Overview of the Business
Due to global health issues and the pandemic, people have increased their health
and nutrition consciousness. We believe preventive care is the most effective
investment in health. To promote the awareness of preventive care to the people
in the PRC, we have developed and launched our mobile social e-commerce platform
(King Eagle Mall). We also started establishing physical (Smart Kiosk) platforms
with the cooperation with Guoxin Star Network Co., Ltd.
King Eagle Mall
King Eagle Mall is a mobile social e-commerce platform which was launched in
July 2020 and promotes preventive health care products and services as our core
business. It adopts the S2B2C business model and integrates many major health
care products and services. We focus on health-related products and services.
King Eagle Mall is designed to enable health-related products to be sold by us
and by third parties. King Eagle Mall's products are divided into two sectors:
self-operated products and selected products which promote preventive health
care. Our team screens and examines products that are and will be offered both
by us and affiliated merchants. Our major products include health care products
such as dietary supplements, nutritional health foods, beauty cosmeceuticals,
and other categories (for instance, milk powder, dried fruits) of health foods
for supporting the cardiovascular system and bone joint health. We offer
collagen peptides, probiotics, and health foods for improving blood circulation
and vein health, as well as household products which can promote and improve a
healthier lifestyle for our members. We receive customer orders and may arrange
fulfillment with our merchants who are responsible for delivery arrangement or
fulfill customer orders through our outsourced networks.
At the same time, we operate customer service centers with whom our members can
directly communicate for any assistance related to product purchases,
suggestions for health care products and services, and delivery logistics.
Smart Kiosk
We introduced "Smart Kiosk" with the support from the previous stakeholder of
King Eagle (China), Guoxin Ruilian Group Co., Ltd ("Guoxin Ruilian"), which is a
wholly owned subsidiary of CITIC Group Corporation Ltd and a related party of
Guoxin Zhengye. The construction of Smart Kiosk was initiated and administered
by Guoxin Ruilian Group Co., Ltd. After the completion of the construction of
Smart Kiosk, Guoxin Ruilian Group Co., Ltd assigned its wholly-owned subsidiary,
Guoxin Star Network Co., Ltd to cooperate with King Eagle (Tianjin) in
development of Smart Kiosk. The Smart Kiosk is a physical platform which focuses
on developing a "small shop economy." It is integrated with the King Eagle Mall
which creates a "social, health and physical store" to provide people with more
professional and comprehensive preventive health care products and services.
Smart Kiosk is a principal component of our business.
The smart service kiosk functions as a physical customer service center and
community marketing for attracting customers, providing customer services,
promoting our 500+ preventive health care and health related household products
and introducing concepts of maintaining a healthy life. 5G internet connection
is also available for our customers to connect to our online application, King
Eagle Mall, so that our customers can access King Eagle Mall and place orders
for our products.
Recent Developments
COVID-19 Update
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.
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During the first quarter of 2022, the restrictions, quarantines and closures
remained in certain affected areas and government agencies in the PRC. The
approval process of our applications for the construction permits of smart
kiosks was delayed by the local governmental agencies and the construction
project of smart kiosks was also postponed. The Company continues to focus its
business through its online platform, King Eagle Mall, to mitigate the adverse
impacts by COVID-19 and follows up closely with the local governmental agencies
for the application for the construction permits of smart kiosks. In fact, the
pandemic increased the overall public health consciousness in the PRC and the
Company experienced a significant growth in its average monthly online sale
revenue by $1.4 million or 755.2% from $0.2 million for the three months ended
December 31, 2020 to $1.6 million for the three months ended December 31, 2021.
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 global
situation of COVID-19. The Company continues to monitor and assess the evolving
situation closely and evaluate its potential exposure.
Recent Regulatory Developments in China
Under current Chinese laws and regulations, the Company believes that the VIE
Agreements are not subject to any government approval. The shareholders of King
Eagle (Tianjin) were required to register with SAFE when they established
offshore vehicles to hold KP International, 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.
On July 6, 2021, the PRC government issued the Opinions on Strictly Cracking
Down on Illegal Securities Activities, calling for: (i) tightening oversight of
data security, cross-border data flow and administration of classified
information, as well as amendments to relevant regulation to specify
responsibilities of overseas listed Chinese companies with respect to data
security and information security; (ii) enhanced oversight of overseas listed
companies as well as overseas equity fundraising and listing by Chinese
companies; and (iii) extraterritorial application of China's securities laws. As
the Opinions on Strictly Cracking Down on Illegal Securities Activities were
recently issued, there are great uncertainties with respect to the
interpretation and implementation thereof. We will closely monitor further
developments.
