Addentax Group Corp 10-Q for FY2024 Q3
Addentax Group Corp. (ATXG)
About this 10-Q
Addentax Group Corp filed this 10-Q on February 14, 2024, covering the quarter ended December 31, 2023 (FY2024 Q3).
Headline figures
Quarter ended December 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.47M
- down 30.8% from $2.12M a year earlier
- Net loss
- $2.61M
- compared with a net loss of $82.22K a year earlier
- Diluted EPS
- -$0.66
- compared with $0.00 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended:
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____________ to _________________
Commission
File No.
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or formation) | Identification Number) |
(Address of principal executive offices)
+
(
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller
reporting company | |
| Emerging
growth |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒
As of February 13, 2024, there were shares outstanding of the registrant’s common stock.
TABLE OF CONTENTS
| PART I – FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements (Unaudited) | F-1 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 3 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 16 |
| Item 4. | Controls and Procedures | 16 |
| PART II – OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 17 |
| Item 1A. | Risk Factors | 17 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 17 |
| Item 3. | Defaults Upon Senior Securities | 17 |
| Item 4. | Mine Safety Disclosures | 17 |
| Item 5. | Other Information | 17 |
| Item 6. | Exhibits | 17 |
| 2 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements and Supplementary Data
ADDENTAX GROUP CORP.
FINANCIAL STATEMENTS
For the three and nine months ended December 31, 2023 and 2022
TABLE OF CONTENTS
| F-1 |
ADDENTAX GROUP CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In U.S. Dollars, except share data or otherwise stated)
| December 31, 2023 (unaudited) | March 31, 2023 (audited) | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivables, net | ||||||||
| Debt securities held-to-maturity | ||||||||
| Inventories | ||||||||
| Prepayments and other receivables | ||||||||
| Advances to suppliers | ||||||||
| Amount due from related party | ||||||||
| Total current assets | ||||||||
| NON-CURRENT ASSETS | ||||||||
| Plant and equipment, net | ||||||||
| Long-term prepayments | ||||||||
| Restricted cash | ||||||||
| Long-term receivables | ||||||||
| Operating lease right of use asset | ||||||||
| Total non-current assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Short-term loan | $ | $ | ||||||
| Accounts payable | ||||||||
| Amount due to related parties | ||||||||
| Advances from customers | ||||||||
| Accrued expenses and other payables | ||||||||
| Operating lease liability current portion | ||||||||
| Total current liabilities | ||||||||
| NON-CURRENT LIABILITIES | ||||||||
| Convertible debts | ||||||||
| Derivative liabilities | ||||||||
| Operating lease liability | ||||||||
| Total non-current liabilities | ||||||||
| TOTAL LIABILITIES | $ | $ | ||||||
| EQUITY | ||||||||
| Common stock ($ par value, shares authorized, and shares issued and outstanding at December 31 and March 31, 2023, respectively) | $ | $ | ||||||
| Additional paid-in capital | ||||||||
| Accumulated Deficit | ( | ) | ( | ) | ||||
| Statutory reserve | ||||||||
| Accumulated other comprehensive loss | ( | ) | ||||||
| Total equity | ) | |||||||
| TOTAL LIABILITIES AND EQUITY | $ | $ | ||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| F-2 |
ADDENTAX GROUP CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In U.S. Dollars, except share data or otherwise stated)
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Three months ended December 31, | Nine months ended December 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| REVENUES | $ | $ | $ | $ | ||||||||||||
| COST OF REVENUES | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| GROSS PROFIT | ||||||||||||||||
| OPERATING EXPENSES | ||||||||||||||||
| Selling and marketing | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| General and administrative | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total operating expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| INCOME (LOSS) FROM OPERATIONS | ( | ) | ( | ) | ( | ) | ||||||||||
| Fair value gain or loss | ( | ) | ( | ) | ||||||||||||
| Interest income | ||||||||||||||||
| Interest expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense), net | ( | ) | ||||||||||||||
| INCOME (LOSS) BEFORE INCOME TAX EXPENSE | ( | ) | ( | ) | ( | ) | ||||||||||
| INCOME TAX EXPENSE | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| NET (LOSS)/INCOME | ( | ) | ( | ) | ( | ) | ||||||||||
| Foreign currency translation gain | ( | ) | ( | ) | ||||||||||||
| TOTAL COMPREHENSIVE INCOME (LOSS) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
| EARNINGS PER SHARE | ||||||||||||||||
| Basic and diluted | ) | ) | ) | |||||||||||||
| Weighted average number of shares outstanding – Basic and diluted | ||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| F-3 |
ADDENTAX GROUP CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In U.S. Dollars, except share data or otherwise stated)
| BALANCe | Share | $ | Value | $ | Share | $ | Value | ) | $ | Value | $ | Value | ) | $ | Total | |||||||||||||
| Common Stock | Additional paid-in | Retained earnings (accumulated deficit) | Accumulated other comprehensive | Total | ||||||||||||||||||||||||
| Shares | Amount | capital | Unrestricted | Statutory reserve | loss | Equity | ||||||||||||||||||||||
| BALANCE AT OCTOBER 1, 2022 | $ | $ | $ | ( | ) | $ | $ | ) | $ | |||||||||||||||||||
| Appropriation to Statutory Reserves | - | ( | ) | |||||||||||||||||||||||||
| Foreign currency translation | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Net loss for the period | - | ( | ) | ( | ) | |||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2022 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
| BALANCE AT OCTOBER 1, 2023 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
| Additional paid-in capital from conversion of convertible debts | - | |||||||||||||||||||||||||||
| Appropriation to Statutory Reserves | - | ( | ) | |||||||||||||||||||||||||
| Foreign currency translation | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Net loss for the period | - | ( | ) | ( | ) | |||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2023 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
| BALANCE AT APRIL 1, 2022 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||
| Issuance of new shares | ||||||||||||||||||||||||||||
| Appropriation to Statutory Reserves | - | ( | ) | |||||||||||||||||||||||||
| Foreign currency translation | - | |||||||||||||||||||||||||||
| Net income for the period | - | |||||||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2022 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
| BALANCE AT APRIL 1, 2023 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
| Issuance of new shares before reversed split | ( | ) | ||||||||||||||||||||||||||
| Reverse stock split | ( | ) | ( | ) | ||||||||||||||||||||||||
| New shares for round up of fragmental shares | ||||||||||||||||||||||||||||
| Issuance of new shares after reversed split | ( | ) | ||||||||||||||||||||||||||
| Additional paid-in capital from conversion of convertible debts | - | |||||||||||||||||||||||||||
| Appropriation to Statutory Reserves | - | ( | ) | |||||||||||||||||||||||||
| Foreign currency translation | - | |||||||||||||||||||||||||||
| Net loss for the period | - | ( | ) | ( | ) | |||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2023 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| F-4 |
ADDENTAX GROUP CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In U.S. Dollars, except share data or otherwise stated)
| 2023 | 2022 | |||||||
| Nine Months Ended December 31 | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amotization of convertible debt | ||||||||
| Investment income | ( | ) | ||||||
| Fair value gain or loss | ||||||||
| Loss on debts extinguishment | ||||||||
| Gain on bargain purchase | ( | ) | ||||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventories | ( | ) | ||||||
| Advances to suppliers | ( | ) | ||||||
| Other receivables | ( | ) | ( | ) | ||||
| Accounts payables | ( | ) | ||||||
| Accrued expenses and other payables | ( | ) | ||||||
| Advances from customers | ||||||||
| Net cash used in operating activities | $ | ( | ) | $ | ( | ) | ||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment and intangible assets | ( | ) | ||||||
| Cash from acquired investee | ||||||||
| Purchase of debt securities | ( | ) | ||||||
| Net cash used in investing activities | $ | $ | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from issue of ordinary shares | ||||||||
| Proceeds from related party borrowings | ||||||||
| Repayment of related party borrowings | ( | ) | ( | ) | ||||
| Release of restricted cash | ||||||||
| Proceeds from bank borrowings | ||||||||
| Repayment of bank borrowings | ( | ) | ||||||
| Net cash provided by financing activities | $ | $ | ||||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS | ( | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents, beginning of the period | ||||||||
| CASH AND CASH EQUIVALENTS, END OF THE PERIOD | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid during the period for interest | $ | $ | ||||||
| Cash paid during the period for income tax | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Right-of-use assets obtained in exchange for operating lease obligations | $ | $ | ||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| F-5 |
ADDENTAX GROUP CORP. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS ACQUISITIONS
ATXG and its subsidiaries (the “Company”) are engaged in the business of garments manufacturing, providing logistic services, property leasing and management service in the People’s Republic of China (“PRC” or “China”).
2. BASIS OF PRESENTATION
In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. All significant intercompany transactions and balances are eliminated in consolidation. However, the results of operations included in such financial statements may not necessarily be indicative of annual results.
The Company uses the same accounting policies in preparing quarterly and annual financial statements. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2023 filed with the Securities and Exchange Commission (“SEC”) on June 29, 2023 (“2023 Form 10-K”).
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however actual results could differ materially from those estimates.
Accounts receivable, net
Accounts receivable, net are stated at the historical carrying amount net of allowance for doubtful accounts.
Account receivables are classified as financial assets subsequently measured at amortized cost. Account receivables are recognized when the Company becomes a party to the contractual provisions of the receivables. They are measured, at initial recognition, at fair value plus transaction costs, if any and are subsequently measured at amortized cost. The amortized cost is the amount recognized on the receivable initially, minus principal repayments, plus cumulative amortization (interest) using the effective interest method of any difference between the initial amount and the maturity amount, adjusted for any loss allowance.
