Addentax Group Corp S-1/A, filed Jan 22, 2021
Addentax Group Corp. (ATXG)
As filed with the Securities and Exchange Commission on January 22, 2021
Registration No. 333-230943
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1/A
(Amendment No. 6)
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
ADDENTAX GROUP CORP.
(Exact name of registrant as specified in its charter)
| Nevada | 3990 | 35-2521028 | ||
(State or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification Number) |
Kingkey 100, Block A, Room 4805
Luohu District, Shenzhen City, China 518000
+(86) 755 8696 1405
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)
Business Filings Incorporated
701 S Carson Street, Suite 200
Carson City, Nevada 89701
Tel: (608) 827-5300
(Name, address, including zip code, and telephone number,
including area code, of agent for service of process)
Copies To:
Mitchell S. Nussbaum, Esq. Lawrence Venick, Esq. Loeb & Loeb LLP 345 Park Avenue New York, NY 10154 Telephone: (212) 407-4000 |
Fang
Liu, Esq. |
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
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,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer [ ] | Accelerated filer [ ] |
| Non-accelerated filer [X] | Smaller reporting company [X] |
| Emerging growth company [X] |
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 to Section 7(a)(2)(B) of the Securities Act. [ ]
CALCULATION OF REGISTRATION FEE
| Title of Each Class of Security Being Registered | Amount to be Registered |
Proposed Maximum Offering Price | Proposed Maximum Aggregate Offering Price (1) | Amount of Registration Fee | ||||||||||||
| Common Stock, $0.001 par value (2) | 5,750,000 | 5.00 | $ | 28,750,000 | $ | 3,136.63 | ||||||||||
| Common Stock, $0.001 par value (3) | 987,000 |
$ | 7.00 | $ | 6,909,000 |
$ | 753.77 |
|||||||||
| Underwriter Warrants (4) (5) | — | — | — | — | ||||||||||||
| Common Stock Underlying Underwriter Warrants (6) | 500,000 | 6.25 | $ | 3,125,000 | $ | 340.93 | ||||||||||
| Total | — | — | $ | 38,784,000 |
$ | 4,231.33 |
(7) | |||||||||
| (1) | Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. |
| (2) | Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price, includes 750,000 shares of Common Stock issuable upon exercise of a 45-day option granted to the Underwriter to cover over-allotments, if any. |
| (3) | This Registration Statement also covers the resale under a separate resale prospectus (the “Resale Prospectus”) by selling stockholders of the Registrant of up to 987,000 shares of common stock previously issued to the selling stockholders as named in the Resale Prospectus. Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended, using the average of the high and low prices of the Registrant’s common stock reported by the OTCQB Marketplace on January 21, 2021. |
| (4) | No fee is required pursuant to Rule 457(g) under the Securities Act. Resales of the underwriter warrants on a delayed or continuous basis pursuant to Rule 415 under the Securities Act are registered hereby. |
| (5) | We have agreed to issue to the underwriter warrants to purchase the number of common stock (the “Underwriter Warrants”) in the aggregate equal to 10% of the common stock sold at closing of the offering, not including any shares that may be sold as result of the Underwriter exercising the over-allotment option. The Underwriter Warrants will be exercisable from time to time from 6 months after the closing of the offering and will expire after five years from the effective date of this registration statement, in whole or in part, but may not be transferred nor may the shares underlying the warrants be sold until 180 days from the beginning on the date of commencement of sales of the offering. The exercise price of the Underwriter Warrants is equal to 125% the public offering price per share in the offering. |
| (6) | Resales of shares of common stock issuable upon exercise of the underwriter warrants on a delayed or continuous basis pursuant to Rule 415 under the Securities Act are also registered hereby. |
| (7) | Previously paid. |
The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission acting pursuant to said Section 8(a), may determine.
EXPLANATORY NOTE
This Registration Statement contains two prospectuses, as set forth below.
| ● | Public Offering Prospectus. A prospectus to be used for the public offering of 5,000,000 shares of common stock of the Registrant (the “Public Offering Prospectus”) through the underwriter named on the cover page of the Public Offering Prospectus. |
| ● | Resale Prospectus. A prospectus to be used for the resale by the selling stockholders set forth therein of 987,000 shares of common stock of the Registrant (the “Resale Prospectus”). |
The Resale Prospectus is substantively identical to the Public Offering Prospectus, except for the following principal points:
| ● | they contain different outside and inside front covers and back covers; |
| ● | they contain different Offering sections in the Prospectus Summary section beginning on page 2; |
| ● | they contain different Use of Proceeds sections on page 21; |
| ● | a Selling Stockholder section is included in the Resale Prospectus; |
| ● | the Plan of Distribution section from the Public Offering Prospectus on page 61 is deleted from the Resale Prospectus and a Selling Stockholder Plan of Distribution is inserted in its place; and |
| ● | the Legal Matters section in the Resale Prospectus on page 67 deletes the reference to counsel for the underwriter. |
The Registrant has included in this Registration Statement a set of alternate pages after the back cover page of the Public Offering Prospectus (the “Alternate Pages”) to reflect the foregoing differences in the Resale Prospectus as compared to the Public Offering Prospectus. The Public Offering Prospectus will exclude the Alternate Pages and will be used for the public offering by the Registrant. The Resale Prospectus will be substantively identical to the Public Offering Prospectus except for the addition or substitution of the Alternate Pages and will be used for the resale offering by the selling stockholders.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JANUARY 22, 2021
PRELIMINARY PROSPECTUS
Addentax Group Corp.
5,000,000 Shares of Common Stock
This is the initial public offering of Addentax Group Corp. We are offering 5,000,000 shares of common stock, par value $0.001 per share on a firm commitment basis. We currently expect the public offering price to be $5.00 per share.
We are an “emerging growth company”, as that term is used in the Jumpstart Our Business Startups Act of 2012, and will be subject to reduced public company reporting requirements.
We are a reporting company under Section 15(d) of the Securities Exchange Act of 1934, as amended. Our common stock is currently quoted on the OTCQB Marketplace (the “OTCQB”) under the symbol “ATXG.” The closing price for our common stock on January 21, 2021, was $7.00 per share. There is a limited public trading market for our common stock. We have applied to list our common stock on the Nasdaq Capital Market under the symbol “ATXG.”
Investing in our securities involves risks. You should carefully consider the risk factors beginning on page 8 of this prospectus and set forth in the documents incorporated by reference herein before making any decision to invest in our securities.
| Per share | Total | |||||||
| Public offering price | $ | 5.00 | $ | 25,000,000 | ||||
| Underwriting discounts and commissions (1) | $ | 0.375 | $ | 1,875,000 | ||||
| Offering proceeds to us, before expenses | $ | 4.625 | $ | 23,125,000 | ||||
| (1) | Does not include additional items of compensation payable to Network 1 Financial Securities, Inc., the underwriter, which includes warrants to purchase 10% of the aggregate number of shares issued in this offering, with an exercise price equal to 125% of the price per share sold in this offering. We have also agreed to reimburse the underwriter for certain accountable expenses incurred by them. See “Underwriting.” |
We have also granted a 45-day option to the underwriter to purchase up to 750,000 additional shares of common stock solely to cover over-allotments, if any.
The underwriter expects to deliver our shares of common stock to purchasers in this offering on or about [●], 2021.
The date of this prospectus is , 2021
TABLE OF CONTENTS
This prospectus is part of a registration statement that we filed with the Securities and Exchange Commission (the “SEC” or the “Commission”). You should rely only on the information contained in this prospectus or any supplement or amendment hereto. Neither we, nor the underwriter have authorized any person to provide you with different information. Neither we, nor the underwriter are offering to sell, or seeking an offer to buy, our common stock in any jurisdiction where such offer or sale is not permitted. You should assume that the information contained in this prospectus and any supplement or amendment hereto is accurate only as of their respective dates, regardless of the time of delivery of this prospectus or of any sale of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date. On February 27, 2019, we effected a 1-for-20 reverse split on our shares of common stock and the proportional reduction of our total authorized shares of common stock from 506,920,000 shares to 25,346,004 shares.
You should read this prospectus, together with additional information described under “Where You Can Find More Information”, beginning on page 61, before making an investment decision.
The market data and certain other statistical information used throughout this prospectus is based on independent industry publications, reports by market research firms or other independent sources that we believe to be reliable sources. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. We are responsible for all of the disclosure contained in this prospectus, and we believe these industry publications and third-party research, surveys and studies are reliable. While we are not aware of any misstatements regarding any third-party information presented in this prospectus, their estimates, in particular, as they relate to projections, involve numerous assumptions, are subject to risks and uncertainties, and are subject to change based on various factors. Some market and other data included herein, as well as the data of competitors as they relate to Addentax Group Corp., is also based on our good faith estimates.
Unless the context otherwise requires, all references in this prospectus to:
| ● | “we,” “us,” “our,” the “Registrant”, the “Company,” and “Addentax” refer to Addentax Group Corp. and its subsidiaries; | |
| ● | “Exchange Act” refers to the Securities Exchange Act of 1934, as amended; | |
| ● | “SEC” or the “Commission” refers to the United States Securities and Exchange Commission; | |
| ● | “Securities Act” refers to the Securities Act of 1933, as amended; | |
| ● | “China,” “Chinese” or the “PRC” refers to the People’s Republic of China, excluding, for the purposes of this prospectus only, Hong Kong, Macau and Taiwan; | |
| ● | all references to “RMB” or “Chinese Yuan” is to the legal currency of the People’s Republic of China; and | |
| ● | all references to “U.S. dollars,” “dollars,” “USD” or “$” are to the legal currency of the United States; |
Unless otherwise noted, all translations from Chinese Yuan to U.S. dollars using the exchange rate refers to the exchange rate quoted on http://www.oanda.com on March 31, 2020, which was RMB 7.10 to USD$1.00. We make no representation that the Chinese Yuan amounts referred to in this prospectus could have been or could be converted into U.S. dollars at any particular rate or at all.
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This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our securities, you should carefully read this entire prospectus, especially the risks of investing in our securities as discussed under “Risk Factors” and the financial statements and notes thereto herein. The following summary is qualified in its entirety by the detailed information appearing elsewhere in this prospectus.
Overview
Our Business
We are a garment manufacturer and logistics service provider based in China. We are listed on the OTCQB under the symbol of “ATXG”. We classified our businesses into two revenue segments for the fiscal year ended 2020 and in previous fiscal years: (i) garment manufacturing and (ii) logistics services. During the fiscal year 2021, we developed a new business segment: epidemic prevention supplies.
Our garment manufacturing business consists of sales made principally to wholesalers located in China. 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 delivery requirements for our customers. We conduct our garment manufacturing operations through five indirect wholly owned subsidiaries of the Company, namely Dongguan Heng Sheng Wei Garments Co., Ltd (“HSW”), Shantou Chenghai Dai Tou Garments Co., Ltd (“DT”), Dongguan Yingxi Daying Commercial Co., Ltd (“DY”), Dongguan Yushang Clothing Co., Ltd (“YS”), and Shantou Yi Bai Yi Garments Co., Ltd (“YBY”) which are located in the Guangdong province, China.
Our logistics services business consists of delivery and courier services covering approximately 79 cities in approximately seven provinces and two 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 two wholly owned subsidiaries, namely Shenzhen Xin Kuai Jie Transportation Co., Ltd (“XKJ”) and Shenzhen Hua Peng Fa Logistic Co., Ltd (“HPF”), which are located in the Guangdong province, China.
Our epidemic prevention supplies business consists of manufacturing and distribution of epidemic prevention products and reselling of epidemic prevention supplies purchased from third parties in both domestic and overseas markets. We conduct our manufacturing of the epidemic prevention products in YS. We conduct the trading of epidemic prevention suppliers through Addentax Group Corp. (“ATXG”) and Shenzhen Qianhai Yingxi Industrial Chain Services Co., Ltd (“YX”), an indirect wholly owned subsidiary of the Company.
Business Objectives
Garment Manufacturing Business
We believe the strength of our garment manufacturing business segment is mainly due to our consistent emphasis on exceptional quality and timely delivery of our products. The primary business objective for our garment manufacturing business segment is to expand our customer base and improve our profit.