In addition, on July 10, 2021, the Cyberspace Administration of China issued the
Measures for Cybersecurity Review (Revision Draft for Comments), or the
Measures, for public comments, which propose to authorize the relevant
government authorities to conduct cybersecurity review on a range of activities
that affect or may affect national security, including listings in foreign
countries by companies that possess the personal data of more than one million
users. The Measures are soliciting comments and subject to change. As we have
less than one million users, we believe that the Measures are not applicable to
us even after they take effect in current form. The PRC government is
increasingly focused on data security, recently launching cybersecurity review
against a number of mobile apps operated by several US-listed Chinese companies
and prohibiting these apps from registering new users during the review period.
There are great uncertainties regarding the interpretation and enforcement of
PRC laws, rules, and regulations regarding data and privacy security. We may be
required to change our data and other business practices and be subject to
regulatory investigations, penalties, increased cost of operations, or declines
in issuer growth or engagement as a result of these laws and policies. Further,
our consulting business with respect to overseas listing and capital raising may
be adversely affected.
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Financial Operations Overview
Results of Operations for the three months ended December 31, 2021 and 2020
For the three months ended December 31,
2021 2020
Amount % of revenue Amount % of revenue
Revenues $ 4,669,408 100.0 % $ 545,961 100.0 %
Cost of revenues 709,209 15.2 93,850 17.2
Gross profit 3,960,199 84.8 452,111 82.8
Operating expenses:
General and administrative
expenses 381,901 8.2 434,418 79.6
Selling expense 3,265,453 69.9 388,464 71.2
Total operating expenses 3,647,354 78.1 822,882 150.8
Income (loss) from
operations 312,845 6.7 (370,771 ) (68.0 )
Other income 25,013 0.5 53 0.0
Income (loss) before income
taxes 337,858 7.2 (370,718 ) (68.0 )
Income tax expense - - - -
Net income (loss) $ 337,858 7.2 $ (370,718 ) (68.0 )%
Revenues
For the three months ended December 31, 2021 and 2020, revenues amounted to
$4,669,408 and $545,961, respectively. Our revenues primarily included the sale
of health care and health related household products to our customers via our
mobile application, King Eagle Mall, which was launched in July 2020. Compared
to the three months ended December 31, 2020, we generated a higher revenue
amount during the three months ended December 31, 2021 as we engaged service
agents to promote our platform and products since December 2020. We recognized
our revenue on a gross basis, net of sub-charges and value-added tax ("VAT") of
gross sales.
Cost of revenue
Our cost of revenue for the three months ended December 31, 2021 and 2020 were
$709,209 and $93,850, respectively. This primarily included the purchase of
health care and health related household products from our suppliers. We
incurred a higher cost of revenue for the three months ended December 31, 2021,
compared to that in the same period of 2020, because we generated a higher
revenue amount during the three months ended December 31, 2021 as discussed
above.
Gross profit
For the three months ended December 31, 2021, and 2020, our gross profit
amounted to $3,960,199 or 84.8%, and $452,111 or 82.8%, respectively. While our
gross profit amount for the three months ended December 31, 2021 was
significantly higher than that for the same period in 2020 due to a higher
revenue generated during the three months ended December 31, 2021, our gross
profit margin for the three months ended December 31, 2021 remained comparable
to the same period in 2020.
Operating Expenses
Our operating expenses consist of general and administrative expenses and
selling expense. For the three months ended December 31, 2021 and 2020, our
total operating expenses were $3,647,354 and $822,882, respectively. We
experienced a higher amount of operating expenses in the three months ended
December 31, 2021, compared to the same period in 2020 primarily due to the
higher selling expense.
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General and administrative expenses
General and administrative expenses for the three months ended December 31, 2021
and 2020 were $381,901 and $434,418, respectively. The decrease in general and
administrative expenses by $52,517 was chiefly triggered by a lower employee
compensation and benefits and office supplies during the three months ended
December 31, 2021. Our employee compensation and benefit and office supplies and
meeting decreased by $36,987 and $21,529, respectively, for the three months
ended December 31, 2021. During the three months ended December 31, 2021, the
CEO of the Company and King Eagle (Tianjin) resigned and the basic salary
amounts of our executives were reduced in order to save operating costs. Our
office supplies and meeting expenses for the three months ended December 31,
2021 also decreased during the three months ended December 31, 2021 compared to
the same period in 2020. As we started our operation in July 2020, we incurred
additional office supplies and decoration expenses during the three months ended
December 31, 2020.