A loss allowance for expected credit losses is recognized on account receivables and is updated at each reporting date. The Company determines the expected credit losses provisions based on ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (‘‘ASC 326’’) using a modified retrospective approach which did not have a material impact on the opening balance of accumulated deficit. To determine expected credit losses on account receivables, the Company will consider the historic credit loss experience, adjusted for factors that are specific to the debtors, general economic conditions, and an assessment of both the current and forecasted direction of conditions at the reporting date, including the time value of money, where appropriate.
The loss allowance is calculated on a collective basis for all trade and other receivables in totality. An impairment gain or loss is recognized in profit or loss with a corresponding adjustment to the carrying amount of account receivables, through use of a loss allowance account. The impairment loss is included in operating expenses as a movement in credit loss allowance.
Receivables are written off when there is information indicating that the counterparty is in severe financial difficulty and there is no realistic prospect of recovery, e.g., when the counterparty has been placed under liquidation or has entered into bankruptcy proceedings. Receivables written off may still be subject to enforcement activities under the Company’s recovery procedures, considering legal advice where appropriate. Any recoveries made are recognized in profit or loss.
There is no change in the accounting policies for the three months ended December 31, 2023.
Recently issued accounting pronouncements
Accounting for Convertible Instruments: In August 2020, FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. Among other changes, the new guidance removes from GAAP separation models for convertible debt that require the convertible debt to be separated into a debt and equity component, unless the conversion feature is required to be bifurcated and accounted for as a derivative or the debt is issued at a substantial premium. As a result, after adopting the guidance, entities will no longer separately present such embedded conversion features in equity and will instead account for the convertible debt wholly as debt. The new guidance also requires use of the “if-converted” method when calculating the dilutive impact of convertible debt on earnings per share, which is consistent with the Company’s current accounting treatment under the current guidance. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted, but only at the beginning of the fiscal year.
The Company reviews new accounting standards as issued. Management has not identified any other new standards that it believes will have a significant impact on the Company’s consolidated financial statements.
| F-6 |
4. BUSINESS ACQUISITION
In
September 2023, the Company acquired a
The following table summarizes the fair values of the assets acquired and liabilities assumed as of the date of acquisition:
SCHEDULE OF ASSETS ACQUIRED AND LIABILITIES ASSUMED
| September 5, 2023 | ||||
| Cash in bank | $ | |||
| Other receivables | ||||
| Fixed assets, net | ||||
| Long-term prepayments | ||||
| Advance from customers | ( | ) | ||
| Payroll payable | ( | ) | ||
| Other tax payable | ( | ) | ||
| Other payables | ( | ) | ||
| Net book value at acquisition date | ||||
| Gain on bargain purchase | ( | ) | ||
| Purchase price | $ | |||
Pro forma results of operation for this acquisition have not been presented because the effects of the acquisition were not material to the Company’s consolidated financial results.
5. RELATED PARTY TRANSACTIONS
SUMMARY OF FINANCIAL POSITION OF ENTITIES AND GAIN OR LOSS ON DISPOSAL
| Name of Related Parties | Relationship with the Company | |
The Company leases Shenzhen XKJ office rent-free from Bihua Yang.
The Company had the following related party balances as of December 31, 2023 and March 31, 2023:
SCHEDULE OF AMOUNT DUE FROM RELATED PARTY
| Amount due from related party | December 31, 2023 | March 31, 2023 | ||||||
| Zhida Hong (1) | $ | $ | ||||||
| Bihua Yang | ||||||||
| Amount due from related party | $ | $ | ||||||
SCHEDULE OF RELATED PARTIES BORROWINGS
| Related party borrowings | December 31, 2023 | March 31, 2023 | ||||||
| Zhida Hong | $ | $ | ||||||
| Hongye Financial Consulting (Shenzhen) Co., Ltd. | ||||||||
| Dewu Huang (2) | ||||||||
| Jinlong Huang | ||||||||
| Total Related party borrowings | $ | $ | ||||||
| (1) | ||
| (2) |
The borrowing balances with related parties are unsecured, non-interest bearing and repayable on demand.
6. RESTRICTED CASH
The proceeds from issuance of the convertible note and warrants were deposited in a Holder Master Restricted Account controlled by the holders of the convertible note and warrants. The restricted cash will be released, over the period from the issuance date to the maturity date of the convertible note, when control account release events occur, which includes: (i) the Company’s receipt of a notice by the Holder electing to voluntarily effect a release of cash to the Company; (ii) the shareholder approval and registration of the new authorized shares according to the Securities Purchase Agreement; and (iii) any conversion of the convertible note.
7. DEBT SECURITIES HELD-TO-MATURITY
SCHEDULE OF DEBT SECURITIES HELD TO MATURITY
| December 31, 2023 | March 31, 2023 | |||||||
| Debt securities held-to-maturity | $ | $ | ||||||
The
Company purchased a note issued by a third-party investment company on August 24, 2022. The principal amount of the note is $
| F-7 |
8. INVENTORIES
Inventories consist of the following as of December 31, 2023 and March 31, 2023:
SCHEDULE OF INVENTORIES
| December 31, 2023 | March 31, 2023 | |||||||
| Raw materials | $ | $ | ||||||
| Work in progress | ||||||||
| Finished goods | ||||||||
| Total inventories | $ | $ | ||||||
9. ADVANCES TO SUPPLIERS
The Company has made advances to third-party suppliers in advance of receiving inventory parts. These advances are generally made to expedite the delivery of required inventory when needed and to help to ensure priority and preferential pricing on such inventory. The amounts advanced to suppliers are fully refundable on demand.
The Company reviews a supplier’s credit history and background information before advancing a payment. If the financial condition of its suppliers were to deteriorate, resulting in an impairment of their ability to deliver goods or provide services, the Company would recognize bad debt expense in the period they are considered unlikely to be collected.
10. PREPAYMENTS AND OTHER RECEIVABLES
Prepayments and other receivables consist of the following as of December 31, 2023 and March 31, 2023:
SCHEDULE OF PREPAYMENTS AND OTHER RECEIVABLES
| December 31, 2023 | March 31, 2023 | |||||||
| Prepayment | ||||||||
| Deposit | ||||||||
| Receivable of consideration on disposal of subsidiaries | ||||||||
| Receivable of matured debt security (Note) | ||||||||
| Other receivables | ||||||||
| $ | $ | |||||||
Note: The debt security held-to-maturity was matured and was reclassified to Other receivables. The Company is discussing with the issuer and will determine whether to renew the note. (Note 7)
11. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following as of December 31, 2023 and March 31, 2023:
SCHEDULE OF PLANT AND EQUIPMENT
| December 31, 2023 | March 31, 2023 | |||||||
| Production plant | $ | $ | ||||||
| Motor vehicles | ||||||||
| Office equipment | ||||||||
| Total gross | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Plant and equipment, net | $ | $ | ||||||
Depreciation
expense for the three and nine months ended December 31, 2023 and 2022 was $
| F-8 |
12. LONG-TERM RECEIVABLES
The
Company entered into a long-term loan agreement with an independent third party in September 2022. The principal to the borrower is $
13. SHORT-TERM BANK LOAN
In
August 2019, HSW entered into a facility agreement with Agricultural Bank of China and obtained a line of credit, which allows the Company
to borrow up to approximately $
In
February 2023, XKJ entered into a facility agreement with China Construction Bank and obtained a line of revolving credit, which
allows the Company to borrow up to approximately $
In December 2023, PF entered into a facility agreement with Sichuan Xinwang Bank Co., Ltd. and obtained a line of
credit, which allows the Company to borrow up to approximately $
14. TAXATION
| (a) | Enterprise Income Tax (“EIT”) |
The Company operates in the PRC and files tax returns in the PRC jurisdictions.
Yingxi Industrial Chain Group Co., Ltd was incorporated in the Republic of Seychelles and, under the current laws of the British Virgin Islands, is not subject to income taxes. It’s wholly owned subsidiary of Addentax Group Corp.
Yingxi
HK (Yingxi Industrial Chain Investment Co., Ltd.) was incorporated in Hong Kong which is indirectly wholly owned by Addentax Group Corp.,
and is subject to Hong Kong income tax at a progressive rate of
YX,
our wholly owned subsidiary, were incorporated in the PRC and is subject to the EIT tax rate of
The
Company is governed by the Income Tax Laws of the PRC. All Yingxi’s operating companies were subject to progressive EIT rates from
The Company’s parent entity, Addentax Group Corp. is a U.S entity and is subject to the United States federal income tax. No provision for income taxes in the United States has been made as Addentax Group Corp. had no United States taxable income for the three months ended December 31, 2023 and 2022.
| F-9 |
The reconciliation of income taxes computed at the PRC statutory tax rate applicable to the PRC, to income tax expenses are as follows:
SCHEDULE OF EFFECTIVE INCOME TAX RATE RECONCILIATION
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Three months ended | Nine months ended | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| PRC statutory tax rate | % | % | % | % | ||||||||||||
| Computed expected benefits | ( | ) | ( | ) | ( | ) | ||||||||||
| Temporary differences | ( | ) | ( | ) | ||||||||||||
| Permanent difference | ||||||||||||||||
| Changes in valuation allowance | ||||||||||||||||
| Income tax expense | $ | $ | ||||||||||||||
Deferred tax assets had not been recognized in respect of any potential tax benefit that may be derived from non-capital loss carry forward and property and equipment due to past negative evidence of previous cumulative net losses and uncertainty upon restructuring. The management will continue to assess at each reporting period to determine the realizability of deferred tax assets.