Logistics Services Business
The business objective and future plan for our logistics services business segment is to establish an efficient logistic system and to build a nationwide delivery and courier network in China. As of September 30, 2020, we provide logistics services to over 79 cities in approximately seven provinces and two municipalities. We expect to develop an additional 20 logistics points in existing serving cities and improve the Company’s profit for the fiscal year ending 2021.
Epidemic Prevention Supplies Business
The primary business objective of our epidemic prevention supplies business segment is to take the advantage of our resources in supply chain from our garment manufacturing business segment to facilitate and maximize the production, distribution and resale of epidemic prevention supplies, in order to increase our revenue and improve our net profit.
Competitive Strengths
We believe we have the following competitive strengths:
Cost-effective production. We have adopted a vertical integration production process. We produce garments in our own production facilities and employ our in-house transport teams to deliver garments to our customers. This one-stop service optimizes production efficiency and saves costs by lowering the cost per unit, thereby achieving economies of scale.
Stringent quality control process. As of September 30, 2020, we had 7 employees in the production department that are responsible for conducting our quality control process. We implement a stringent quality control process which monitors various stages of our garment manufacturing business, including sampling checks of semi-finished products and finished products. We prepare inspection reports to address the quality problems and make recommendations to improve the quality of our products. During final product inspection, we pay special attention to the measurements, workmanship, ironing and packaging of our products to help best ensure that the quality of our products comply with the specifications, standards and requirements of our customers.
Strong design capabilities. Our design team works closely with our customers to understand their needs and make recommendations to them. Our design team also conducts market research and attend industry exhibitions to understand the latest market trends. As of September 30, 2020, our design team consisted of five members.
Extensive delivery network. Our logistics services business has nine routes and covers 79 cities in approximately seven provinces and two municipalities in the PRC.
Our Strategies
Key elements of our business and growth strategies include the following:
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Sales of raw materials. We intend to enter into exclusive agreements with textile and garment suppliers in Southeast China to be their exclusive agent and supply their textiles and garments to our customers. To execute this plan, we intend to set up several retailers for the sales of textiles and garments to retail customers and supply the textiles and garments exclusively to various high-end fashion brands.
Develop our own brands. We intend to develop our own brands that focus on fast fashion with teenagers being our primary target customers. We plan to adopt a low cost strategy at the early stage and improve the quality of our products after increasing our market share. We are in the process of registering a trademark for our own brand and intend to start our advertising campaign after the registration of this trademark. We plan to distribute our products in different channels, including our own retailers, co-operative retailers and franchisees.
Expand our delivery network. As of September 30, 2020, we provide logistics service to over 79 cities in approximately seven provinces and two municipalities. We expect to develop an additional 20 logistics points in existing serving cities and improve the Company’s profit for the fiscal year ending 2021.
Develop our logistics services management application. We intend to develop our own mobile application and integrate with to replace our old internal system. We expect this mobile application to improve our routes optimization, courier goods tracking, security of courier goods , booking time required by our customers, and customer care.
Develop international logistics services and warehousing services. We intend to develop international logistics services for customers located all over the world and international warehousing services.
Our Corporate Structure
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Risks Related to Our Business
Our ability to implement our business strategy is subject to numerous risks and uncertainties that you should be aware of before making an investment decision. We face many risks inherent in our business and our industry generally. You should carefully consider all of the information set forth in this prospectus and, in particular, the information under the heading “Risk Factors,” prior to making an investment in our common stock. These risks include, among others, the following:
| ● | Our success depends on our customer’s ability to market and sell their products manufactured by us. | |
| ● | Our future expansion plans are subject to uncertainties and risks. | |
| ● | Future price increases in raw materials or changes in the supply of raw materials may materially and adversely affect our business, financial condition and results of operations. | |
| ● | Future increases in cost of epidemic prevention supplies or changes in the demand and supply may materially and adversely affect our business, financial condition and results of operations. | |
| ● | Any labor shortages, increased labor costs or other factors affecting labor supply for our production materials may materially and adversely affect our business operations. | |
| ● | If we are unable to attract additional customers and clients to purchase our services (and future products we may develop or sell) it will have a negative effect on our ability to generate the revenue. |
Corporate Information
Addentax Group Corp. was incorporated in the State of Nevada on October 28, 2014. We have a fiscal year-end of March 31. Our principal executive offices are located at Kingkey 100, Block A, Room 4805, Luohu District, Shenzhen City, China 518000 and our telephone number is + (86) 755 8696 1405. We maintain a website at www.addentax.com. The information contained on our website is not, and should not be interpreted to be, a part of this prospectus.
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| Shares of common stock offered by us: | 5,000,000 shares of common stock, or 5,750,000 shares if the underwriter exercises the over-allotment option in full. |
| Number of shares of common stock outstanding after this offering: (1) | 31,093,004 shares of common stock will be outstanding after this offering is completed, 31,843,004 shares if the underwriter exercises the over-allotment option in full. |
| Over-allotment option: | We have granted the underwriter the right to purchase up to 750,000 additional shares of common stock from us at the public offering price less the underwriting discount within 45 days from the date of this prospectus to cover over-allotments. |
Underwriter’s warrants: |
We will issue to Network 1 Financial Securities, Inc., upon closing of this offering, compensation warrants, or the Underwriter’s Warrants, entitling the underwriter to purchase 10% of the aggregate number of shares of common stock issued in this offering, excluding shares issued pursuant to the exercise of the over-allotment option, at an exercise price of $6.25 per share. The Underwriter’s Warrants will have a term of five years and may be exercised commencing 180 days after the date of closing. The Underwriter’s Warrants may be exercised on a cashless basis. |
| Use of proceeds: | Our proceeds from this offering are expected to be approximately $25,000,000, before payment of underwriter commissions and other expenses. We intend to use the proceeds from this offering for the purchase and sale of raw materials and developing our own brands, including working capital and general corporate purposes. See “Use of Proceeds” on page 21. |
| Proposed Nasdaq Capital Market symbol: | We have applied to list our common stock on the Nasdaq Capital Market under the symbol “ATXG”. There can be no assurance that our application will be approved. The closing of this offering is contingent upon the successful listing of our common stock on the Nasdaq Capital Market. |
Lock-Up Agreements: |
“See “Plan of Distribution” for more information. |
| Risk factors: | Investing in our common stock is highly speculative and involves a significant degree of risk. As an investor you should be able to bear a complete loss of your investment. You should carefully consider the information set forth in the “Risk Factors” section beginning on page 8. |
| OTCQB Market Symbol | “ATXG”. |
| (1) | The number of shares of our common stock to be outstanding after this offering is based on 26,093,004 shares outstanding as of January 22, 2021. |
Unless otherwise indicated, all information in this prospectus gives effect to a 1-for-20 reverse stock split of our common stock effected on February 27, 2019.
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SUMMARY FINANCIAL AND OTHER DATA
The following tables set forth our summary historical financial data for the periods presented. The following summary financial data for the years ended March 31, 2020 and 2019 are derived from our audited financial statements appearing elsewhere in this prospectus. The following summary financial data for the six-month periods ended September 30, 2020 and 2019 and the selected balance sheet data as of September 30, 2020 are derived from our unaudited financial statements appearing elsewhere in this prospectus.
This summary financial data should be read together with the historical financial statements and related notes to those statements, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this prospectus.
| As of March 31, | As of September 30, | |||||||||||
| 2019 | 2020 | 2020 | ||||||||||
| Balance Sheet Data: | ||||||||||||
| Cash and cash equivalents | $ | 277,264 | $ | 531,681 | $ | 1,178,394 | ||||||
| Prepayments, Deposits and Other Receivable | 2,525,148 | 5,469,561 | 2,907,053 | |||||||||
| Total Assets | 3,496,843 | 8,421,978 | 6,653,494 | |||||||||
| Total Current Liabilities | 5,674,393 | 10,096,528 | 8,129,385 | |||||||||
| Total Liabilities | 5,674,393 | 11,488,702 | 9,329,994 | |||||||||
| Total Stockholders’ equity (deficit) | (2,177,550 | ) | (3,066,724 | ) | (2,676,500 | ) | ||||||
| Years
Ended March 31, | Six Months Ended September 30, | |||||||||||||||
| 2019 | 2020 | 2019 | 2020 | |||||||||||||
| Statements of Operations Data: | ||||||||||||||||
| Revenues | $ | 10,026,920 | $ | 10,172,379 | $ | 4,154,494 | $ | 17,602,512 | ||||||||
| Gross (Loss) Profit | 1,282,694 | 1,385,361 | 678,851 | (2,223,451 | ) | |||||||||||
| Total operating expenses | (1,965,821 | ) | (2,249,679 | ) | (1,341,960 | ) | (1,081,038 | ) | ||||||||
| Loss from Operations | (683,127 | ) | (864,318 | ) | (663,109 | ) | (3,304,489 | ) | ||||||||
| Loss before provision for income taxes | (685,774 | ) | (964,547 | ) | (686,209 | ) | (3,249,213 | ) | ||||||||
| Net Loss | $ | (694,329 | ) | $ | (980,617 | ) | (689,273 | ) | (3,256,625 | ) | ||||||
| Net loss per common share | ||||||||||||||||
| Basic and diluted | $ | (0.03 | ) | $ | (0.04 | ) | $ | (0.03 | ) | $ | (0.13 | ) | ||||
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This prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act and the Private Securities Litigation Reform Act of 1995, as amended. These forward-looking statements that are based on our management’s belief and assumptions and on information currently available to our management. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors” and elsewhere in this prospectus. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance. You should read this prospectus and those documents which we have filed with the SEC as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from any future results expressed or implied by these forward-looking statements.
The forward-looking statements in this prospectus represent our views as of the date of this prospectus. We anticipate that subsequent events and developments may cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should therefore not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this prospectus.
You should also consider carefully the statements under “Risk Factors” and other sections of this prospectus, which address additional facts that could cause our actual results to differ from those set forth in the forward-looking statements. We caution investors not to place significant reliance on the forward-looking statements contained in this prospectus. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise, except as otherwise required by law.
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You should carefully consider the risks described below and elsewhere in this prospectus, which could materially and adversely affect our business, results of operations or financial condition. Our business faces significant risks and the risks described below may not be the only risks we face. Additional risks not presently known to us or that we currently believe are immaterial may materially affect our business, results of operations, or financial condition. If any of these risks occur, the trading price of our common stock could decline, and you may lose all or part of your investment. You should consider our business and prospects in light of the challenges we face, including the ones discussed in this section. In the event that any of the events described in the risk factors below occur, it could have a material adverse effect on our operations and cash flow and cause the value of our securities to decline in value or become worthless.
Risks Associated with Our Company
Our success depends on our customer’s ability to market and sell their products manufactured by us.
All of our customers in our garment manufacturing business are garment wholesalers and retailers. Consequently, our business and results of operations are directly affected by the demand of their end customers for their products supplied by us. Drastic changes in consumer preferences are beyond our control and will affect the demand for certain products supplied by us. We may not be able to anticipate and respond to such changes in consumer preferences in a timely manner. If the sales of our customers’ products decrease or do not grow as we expect, our customers may decrease the volume or purchase price of their orders, which could materially and adversely affect our business, financial condition and results of operations.
Our future expansion plans are subject to uncertainties and risks.
We have set out our future business plans in the “Business – Business Strategies” section in this prospectus. The implementation of such future plans requires us to effectively manage our sales, procurement, new logistics points and other aspects of our operations. If we fail to effectively and efficiently implement our future plans, we may not be successful in achieving desirable and profitable results. Even if we effectively and efficiently implement our future plans, there may be other unexpected events or factors that prevent us from achieving the desirable and profitable results from the implementation of our future plans, such as changes in our ability to comply with local rules and regulations or any delays or difficulties in obtaining the necessary licenses and approvals from local governments. Our business, financial condition, results of operations and growth prospects may be materially and adversely affected if our future expansion plans fail to achieve positive results.
If we are unable to create brand influence, we may face difficulties in attracting new business partners and clients.
Our brand is still being nurtured. It is of critical importance that we create and develop brand awareness in our industry in order to attract new clients and business partners. Our major competitors have built well-known brands and continue to increase their influence. Our failure to create and develop brand awareness for any reason may result in a material adverse effect on our business, operational results, and financial position.