Our general and administrative expenses for the three months ended December 31,
2021 and 2020 were comprised of the following:
For the three months ended December 31,
2021 2020
Employee compensation and benefit $ 156,325 $ 193,312
Office rent and building management 95,845 93,360
Office supplies and meeting 7,405 28,934
Professional services fee 85,759 75,254
Travel, transportation and gasoline 4,556 15,641
Meals and entertainment 8,352 12,536
Depreciation and amortization 7,963 4,794
Repair and maintenance - 4,550
Others 15,696 6,037
Total $ 381,901 $ 434,418
Selling expense
Our selling expense, which was primarily incurred by our sales and marketing
department, for the three months ended December 31, 2021 and 2020, were
$3,265,453 and $388,464, respectively. Compared to the three months ended
December 31, 2020, our selling expense for the three months ended December 31,
2021 increased by $2,876,989. Such significant increase was primarily driven by
an increase in service agent fee by $2,765,877, as we engaged service agents
since December 2020 to promote our platform and products. Compared to the three
months ended December 31, 2020, the average monthly revenue from our online
sales for the same period in 2021 increased by approximately $1.4 million, from
approximately $0.2 million for the three months ended December 31, 2020 to
approximately $1.6 million for the same period in 2021. The increase in selling
expense also included an increase in employee compensation and benefit by
$76,734 as well as travel, transportation and gasoline and by $31,768. During
the three months ended December 31, 2021, we increased our headcount and
compensation for our planning team. Our sales and marketing department as well
as executives launched marketing activities in various cities which resulted in
a higher travel expense.
Our selling expense included the following:
For the three months ended December 31,
2021 2020
Service agents $ 3,020,635 $ 254,758
Employee compensation and benefit 160,312 83,578
Office supplies and meeting 18,259 32,859
Customer services 13,547 8,432
Travel, transportation and gasoline 36,504 4,736
Meals and entertainment 14,627 3,423
Depreciation and amortization 1,569 678
Total $ 3,265,453 $ 388,464
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Other income
Other income primarily included bank interest income, foreign exchange gain or
loss and other service income. Our other income for the three months ended
December 31, 2021 and 2020 were $25,013 and $53, respectively. During the three
months ended December 31, 2021, we incurred an additional source of income in an
amount of $17,737 which was related to online technical support services of our
lutein supplement provided to a corporate customer. We also incurred a higher
interest income during the three months ended December 31, 2021. Due to a higher
revenue amount, our average monthly cash balance in our bank accounts during
this period was higher compared to the same period in 2020. Conversely, we only
incurred bank interest income in an amount of $53 for the three months ended
December 31, 2020.
Income tax expense
For the three months ended December 31, 2021 and 2020, the income tax expense of
the Company was nil. During the three months ended December 31, 2021, King Eagle
(Tianjin) incurred book income before income tax and taxable income and utilized
the net operating loss carryforwards to offset its entire taxable income. On the
other hand, KPIL, the subsidiaries in Hong Kong and King Eagle (China) incurred
book loss and tax loss. The Company recognized a full valuation allowance
against the deferred tax assets of these entities as it believes that it is more
likely than not that these entities will not recognize its deferred tax assets
in a near future. During the three months ended December 31, 2020, the Company
generated net loss before income tax and the Company recognized a full valuation
allowance against its deferred tax assets, which included net operating loss
carryforwards, as management believes it is more likely than not that the
Company will not recognize its net operating loss carryforwards in a near future
or before it expires.
Net income (loss)
As a result of the factors discussed above, the Company posted a net income in
an amount of $337,858 for the three months ended December 31, 2021 while it
recorded a net loss in an amount of $370,718 for the three months ended December
31, 2020.
Foreign currency translation adjustment
The functional currency of our operation in PRC is Chinese Yuan or Renminbi
("RMB") and while our operation in Hong Kong is Hong Kong Dollars ("HKD"). The
financial statements are translated to U.S. dollars using the period end rates
of exchange for assets and liabilities, equity is translated at historical
exchange rates, and average rates of exchange (for the period) are used for
revenues and expenses and cash flows. Transaction gains and or losses that arise
from exchange rate fluctuations on transactions denominated in a currency other
than the functional currency are included in the results of operations as
incurred. As a result of foreign currency translation, which is a noncash
adjustment, we reported a foreign currency translation gain (loss) of $13,004
and $(14,139) for the three months ended December 31, 2021, and 2020,
respectively.
Comprehensive income (loss)
The Company recognized a comprehensive income in an amount of $350,862 for the
three months ended December 31, 2021 whereas it recorded a comprehensive loss in
an amount of $384,857 for the same period in 2020.