| (b) | Value Added Tax (“VAT”) |
In
accordance with the relevant taxation laws in the PRC, the normal VAT rate for domestic sales is
For
services, the applicable VAT rate is
15. CONSOLIDATED SEGMENT DATA
Segment information is consistent with how chief operating decision maker reviews the businesses, makes investing and resource allocation decisions and assesses operating performance. The segment data presented reflects this segment structure. The Company reports financial and operating information in the following four segments:
| (a) | Garment manufacturing. Including manufacturing and distribution of garments; | |
| (b) | Logistics services. Providing logistic services; and | |
| (c) | Property management and subleasing. Providing shops subleasing and property management services for garment wholesalers and retailers in garment market. |
The Company also provides general corporate services to its segments and these costs are reported as “Corporate and others”.
| F-10 |
Selected information in the segment structure is presented in the following tables:
Revenues by segment for the three and nine months ended December 31, 2023 and 2022 are as follows:
SCHEDULE OF SEGMENT REPORTING FOR REVENUE
| Revenues from external customers | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Three months ended | Nine months ended | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| Revenues from external customers | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Garments manufacturing segment | ||||||||||||||||
| Logistics services segment | ||||||||||||||||
| Property management and subleasing | ||||||||||||||||
| Total of reportable segments | $ | $ | $ | |||||||||||||
| Corporate and other | ||||||||||||||||
| Total consolidated revenue | $ | $ | $ | $ | ||||||||||||
| Revenues from external customers | ||||||||||||||||
(Loss) Income from operations by segment for the three ended December 31, 2023 and 2022 are as follows:
SCHEDULE OF SEGMENT REPORTING FOR (LOSS) INCOME FROM OPERATION
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Three months ended | Nine months ended | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Garments manufacturing segment | ( | ) | ( | ) | ( | ) | ||||||||||
| Logistics services segment | ( | ) | ||||||||||||||
| Property management and subleasing | ( | ) | ( | ) | ||||||||||||
| Total of reportable segments | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Corporate and other | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total consolidated income (loss) from operations | ( | ) | ( | ) | ( | ) | ||||||||||
Total assets by segment as of December 31, 2023 and March 31, 2023 are as follows:
SCHEDULE OF SEGMENT REPORTING FOR ASSETS
| Total assets | December 31, 2023 | March 31, 2023 | ||||||
| Garment manufacturing segment | $ | $ | ||||||
| Logistics services segment | ||||||||
| Property management and subleasing | ||||||||
| Total of reportable segments | ||||||||
| Corporate and other | ||||||||
| Consolidated total assets | $ | $ | ||||||
Geographical Information
The Company operates predominantly in China. In presenting information on the basis of geographical location, revenue is based on the geographical location of customers and long-lived assets are based on the geographical location of the assets.
Geographic Information
SCHEDULE OF GEOGRAPHICAL INFORMATION
| Three months ended December 31, | Nine months ended December 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues | ||||||||||||||||
| China | ||||||||||||||||
| Total | ||||||||||||||||
| December 31, 2023 | March 31, 2023 | |||||||
| Long-Lived Assets | ||||||||
| China | ||||||||
| F-11 |
16. FINANCIAL INSTRUMENTS
On
January 4, 2023, the Company entered into a series of agreements with certain accredited investors, pursuant to which the Company received
a net proceed of $
| ● | senior
secured convertible notes in the aggregate original principal amount of approximately $ | |
| ● | warrants
to purchase up to approximately |
The
Warrant is considered a freestanding instrument issued together with the Convertible Note and measured at its issuance date fair value.
Proceeds received were first allocated to the Warrant based on its initial fair value. The initial fair value of the Warrant was $
The
Convertible Note is classified as a liability and is subsequently stated at amortized cost with any difference between the initial carrying
value and the repayment amount as interest expenses using the effective interest method over the period from the issuance date to the
maturity date. The embedded conversion feature should be bifurcated and separately accounted for using fair value, as this embedded feature
is considered not clearly and closely related to the debt host. The bifurcated conversion feature was recorded at fair value with the
changes recorded in the consolidated statements of operations and comprehensive loss. The initial fair value of the embedded conversion
feature was $
The Company determined that the other embedded features do not require bifurcation as they either are clearly and closely related to the Convertible Note or do not meet the definition of a derivative.
The
total proceeds of the Convertible Note and the Warrants, net of issuance cost, of $
SCHEDULE OF FINANCIAL INSTRUMENTS
As of January 4, 2023 | ||||
| Derivative liabilities – Fair value of the Warrants | $ | |||
| Derivative liabilities – Embedded conversion feature | ||||
| Convertible Note | ||||
| $ | ||||
In
January 2023, the Company also granted to the placement agent a warrant as partial of agent fee to purchase
The movement of the Company’s convertible notes obligations were as the following for the three and nine months ended December 31, 2023 and 2022:
SCHEDULE OF CONVERTIBLE NOTES OBLIGATION
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Three months ended | Nine months ended | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Carrying value – beginning balance | $ | $ | $ | $ | ||||||||||||
| Converted to ordinary shares | ( | ) | ( | ) | ||||||||||||
| Reversal of debt discount due to conversion | ||||||||||||||||
| Redemption | ( | ) | ||||||||||||||
| Amortization of debt discount | ||||||||||||||||
| Deferred debt discount and cost of issuance | ( | ) | ( | ) | ||||||||||||
| Interest charge | ||||||||||||||||
| Carrying value – ending balance | $ | $ | $ | $ | ||||||||||||
During
the three months ended December 31 2023, approximately $
During
the nine months ended December 31 2023, approximately $
On
July 13, 2023, the Company entered into a Waiver and Ratification Agreement with one of the holders of the Convertible Note. According
to the agreement, the holder redeemed the full amount of $
| F-12 |
The Company’s derivative liabilities were as the following for the three and nine months ended December 31, 2023 and 2022:
SCHEDULE OF DERIVATIVE LIABILITIES
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Three months ended | Nine months ended | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Derivative liabilities –Warrants | $ | $ | $ | $ | - | |||||||||||
| Beginning balance | ||||||||||||||||
| Marked to the market | ( | ) | ||||||||||||||
| Ending fair value | ||||||||||||||||
| - | ||||||||||||||||
| Derivative liabilities – Embedded conversion feature | - | |||||||||||||||
| Beginning balance | ||||||||||||||||
| Converted to ordinary shares | ( | ) | ( | ) | ||||||||||||
| Remeasurement on change of convertible price | ||||||||||||||||
| Redemption | ( | ) | ||||||||||||||
| Marked to the market | ||||||||||||||||
| Ending fair value | ||||||||||||||||
| - | - | |||||||||||||||
| Total Derivative fair value at end of period | $ | $ | $ | $ | ||||||||||||
17. LEASE RIGHT-OF-USE ASSET AND LEASE LIABILITIES
The
Company recognized right-of-use asset as well as lease liability according to the ASC 842, Leases (with the exception of short-term leases).
Lease liabilities are measured at present value of the sum of remaining rental payments as of December 31, 2023, with average discounted
rate of
The
Company leases its head office. The lease period is
The Following table summarizes the components of lease expense:
SCHEDULE OF LEASE COST
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Three months ended December 31, | Nine months ended December 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Operating lease cost | ||||||||||||||||
| Short-term lease cost | ||||||||||||||||
| Lease Cost | $ | $ | $ | $ | ||||||||||||
The following table summarizes supplemental information related to leases:
SCHEDULE OF SUPPLEMENTAL INFORMATION RELATED TO LEASES
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Three months ended December 31, | Nine months ended December 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||||||||||
| Operating cash flow from operating leases | $ | $ | ||||||||||||||
| Right-of-use assets obtained in exchange for new operating leases liabilities | ( | ) | ||||||||||||||
| Weighted average remaining lease term - Operating leases (years) | ||||||||||||||||
| Weighted average discount rate - Operating leases | % | % | % | % | ||||||||||||
| F-13 |
The following table summarizes the maturity of operating lease liabilities:
SCHEDULE OF MATURITY OF OPERATING LEASE LIABILITY
| Years ending December 31 | Lease cost | |||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 and there after | ||||
| Total lease payments | ||||
| Less: Interest | ( | ) | ||
| Total | $ | |||
18. SHARE CAPITAL
The Company effected the amendment and combination to the outstanding shares of our common stock into a lesser number of outstanding shares (the “Reverse Stock Split Amendment”) on a ratio of one-for-ten, with effected date on June 26, 2023.
19. RISKS AND UNCERTAINTIES
| (a) | Economic and Political Risks |
The Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.
The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation.
| (b) | Foreign Currency Translation |
The
Company’s reporting currency is the U.S. dollar. The functional currency of the parent company is the U.S. dollar and the functional
currency of the Company’s operating subsidiaries is the Chinese Renminbi (“RMB”). For the subsidiaries whose functional
currencies are the RMB, all assets and liabilities are translated at exchange rates at the balance sheet date, which was
| (c) | Concentration Risks |
The followings are the percentages of accounts receivable balance of the top customers over accounts receivable for each segment as of December 31, 2023 and March 31, 2023.
| F-14 |
Garment manufacturing segment
SCHEDULE OF CONCENTRATION RISKS
| December 31, 2023 | March 31, 2023 | |||||||
| Customer A | % | % | ||||||
| Customer B | % | % | ||||||
The high concentration as of December 31, 2023 was mainly due to business development of a large distributor of garments. Management believes that should the Company lose any one of its major customers, it was able to sell similar products to other customers.
Logistics services segment
| December 31, 2023 | March 31, 2023 | |||||||
| Customer A | % | % | ||||||
| Customer B | % | % | ||||||
| Customer C | % | % | ||||||
| Customer D | % | % | ||||||
| Customer E | % | |||||||
Property management and subleasing segment
There is no account receivable for Property management and subleasing segment as for December 31, and March 31, 2023.