Our ability to adequately protect our trade names, trademarks and patents could have an impact on our brand images and ability to penetrate new markets.
We believe that our trade names, trademarks and patents are important assets and an essential element of our strategy. We have applied the registration of these trade names, trademarks and patents in China and Hong Kong, and these registrations are currently pending approval from the corresponding departments. There can be no assurance that we will obtain such registrations or that the registrations we obtain will prevent the imitation of our products or infringement of our intellectual property rights by others. In particular, the laws of certain foreign countries may not protect proprietary rights to the same extent as the laws of the U.S. If any third-party copies our products or our stores in a manner that projects lesser quality or carries a negative connotation, it could have a material adverse effect on our brand image and reputation as well as our results of operations, financial condition and cash flows.
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We may be impacted by our ability to adequately source, distribute and sell merchandise and other materials in China.
We face a variety of other risks generally associated with doing business in China. For example:
| ● | political instability, significant health hazards, environmental hazards or natural disasters which could negatively affect international economies, financial markets and business activity; |
| ● | imposition of new or retaliatory trade duties, sanctions or taxes and other charges on imports or exports; |
| ● | evolving, new or complex legal and regulatory matters; |
| ● | volatility in currency exchange rates; |
| ● | local business practice and political issues (including issues relating to compliance with domestic or international labor standards) which may result in adverse publicity or threatened or actual adverse consumer actions, including boycotts; |
| ● | potential delays or disruptions in shipping and transportation and related pricing impacts; |
| ● | disruption due to labor disputes; and |
| ● | changing expectations regarding product safety due to new legislation or other factors. |
We also rely upon third-party transportation providers for certain of our product shipments, including shipments to and from our distribution centers, to our customers. Our utilization of these delivery services for shipments is subject to risks, including increases in labor costs and fuel prices, which would increase our shipping costs, and associate strikes and inclement weather, which may impact our transportation providers’ ability to provide delivery services that adequately meet our shipping needs.
Future price increases in raw materials or changes in the supply of raw materials may materially and adversely affect our business, financial condition and results of operations.
The purchase of raw materials accounted for a substantial amount of our total purchases. The price of finished fabric and yarns can be volatile and affected by factors such as weather, industry demand and supply. We cannot assure you that we can fully pass on the increased cost in raw materials to our customers. Future price increases in raw materials or changes in the supply of raw materials may materially and adversely affect our business, financial condition and results of operations.
Future increases in cost of epidemic prevention supplies or changes in the demand and supply may materially and adversely affect our business, financial condition and results of operations.
The purchase of epidemic prevention supplies accounted for a substantial amount of our total purchases for the fiscal year 2021. The price of finished face masks and nitrile gloves can be volatile and affected by factors such as COVID-19 outbreak condition, weather, industry demand and supply. We cannot assure you that we can fully pass on the increased cost to our customers. Future increases in cost of epidemic prevention supplies or changes in the demand and supply may materially and adversely affect our business, financial condition and results of operations.
The company’s revenue increased in the first six months of fiscal 2021 due to a new business segment of epidemic prevention supplies business. The company made a significant net loss despite of its overall revenue increase and the addition of a new business segment. During first six months of fiscal 2021, we accepted a nitrile glove purchase order from a customer. However, due to significant price increase in nitrile glove due to the COVID-19 driven demand surge and the shortage of raw materials, the Company incurred a significant loss during this period.
Any labor shortages, increased labor costs or other factors affecting labor supply for our production materials may materially and adversely affect our business operations.
We rely on skilled workers to a significant extent as our production process in our garment manufacturing business is labor intensive in nature. Our business performance relies on the steady supply of relatively low cost labor in the PRC. There is no guarantee that our supply of labor will not be disrupted or that our labor costs will not increase. If we fail to retain our existing labor resources and/or recruit sufficient labor in a timely manner, we may not be able to accommodate sudden increases in demand for our products.
Labor costs are affected by the demand for and supply of labor and economic factors, such as the inflation rate and costs of living. Labor costs may further increase in the future due to a shortage of skilled labor and growing industry demands. The failure to identify and recruit replacement staff immediately following the unexpected loss of skilled workers could reduce our competitiveness. In addition, we expect continued increases in labor costs in the PRC. In these circumstances, our business, financial condition, results of operations and prospects could be materially and adversely affected.
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We may be impacted by our ability to attract, develop and retain qualified associates and manage labor-related costs.
We believe our competitive advantage is providing a positive, engaging and satisfying experience for each customer, which requires us to have highly trained and engaged associates. Our success depends in part upon our ability to attract, develop and retain a sufficient number of qualified associates, including skill intensive labor. The turnover rate in the textile industry is generally high, and qualified individuals of the requisite caliber and number needed to fill these positions may be in short supply in our operations. Competition for such qualified individuals or changes in labor laws could require us to incur higher labor costs. Our inability to recruit a sufficient number of qualified individuals in the future may delay planned delivery of finished products or affect the speed with which we expand. Delayed deliveries, significant increases in associate turnover rates or significant increases in labor-related costs could have a material adverse effect on our results of operations, financial condition and cash flows.
We may be impacted by our vendors’ ability to manufacture and deliver raw materials in a timely manner, meet quality standards and comply with applicable laws and regulations.
We purchase raw materials from third-party vendors. Factors outside our control, such as production or shipping delays or quality problems, could disrupt merchandise deliveries and result in lost sales, cancellation charges or excessive markdowns.
In addition, quality problems could result in a product liability judgment or a widespread product recall that may negatively impact our sales and profitability for a period of time depending on product availability, competition reaction and consumer attitudes. Even if the product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertions could adversely impact our reputation with existing and potential customers and our brand image.
Our business could also suffer if our third-party vendors fail to comply with applicable laws and regulations. While our internal and vendor’s operating guidelines promote ethical business practices and our associates visit and monitor the operations of our third-party vendors, we do not control these vendors or their practices. The violation of labor, environmental or other laws by third-party vendors used by us, or the divergence of a third-party vendor’s or partner’s labor or environmental practices from those generally accepted as ethical or appropriate, could interrupt or otherwise disrupt the shipment of finished products to us or damage our reputation.
Large and similar sized competitors could steal our market share by offering lower prices.
We endeavor to provide the highest possible quality service to our clients at the best possible price, however, large and similar sized competitors might steal some of our market share by offering lower prices, causing us to lose some of our clients. If this happens, we might not be able to generate adequate revenues and may soon find ourselves lacking the capital that is required to continue operations.
If we are unable to attract additional customers and clients to purchase our services (and future products we may develop or sell), it will have a negative effect on our ability to generate the revenue.
We currently have a limited number of clients and customers. We have identified additional potential clients, but we cannot guarantee that we will be able to secure them as clients. Even if we obtain additional clients and customers, there is no guarantee that we will be able to develop products and/or services that our clients and customers will want to purchase. If we are unable to attract enough customers and clients to purchase services (and any products we may develop or sell) it will have a negative effect on our ability to generate the revenue that is necessary to operate or expand our business. The lack of sufficient revenue will have a negative effect on the ability of our company to continue operations and could force us to cease operations.
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We may be adversely affected by the performance of third-party contractors.
We engaged third-party contractors to carry out logistics services. We endeavor to engage third-party companies with a strong reputation and track record, high performance reliability and adequate financial resources. However, any such third-party contractor may still fail to provide satisfactory logistics services at the level of quality or within the timeframe required by us or our customers. While we generally require our logistics contractors to fully reimburse us for any losses arising from delay in delivery or non-delivery, our results of operation and financial condition may be adversely affected if any of the losses are not borne by them. If the performance of any third-party contractor is not satisfactory, we may need to replace such contractor or take other remedial actions, which could adversely affect the cost structure and delivery schedule of our products and thus have a negative impact on our reputation, financial position and business operations. In addition, as we are expanding our business into other geographical locations in the PRC, there may be a shortage of third-party contractors that meet our quality standards and other selection criteria in such locations and, as a result, we may not be able to engage a sufficient number of high-quality third-party contractors in a timely manner, which may adversely affect our delivery schedules and delivery costs and hence our business, results of operations and financial conditions.
Our insurance may not be sufficient.
We carry insurance that we consider adequate in regard to the nature of the covered risks and the costs of coverage. We are not fully insured against all possible risks, nor are all such risks insurable.
Our business depends on the continued contributions made by Mr. Hong Zhida, as our key executive officer, the loss of who may result in a severe impediment to our business.
Our success is dependent upon the continued contributions made by our CEO and President, Mr. Hong Zhida. We rely on his expertise in business operations when we are developing new products and services. The Company has no “Key Man” insurance to cover the resulting losses in the event that any of our officer or directors should die or resign.
If Mr. Hong Zhida cannot serve the Company or is no longer willing to do so, the Company may not be able to find alternatives in a timely manner or at all. This would likely result in a severe damage to our business operations and would have an adverse material impact on our financial position and operational results. To continue as a viable operation, the Company may have to recruit and train replacement personnel at a higher cost.
Additionally, if Mr. Hong Zhida joins our competitors or develops similar businesses that are in competition with our Company, our business may also be negatively impacted.
Our future success depends on our ability to attract and retain qualified long-term staff to fill management, technology, sales, marketing, and customer services positions. We have a great need for qualified talent, but we may not be successful in attracting, hiring, developing, and retaining the talent required for our success.
We may be adversely impacted by certain compliance or legal matters.
We, along with third parties we do business with, are subject to complex compliance and litigation risks. Actions filed against us from time to time include commercial, tort, intellectual property, customer, employment, wage and hour, data privacy, securities, anti-corruption and other claims, including purported class action lawsuits. The cost of defending against these types of claims against us or the ultimate resolution of such claims, whether by settlement or adverse court decision, may harm our business. Further, potential claimants may be encouraged to bring lawsuits based on a settlement from us or adverse court decisions against us. We cannot currently assess the likely outcome of such suits, but if the outcome were negative, it could have a material adverse effect on our reputation, results of operations, financial condition and cash flows.
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In addition, we may be impacted by litigation trends, including class action lawsuits involving consumers and shareholders, that could have a material adverse effect on our reputation, the market price of our common stock, results of operations, financial condition and cash flows.
Failure to make adequate contributions to various employee benefits plans as required by PRC regulations may subject us to penalties.
Companies operating in China are required to participate in various government sponsored employee benefit plans, including certain social insurance, housing funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain percentages of salaries, including bonuses and allowances, of employees up to a maximum amount specified by the local government from time to time at locations where they operate their businesses. The requirement of employee benefit plans has not been implemented consistently by the local governments in China given the different levels of economic development in different locations. As of September 30, 2020, we have made adequate employee benefit payments in strict compliance with the relevant PRC regulations for and on behalf of our employees.
There is no guarantee that we will not fail in making adequate employee benefit payments in strict compliance with applicable PRC labor related laws and regulations in the future. Our failure in making contributions to various employee benefits plans in strict compliance with applicable PRC labor related laws and regulations may subject us to late payment penalties, and we could also be required to make up the contributions for these plans as well as to pay late fees and fines. If we are subject to late fees or fines in relation to the underpaid employee benefits, our financial condition and results of operations may be adversely affected.
A recent joint statement by the SEC and the Public Company Accounting Oversight Board (United States), or the “PCAOB,” proposed rule changes submitted by Nasdaq, and the newly enacted “Holding Foreign Companies Accountable Act” all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to our offering.
On April 21, 2020, the SEC and the PCAOB released a joint statement highlighting the risks associated with investing in companies based in or having substantial operations in emerging markets including China. The joint statement emphasized the risks associated with lack of access for the PCAOB to inspect auditors and audit work papers in China and higher risks of fraud in emerging markets.
On May 18, 2020, Nasdaq filed three proposals with the SEC to (i) apply a minimum offering size requirement for companies primarily operating in a “Restrictive Market,” (ii) adopt a new requirement relating to the qualification of management or the board of directors for Restrictive Market companies, and (iii) apply additional and more stringent criteria to an applicant or listed company based on the qualifications of the company’s auditor.
