to our promoting products at
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significantly discounted prices. Pricing for masks and courier services has since improved, and we have ended our aggressive promotions.
Our PPE sales have not been significant enough to achieve a steady level of increased revenues and profitability. In addition, the global pandemic has impacted international trade in both goods and services. The disturbance in supply chain, logistic and labor market have drove the cost of goods and freight to surge abnormally, accompany with unpredictable shortage on supply and delay in logistic. On the other hand, along with the recovering of the international trade, the costs are expecting to drop, thus, lowered retail price and crushed profit margin on existing inventories that were purchased at higher costs. For these reasons, we have not been expanding product category or inventories base.
As a result of our current predicament, we have sought out other business opportunities that provide a better return to our investors. Our recent transaction related to convention services, we believe, will provide our shareholders with a better opportunity for a return on their investments.
We incurred operating expenses of $49,053 and $3,000 for the three months ended March 31, 2022 and 2021, respectively. We incurred operating expenses of $88,966 and $30,300 for the nine months ended March 31, 2022 and 2021, respectively. The increase of operating expense for the nine months ended March 31, 2022 is due to the convention services expense. Our operating expenses for both periods consisted of general and administrative expenses.
We incurred other expense of $1,710 and $1,849 for the three months ended March 31, 2022 and 2021, respectively.
We incurred other expense of $826,792 and $4,126 for the nine months ended March 31, 2022 and 2021, respectively. The increased expense is from the loss of extinguishment of convertible notes converted to Series B preferred stock.
We had a net loss of $51,432 and $2,624 for the three months ended March 31, 2022 and 2021, respectively. We had a net loss of $909,005 and $34,187 for the nine months ended March 31, 2022 and 2021, respectively.
Liquidity and Capital Resources
As of March 31, 2022, we had total current assets of $68,999 and total current liabilities of $147,758. We had a working capital deficit of $78,759 as of March 31, 2022.
Operating activities used $56,889 in cash for the nine months ended March 31, 2022, as compared with $2,934 provided for the same period ended 2021. Our negative operating cash flow in 2022 is largely the result of a $821,307 increase in loss on extinguishment of debt and $10,102 change in prepaid expenses, offset by our net loss for the period. Our positive operating cash flow in 2021 is largely the result of a $34,400 increase in inventory, offset by our net loss for the period.
Financing activities used $34,507 in cash for the nine months ended March 31, 2022, as compared with $21,262 for the same period ended 2021. Our positive financing cash flow in 2022 is the result of $4,938 in repayments to amounts due to related parties, and the proceeds of $39,445 from the line of credit. Our positive financing cash flow in 2021 is the result of $30,000 in proceeds from notes payable and cash for stock subscriptions, offset by $10,238 in repayments to amounts due to related parties.
Off Balance Sheet Arrangements
As of March 31, 2022, we had no off balance sheet arrangements.
Going Concern
As of March 31, 2022, the Company has a cumulative deficit of $968,236 and a working capital deficit of $78,759. The Company had a net loss of $909,005 for the nine months ended March 31, 2022. These conditions raise substantial doubt about the Company’s ability to continue as a going concern from a period of one year from the issuance of these financial statements. Because of these conditions, the Company will
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require additional working capital to develop business operations. Management’s plans are to raise additional working capital through the sale of debt and/or equity instruments as well as to generate revenues for other services. There are no assurances that the Company will be able to achieve the level of revenues adequate to generate sufficient cash flow from operations to support the Company’s working capital requirements. To the extent that funds generated are insufficient, the Company will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on terms acceptable to the Company. If adequate working capital is not available, the Company may not continue its operations.
The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
As of the filing date, the Coronavirus has caused significant volatility in global markets, including the market price of our inventory. The demand for our products and services has fluctuated and the ability of our customers to make payments for the products and services they purchased has been impacted.