Concentration on customers
For
the three months ended December 31, 2023, two customers from Logistics services segment provided more than
Management believes that should the Company lose any one of its major customers, it was able to sell similar products to other customers.
Concentration on suppliers
The following tables summarized the purchases from five largest suppliers of each of the reportable segments for the three and nine months ended December 31, 2023 and 2022.
SCHEDULE OF PURCHASES FROM SUPPLIERS
| Three months ended | Nine months ended | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Garment manufacturing segment | % | % | % | % | ||||||||||||
| Logistics services segment | % | % | % | % | ||||||||||||
| Property management and subleasing | % | % | % | % | ||||||||||||
| (d) | Interest Rate Risk |
The
Company’s exposure to interest rate risk primarily relates to the interest expenses on our outstanding bank borrowings and the
interest income generated by cash invested in cash deposits and liquid investments. As of December 31, 2023, the total outstanding borrowings
amounted to $
| F-15 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations for the three and nine months ended December 31, 2023 and 2022 should be read in conjunction with the Financial Statements and corresponding notes included in this Report on Form 10-Q. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors and Special Note Regarding Forward-Looking Statements in this report. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” “target”, “forecast” and similar expressions to identify forward-looking statements.
Overview
Our Business
We, Addentax Group Corp., are a Nevada holding company with no material operations of our own. We conduct substantially all of our operations through our operating companies established in the PRC, primarily Shenzhen Qianhai Yingxi Industrial Chain Service Co., Ltd. (“YX”), our wholly owned subsidiary and its subsidiaries. We are not a Chinese operating company. We are a holding company and do not directly own any substantive business operations in China. Therefore, our investors will not directly hold any equity interests in our operating companies. Our holding company structure involves unique risks to investors. Chinese regulatory authorities could disallow our operating structure, which would likely result in a material change in our operations and/or the value of our common stock, including that it could cause the value of such securities to significantly decline or become worthless. Our holding company, Addentax Group Corp., is listed on the Nasdaq Capital Market under the symbol “ATXG”. We classify our businesses into three segments: garment manufacturing, logistics services, property management and subleasing.
Unless the context otherwise requires, all references in this annual report to “Addentax” refer to Addentax Group Corp., a holding company, and references to “we,” “us,” “our,” the “Registrant”, the “Company,” or “our company” refer to Addentax and/or its consolidated subsidiaries. Addentax Group Corp., our Nevada holding company, is the entity in which our investors are investing.
Our subsidiaries include (i) Yingxi Industrial Chain Group Co., Ltd., a Republic of Seychelles company; (ii) Yingxi Industrial Chain Investment Co., Ltd., a Hong Kong company (“Yingxi HK”); (iii) Qianhai Yingxi Textile & Garments Co., Ltd., a PRC company; (iv) Shenzhen Qianhai Yingxi Industrial Chain Services Co., Ltd, a PRC company (“YX”), (v) Dongguan Heng Sheng Wei Garments Co., Ltd, a PRC company (“HSW”), (vi) Dongguan Yushang Clothing Co., Ltd, a PRC company (“YS”), (vii) Shantou Yi Bai Yi Garment Co., Ltd, a PRC company (“YBY”), (viii) Shenzhen Yingxi Peng Fa Logistic Co., Ltd., a PRC company (“PF”); (ix) Shenzhen Xin Kuai Jie Transportation Co., Ltd, a PRC company (“XKJ”), (x) Shenzhen Yingxi Tongda Logistic Co., Ltd, a PRC company (“TD”), (xi) Zhuang Hao Jia (Dongguan) Decoration Engineering Co.,Ltd, a PRC company (“ZHJ”), and (xii) Dongguan Aotesi Garments Co., Ltd., a PRC company (“AOT”), (xiii) Dongguan Hongxiang Commercial Co., Ltd., a PRC company (“HX”).
“PRC Subsidiaries” refer to, collectively, (i) Qianhai Yingxi Textile & Garments Co., Ltd.; (ii) Shenzhen Qianhai Yingxi Industrial Chain Services Co., Ltd (“YX”), (iii) Dongguan Heng Sheng Wei Garments Co., Ltd (“HSW”), (iv) Dongguan Yushang Clothing Co., Ltd (“YS”); (v) Shantou Yi Bai Yi Garment Co., Ltd (“YBY”); (vi) Shenzhen Yingxi Peng Fa Logistic Co., Ltd., a PRC company (“PF”); (vii) Shenzhen Xin Kuai Jie Transportation Co., Ltd, a PRC company (“XKJ”), (viii) Shenzhen Yingxi Tongda Logistic Co., Ltd, a PRC company (“TD”),,(ix) Zhuang Hao Jia (Dongguan) Decoration Engineering Co.,Ltd, a PRC company (“ZHJ”), and (x) Dongguan Aotesi Garments Co., Ltd., a PRC company (“AOT”), (xi) Dongguan Hongxiang Commercial Co., Ltd., a PRC company (“HX”).
“WFOE” refers to Qianhai Yingxi Textile & Garments Co., Ltd, a wholly foreign owned enterprise in China, which is indirectly wholly owned by Addentax Group Corp.
Our garment manufacturing business consists of sales made principally to wholesaler located in the PRC. We have our own manufacturing facilities, with sufficient production capacity and skilled workers on production lines to ensure that we meet our high quality control standards and timely meet the delivery requirements for our customers. We conduct our garment manufacturing operations through five wholly owned subsidiaries, namely Dongguan Heng Sheng Wei Garments Co., Ltd (“HSW”), Dongguan Yushang Clothing Co., Ltd (“YS”), Shantou Yi Bai Yi Garment Co., Ltd (“YBY”), Zhuang Hao Jia (Dongguan) Decoration Engineering Co.,Ltd (“ZHJ”), and Dongguan Aotesi Garments Co., Ltd., (“AOT”), which are located in the Guangdong province, China.
Our logistics business consists of delivery and courier services covering 86 cities in 11 provinces and 3 municipalities in China. Although we have our own motor vehicles and drivers, we currently outsource some of the business to our contractors. We believe outsourcing allows us to maximize our capacity and maintain flexibility while reducing capital expenditures and the costs of keeping drivers during slow seasons. We conduct our logistic operations through three wholly owned subsidiaries, namely Shenzhen Xin Kuai Jie Transportation Co., Ltd (“XKJ”), Shenzhen Yingxi Peng Fa Logistic Co., Ltd (“PF”) and Shenzhen Yingxi Tongda Logistic Co., Ltd (“TD”), which are located in the Guangdong province, China.
Our property management and subleasing business provides shops subleasing and property management services for garment wholesalers and retailers in the garment market. We conduct our property management and subleasing operation through a wholly owned subsidiary, namely Dongguan Yingxi Daying Commercial Co., Ltd. (“DY”), which is located in the Guangdong province, China.
| 3 |
Business Objectives
Garment Manufacturing Business
We believe the strength of our garment manufacturing business is mainly due to our consistent emphasis on exceptional quality and timely delivery of our products. The primary business objective for our garment manufacturing segment is to expand our customer base and improve our profit.
Logistics Services Business
The business objective and future plan for our logistics services segment is to establish an efficient logistic system and to build a nationwide delivery and courier network in China. As of December 31, 2023, we provide logistics services to over 86 cities in approximately 11 provinces and 3 municipalities . We expect to develop an additional 20 logistics points in existing serving cities and improve the Company’s profit in the year 2024.
Property Management and Subleasing Business
The business objective of our property management and subleasing segment is to integrate resources in shopping mall, develop e-commerce bases and the Internet celebrity economy together to drive to increase the value of the stores in the area. The short-term goal for the year is to increase the occupancy rate of stores in the mall to more than 70%. In February 2023, the Company disposed of DY to an independent third party at fair value, which was also its carrying value as of February 28, 2023. In September 2023, we finished the acquisition of HX.
Seasonality of Business
Our business is affected by seasonal trends, with higher levels of garment sales during our second and third quarters and higher logistics services revenue during our third and fourth quarters. These trends primarily result from the timing of seasonal garment manufacturing shipments and holiday periods in the logistics services segment.
Collection Policy
Garment manufacturing business
For our new customers, we generally require orders placed to be backed by advances or deposits. For our long-term and established customers with good payment track records, we generally provide payment terms between 30 to 180 days following their acknowledgement of receipt of goods.
Logistics services business
For logistics services, we generally receive payments from the customers between 30 to 90 days following the date of the registration of our receipt of packages.
Property management and subleasing business
For property management and subleasing business, we generally collect rental and management fees of the following month each month in advance.
| 4 |
Economic Uncertainty
Our business is dependent on consumer demand for our products and services. We believe that the significant uncertainty in the economy in China has increased our clients’ sensitivity to the cost of our products and services. We have experienced continued pricing pressure. If the economic environment becomes weak, the economic conditions could have a negative impact on our sales growth and operating margins, cash position and collection of accounts receivable. Additionally, business credit and liquidity have tightened in China. Some of our suppliers and customers may face credit issues and could experience cash flow problems and other financial hardships. These factors currently have not had an impact on the timeliness of receivable collections from our customers. We cannot predict at this time how this situation will develop and whether accounts receivable may need to be allowed for or written off in the coming quarters.
Despite the various risks and uncertainties associated with the current economy in China, we believe our core strengths will continue to allow us to execute our strategy for long-term sustainable growth in revenue, net income and operating cash flow.
Summary of Critical Accounting Policies
We have identified critical accounting policies that, as a result of judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operation involved could result in material changes to our financial position or results of operations under different conditions or using different assumptions.
Estimates and Assumptions
We regularly evaluate the accounting estimates that we use to prepare 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.