On December 18, 2020, the “Holding Foreign Companies Accountable Act” was signed by previous President of the United States and became law. This legislation requires certain issuers of securities to establish that they are not owned or controlled by a foreign government. Specifically, an issuer must make this certification if the PCAOB is unable to audit specified reports because the issuer has retained a foreign public accounting firm not subject to inspection by the PCAOB. Furthermore, if the PCAOB is unable to inspect the issuer's public accounting firm for three consecutive years, the issuer's securities are banned from trade on a national exchange or through other methods.
The lack of access to the PCAOB inspection in China prevents the PCAOB from fully evaluating audits and quality control procedures of the auditors based in China. As a result, investors may be deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of these accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB inspections, which could cause investors and potential investors in our Ordinary Shares to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.
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Our auditor, BF Borgers CPA PC, is an independent registered public accounting firm with the PCAOB, and as an auditor of publicly traded companies in the U.S., is subject to laws in the U.S. pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Our auditor has been inspected by the PCAOB on a regular basis. If we were to be found out of compliance with the existing or future guidelines discussed above, it may impair or halt the ability to trade our shares on Nasdaq or other applicable trading market within the US.
There are uncertainties under the PRC Securities Law relating to the procedures and requisite timing for the U.S. securities regulatory agencies to conduct investigations and collect evidence within the territory of the PRC.
On December 28, 2019, the newly amended Securities Law of the PRC (the “PRC Securities Law”) was promulgated, which became effective on March 1, 2020. According to Article 177 of the PRC Securities Law (“Article 177”), the securities regulatory authority of the State Council may establish a regulatory cooperation mechanism with securities regulatory authorities of another country or region for the implementation of cross-border supervision and administration. Article 177 further provides that overseas securities regulatory authorities shall not engage in activities pertaining to investigations or evidence collection directly conducted within the territories of the PRC, and that no Chinese entities or individuals shall provide documents and information in connection with securities business activities to any organizations and/or persons aboard without the prior consent of the securities regulatory authority of the State Council and the competent departments of the State Council. As of the date of this prospectus, we are not aware of any implementing rules or regulations which have been published regarding application of Article 177.
As advised by our PRC counsel, Article 177 is only applicable where the activities of overseas authorities constitute a direct investigation or evidence collection by such authorities within the territory of the PRC. Our principal business operation is conducted in the PRC. In the event that the U.S. securities regulatory agencies carry out an investigation on us such as an enforcement action by the Department of Justice, the SEC or other authorities, such agencies’ activities will constitute conducting an investigation or collecting evidence directly within the territory of the PRC and accordingly fall within the scope of Article 177. In that case, the U.S. securities regulatory agencies may have to consider establishing cross-border cooperation with the securities regulatory authority of the PRC by way of judicial assistance, diplomatic channels or establishing a regulatory cooperation mechanism with the securities regulatory authority of the PRC. However, there is no assurance that the U.S. securities regulatory agencies will succeed in establishing such cross-border cooperation in this particular case and/or establish such cooperation in a timely manner.
Furthermore, as Article 177 is a recently promulgated provision and, as the date of this prospectus, there have not been implementing rules or regulations regarding the application of Article 177, it remains unclear as to how it will be interpreted, implemented or applied by the Chinese Securities Regulatory Commission or other relevant government authorities. As such, there are uncertainties as to the procedures and requisite timing for the U.S. securities regulatory agencies to conduct investigations and collect evidence within the territory of the PRC. If the U.S. securities regulatory agencies are unable to conduct such investigations, there exists a risk that they may determine to suspend or de-register our registration with the SEC and may also delist our securities from Nasdaq or other applicable trading market within the US.
We are exposed to liabilities relating to environmental protection and safety laws and regulations.
Our operations are subject to comprehensive and frequently changing laws and regulations relating to environmental protection and health and safety. The discharge of waste and pollutants from our manufacturing operations into the environment may give rise to liabilities that may require us to incur costs to remedy such discharge. If we violate such laws or regulations, we may be required to implement corrective actions and could be subject to civil or criminal fines or penalties or other sanctions.
However, we cannot assure you that any environmental laws adopted in the future will not materially increase our operating costs and other expenses. We cannot assure you that we will not have to make significant capital or operating expenditures in the future in order to comply with existing or new laws and regulations or that we will comply with applicable environmental laws at all times. Such violations or liability could have a material adverse effect on our business, financial condition and results of operations.
If our employees do not maintain a strong work ethic and comply with our code of ethics, including our confidentiality requirements, their actions may negatively influence our business and reputation.
Employees with good professional ethics are important for any company’s development. An employee might, either intentionally or unintentionally, disclose confidential information about our Company or our clients and particularly unscrupulous employees might endeavor to sell material information to industry competitors. Furthermore, our employees will develop relationships with our business partners and clients, and may acquire information that could be used to harm their business interests. If this should happen, our partners and clients might lose faith in our company. While we can never eliminate these ethical risks entirely, we will attempt to reduce the likelihood of breaches of trust and mitigate their impacts of it by hiring highly professional employees and establishing strong internal information management systems.
We also plan to establish a series of policies to reduce the likelihood of such events.
However, in the event that any employee discloses confidential information about our Company or our clients or sells material information to industry competitors, it could have a material adverse effect on our reputation, operations and cash flow.
We face risks associated with future Chinese regulations.
Currently there are no government regulations in China regarding our type of services. The Chinese government encourages small-medium sized traditional industry companies to conduct business model transformation and technology updates, which may help companies gain more competitive advantages in international markets.
Other than the required adherence to general business laws and regulatory disclosures, our services are not affected by any specific additional Chinese government regulations. However, this does not preclude the possibility that China may institute regulations that will make it difficult or impossible for us to operate successfully, if at all, in the future. If that occurs, we may have to focus our business on companies located outside China. This could cause our results of operations to be materially adversely effected, reduce our revenues and cause the value of our securities to decline in value.
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We may require additional financing in the future and our operations could be curtailed if we are unable to obtain required additional financing when needed.
We may need to obtain additional debt or equity financing to fund future capital expenditures. While we do not anticipate seeking additional financing in the immediate future, any additional equity may result in dilution to the holders of our outstanding shares of capital stock. Additional debt financing may include conditions that would restrict our freedom to operate our business, such as conditions that:
| ● | limit our ability to pay dividends or require us to seek consent for the payment of dividends; | |
| ● | increase our vulnerability to general adverse economic and industry conditions; | |
| ● | require us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow to fund capital expenditures, working capital and other general corporate purposes; and | |
| ● | limit our flexibility in planning for, or reacting to, changes in our business and our industry. |
We cannot guarantee that we will be able to obtain any additional financing on terms that are acceptable to us, or at all.
Natural disasters and other events beyond our control could materially adversely affect us.
Natural disasters or other catastrophic events may cause damage or disruption to our operations, international commerce and the global economy, and thus could have a strong negative effect on us. Our business operations are subject to interruption by natural disasters, fire, power shortages, pandemics and other events beyond our control. This may result in delivery delays, malfunctioning of facilities or shutdown of logistic points. Such events could make it difficult or impossible for us to deliver our products and services to our customers and could decrease demand for our services. In the past, there was no significant disruption of operation at our production facilities and logistic points. However, we could not assure you that the production facilities and logistic points will always operate normally in the future.
We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
General Risks Associated with Business Operations in China
You may have difficulty enforcing judgments against us.
We are a Nevada corporation and most of our assets are and will be located outside of the United States. Almost all of our operations will be conducted in China. In addition, our officers and directors are nationals and residents of a country other than the United States. All of their assets are located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon them. It may also be difficult for you to enforce in U.S. courts judgments on the civil liability provisions of the U.S. federal securities laws against us and our officer and director, since he is not a resident in the United States. In addition, there is uncertainty as to whether the courts of China would recognize or enforce judgments of U.S. courts.
Foreign exchange fluctuations may affect our business.
We accept the payment for services in Chinese Yuan (CNY), Hong Kong Dollars (HKD), and U.S. Dollars (USD). Therefore, foreign exchange fluctuations may influence our business in unpredictable ways.
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The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC government. For instance, in August 2015, the People’s Bank of China, or PBOC, changed the way it calculates the mid-point price of Renminbi against the U.S. dollar, requiring the market-makers who submit for reference rates to consider the previous day’s closing spot rate, foreign-exchange demand and supply as well as changes in major currency rates. In fiscal year 2019 and 2020, the value of the Renminbi depreciated by approximately 6.9% and 5.5% against the U.S. dollar, respectively. From the fiscal year ended March 31, 2020 through the end of September 2020, the value of the Renminbi appreciated by approximately 4.1% against the U.S. dollar. It is difficult to predict how market forces or PRC or U.S. government policy, including any interest rate increases by the Federal Reserve, may impact the exchange rate between the Renminbi and the U.S. dollar in the future. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, including from the U.S. government, which has threatened to label China as a “currency manipulator,” which could result in greater fluctuation of the Renminbi against the U.S. dollar.
A substantial percentage of our revenues and costs are denominated in Renminbi, and a significant portion of our assets are also denominated in Renminbi. We are a holding company and we rely on dividends, loans and other distributions on equity paid by our operating subsidiaries in China. Any significant fluctuations in the value of the Renminbi may materially and adversely affect our liquidity and cash flows. Appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount we would receive. Conversely, to the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive.
Inflation could pose a risk to our business.
Inflation is an important factor that must be considered as we move forward. A change in the rate of inflation could influence the profits that we generate from our business. When the rate of inflation rises, the operational costs of running our company would increase, such as labor costs, raw materials and public utilities, affecting our ability to provide our services at competitive prices. An increase in the rate of inflation would force our clients to search for other service providers, causing us to lose business and revenue.
We face the risk that changes in the policies of the PRC government could have a significant impact upon the business we may be able to conduct in the PRC and the profitability of such business.
The PRC’s economy is in a transition from a planned economy to a market oriented economy subject to five-year and annual plans adopted by the central government that set national economic development goals. Policies of the PRC government can have significant effects on the economic conditions of the PRC. The PRC government has confirmed that economic development will follow the model of a market economy. Under this direction, we believe that the PRC will continue to strengthen its economic and trading relationships with foreign countries and business development in the PRC will follow market forces. While we believe that this trend will continue, we cannot assure you that this will be the case. A change in policies by the PRC government could adversely affect our interests by, among other factors: changes in laws, regulations or the interpretation thereof, confiscatory taxation, restrictions on currency conversion, imports or sources of supplies, or the expropriation or nationalization of private enterprises. Although the PRC government has been pursuing economic reform policies for more than two decades, we cannot assure you that the government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting the PRC’s political, economic and social environment.
There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations.
Most of our operations are conducted in the PRC, and are governed by PRC laws, rules and regulations. Our PRC subsidiaries are subject to laws, rules and regulations applicable to foreign investment in China. The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions may be cited for reference but have limited precedential value.
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In 1979, the PRC government began to promulgate a comprehensive system of laws, rules and regulations governing economic matters in general. The overall effect of legislation over the past four decades has significantly enhanced the protections afforded to various forms of foreign investment in China. However, China has not developed a fully integrated legal system, and recently enacted laws, rules and regulations may not sufficiently cover all aspects of economic activities in China or may be subject to significant degree of interpretation by PRC regulatory agencies and courts. In particular, because these laws, rules and regulations are relatively new, and because of the limited number of published decisions and the non-precedential nature of these decisions, and because the laws, rules and regulations often give the relevant regulator significant discretion in how to enforce them, the interpretation and enforcement of these laws, rules and regulations involve uncertainties and can be inconsistent and unpredictable. Therefore, it is possible that our existing operations may be found not to be in full compliance with relevant laws and regulations in the future. In addition, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all, and which may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until after the occurrence of the violation.
Any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into and could materially and adversely affect our business, financial condition and results of operations.
PRC regulations regarding acquisitions impose significant regulatory approval and review requirements, which could make it more difficult for us to pursue growth through acquisitions.