Liquidity and Capital Resources
As of December 31, 2021 and September 30, 2021, we had a cash and cash
equivalents balance of $2,687,348 and $2,059,685, respectively.
For the three months ended December 31, 2021, net cash provided by operating
activities totaled to $679,690. Operating cash inflow was mainly attributable to
the net income, $337,858, a decrease in prepayments to vendors, $103,754 and an
increase in amount due to related parties, $741,889, offset by payments made to
third party vendors, $366,122, an increase in advance to our employees, $30,413,
a decrease in customers' prepayment, $78,588, an increase in payroll payments,
$13,936 and an increase in indirect tax payments, $24,284.
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Net cash used in investing activities totaled to $7,459, was primarily related
to the purchase of office and computer equipment.
There was no financing activity for the three months ended December 31, 2021.
Effect of exchange rate change on cash totaled $44,568. The resulting change in
cash for the period was an increase of $627,663.
For the three months ended December 31, 2020, net cash used in operating
activities totaled to $3,428. Operating cash outflow was primarily attributable
to a net loss of $370,718, an increase in prepayments to vendors and lessors,
$127,180, an increase in rental deposit payments and advance to employees,
$249,790, repayments to a related party who paid rent deposits and lease
payments to our lessors on behalf of King Eagle (China), $69,407 and an increase
in payroll payments, $8,963. The overall cash outflow was offset by an increase
in trade and other payable, $242,576, an increase in customers' prepayments,
$550,383 and a decrease in indirect tax payments, $24,198.
Net cash used in investing activities totaled to $13,626 included the purchase
of office and computer equipment, software and leasehold improvements.
There was no financing activity for the period for the three months ended
December 31, 2020.
Effect of exchange rate change on cash totaled $5,408. The resulting change in
cash for the period was a decrease by $11,646.
The following table sets forth a summary of changes in our working capital as of
December 31, 2021 and September 30, 2021:
December 31, September 30,
2021 2021
Current Assets $ 3,416,783 2,871,157
Current Liabilities 5,311,868 5,189,941
$ (1,895,085 ) (2,318,784 )
We require additional cash of approximately $1.5 million within the next twelve
months which primarily relates to third party vendors payables. In an effort to
support and maintain our financial positions and operations, the Company focused
on increasing its revenue through its online platform and slimming its overhead
costs. As aforementioned, during the first quarter of 2022, our average monthly
online sales increased. We also reduced the compensation and benefits of our
executives, decreased office supplies expense, trimmed staff meeting expense and
terminated the lease arrangements of employee accommodations. Simultaneously,
our directors and stakeholders continue to support our operation financially. We
believe that such measures will improve our liquidity in the next twelve months.
If we are not able to increase revenue or obtain any financing, we may be unable
to continue as a going concern.
Going Concern Consideration
The accompanying condensed consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United States
of America which contemplate continuation of the Company 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 three months
ended December 31, 2021, although the Company generated cash inflows from
operating activities of $679,690 and a net income of $337,858, it incurred a
negative working capital of $1,895,085. Moreover, as the COVID-19 outbreak
continues, there is a delay in the progress of construction and approval for the
construction permit of smart kiosk due to the lockdown of the affected areas in
the PRC and the closure of the government agencies in the PRC. These conditions
raise substantial doubt about the ability of the Company to continue as a going
concern.
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The Company continues to monitor its operations to help refine the Company's
financial liquidity. 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. During the first quarter of 2022, the
Company focused 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 $0.8 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.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements, including arrangements that would
affect our liquidity, capital resources, market risk support, and credit risk
support or other benefits.
Future Financings
We will continue to rely on equity sales of our common shares in order to
continue to fund our business operations. Issuances of additional shares will
result in dilution to existing stockholders. There is no assurance that we will
achieve any additional sales of the equity securities or arrange for debt or
other financing to fund our operations and other activities, or if we are able,
there is no guarantee that existing shareholders will not be substantially
diluted.
Critical Accounting Policies
We regularly evaluate the accounting policies and estimates that we use to make
budgetary and financial statement assumptions. A complete summary of these
policies is included in the notes to our financial statements. In general,
management's estimates are based on historical experience, on information from
third party professionals, and on various other assumptions that are believed to
be reasonable under the facts and circumstances. Actual results could differ
from those estimates made by management.
See Note 2 to the financial statements included herewith and Note 2 to the
financial statements on Form 10-K/A for the fiscal year ended September 30,
2021, previously filed with the SEC.
Recent Accounting Pronouncements
See Note 2 to the financial statements included herewith and Note 2 to the
financial statements on Form 10-K/A for the fiscal year ended September 30,
2021, previously filed with the SEC.
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