Revenue Recognition
Revenue is generated through sale of goods and delivery services. Revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amount of revenue that is recorded reflects the consideration that the Company expects to receive in exchange for those goods and services. The Company applies the following five-step model in order to determine this amount:
| (i) | identification of the promised goods and services in the contract; | |
| (ii) | determination of whether the promised goods and services are performance obligations, including whether they are distinct in the context of the contract; | |
| (iii) | measurement of the transaction price, including the constraint on variable consideration; | |
| (iv) | allocation of the transaction price to the performance obligations; and | |
| (v) | recognition of revenue when (or as) the Company satisfies each performance obligation. |
| 5 |
The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. Once a contract is determined to be within the scope of ASC 606 at contract inception, the Company reviews the contract to determine which performance obligations the Company must deliver and which of these performance obligations are distinct. The Company recognizes as revenues the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied. Generally, the Company’s performance obligations are transferred to customers at a point in time, typically upon delivery.
For all reporting periods, the Company has not disclosed the value of unsatisfied performance obligations for all product and service revenue contracts with an original expected length of one year or less, which is an optional exemption that is permitted under the adopted rules.
Leases
Lessee
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities in our consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in the consolidated balance sheets.
ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the leases do not provide an implicit rate, The Company generally use the incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Lessor
As a lessor, the Company’s leases are classified as operating leases under ASC 842. Leases, in which the Company is the lessor, are substantially all accounted for as operating leases and the lease components and non-lease components are accounted for separately. Rental income from operating leases is recognized on a straight line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized on a straight line basis over the lease term.
Recently issued accounting pronouncements
In September 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This standard requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. This standard will be effective for the Company on April 1, 2023. The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements.
Accounting for Convertible Instruments: In August 2020, FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. Among other changes, the new guidance removes from GAAP separation models for convertible debt that require the convertible debt to be separated into a debt and equity component, unless the conversion feature is required to be bifurcated and accounted for as a derivative or the debt is issued at a substantial premium. As a result, after adopting the guidance, entities will no longer separately present such embedded conversion features in equity and will instead account for the convertible debt wholly as debt. The new guidance also requires use of the “if-converted” method when calculating the dilutive impact of convertible debt on earnings per share, which is consistent with the Company’s current accounting treatment under the current guidance. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted, but only at the beginning of the fiscal year.
The Company reviews new accounting standards as issued. Management has not identified any other new standards that it believes will have a significant impact on the Company’s consolidated financial statements.
Results of Operations for the three months ended December 31, 2023 and 2022
The following tables summarize our results of operations for the three months ended December 31, 2023 and 2022. The table and the discussion below should be read in conjunction with our consolidated financial statements and the notes thereto appearing elsewhere in this report.
Three Months Ended December 31, | Changes in 2023 | |||||||||||||||||||||||
| 2023 | 2022 | compared to 2022 | ||||||||||||||||||||||
| (In U.S. dollars, except for percentages) | ||||||||||||||||||||||||
| Revenue | $ | 1,468,496 | 100.0 | % | $ | 2,122,242 | 100 | % | $ | (653,746 | ) | (30.8 | )% | |||||||||||
| Cost of revenues | (1,306,169 | ) | (88.9 | )% | (1,514,780 | ) | (71.4 | )% | 208,611 | 13.8 | % | |||||||||||||
| Gross profit | 162,327 | 11.1 | % | 607,462 | 28.6 | % | (445,135 | ) | (73.3 | )% | ||||||||||||||
| Operating expenses | (611,919 | ) | (41.7 | )% | (700,429 | ) | (33.0 | )% | (88,510 | ) | 12.6 | % | ||||||||||||
| (Loss) Income from operations | (449,592 | ) | (30.6 | )% | (92,967 | ) | 4.4 | % | (356,625 | ) | (383.6 | )% | ||||||||||||
| Other income, net | 111,566 | 7.6 | % | 19,232 | 0.9 | % | 92,334 | 480.1 | % | |||||||||||||||
| Fair value gain | (1,738,593 | ) | (118.4 | )% | - | - | (1,738,593 | ) | ||||||||||||||||
| Net finance cost | (527,818 | ) | (35.9 | )% | (299 | ) | (0.0 | )% | (527,519 | ) | (26563.1 | )% | ||||||||||||
| Income tax expense | (3,225 | ) | (0.2 | )% | (8,184 | ) | (0.4 | )% | 4,959 | 60.6 | % | |||||||||||||
| Net (loss) income | $ | (2,607,662 | ) | (177.6 | )% | $ | (82,218 | ) | (3.9 | )% | $ | (2,525,444 | ) | (3071.6 | )% | |||||||||
| 6 |
Revenue
Total revenue for the three months ended December 31, 2023 decreased by approximately $0.7 million, or 30.8%, as compared with the three months ended December 31, 2022. The decrease was mainly due to the decrease of $0.6 million in property management and subleasing business and $0.1 million decrease in garment manufacturing business.
Revenue generated from our garment manufacturing business contributed approximately $0.03 million or 1.8% of our total revenue for the three months ended December 31, 2023. Revenue generated from garment manufacturing business contributed approximately $0.1 million or 4.7% of our total revenue for the three months ended December 31, 2022, respectively. The low level of sales was mainly due to factory facilities renewal and repair, remaining factories cannot provide the same capacity as previously. We estimate the capacity will recover at the last quarter of the fiscal year ending 2024.
Revenue generated from our logistics services business contributed approximately $1.2 million or 81.0% of our total revenue for the three months ended December 31, 2023. Revenue generated from our logistic business contributed approximately $1.2 million or 57.2% of our total revenue for the three months ended December 31, 2022.
Revenue generated from our property management and subleasing business was $0.3 million or 17.2% of our total revenue for the three months ended December 31, 2023. The revenue from this business segment was $0.8 million or 37.5% of our total revenue of this business for the three months ended December 31, 2022.
Cost of revenue
Three months ended December 31, | Increase (decrease) in | |||||||||||||||||||||||
| 2023 | 2022 | 2023 compared to 2022 | ||||||||||||||||||||||
| (In U.S. dollars, except for percentages) | ||||||||||||||||||||||||
| Net revenue for garment manufacturing | $ | 27,015 | 100.0 | % | $ | 100,723 | 100 | % | $ | (73,708 | ) | (73.2 | )% | |||||||||||
| Raw materials | 4,238 | 15.7 | % | 771 | 0.8 | % | 3,467 | 449.7 | % | |||||||||||||||
| Labor | 6,957 | 25.8 | % | 64,108 | 63.7 | % | (57,151 | ) | (89.1 | )% | ||||||||||||||
| Other and Overhead | (1,292 | ) | (4.8 | )% | 2,761 | 2.7 | % | (4,053 | ) | (146.8 | )% | |||||||||||||
| Total cost of revenue for garment manufacturing | 9,903 | 36.7 | % | 67,640 | 67.2 | % | (57,737 | ) | (85.4 | )% | ||||||||||||||
| Gross profit (loss) for garment manufacturing | 17,112 | 63.3 | % | 33,083 | 32.8 | % | (15,971 | ) | (48.3 | )% | ||||||||||||||
| Net revenue for logistics services | 1,189,004 | 100.0 | % | 1,213,530 | 100.0 | % | (24,526 | ) | (2.0 | )% | ||||||||||||||
| Fuel, toll and other cost of logistics services | 495,352 | 41.6 | % | 648,971 | 53.5 | % | (153,619 | ) | (23.7 | )% | ||||||||||||||
| Subcontracting fees | 560,735 | 47.2 | % | 253,359 | 20.9 | % | 307,376 | 121.3 | % | |||||||||||||||
| Total cost of revenue for logistics services | 1,056,087 | 88.8 | % | 902,330 | 74.4 | % | 153,757 | 17.0 | % | |||||||||||||||
| Gross Profit for logistics services | 132,917 | 11.2 | % | 311,200 | 25.6 | % | (178,283 | ) | (57.3 | )% | ||||||||||||||
| Net revenue for property management and subleasing | 252,477 | 100.0 | % | 796,343 | 100.0 | % | (543,866 | ) | (68.3 | )% | ||||||||||||||
| Total cost of revenue for property management and subleasing | 236,291 | 93.6 | % | 536,732 | 67.4 | % | (300,442 | ) | (56.0 | )% | ||||||||||||||
| Gross Profit for property management and subleasing | 16,186 | 6.4 | % | 259,611 | 32.6 | % | (243,425 | ) | (93.8 | )% | ||||||||||||||
| Net revenue for corporate and others | $ | - | 0 | % | $ | 11,646 | 100.0 | % | (11,646 | ) | (100.0 | )% | ||||||||||||
| Merchandise/Finished goods/Raw materials | 3,888 | 0 | % | 8,078 | 69.4 | % | (4,190 | ) | (51.9 | )% | ||||||||||||||
| Total cost of revenue for corporate and others | 3,888 | 0 | % | 8,078 | 69.4 | % | (4,190 | ) | (51.9 | )% | ||||||||||||||
| Gross (loss) income for corporate and others | (3,888 | ) | 0 | % | 3,568 | 30.6 | % | (7,456 | ) | (209.0 | )% | |||||||||||||
| Total cost of revenue | $ | 1,306,169 | 88.9 | % | $ | 1,514,780 | 71.4 | % | $ | (208,611 | ) | (13.8 | )% | |||||||||||
| Gross profit | $ | 162,327 | 11.1 | % | $ | 607,462 | 28.6 | % | $ | (445,135 | ) | (73.3 | )% | |||||||||||
| 7 |
For our garment manufacturing business, we purchase the majority of our raw materials directly from numerous local fabric and accessories suppliers.