Under the PRC Anti-Monopoly Law, companies undertaking acquisitions relating to businesses in China must notify the anti-monopoly enforcement agency, in advance of any transaction where the parties’ revenues in the China market exceed certain thresholds and the buyer would obtain control of, or decisive influence over, the other party. In addition, on August 8, 2006, six PRC regulatory agencies, including the MOFCOM, the State-Owned Assets Supervision and Administration Commission, the State Administration of Taxation, the SAIC, the China Securities Regulatory Commission, or the CSRC, and the State Administration of Foreign Exchange, or SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, which came into effect on September 8, 2006 and was amended on June 22, 2009. Under the M&A Rules, the approval of MOFCOM must be obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire domestic companies affiliated with such PRC enterprises or residents. Applicable PRC laws, rules and regulations also require certain merger and acquisition transactions to be subject to security review.
PRC regulations relating to investments in offshore companies by PRC residents may subject our PRC-resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries or limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits.
SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the former circular commonly known as “SAFE Circular 75” promulgated by SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special purpose vehicle.” SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Moreover, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls.
| -16- |
We have notified substantial beneficial owners of shares of common stock who we know are PRC residents of their filing obligation, and pursuant to SAFE Circular 37, we have periodically filed and updated the above-mentioned foreign exchange registration on behalf of certain employee shareholders who we know are PRC residents. However, we may not be aware of the identities of all of our beneficial owners who are PRC residents. We do not have control over our beneficial owners and cannot assure you that all of our PRC-resident beneficial owners will comply with SAFE Circular 37 and subsequent implementation rules. The failure of our beneficial owners who are PRC residents to register or amend their SAFE registrations in a timely manner pursuant to SAFE Circular 37 and subsequent implementation rules, or the failure of future beneficial owners of our company who are PRC residents to comply with the registration procedures set forth in SAFE Circular 37 and subsequent implementation rules, may subject the beneficial owners or our PRC subsidiaries to fines and legal sanctions. On February 13, 2015, SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13, which became effective on June 1, 2015. Pursuant to SAFE Notice 13, entities and individuals are required to apply for foreign exchange registration of foreign direct investment and overseas direct investment, including those required under the SAFE Circular 37, with designated domestic banks, instead of SAFE. The designated domestic banks will directly review the applications and conduct the registration.
Furthermore, since it is unclear how those new SAFE regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant PRC government authorities, we cannot predict how these regulations will affect our business operations or future strategy. Failure to register or comply with relevant requirements may also limit our ability to contribute additional capital to our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to our company. These risks may have a material adverse effect on our business, financial condition and results of operations.
We may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we may therefore be subject to PRC income tax on our global income.
Under the PRC Enterprise Income Tax Law and its implementing rules, both of which came into effect on January 1, 2008, enterprises established under the laws of jurisdictions outside of China with “de facto management bodies” located in China may be considered PRC tax resident enterprises for tax purposes and may be subject to the PRC enterprise income tax at the rate of 25% on their global income. “De facto management body” refers to a managing body that exercises substantive and overall management and control over the production and business, personnel, accounting books and assets of an enterprise. The State Administration of Taxation issued the Notice Regarding the Determination of Chinese-Controlled Offshore-Incorporated Enterprises as PRC Tax Resident Enterprises on the basis of de facto management bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. Although Circular 82 only applies to offshore enterprises controlled by PRC enterprises, not those controlled by foreign enterprises or individuals, the determining criteria set forth in Circular 82 may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises. If we were to be considered a PRC resident enterprise, we would be subject to PRC enterprise income tax at the rate of 25% on our global income. In such case, our profitability and cash flow may be materially reduced as a result of our global income being taxed under the Enterprise Income Tax Law. We believe that none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.”
Restrictions on currency exchange may limit our ability to utilize our PRC revenue effectively.
Substantially all of our revenue is denominated in Renminbi. The Renminbi is currently convertible under the “current account,” which includes dividends, trade and service-related foreign exchange transactions, but requires approval from or registration with appropriate government authorities or designated banks under the “capital account,” which includes foreign direct investment and loans, including loans we may secure from our onshore subsidiaries or variable interest entities. Currently, our PRC subsidiaries, which are wholly-foreign owned enterprises, may purchase foreign currency for settlement of “current account transactions,” including payment of dividends to us, without the approval of SAFE by complying with certain procedural requirements. However, the relevant PRC governmental authorities may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions.
| -17- |
Since 2016, PRC governmental authorities have imposed more stringent restrictions on outbound capital flows, including heightened scrutiny over “irrational” overseas investments for certain industries, as well as over four kinds of “abnormal” offshore investments, which are:
● investments through enterprises established for only a few months without substantive operation;
● investments with amounts far exceeding the registered capital of onshore parent and not supported by its business performance shown on financial statements;
● investments in targets which are unrelated to onshore parent’s main business; and
● investments with abnormal sources of Renminbi funding suspected to be involved in illegal transfer of assets or illegal operation of underground banking.
On January 26, 2017, SAFE promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing Genuineness and Compliance Verification, which tightened the authenticity and compliance verification of cross-border transactions and cross-border capital flow, including requiring banks to verify board resolutions, tax filing forms and audited financial statements before wiring foreign invested enterprises’ foreign exchange dividend distribution of over US$50,000. In addition, the Outbound Investment Sensitive Industry Catalogue (2018) lists certain sensitive industries that are subject to NDRC pre-approval requirements prior to remitting investment funds offshore, which subjects us to increased approval requirements and restrictions with respect to our overseas investment activity. Since a significant amount of our PRC revenue is denominated in Renminbi, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in Renminbi to fund our business activities outside of the PRC, make investments, service any debt we may incur outside of China or pay dividends in foreign currencies to our shareholders.
The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the PRC.
We are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under the Securities Act and the Exchange Act. Our SEC reports and other disclosure and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review by China Securities Regulatory Commission, a PRC regulator that is responsible for oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has done any review of us, our SEC reports, other filings or any of our other public pronouncements.
Introduction of new laws or changes to existing laws by the PRC government may adversely affect our business.
The PRC legal system is a codified legal system made up of written laws, regulations, circulars, administrative directives and internal guidelines. Unlike common law jurisdictions like the U.S., decided cases (which may be taken as reference) do not form part of the legal structure of the PRC and thus have no binding effect on subsequent cases with similar issues and fact patterns. Furthermore, in line with its transformation from a centrally-planned economy to a more free market-oriented economy, the PRC government is still in the process of developing a comprehensive set of laws and regulations. As the legal system in the PRC is still evolving, laws and regulations or the interpretation of the same may be subject to further changes. For example, the PRC government may impose restrictions on the amount of service fees that may be payable by municipal governments to wastewater and sludge treatment service providers. Also, the PRC central and municipal governments may impose more stringent environmental regulations which would affect our ability to comply with, or our costs to comply with, such regulations. Such changes, if implemented, may adversely affect our business operations and may reduce our profitability.
| -18- |
Risks Related to this Offering and our Common Stock
Prior to this offering, we had a limited public market for our shares of common stock and you may not be able to resell our shares at or above the price you paid, or at all.
Prior to this offering, there was a limited public market for our common stock in the OTCQB. We cannot assure you that an active public market for our common stock will develop or that the market price of our shares will not decline below the public offering price. The public offering price of our shares may not be indicative of prices that will prevail in the trading market following the offering.
Future sales of substantial amounts of the shares of common stock by existing shareholders could adversely affect the price of our common stock.
If our existing shareholders sell substantial amounts of the shares following this offering, the market price of our common stock could fall. Such sales by our existing shareholders might make it more difficult for us to issue new equity or equity-related securities in the future at a time and place we deem appropriate. Up to 5,000,000 shares of common stock offered in this offering will be eligible for immediate resale in the public market without restrictions. All remaining shares, which are currently held by our existing shareholders, may be sold in the public market in the future subject to the lock-up agreements and the restrictions contained in Rule 144 under the Securities Act. If any existing shareholders sell a substantial number of shares, the prevailing market price for our shares could be adversely affected.
The market price of our shares is likely to be highly volatile and subject to wide fluctuations in response to factors such as:
| ● | variations in our actual and perceived operating results; |
| ● | news regarding gains or losses of customers or partners by us or our competitors; |
| ● | news regarding gains or losses of key personnel by us or our competitors; |
| ● | announcements of competitive developments, acquisitions or strategic alliances in our industry by us or our competitors; |
| ● | changes in earnings estimates or buy/sell recommendations by financial analysts; |
| ● | potential litigation; |
| ● | the imposition of fines or penalties related to our activities in the PRC and failure to comply with applicable rules and regulations; |
| ● | general market conditions or other developments affecting us or our industry; and |
| ● | the operating and stock price performance of other companies, other industries and other events or factors beyond our control. |
In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of the shares.
| -19- |
We may never be able to pay dividends and are unlikely to do so.
To date, we have not paid, nor do we intend to pay in the foreseeable future, dividends on our common stock, even if we become profitable. Earnings, if any, are expected to be used to advance our activities and for working capital and general corporate purposes, rather than to make distributions to stockholders. Since we are not in a financial position to pay dividends on our common stock and future dividends are not presently being contemplated, investors are advised that return on investment in our common stock is restricted to an appreciation in the share price. The potential or likelihood of an increase in share price is uncertain.
In addition, under Nevada law, we may only pay dividends subject to our ability to service our debts as they become due and provided that our assets will exceed our liabilities after the dividend. Our ability to pay dividends will therefore depend on our ability to generate sufficient profits. Further, because of the various rules applicable to our operations in China and the regulations on foreign investments as well as the applicable tax law, we may be subject to further limitations on our ability to declare and pay dividends to our shareholders.
Shareholders may be diluted significantly through our efforts to obtain financing and satisfy obligations through the issuance of securities.
Wherever possible, our board of directors will attempt to use non-cash consideration to satisfy obligations. In many instances, we believe that the non-cash consideration will consist of shares of our common stock, warrants to purchase shares of our common stock or other securities. Our board of directors has authority, without action or vote of the shareholders, to issue all or part of the authorized but unissued shares of common stock or warrants to purchase such shares of common stock. In addition, we may attempt to raise capital by selling shares of our common stock, possibly at a discount to market in the future. These actions will result in dilution of the ownership interests of existing shareholders and may further dilute common stock book value, and that dilution may be material. Such issuances may also serve to enhance existing management’s ability to maintain control of us, because the shares may be issued to parties or entities committed to supporting existing management.
In the event that our shares are traded, they may trade under $5.00 per share and thus will be a penny stock. Trading in penny stocks has many restrictions and these restrictions could severely affect the price and liquidity of our shares.
In the event that our shares are traded, and our stock trades below $5.00 per share, our stock would be known as a “penny stock”, which is subject to various regulations involving disclosures to be given to you prior to the purchase of any penny stock. The SEC has adopted regulations which generally define a “penny stock” to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. Depending on market fluctuations, our common stock could be considered to be a “penny stock”. A penny stock is subject to rules that impose additional sales practice requirements on broker/dealers who sell these securities to persons other than established Members and accredited investors. For transactions covered by these rules, the broker/dealer must make a special suitability determination for the purchase of these securities. In addition, he must receive the purchaser’s written consent to the transaction prior to the purchase. He must also provide certain written disclosures to the purchaser. Consequently, the “penny stock” rules may restrict the ability of broker/dealers to sell our securities, and may negatively affect the ability of holders of shares of our common stock to resell them. These disclosures require you to acknowledge that you understand the risks associated with buying penny stocks and that you can absorb the loss of your entire investment. Penny stocks are low priced securities that do not have a very high trading volume. Consequently, the price of the stock is often volatile and you may not be able to buy or sell the stock when you want to.
We will have discretion in applying a portion of the net proceeds of this offering and may not use these proceeds in ways that will enhance the market value of our common stock.
Our management will have considerable discretion in the application of the proceeds received by us from this offering. Such proceeds may be used to purchase and sell raw materials, grow our brand and for working capital and general corporate purposes. You will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. The net proceeds may be used for corporate purposes that do not improve our profitability or increase our common stock price. The net proceeds from this offering may also be placed in investments that do not produce income or that lose value. Future issuances of capital stock may depress the trading price of our common stock. Any issuance of shares of our common stock after this offering could dilute the interests of our existing stockholders and could substantially decrease the trading price of our common stock. We may issue additional shares of common stock in the future for a number of reasons, including to finance our operations and business strategy (including in connection with acquisitions, strategic collaborations or other transactions).