Raw material costs for our garment manufacturing business was approximately 15.7% of our total garment manufacturing business revenue for the three months ended December 31, 2023, as compared with 0.8% for the three months ended December 31, 2022.
Labor costs for our garment manufacturing business was approximately 25.8% of our total garment manufacturing business revenue for the three months ended December 31, 2023, as compared with 63.7% for the three months ended December 31, 2022.
Overhead and other expenses for our garment manufacturing business accounted for approximately (4.8)% of our total garment business revenue for the three months ended December 31, 2023, as compared with 2.7% of total garment business revenue for the three months ended December 31, 2022.
For our logistic business, we outsource some of our business to our contractors. The Company relied on a few subcontractors, which the subcontracting fees to our largest contractor represented approximately 53.1% and 28.1 % of total cost of revenues for our service segment for the three months ended December 31, 2023 and 2022, respectively. The increase was attributed to a decrease usage of our own logistics as compared to the subcontractor. We have not experienced any dispute with our subcontractors and we believe we maintain good relationships with our contract logistics services provider.
Fuel, toll and other costs for our service business for the three months ended December 31, 2023 was approximately $0.5 million as compared with $0.6 million for the three months ended December 31, 2022. Fuel, toll and other costs for our service business accounted for approximately 41.6% of our total service revenue for the three months ended December 31, 2023, as compared with 53.5% for the three months ended December 31, 2022. The decrease was primarily attributable to an increase of subcontractors usage after the COVID-19 epidemic.
Subcontracting fees for our service business for the three months ended December 31, 2023 increased significantly by approximately 121.3% to $0.6 million from $0.3 million for the three months ended December 31, 2022. Subcontracting fees accounted for approximately 47.2% and 20.9% of our total service business revenue in the three months ended December 31, 2023 and 2022, respectively. The increase was primarily attributable to a decrease usage of our own logistics as compared to the subcontractors after the COVID-19 epidemic.
| 8 |
For property management and subleasing business, the cost of revenue was mainly the amortization of operating lease assets for the subleasing business. The Company disposed of DY in February 2023 and acquired HX in September 2023. Therefore, the revenue in the quarter was only $0.3 million compared to $0.8 million for the three months ended December 31, 2022.
Gross profit
Garment manufacturing business gross profit for the three months ended December 31, 2023 was approximately $17,113, as compared with gross profit of approximately $33,082 for the three months ended December 31, 2022. Gross profit accounted for approximately 63.3% of our total garment manufacturing business revenue for the three months ended December 31, 2023.
Gross profit in our logistics services business for the three months ended December 31, 2023 was approximately $132,917 and gross margin was 11.2%. Gross profit in our logistics services business for the three months ended December 31, 2022 was approximately $311,300 and gross margin was 25.6%. The decrease of gross profit ratio was mainly because the subsidiary PF used more subcontractors to proceed the orders which increase the cost of revenue.
Gross profit in our property management and subleasing business for the three months ended December 31, 2023 was approximately $16,186, or 6.4% of revenue of the segment. It was approximately $259,611, or 32.6% margin for the three months ended December 31, 2022.
Three months ended December 31, | Increase (decrease) in | |||||||||||||||||||||||
| 2023 | 2022 | 2023 compared to 2022 | ||||||||||||||||||||||
| (In U.S. dollars, except for percentages) | ||||||||||||||||||||||||
| Gross profit | $ | 162,327 | 100 | % | $ | 607,462 | 100 | % | (445,135 | ) | (73.3 | )% | ||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Selling expenses | (95,321 | ) | (58.7 | )% | (24,511 | ) | (4.0 | )% | (70,810 | ) | 288.9 | % | ||||||||||||
| General and administrative expenses | (516,598 | ) | (318.2 | )% | (675,918 | ) | (111.3 | )% | 159,320 | (23.6 | )% | |||||||||||||
| Total | $ | (611,919 | ) | (377.0 | )% | $ | (700,429 | ) | (115.3 | )% | 88,510 | (12.6 | )% | |||||||||||
| (Loss) Income from operations | $ | (449,592 | ) | (277.0 | )% | $ | (92,967 | ) | (15.3 | )% | (356,625 | ) | 383.6 | % | ||||||||||
Selling, General and administrative expenses
Our selling expenses were mainly incurred for our property management and subleasing business. It was $81,817 for property management and subleasing business and $13,504 for garments manufacturing business for the three months ended December 31, 2023 It was approximately $24,511 for property management and subleasing business for the three months ended December 31, 2022. Selling expenses consisted primarily of advertisement, local transportation, unloading charges and product inspection charges.
Our general and administrative expenses in our garment manufacturing business segment for the three months ended December 31, 2023 and 2022 was approximately $34,008 and $25,228, respectively. Our general and administrative expenses in our logistics services segment for the three months ended December 31, 2023 and 2022 was approximately $174,618 and $220,052, respectively. The general and administrative expenses in our property management and subleasing business was approximately $132,336 and $103,999 for the three months ended December 31, 2023 and 2022, respectively. Our general and administrative expenses in our corporate office for the three months ended December 31, 2023 and 2022 was approximately $175,636 and $326,639, respectively. General and administrative expenses consisted primarily of administrative salaries, office expense, certain depreciation and amortization charges, repairs and maintenance, legal and professional fees, warehousing costs and other expenses that are not directly attributable to our revenues.
| 9 |
Total general and administrative expenses for the three months ended December 31, 2023 decreased by approximately 23.6% to $516,598 from $675,918 for the three months ended December 31, 2022.
(Loss) Income from operations
Loss from operations for the three months ended December 31, 2023 was approximately $449,592, while loss from operations for the three months ended December 31, 2022 was $92,967. Loss from operations of approximately $30,398 and income from operations of $7,745 was attributed from our garment manufacturing segment for the three months ended December 31, 2023 and 2022, respectively. Loss from operations of approximately $41,699 and income from operations of approximately $91,147 was attributed from our logistics services segment for the three months ended December 31, 2023 and 2022, respectively. Loss from operations of approximately $168,012 and income from operations of $131,213 for the three months ended December 31, 2023 and 2022 was attributed from our property management and subleasing business, respectively. We incurred expenses from operations in corporate office of approximately $209,483 and $324,046 for the three months ended December 31, 2023 and 2022, respectively. The decrease of expenses from our corporate office was mainly due to decrease in legal and professional fees to comply with the SEC accounting, disclosure and reporting requirements.
Income Tax Expenses
Income tax expense for the three months ended December 31, 2023 and 2022 was approximately $3,255 and $8,184, respectively. The Company operates in the PRC and files tax returns in the PRC jurisdictions.
Yingxi Industrial Chain Group Co., Ltd was incorporated in the Republic of Seychelles and, under the current laws of the British Virgin Islands, is not subject to income taxes.
Yingxi HK was incorporated in Hong Kong and is subject to Hong Kong income tax at a progressive tax rate of 16.5%. No provision for income taxes in Hong Kong has been made as Yingxi HK had no taxable income for the three months ended December 31, 2023 and 2022.
QYTG and YX were incorporated in the PRC and are subject to the PRC Enterprise Income Tax (EIT) rate is 25%. No provision for income taxes in the PRC has been made as QYTG and YX had no taxable income for the three months ended December 31, 2023 and 2022.
The Company is governed by the Income Tax Laws of the PRC. All Yingxi’s operating companies are subject to progressive EIT rates from 5% to 15% in 2023. The preferential tax rates will be expired at end of year 2023.
The Company’s parent entity, Addentax Group Corp. is a U.S. entity and is subject to the United States federal income tax. No provision for income taxes in the United States has been made as Addentax Group Corp. had no United States taxable income for the three months ended December 31, 2023 and 2022.
Net Income (Loss)
We incurred net loss of approximately $2.6 million for the three months ended December 31, 2023 and a net loss of approximately $0.08 million for the three months ended December 31, 2022. Our basic and diluted loss per share were $0.66 and $0.00 for the three months ended December 31, 2023 and 2022, respectively.
| 10 |
Results of Operations for the nine months ended December 31, 2023 and 2022
The following tables summarize our results of operations for the nine months ended December 31, 2023 and 2022. The table and the discussion below should be read in conjunction with our consolidated financial statements and the notes thereto appearing elsewhere in this report.
Nine Months Ended December 31, | Changes in 2023 | |||||||||||||||||||||||
| 2023 | 2022 | compared to 2022 | ||||||||||||||||||||||
| (In U.S. dollars, except for percentages) | ||||||||||||||||||||||||
| Revenue | $ | 3,856,316 | 100 | % | $ | 6,652,645 | 100.0 | % | $ | (2,796,329 | ) | (42.0 | )% | |||||||||||
| Cost of revenues | (3,054,193 | ) | (79.2 | )% | (5,023,338 | ) | (75.5 | )% | 1,969,145 | 39.2 | % | |||||||||||||
| Gross profit | 802,123 | 20.8 | % | 1,629,307 | 24.5 | % | (827,184 | ) | (50.8 | )% | ||||||||||||||
| Operating expenses | (1,817,596 | ) | (47.1 | )% | (1,606,020 | ) | (24.1 | )% | (211,576 | ) | (13.2 | )% | ||||||||||||
| (Loss) Income from operations | (1,015,473 | ) | (26.3 | )% | 23,287 | 0.4 | % | (1,038,760 | ) | (4460.7 | )% | |||||||||||||
| Other income, net | (357,848 | ) | (9.3 | )% | 93,288 | 1.4 | % | (451,136 | ) | (483.6 | )% | |||||||||||||
| Fair value gain | (172,001 | ) | (4.5 | )% | - | - | (172,001 | ) | - | |||||||||||||||
| Net finance cost | (2,420,935 | ) | (62.8 | )% | 34 | (0.0 | )% | (2,420,969 | ) | 36365.7 | % | |||||||||||||
| Income tax expense | (7,726 | ) | (0.2 | )% | (18,939 | ) | (0.3 | )% | 11,213 | 59.2 | % | |||||||||||||
| Net (loss) income | $ | (3,973,983 | ) | (103.1 | )% | $ | 97,670 | 1.5 | % | $ | (4,071,653 | ) | (4168.8 | )% | ||||||||||
Revenue
Total revenue for the nine months ended December 31, 2023 decreased by approximately $2.8 million, or 42.0%, as compared with the nine months ended December 31, 2022. The decrease was mainly due to the decrease of $0.4 million in logistics services and $2.3 million in property management and subleasing business.
Revenue generated from our garment manufacturing business contributed approximately $0.2 million or 4.5% of our total revenue for the nine months ended December 31, 2023. Revenue generated from garment manufacturing business contributed approximately $0.1 million or 2.1% of our total revenue for the nine months ended December 31, 2022, respectively. The low level of sales was mainly due to factory facilities renewal and repair, remaining factories cannot provide the same capacity as previously. We estimate the capacity will appear to recover at last quarter of for the fiscal year ending 2024.
| 11 |
Revenue generated from our logistics services business contributed approximately $3.4 million or 87.5% of our total revenue for the nine months ended December 31, 2023. Revenue generated from our logistic business contributed approximately $3.8 million or 57.5% of our total revenue for the nine months ended December 31, 2022.
Revenue generated from our property management and subleasing business was $0.3 million or 8.1% of our total revenue for the nine months ended December 31, 2023. The revenue from this business segment was $2.7 million or 40.2% of our total revenue of this business for the nine months ended December 31, 2022.
Cost of revenue
Nine months ended December 31, | Increase (decrease) in | |||||||||||||||||||||||
| 2023 | 2022 | 2023 compared to 2022 | ||||||||||||||||||||||
| (In U.S. dollars, except for percentages) | ||||||||||||||||||||||||
| Net revenue for garment manufacturing | $ | 172,106 | 100.0 | % | $ | 142,010 | 100.0 | % | $ | 30,096 | 21.2 | % | ||||||||||||
| Raw materials | 30,187 | 17.5 | % | 28,323 | 19.9 | % | 1,864 | 6.6 | % | |||||||||||||||
| Labor | 100,097 | 58.2 | % | 73,376 | 51.7 | % | 26,721 | 36.4 | % | |||||||||||||||
| Other and Overhead | 1,389 | 0.8 | % | 4,380 | 3.1 | % | (2,991 | ) | (68.3 | )% | ||||||||||||||
| Total cost of revenue for garment manufacturing | 131,673 | 76.5 | % | 106,079 | 74.7 | % | 25,595 | 24.1 | % | |||||||||||||||
| Gross profit for garment manufacturing | 40,433 | 23.5 | % | 35,931 | 25.3 | % | 4,502 | 12.5 | % | |||||||||||||||
| Net revenue for logistics services | 3,373,670 | 100.0 | % | 3,826,070 | 100.0 | % | (452,400 | ) | (11.8 | )% | ||||||||||||||
| Fuel, toll and other cost of logistics services | 1,496,570 | 44.4 | % | 1,916,957 | 50.1 | % | (420,387 | ) | (21.9 | )% | ||||||||||||||
| Subcontracting fees | 1,181,160 | 35.0 | % | 890,660 | 23.3 | % | 290,500 | 32.6 | % | |||||||||||||||
| Total cost of revenue for logistics services | 2,677,730 | 79.4 | % | 2,807,617 | 73.4 | % | (129,887 | ) | (4.6 | )% | ||||||||||||||
| Gross Profit for logistics services | 695,940 | 20.6 | % | 1,018,453 | 26.6 | % | (322,513 | ) | (31.7 | )% | ||||||||||||||
| Net revenue for property management and subleasing | 310,540 | 100.0 | % | 2,671,379 | 100.0 | % | (2,360,839 | ) | (88.4 | )% | ||||||||||||||
| Total cost of revenue for property management and subleasing | 240,902 | 77.6 | % | 2,099,050 | 78.6 | % | (1,858,148 | ) | (88.5 | )% | ||||||||||||||
| Gross Profit for property management and subleasing | 69,638 | 22.4 | % | 572,329 | 21.4 | % | (502,691 | ) | (87.8 | )% | ||||||||||||||
| Net revenue for supplies corporate and others | $ | - | - | $ | 13,186 | 100.0 | % | |||||||||||||||||
| Other and Overhead | 3,888 | - | 10,592 | 80.3 | % | (6,704 | ) | (63.3 | )% | |||||||||||||||
| Total cost of revenue for corporate and others | 3,888 | - | 10,592 | 80.3 | % | (6,704 | ) | (63.3 | )% | |||||||||||||||
| Gross (loss) income for corporate and others | (3,888 | ) | - | 2,594 | 19.7 | % | (6,482 | ) | (249.9 | ) | ||||||||||||||
| Total cost of revenue | $ | 3,054,193 | 79.2 | % | $ | 5,023,338 | 75.5 | % | $ | (1,969,145 | ) | (39.2 | )% | |||||||||||
| Gross profit | $ | 802,123 | 20.8 | % | $ | 1,629,307 | 24.5 | % | $ | (827,184 | ) | (50.8 | )% | |||||||||||
| 12 |
For our garment manufacturing business, we purchase the majority of our raw materials directly from numerous local fabric and accessories suppliers.
Raw material costs for our garment manufacturing business was approximately 17.5% of our total garment manufacturing business revenue for the nine months ended December 31, 2023, as compared with 19.9% for the nine months ended December 31, 2022. The decrease in percentages was mainly due to the company develop new raw material suppliers..
Labor costs for our garment manufacturing business was approximately 58.2% of our total garment manufacturing business revenue for the nine months ended December 31, 2023, as compared with 51.7% for the nine months ended December 31, 2022. The increase was mainly due to rising of salary.
Overhead and other expenses for our garment manufacturing business accounted for approximately 0.8% of our total garment business revenue for the nine months ended December 31, 2023, as compared with 3.1% of total garment business revenue for the nine months ended December 31, 2022.
For our logistic business, we outsource some of our business to our contractors. The Company relied on a few subcontractors, which the subcontracting fees to our largest contractor represented approximately 39.9% and 25.8% of total cost of revenues for our service segment for the nine months ended December 31, 2023 and 2022, respectively. The increase was attributed to a decrease usage of our own logistics as compared to the subcontractors after the COVID-19 epidemic. We have not experienced any disputes with our subcontractors and we believe we maintain good relationships with our contract logistics services provider.
Fuel, toll and other costs for our service business for the nine months ended December 31, 2023 was approximately $1.5 million as compared with $1.9 million for the nine months ended December 31, 2022. Fuel, toll and other costs for our service business accounted for approximately 44.4% of our total service revenue for the nine months ended December 31, 2023, as compared with 50.1% for the nine months ended December 31, 2022. The decrease was primarily attributable to an increase of usage of subcontractors after the COVID-19 epidemic.
Subcontracting fees for our service business for the nine months ended December 31, 2023 increased approximately 32.6% to $1.2 million from $0.9 million for the nine months ended December 31, 2022. Subcontracting fees accounted for 35.0% and 23.3% of our total service business revenue in the nine months ended December 31, 2023 and 2022, respectively. The increase was primarily attributable a decrease usage of our own logistics as compared to the subcontractors after the COVID-19 epidemic.
| 13 |
For property management and subleasing business, the cost of revenue was mainly the amortization of operating lease assets for the subleasing business.
Gross profit
Garment manufacturing business gross profit for the nine months ended December 31, 2023 was approximately $40,433, as compared with approximately $35,931 for the nine months ended December 31, 2022. Gross profit accounted for 23.5% of our total garment manufacturing business revenue for the nine months ended December 31, 2023, as compared to 25.3% for the nine months ended December 31, 2022.
Gross profit in our logistics services business for the nine months ended December 31, 2023 was approximately $695,940 and gross margin was 20.6%. Gross profit in our logistics services business for the nine months ended December 31, 2022 was approximately $1,018,453 and gross margin was 26.6%. The decrease of gross profit ratio was mainly because the subsidiary PF used more subcontractors to proceed the orders which increase the cost of revenue.
Gross profit in our property management and subleasing business for the nine months ended December 31, 2023 was $69,639, or 22.4% gross margin. It was approximately $572,329, or 21.4% for the nine months ended December 31, 2022. The decrease was due to disposal of DY.
Nine months ended December 31, | Increase (decrease) in | |||||||||||||||||||||||
| 2023 | 2022 | 2023 compared to 2022 | ||||||||||||||||||||||
| (In U.S. dollars, except for percentages) | ||||||||||||||||||||||||
| Gross profit | $ | 802,123 | 100.0 | % | $ | 1,629,307 | 100.0 | % | (827,184 | ) | (50.8 | )% | ||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Selling expenses | (132,533 | ) | (16.5 | )% | (60,155 | ) | (3.7 | )% | (72,378 | ) | (120.3 | )% | ||||||||||||
| General and administrative expenses | (1,685,063 | ) | (210.1 | )% | (1,545,865 | ) | (94.9 | )% | (139,198 | ) | (9.0 | )% | ||||||||||||
| Total | $ | (1,817,596 | ) | (226.6 | )% | $ | (1,606,020 | ) | (98.6 | )% | (211,576 | ) | (13.2 | )% | ||||||||||
| (Loss) Income from operations | $ | (1,015,473 | ) | (126.6 | )% | $ | 23,287 | 1.4 | % | (1,038,760 | ) | (4460.7 | )% | |||||||||||
Selling, General and administrative expenses
Our selling expenses were mainly incurred for our property management and subleasing business. It consisted of $13,857 for garments manufacturing segment and approximately $118,676 for our property management and subleasing business for the nine months ended December 31, 2023. It was $60,155 for property management and subleasing business for the nine months ended December 31, 2022. Selling expenses consisted primarily of advertisement, local transportation, unloading charges and product inspection charges.