Sales of a substantial number of shares of our common stock in the public market could depress the market price of our common stock, and impair our ability to raise capital through the sale of additional equity securities. We cannot predict the effect that future sales of our common stock or other equity-related securities would have on the market price of our common stock.
| -20- |
After deducting the estimated underwriting commissions and estimated offering expenses payable by us, we expect to receive net proceeds of $22,174,451 from this offering. We anticipate that the proceeds will be applied as follows:
| Planned Actions | Amount | |||
| Working capital and general corporate purposes | $ | 6,052,337 | ||
| Fund existing businesses operation (garment manufacturing and logistic) | 2,000,000 | |||
| Expansion of garment manufacturing business | - | |||
| Branding and marketing | 3,026,168 | |||
| Retailer set-up | 1,008,722 | |||
| Expansion of logistics services business | - | |||
| Expand delivery network | 1,008,722 | |||
| Establish warehouse | 1,008,722 | |||
| Research and development | 1,008,722 | |||
| Marketing | 3,026,168 | |||
| Expansion of epidemic prevention supplies business | - | |||
| Lab and factory set-up | 1,008,722 | |||
| Research and development | 3,026,168 | |||
| Offering expenses | 575,549 | |||
| Underwriting commissions and expenses | 2,250,000 | |||
| TOTAL | $ | 25,000,000 | ||
The amount and timing of these expenditures will vary depending on a number of factors, including the amount of cash generated by our operations and the rate of growth, if any, of our business.
Although we may use a portion of the proceeds for the acquisition of, or investment in, companies, technologies, products or assets that complement our business, we have no present understandings, commitments or agreements to enter into any acquisitions or make any investments. We cannot assure you that we will make any acquisitions or investments in the future.
| -21- |
The following table sets forth our capitalization as of September 30, 2020:
| ● | On an actual basis; and | |
| ● | On a pro forma, as adjusted basis to give effect to the sale of the shares of common stock by us in this offering at the public offering price of $5.00 per share, which is set forth on the cover page of this prospectus, and after deducting the estimated underwriter commissions and estimated offering expenses payable by us. |
You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included elsewhere in this prospectus.
| September 30, 2020 | ||||||||
| Actual | Pro Forma | |||||||
| (unaudited) | (unaudited) | |||||||
| Cash and cash equivalents | $ | 1,178,394 | $ | 23,352,845 | ||||
| Accounts receivable, net | 1,338,787 | 1,338,787 | ||||||
| Inventories | 634,901 | 634,901 | ||||||
| Other receivables | 215,566 | 215,566 | ||||||
| Advances to suppliers | 717,799 | 717,799 | ||||||
| Total current assets | 4,085,447 | 26,259,898 | ||||||
| Plant and equipment, net | 934,223 | 934,223 | ||||||
| Lease right of use asset | 1,633,824 | 1,633,824 |
||||||
| Total non-current assets | 2,568,047 | 2,568,047 | ||||||
| Total Assets | 6,653,494 | 28,827,945 |
||||||
| Total Current Liabilities | 8,129,385 | 8,129,385 | ||||||
| Total Non-current Liabilities | 1,200,609 | 1,200,609 | ||||||
| Total Liabilities | 9,329,994 | 9,329,994 | ||||||
| Stockholders’ Equity: | ||||||||
| Common stock, $.001 par value, 50,000,000 shares authorized; 26,093,004 shares issued and outstanding, actual; 31,093,004 shares issued and outstanding, pro forma | 26,093 | 31,093 | ||||||
| Additional paid-in capital | 3,795,303 | 25,964,754 |
||||||
| Accumulated deficits | (6,489,747 | ) | (6,489,747 | ) | ||||
| Statutory reserve | 23,514 | 23,514 | ||||||
| Accumulated other comprehensive income | (31,663 | ) | (31,663 | ) | ||||
| Total stockholders’ (deficit) equity | (2,676,500 | ) | 19,497,951 | |||||
| Total Liabilities and stockholders’ equity | 6,653,494 | 28,827,945 | ||||||
| -22- |
If you invest in our common stock, your interest will be diluted immediately to the extent of the difference between the public offering price per share you will pay in this offering and the pro forma as adjusted net tangible book value per share of our common stock after this offering. Our net tangible book value as of September 30, 2020 was ($2,676,500), or ($0.10) per share of common stock. Our pro forma net tangible book value per share set forth below represents our total tangible assets less total liabilities, divided by the number of shares of our common stock outstanding on September 30, 2020.
If the shares are sold at the public offering price of $5.00 per share, which is set forth on the cover page of this prospectus, after deducting the estimated underwriter commissions and offering expenses payable by us, the pro forma as adjusted net tangible book value as of September 30, 2020 would have been $19,497,951, or $0.63 per share. This represents an immediate increase in net tangible book value to existing shareholders of $0.73 per share. The public offering price per share will significantly exceed the net tangible book value per share. Accordingly, new investors who purchase shares of common stock in this offering will suffer an immediate dilution of their investment of $4.37 per share. The following table illustrates this per share dilution to the new investors purchasing shares of common stock in this offering:
| Offering(1) | Full Over- allotment Post-offering(2) | |||||||
| Assumed offering price per share | $ | 5.00 | $ | 5.00 | ||||
| Net tangible book value per share as of September 30, 2020 | $ | (0.10 | ) | $ | (0.10 | ) | ||
| Increase in net tangible book value per share after this offering | $ | 0.73 | $ | 0.71 | ||||
| Net tangible book value per common stock after the offering | $ | 0.63 | $ | 0.61 | ||||
| Dilution per common stock to new investors | $ | 4.37 | $ | 4.39 | ||||
| (1) | Assumes gross proceeds from offering of 5,000,000 shares. |
| (2) | Assumes gross proceeds from offering of 5,750,000 shares, if over-allotment option is exercised in full. |
A $1.00 increase (decrease) in the public offering price of $5.00 per share would increase (decrease) the pro forma net tangible book value by $4,550,000, the pro forma net tangible book value per share after this offering by $0.14 per share and the dilution in pro forma net tangible book value per share to investors in this offering by $0.86 per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriter commissions and estimated offering expenses payable by us.
| -23- |
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is currently quoted on the OTCQB under the symbol “ATXG.”
Trading in stocks quoted on the OTCQB is often thin and is characterized by wide fluctuations in trading prices due to many factors that may have little to do with a company’s operations or business prospects. We cannot assure you that there will be a market for our common stock in the future.
We received our trading symbol on September 12, 2016 and were first quoted on September 12, 2016 but no shares were traded until December 12, 2016.
The following table sets forth the high and low trading prices of one share of our common stock for each fiscal quarter over the past two fiscal years, and April 1, 2019 to the date of this prospectus. The quotations provided are for the over the counter market, which reflect interdealer prices without retail mark-up, mark-down or commissions, and may not represent actual transactions. Our common stock trades on a limited, sporadic and volatile basis. These high and low bid prices per share of common stock have been adjusted to give effect to the 1-for-20 reverse stock split of our common stock effected on February 27, 2019.
| Fiscal Year 2021 | High Bid | Low Bid | ||||||
| First Quarter | $ | 7.00 | $ | 7.00 | ||||
| Second Quarter | $ | 7.00 | $ | 7.00 | ||||
| Third Quarter | $ | 7.00 | $ | 7.00 | ||||
| Fourth Quarter (through January 21, 2021) | $ | 7.00 | $ | 7.00 | ||||
| Fiscal Year 2020 | High Bid | Low Bid | ||||||
| First Quarter | $ | 89.75 | $ | 89.75 | ||||
| Second Quarter | $ | 89.75 | $ | 89.75 | ||||
| Third Quarter | $ | 89.75 | $ | 89.75 | ||||
| Fourth Quarter | $ | 89.75 | $ | 89.75 | ||||
| Fiscal Year 2019 | High Bid | Low Bid | ||||||
| First Quarter | $ | 78.00 | $ | 46.00 | ||||
| Second Quarter | $ | 82.00 | $ | 75.00 | ||||
| Third Quarter | $ | 80.00 | $ | 51.00 | ||||
| Fourth Quarter | $ | 89.75 | $ | 80.00 | ||||
Holders of Our Common Stock
26,093,004 shares of common stock were issued and outstanding as of January 22, 2021. They were held by a total of 589 shareholders of record. The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Holders of the common stock have no preemptive rights and no right to convert their common stock into any other securities. There are no redemption or sinking fund provisions applicable to the common stock.
Dividend Policy
No cash dividends were paid on our shares of common stock during the fiscal years ended March 31, 2020 and March 31, 2019. We have not paid any cash dividends since October 28, 2014 (inception) and do not foresee declaring any cash dividends on our common stock in the foreseeable future.
Securities Authorized for Issuance under Equity Compensation Plans
We do not have in effect any compensation plans under which our equity securities are authorized.
| -24- |
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
The following tables set forth our summary historical financial data for the periods presented.
The following summary financial data for the years ended March 31, 2020 and 2019 are derived from our audited financial statements appearing elsewhere in this prospectus. The following summary financial data for the six-month periods ended September 30, 2020 and 2019 and the selected balance sheet data as of September 30, 2020 are derived from our unaudited financial statements appearing elsewhere in this prospectus.
This summary financial data should be read together with the historical financial statements and related notes to those statements, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this prospectus.
| As of March 31, | As of September 30, | |||||||||||
| 2019 | 2020 | 2020 | ||||||||||
| (Restated) | (Unaudited) | |||||||||||
| Balance Sheet Data: | ||||||||||||
| Cash and cash equivalents | $ | 277,264 | $ | 531,681 | $ | 1,178,394 | ||||||
| Prepayments, Deposits and Other Receivable | 2,525,148 | 5,469,561 | 2,907,053 | |||||||||
| Total Assets | 3,496,843 | 8,421,978 | 6,653,494 | |||||||||
| Total Current Liabilities | 5,674,393 | 10,096,528 | 8,129,385 | |||||||||
| Total Liabilities | 5,674,393 | 11,488,702 | 9,329,994 | |||||||||
| Total Stockholders’ equity (deficit) | (2,177,550 | ) | (3,066,724 | ) | (2,676,500 | ) | ||||||
| Years Ended March 31, | Six Months Ended September 30, | |||||||||||||||
| 2019 | 2020 | 2019 | 2020 | |||||||||||||
| (Restated) | (Unaudited) | (Unaudited) | ||||||||||||||
| Statements of Operations Data: | ||||||||||||||||
| Revenues | $ | 10,026,920 | $ | 10,172,379 | $ | 4,154,494 | $ | 17,602,512 | ||||||||
| Gross (Loss) Profit | 1,282,694 | 1,385,361 | 678,851 | (2,223,451 | ) | |||||||||||
| Total operating expenses | (1,965,821 | ) | (2,249,679 | ) | (1,341,960 | ) | (1,081,038 | ) | ||||||||
| Loss from Operations | (683,127 | ) | (864,318 | ) | (663,109 | ) | (3,304,489 | ) | ||||||||
| Loss before provision for income taxes | (685,774 | ) | (964,547 | ) | (686,209 | ) | (3,249,213 | ) | ||||||||
| Net Loss | $ | (694,329 | ) | $ | (980,617 | ) | $ | (689,273 | ) | $ | (3,256,625 | ) | ||||
| Net loss per common share | ||||||||||||||||
| Basic and diluted | $ | (0.03 | ) | $ | (0.04 | ) | $ | (0.03 | ) | $ | (0.13 | ) | ||||
| -25- |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
The following discussion should be read in conjunction with our “Selected Historical Financial and Operation Data” and our consolidated financial statements and related notes and other financial information included elsewhere in this prospectus. In preparation of this prospectus, we reperformed the assessment on goodwill for impairment test as of March 31, 2020 and due to the impact on business environment of Covind-19 outbreak in PRC, it was determined that recoverable amount of one of the Company’s reporting units was lower than the carrying amount of the goodwill recorded as of March 31, 2018. Therefore, it was concluded that the carrying amount of said goodwill should have been fully impaired as of March 31, 2018. The Company has restated the impairment of goodwill as if it was fully impaired during the year ended March 31, 2018. The Comprehensive Loss for the year ended March 31, 2020 decreased by $475,003. The long live assets as of March 31, 2019 decreased by $475,003. The accumulative accumulated deficits as of March 31, 2019 increased by the same amount. The restatement has no impact on previously reported “cash flows” amount. In addition to historical information, the following discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Where possible, we have tried to identify these forward-looking statements by using words such as “anticipate,” “believe,” “intends,” or similar expressions. Our actual results could differ materially from those anticipated by the forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.