Our general and administrative expenses in our garment manufacturing business segment for the nine months ended December 31, 2023 and 2022 was approximately $98,117 and $84,821, respectively. Our general and administrative expenses in our logistics services segment for the nine months ended December 31, 2023 and 2022 was approximately $562,696 and $654,883, respectively. The general and administrative expenses in our property management and subleasing business was approximately $132,336 and $257,351 for the nine months ended December 31, 2023 and 2022, respectively. Our general and administrative expenses in our corporate office for the nine months ended December 31, 2023 and 2022 was approximately $891,914 and $548,810, respectively. General and administrative expenses consisted primarily of administrative salaries, office expense, certain depreciation and amortization charges, repairs and maintenance, legal and professional fees, warehousing costs and other expenses that are not directly attributable to our revenues.
| 14 |
Total general and administrative expenses for the nine months ended December 31, 2023 increased by approximately 9.0% to $1.7 million from $1.5 million for the nine months ended December 31, 2022.
(Loss) Income from operations
Loss from operations for the nine months ended December 31, 2023 was approximately $1.0 million, while income from operations for the nine months ended December 31, 2022 was $23,287. Loss from operations of approximately $71,541 and $48,999 for the nine months ended December 31, 2023 and 2022 was attributed from our garment manufacturing segment, respectively. Income from operations of approximately $132,530 and $363,569 was attributed from our logistics services segment for the nine months ended December 31, 2023 and 2022, respectively. Loss from operations of approximately $181,372 and income of $254,934 for the nine months ended December 31, 2023 and 2022 was attributed from our property management and subleasing business, respectively. We incurred expenses from operations in corporate office of approximately $895,090 and $546,217 for the nine months ended December 31, 2023 and 2022, respectively. The increase of expenses from our corporate office was mainly due to increase in legal and professional fees to comply with the SEC accounting, disclosure and reporting requirements.
Income Tax Expenses
Income tax expense for the nine months ended December 31, 2023 and 2022 was approximately $7,726 and $18,939, respectively. The Company operates in the PRC and files tax returns in the PRC jurisdictions.
Yingxi Industrial Chain Group Co., Ltd was incorporated in the Republic of Seychelles and, under the current laws of the British Virgin Islands, is not subject to income taxes.
Yingxi HK was incorporated in Hong Kong and is subject to Hong Kong income tax at a progressive tax rate of 16.5%. No provision for income taxes in Hong Kong has been made as Yingxi HK had no taxable income for the nine months ended December 31, 2023 and 2022.
QYTG and YX were incorporated in the PRC and are subject to the PRC Enterprise Income Tax (EIT) rate is 25%. No provision for income taxes in the PRC has been made as QYTG and YX had no taxable income for the nine months ended December 31, 2023 and 2022.
The Company is governed by the Income Tax Laws of the PRC. All Yingxi’s operating companies are subject to progressive EIT rates from 5% to 15% in 2023. The preferential tax rates will be expired at end of year 2023.
The Company’s parent entity, Addentax Group Corp. is a U.S. entity and is subject to the United States federal income tax. No provision for income taxes in the United States has been made as Addentax Group Corp. had no United States taxable income for the nine months ended December 31, 2023 and 2022.
Net Income (Loss)
We incurred net loss of approximately $4.0 million for the nine months ended December 31, 2023 and a net income of approximately $0.1 million for the nine months ended December 31, 2022. Our basic and diluted earnings per share were ($1.0) and $0.00 for the nine months ended December 31, 2023 and 2022, respectively.
Summary of cash flows
Summary cash flows information for the nine months ended December 31, 2023 and 2022 is as follow:
Nine months ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| (In U.S. dollars) | ||||||||
| Net cash used in operating activities | $ | (1,521,802 | ) | $ | (1,528,118 | ) | ||
| Net cash provided by (used in) investing activities | $ | 90,863 | $ | (17,500,000 | ) | |||
| Net cash provided by financing activities | $ | 1,332,470 | $ | 19,240,977 | ||||
Net cash used in operating activities in the nine months ended December 31, 2023 was $1.5 million, nearly the same as that of the nine months ended December 31, 2022.
Net cash provided by investing activities in the nine months ended December 31, 2023 was consist of $0.1 million purchase of property and equipment and long-term prepayment and $0.2 million cash from acquired investee. Net cash used in investing activities in the nine months ended December 31, 2022 was for investment in debt securities.
Net cash provided by financing activities for the nine months ended December 31, 2023 included $3.9 million released from restricted cash, proceeds from bank borrowings of $0.2 million and net repayment of $2.7 million to related parties. Net cash provided by financing activities for the nine months ended December 31, 2022 included $20.2 million proceeds from its public offering and $1.0 million net repayment to related parties.
Financial Condition, Liquidity and Capital Resources
As of December 31, 2023, we had cash on hand of approximately $0.5 million, total current assets of approximately $30.3 million and current liabilities of approximately $5.4 million. We presently finance our operations from revenue, fund raising from our initial public offering proceeds and capital contributions from our chief executive officer, Mr. Hong Zhida (the “CEO”).
In the event that the Company requires additional funding to finance the growth of the Company’s current and expected future operations as well as to achieve our strategic objectives, the CEO has indicated the intent and ability to provide additional equity financing.
Foreign Currency Translation Risk
Our operations are located in China, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility in foreign exchange rates between the U.S. dollar and the Chinese Renminbi (“RMB”). All of our sales are in RMB. In last year, RMB depreciated against the U.S. dollar. As of December 31, 2023, the market foreign exchange rate was RMB 7.10 to one U.S. dollar. Our financial statements are translated into U.S. dollars using the closing rate method. The balance sheet items are translated into U.S. dollars using the exchange rates at the respective balance sheet dates. The capital and various reserves are translated at historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for the period. All translation adjustments are included in accumulated other comprehensive income in the statement of equity. The foreign currency translation gain (loss) for the nine months ended December 31, 2023 and 2022 was approximately $0.05 million and $0.2 million respectively.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements (as that term is defined in Item 303(a)(4)(ii) of Regulation S-K) as of December 31, 2023 that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable to smaller reporting companies.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of December 31, 2023. Based on the evaluation of these disclosure controls and procedures, and in light of the material weaknesses found in our internal controls over financial reporting, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective.
Changes in Internal Controls over Financial Reporting
There was no change in the Company’s internal control over financial reporting period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We are not presently a party to any legal proceedings that in the opinion of our management, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition, or cash flows.
Item 1A. Risk Factors
As a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act), we are not required to provide the information called for by this Item 1A.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
There is no other information required to be disclosed under this item, which was not previously disclosed.
Item 6. Exhibits
Exhibit Number |
Description | |
| (31) | Rule 13a-14 (d)/15d-14d) Certifications | |
| 31.1* | Section 302 Certification by the Principal Executive Officer | |
| 31.2* | Section 302 Certification by the Principal Financial Officer and Principal Accounting Officer | |
| (32) | Section 1350 Certifications | |
| 32.1* | Section 906 Certification by the Principal Executive Officer | |
| 32.2* | Section 906 Certification by the Principal Financial Officer and Principal Accounting Officer | |
| 101* | Interactive Data File | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
*Filed herewith.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Addentax Group Corp. | ||
| Date: February 14, 2024 | By: | /s/ Hong Zhida |
| Hong Zhida | ||
| President, Chief Executive Officer and Director, | ||
| (Principal Executive Officer) | ||
| Date: February 14, 2024 | By: | /s/ Huang Chao |
| Huang Chao | ||
| Chief Financial Officer and Treasurer | ||
| (Principal Financial and Accounting Officer) |
| 18 |
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Hong Zhida, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Addentax Group Corp.; | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| 4. | I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; |
| 5. | I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): | |
| (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | ||
| (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: February 14, 2024
| /s/ Hong Zhida | |
| Hong Zhida | |
| President, Chief Executive Officer, Secretary and Director | |
| (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Huang Chao, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Addentax Group Corp.; | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| 4. | I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; |
| 5. | I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): | |
| (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | ||
| (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: February 14, 2024
| /s/ Huang Chao | |
| Huang | |
| Chao Chief Financial Officer and Treasurer | |
| (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, Hong Zhida, Chief Executive Officer, of Addentax Group Corp., hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | the quarterly report on Form 10-Q of Addentax Group Corp. for the period ended December 31, 2023 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
| (2) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Addentax Group Corp. |
| Dated: February 14, 2024 | |
| /s/ Hong Zhida | |
| Hong Zhida | |
| President, Chief Executive Officer, Secretary and Director | |
| (Principal Executive Officer) |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Addentax Group Corp. and will be retained by Addentax Group Corp. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, Huang Chao, Chief Financial Officer, of Addentax Group Corp., hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | the quarterly report on Form 10-Q of Addentax Group Corp. for the period ended December 31, 2023 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
| (2) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Addentax Group Corp. |
| Dated: February 14, 2024 | |
| /s/ Huang Chao | |
| Huang Chao | |
| Chief Financial Officer, Treasurer | |
| (Principal Financial Officer) |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Addentax Group Corp. and will be retained by Addentax Group Corp. and furnished to the Securities and Exchange Commission or its staff upon request.