This prospectus contains statements that we believe are, or may be considered to be, “forward-looking statements”. All statements other than statements of historical fact included in this prospectus regarding the prospects of our industry or our prospects, plans, financial position or business strategy, may constitute forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking words such as “may,” “will,” “expect,” “intend,” “estimate,” “foresee,” “project,” “anticipate,” “believe,” “plans,” “forecasts,” “continue” or “could” or the negatives of these terms or variations of them or similar terms. Furthermore, such forward-looking statements may be included in various filings that we make with the Securities and Exchange Commission or press releases or oral statements made by or with the approval of one of our authorized executive officers. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that these expectations will prove to be correct. These forward-looking statements are subject to certain known and unknown risks and uncertainties, as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements. Readers are cautioned not to place undue reliance on any forward-looking statements contained herein, which reflect management’s opinions only as of the date hereof. Except as required by law, we undertake no obligation to revise or publicly release the results of any revision to any forward-looking statements. You are advised, however, to consult any additional disclosures we make in our reports to the SEC. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this prospectus.
You should read the matters described in “Risk Factors” and the other cautionary statements made in this prospectus, and incorporated by reference herein, as being applicable to all related forward-looking statements wherever they appear in this prospectus. We cannot assure you that the forward-looking statements in this prospectus will prove to be accurate and therefore prospective investors are encouraged not to place undue reliance on forward-looking statements.
Critical Accounting Policies and Estimates
The discussion and analysis of the Company’s financial condition and results of operations are based upon its consolidated audited financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these audited financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis, management evaluates past judgments and estimates, including those related to bad debts, accrued liabilities, convertible promissory notes and contingencies. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The accounting policies and related risks described in the Company’s Annual Report on Form 10-K as initially filed with the Securities and Exchange Commission on July, 2020 are those that depend most heavily on these judgments and estimates.
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Corporate History
Addentax Group Corp. was incorporated in the State of Nevada on October 28, 2014. We were originally incorporated to produce images on multiple surfaces, such as glass, leather, plastic, ceramic, textile, and others using a 3D sublimation vacuum heat transfer machine. We no longer pursue opportunities related to 3D printing positioning.
We have a fiscal year-end of March 31. On July 12, 2016, we filed an amendment to our articles of incorporation, which amendment was effectuated by our transfer agent on July 20, 2016. The certificate of amendment was filed in order to undertake a two for one forward stock split and increase our authorized shares of common stock, par value $0.001 per share, to 150,000,000 shares, which forward stock split has been retroactively reflected throughout this prospectus. On February 27, 2019, we filed a Certificate of Change to effect a 1-for-20 reverse stock split, which reduced our authorized shares of common stock to 50,000,000 shares.
Current Business
Effective December 28, 2016, the Company executed a Sale & Purchase Agreement (“S&P”) for the acquisition of 100% of the shares of Yingxi Industrial Chain Group Co., Ltd. (“YICG”), a company incorporated under the laws of the Republic of Seychelles. YICG is currently a garment manufacturer. Intending to diversify its service portfolio, the Company plans to develop another branch of business: international supply chain management consulting service, which will focus exclusively on the textile & garments industry. The Company plans to assist clients to open textile and garment sales outlets throughout China. The Company will also provide assistance services in plan implementation. Pursuant to the S&P, which transaction closed on September 25, 2017, the Company issued five hundred million (500,000,000) restricted common shares of the Company to the owners of Yingxi Industrial Chain Group Co., Ltd. in consideration for the acquisition of YICG.
After the Share Exchange, YICG’s business became our business. We are a garment manufacturer and logistics service provider based in China. Our common stock is listed on the OTCQB under the symbol of “ATXG”. We classified our businesses into two revenue segments for the fiscal year ended 2020 and in previous fiscal years: (i) garment manufacturing and (ii) logistics services. During the fiscal year 2021, we developed a new business segment: epidemic prevention supplies.
Our garment manufacturing business consists of sales made principally to wholesalers located in China. 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 delivery requirements for our customers. We conduct our garment manufacturing operations through five indirect wholly owned subsidiaries of the Company, namely Dongguan Heng Sheng Wei Garments Co., Ltd (“HSW”), Shantou Chenghai Dai Tou Garments Co., Ltd (“DT”), Dongguan Yingxi Daying Commercial Co., Ltd (“DY”), Dongguan Yushang Clothing Co., Ltd (“YS”), and Shantou Yi Bai Yi Garments Co., Ltd (“YBY”) which are located in the Guangdong province, China.
Our logistics services business consists of delivery and courier services covering approximately 79 cities in approximately seven provinces and two 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 two wholly owned subsidiaries, namely Shenzhen Xin Kuai Jie Transportation Co., Ltd (“XKJ”) and Shenzhen Hua Peng Fa Logistic Co., Ltd (“HPF”), which are located in the Guangdong province, China.
Our epidemic prevention supplies business consists of manufacturing and distribution of epidemic prevention products and reselling of epidemic prevention supplies purchased from third parties in both domestic and overseas markets. We conduct our manufacturing of the epidemic prevention products in YS. We conduct the trading of epidemic prevention suppliers through Addentax Group Corp. (“ATXG”) and Shenzhen Qianhai Yingxi Industrial Chain Services Co., Ltd (“YX”), an indirect wholly owned subsidiary of the Company.
Business Objectives
Garment Manufacturing Business
We believe the strength of our garment manufacturing business segment is mainly due to our consistent emphasis on exceptional quality and timely delivery of our products. The primary business objective for our garment manufacturing business segment is to expand our customer base and improve our profit.
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Logistics Services Business
The business objective and future plan for our logistics service segment is to establish an efficient logistics system and to build a nationwide delivery and courier network in China. As of September 30, 2020, we provide logistics services to over 79 cities in approximately seven provinces and two municipalities. We expect to develop an additional 20 logistics points in existing serving cities and improve the Company’s profit for the fiscal year ending 2021.
Epidemic Prevention Supplies Business
The primary business objective of our epidemic prevention supplies business segment is to take the advantage of our resource in supply chain from our garment manufacturing business segment to facilitate and maximize the production, distribution and resale of epidemic prevention supplies, in order to increase our revenue and improve our net profit.
Seasonality of Business
Our business is affected by seasonal trends, with higher levels of garment sales in our second and third quarters and higher logistics service revenue in our third and fourth quarters. These trends primarily result from the timing of seasonal garment manufacturing shipments and holiday periods in the logistic segment.
Credit period
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 our logistics service, we generally receive payments from the customers between 30 to 90 days following the date of the registration of our receipt of packages.
Epidemic Prevention Supplies Business
For our epidemic prevention supplies business, we generally receive payment from the customers within 30 days following the delivery of finished goods. We would also give our long-term customers with a 12 months long credit term policy to maintain a good business relationship.
Markets
Currently, our market focuses on small and medium-sized enterprises in China who have business expansion plans.
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.
Sufficiency of Cash Flows
Because current cash balances and our projected cash generated from operations are not sufficient to meet our cash needs for working capital and capital expenditures, management intends to seek additional equity or obtain additional credit facilities. However, we may be unable to raise additional capital upon terms acceptable to us. The sale of additional equity will result in additional dilution to our shareholders. A portion of our cash may be used to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. From time to time, in the ordinary course of business, we evaluate potential acquisitions of such businesses, products or technologies.
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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. |
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.
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Leases
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.
Recently issued and adopted accounting pronouncements
In June 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.
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.
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Results of Operations for the six months ended September 30, 2020 and 2019
The following tables summarize our results of operations for the six months ended September 30, 2020 and 2019. 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.
| Six months Ended September 30, | Increase (decrease) in | |||||||||||||||||||||||
| 2020 | 2019 | 2020 compared to 2019 | ||||||||||||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||||||||||
| (In U.S. dollars, except for percentages) | ||||||||||||||||||||||||
| Revenue | $ | 17,602,512 | 100.0 | % | $ | 4,154,494 | 100 | % | $ | 13,448,018 | 323.7 | % | ||||||||||||
| Cost of revenues | (19,825,963 | ) | (112.6 | )% | (3,475,643 | ) | (83.7 | )% | (16,350,320 | ) | (470.4 | )% | ||||||||||||
| Gross profit | (2,223,451 | ) | (12.6 | )% | 678,851 | 16.3 | % | (2,902,302 | ) | (427.5 | )% | |||||||||||||
| Operating expenses | (1,081,038 | ) | (6.1 | )% | (1,341,960 | ) | (32.3 | )% | 260,922 | 19.4 | % | |||||||||||||
| Loss from operations | (3,304,489 | ) | (18.8 | )% | (663,109 | ) | (15.3 | )% | (2,641,380 | ) | (398.3 | )% | ||||||||||||
| Other income, net | 61,216 | 0.3 | % | (10,820 | ) | (0.3 | )% | 72,036 | 665.8 | % | ||||||||||||||
| Net finance cost | (5,940 | ) | (0.0 | )% | (12,280 | ) | (0.3 | )% | 6,340 | 51.6 | % | |||||||||||||
| Income tax expense | (7,412 | ) | (0.0 | )% | (3,064 | ) | (0.1 | )% | (4,348 | ) | (141.9 | )% | ||||||||||||
| Net Loss | $ | (3,256,625 | ) | (18.5 | )% | $ | (689,273 | ) | (16.6 | )% | $ | (2,567,352 | ) | (372.5 | )% | |||||||||
Revenue
Revenue generated from our garment manufacturing business was $2,898,061, or 16.5%, of our total revenue for the six months ended September 30, 2020. Revenue generated from our garment manufacturing business was $873,448, or 21.0%, of our total revenue for the six months ended September 30, 2019. The significant increase of approximately $2.0 million, or 231.8%, in revenue was mainly attributed to the increase of revenue in production capacity from our newly establish subsidiary YBY.
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Revenue generated from our logistics services logistic business was $2,840,384, or 16.1%, of our total revenue for the six months ended September 30, 2020. Revenue generated from our logistics services business was $3,281,046, or 79.0%, of our total revenue for the six months ended September 30, 2019. The decrease of approximately $441,000, or 13.4%, in revenue was mainly attributed to the coronavirus disease outbreak (“COVID-19”), as, we cannot smoothly go through with logistics services deliveries business.
Revenue generated from our epidemic prevention supplies business was $11,864,067, or 67.4%, of our total revenue for the six months ended September 30, 2020. This is a new business segment developed during the fiscal year 2020. Epidemic prevention supplies revenue included revenue from trading of merchandises and revenue from sales of our own products. The revenue from trading of merchandise was $11,791,672, representing 99.4% of total revenue from the epidemic prevention suppliers business.
Total revenue for the six months ended September 30, 2020 and 2019 were $17,602,512 and $ 4,154,494, respectively, representing approximately a 323.7% increase compared with the six months ended September 30, 2019. The significant increase was mainly attributed to the increase of garment production capacity in our newly established subsidiaries, DT and YBY, and the epidemic prevention supplies business newly developed during the fiscal year 2020.
Cost of revenue
| Six months ended September 30, | Increase (decrease) in | |||||||||||||||||||||||
| 2020 | 2019 | 2020 compared to 2019 | ||||||||||||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||||||||||
| (In U.S. dollars, except for percentages) | ||||||||||||||||||||||||
| Net revenue for garment | $ | 2,898,061 | 100.0 | % | $ | 873,448 | 100 | % | $ | 2,024,613 | 231.8 | % | ||||||||||||
| Raw materials | 2,088,499 | 72.1 | % | 605,053 | 69.3 | % | 1,483,446 | 245.2 | % | |||||||||||||||
| Labor | 562,873 | 19.4 | % | 100,913 | 11.5 | % | 461,960 | 457.8 | % | |||||||||||||||
| Other and Overhead | 14,172 | 0.5 | % | 32,058 | 3.7 | % | (17,886 | ) | (55.8 | )% | ||||||||||||||
| Total cost of revenue for garment | 2,665,543 | 92.0 | % | 738,024 | 84.5 | % | 1,927,519 | 261.2 | % | |||||||||||||||
| Gross profit for garment | 232,518 | 8.0 | % | 135,424 | 15.5 | % | 97,094 | 71.7 | % | |||||||||||||||
| Net revenue for logistics services | 2,840,384 | 100.0 | % | 3,281,046 | 100 | % | (440,662 | ) | (13.4 | )% | ||||||||||||||
| Fuel, toll and other cost of logistics services | 885,185 | 31.2 | % | 921,287 | 28.1 | % | (36,102 | ) | (3.9 | )% | ||||||||||||||
| Subcontracting fees | 1,490,462 | 52.4 | % | 1,816,332 | 55.3 | % | (325,870 | ) | (17.9 | )% | ||||||||||||||
| Total cost of revenue for logistics services | 2,375,647 | 83.6 | % | 2,737,619 | 83.4 | % | (361,972 | ) | (13.2 | )% | ||||||||||||||
| Gross Profit for logistics services | 464,737 | 16.4 | % | 543,427 | 16.6 | % | (78,690 | ) | (14.5 | )% | ||||||||||||||
| Net revenue for epidemic prevention supplies | $ | 11,864,067 | 100 | % | $ | - | - | $ | 11,864,067 | N/A | ||||||||||||||
| Merchandise/Finished goods/Raw materials | 14,680,253 | 123.7 | % | - | - | 14,680,253 | N/A | |||||||||||||||||
| Labor | 64,946 | 0.5 | % | - | - | 64,946 | N/A | |||||||||||||||||
| Other and Overhead | 39,574 | 0.3 | % | - | - | 39,574 | N/A | |||||||||||||||||
| Total cost of revenue for epidemic prevention supplies | 14,784,773 | 124.6 | % | - | - | 14,784,773 | N/A | |||||||||||||||||
| Gross profit for epidemic prevention supplies | (2,920,706 | ) | (24.6 | )% | - | - | (2,920,706 | ) | N/A | |||||||||||||||
| Total cost of revenue | $ | 19,825,963 | 112.6 | % | $ | 3,475,643 | 83.7 | % | $ | 16,350,320 | 470.4 | % | ||||||||||||
| Gross profit | $ | (2,223,451 | ) | (12.6 | )% | $ | 678,851 | 16.3 | % | $ | (2,902,302 | ) | 427.5 | % | ||||||||||
For our garment manufacturing business, we purchase the majority of our raw materials directly from numerous local fabric and accessories suppliers. Aggregate purchases from our five largest raw material suppliers represented approximately 97.2% and 74.5% of raw materials purchases for the six months ended September 30, 2020 and 2019, respectively. One and two suppliers provided more than 10% of our raw materials purchases for both six months ended September 30, 2020 and 2019, respectively. We have not experienced difficulty in obtaining raw materials essential to our business, and we believe we maintain good relationships with our suppliers.
Raw material costs for our garment manufacturing business was approximately 72.1% of our total garment manufacturing business revenue in the six months ended September 30, 2020, compared with approximately 69.3% in the six months ended September 30, 2019. The increased in percentages was mainly attributed to the purchase cost of the cotton fabrics as the continuing high demand from epidemic prevention supplies industry drove up the prices of cotton fabrics.
Labor costs for our garment manufacturing business was approximately 19.4% of our total garment manufacturing business revenue in the six months ended September 30, 2020, compared with approximately 11.6% in the six months ended September 30, 2019. The increase in percentages was mainly attributed to the rising wages in the PRC.
Overhead and other expenses for our garment manufacturing business accounted for approximately 0.5% of our total garment manufacturing business revenue for the six months ended September 30, 2020, compared with approximately 3.7% of total garment manufacturing business revenue for the six months ended September 30, 2019. The decrease in percentages was mainly attributed to increased usage of sub-contractors in the manufacturing segment of garment products in the six months ended September 30, 2020..
For our logistics services business, we outsource some of the business to our contractors. The Company relied on a few subcontractors, in which the subcontracting fees to our largest contractor represented were approximately 33.6% and 17.0% of total cost of revenues for our service segment for the six months ended September 30, 2020 and 2019, respectively. The increase in percentages was mainly attributed to the usage of good suppliers after evaluations of suppliers’ performance and we have not experienced any disputes with our subcontractor. As such, we believe we maintain good relationships with our contract logistics services provider.
Fuel, toll and other costs for our service business for the six months ended September 30, 2020 was $885,185 as compared with $921,287 for the six months ended September 30, 2019. Fuel, toll and other costs for our service business accounted for approximately 31.2% of our total service revenue for the six months ended September 30, 2020, compared with approximately 28.1% for the six months ended September 30, 2019. The increase in percentages was primarily attributed to the decrease usage of subcontractors under the epidemic circumstance.
Subcontracting fees for our service business for the six months ended September 30, 2020 decreased by approximately 17.9% to $1,490,462 from $1,816,332 for the six months ended September 30, 2019. Subcontracting fees accounted for approximately 52.5% and 55.4% of our total service business revenue in the six months ended September 30, 2020 and 2019, respectively. This decrease in percentages was primarily attributed to the Company decrease usage of subcontractors under the epidemic circumstance.
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For epidemic prevention supplies business, we have trading and own production. The cost of revenue included cost of merchandise and cost of our own products. The cost of merchandise was $14,680,253, represented approximately 123.7% of our total cost of revenue of the epidemic prevention supplies business.
Total cost of revenue for the six months ended September 30, 2020 was $19,825,963, compared with $3,475,643 for the six months ended September 30, 2019. Total cost of sales as a percentage of total sales for the six months ended September 30, 2020 was approximately 112.6%, compared with approximately 83.7% for the six months ended September 30, 2019. Gross (loss) margin for the six months ended September 30, 2020 was (12.6)%, compared with 16.3% for the six months ended September 30, 2019.
Gross profit
Gross profit of garment manufacturing business for the six months ended September 30, 2020 was $232,518, compared with $135,424 for the six months ended September 30, 2019. Gross profit accounted for approximately 8.0% of our total garment manufacturing business revenue for the six months ended September 30, 2020, compared with approximately 15.5% for the six months ended September 30, 2019. The decrease of gross margin was due to increase of raw materials costs and labor costs.
Gross profit in our logistics services business for the six months ended September 30, 2020 was $464,737 and gross profit margin was approximately 16.4%. Gross profit in our logistics services business for the six months ended September 30, 2019 was $543,427 and gross profit margin was approximately 16.6%.
Gross loss in our epidemic prevention supplies business for the six months ended September 30, 2020 was $(2,920,706) and gross margin was approximately (24.6)%. The significant loss was mainly attributed to the cost of materials increased significantly and rapidly while the selling price was fixed in the sales agreement with the customers.
| Six months ended September 30, | Increase (decrease) in 2020 compared to | |||||||||||||||||||||||
| 2020 | 2019 | 2019 | ||||||||||||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||||||||||
| (In U.S. dollars, except for percentages) | ||||||||||||||||||||||||
| Gross profit | $ | (2,223,451 | ) | 100 | % | $ | 678,851 | 100 | % | (2,902,302 | ) | (427.5 | )% | |||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Selling expenses | (159,033 | ) | (7.2 | )% | (10,866 | ) | (1.6 | )% | (148,167 | ) | (1363.6 | )% | ||||||||||||
| General and administrative expenses | (922,005 | ) | (41.4 | )% | (1,331,093 | ) | (196.1 | )% | 409,088 | 30.7 | % | |||||||||||||
| Total | $ | (1,081,038 | ) | (48.6 | )% | $ | (1,341,959 | ) | (197.7 | )% | 260,921 | 19.4 | % | |||||||||||
| Income (Loss) from operations | $ | (3,304,489 | ) | (148.6 | )% | $ | (663,108 | ) | (97.7 | )% | (2,641,381 | ) | (398.3 | )% | ||||||||||
Selling, General and administrative expenses
Our selling expenses in our garment manufacturing business segment for the six months ended September 30, 2020 and 2019 was $1,723 and $10,866, respectively. Our selling expenses in our logistics services business segment was nil and nil for the six months ended September 30, 2020 and 2019, respectively. Selling expenses in our epidemic prevention supplies business segment was $157,311 for the six months ended September 30, 2020. Selling expenses primarily consist of local transportation charges, unloading charges and product inspection charges. Total selling expenses for the six months ended September 30, 2020 increased significantly by approximately 1,363.6% to $159,033 from $10,866 for the six months ended September 30, 2019.
Our general and administrative expenses in our garment manufacturing business segment for the six months ended September 30, 2020 and 2019 was $88,950 and $95,023, respectively. Our general and administrative expenses in our logistics services business segment, for the six months ended September 30, 2020 and 2019 was $429,453 and $535,711, respectively. Our general and administrative expenses in our epidemic prevention supplies business segment was $18,429 for the six months ended September 30, 2020. Our general and administrative expenses in our corporate office for the six months ended September 30, 2020 and 2019 was $385,173 and $700,360, respectively. General and administrative expenses primarily consist 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.
Total general and administrative expenses for the six months ended September 30, 2020 decreased by approximately 30.7% to $922,005 from $1,331,093 for the six months ended September 30, 2019. The increase of total general and administrative expenses was mainly due to the professional fees for the uplisting Form S-1 filing.
Income (loss) from operations
Loss from operations for the six months ended September 30, 2020 and 2019 was $3,304,489 and $663,108, respectively. Income from operations of $141,518 and $29,535 was attributed from our garment manufacturing business segment for the six months ended September 30, 2020 and 2019, respectively. Income from operations of $35,284 and $7,716 was attributed from our logistics services business segment for the six months ended September 30, 2020 and 2019, respectively. Loss from operations of $3,096,118 was attributed from our epidemic prevention supplies business segment for the six months ended September 30, 2020. We incurred a loss from operations in corporate office of $385,173 and $700,360 for the six months ended September 30, 2020 and 2019, respectively. The loss from our corporate office was mainly attribute to the increase in legal and professional fees to comply with the SEC accounting, disclosure and reporting requirements and the professional fee for Form S-1 filing.
Income Tax Expenses
Income tax expense for the six months ended September 30, 2020 and 2019 was $7,412 and $3,064, respectively, approximately a 141.9% significant increase compared to 2019. The Company operates in the PRC and files tax returns in the PRC jurisdictions.
The tax jurisdiction and income tax rate of each entity was described in the above section of analysis of three months’ results. Addentax, Yingxi, Yingxi HK, QYTG, YX, HSW, HPF and YS had no taxable income for the six months ended September 30, 2020 and 2019.
Net Income (Loss)
We incurred a net loss of $3,256,625 and $689,273 for the six months ended September 30, 2020 and 2019, respectively. Our basic and diluted loss per share were $0.13 and $0.03 for the six months ended September 30, 2020 and 2019, respectively.
Summary of cash flows
Summary cash flows information for the six months ended September 30, 2020 and 2019 is as follow:
| Six months ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| (In U.S. dollars) | ||||||||
| Net cash used in operating activities | $ | (3,062,555 | ) | $ | (881,868 | ) | ||
| Net cash used in investing activities | $ | (379,393 | ) | $ | (95,445 | ) | ||
| Net cash provided by financing activities | $ | 4,073,950 | $ | 969,330 | ||||
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Net cash used in operating activities in the six months ended September 30, 2020 was approximately $2.2 million more than the same corresponding period in 2019. It was mainly attributed to the net loss of six months ended September 30, 2020 was approximately $2.5 million higher than the net loss of the same period in 2019; and cash from improvement of working capital was approximately $0.3 million more in the six months ended September 30, 2020 compared to the same corresponding period in 2019.
Net cash used in investing activities was approximately $0.3 million higher in the six months ended September 30, 2020 than 2019 mainly attributed to more trucks for logistics services business.
Net cash provided by financing activities in the six months ended September 30, 2020 was approximately $3.1 million more than the same corresponding period in 2019. It was mainly attributed to of proceeds of approximately $3.7 million from subscription of ordinary shares offered to a shareholder in August 2020; approximately $0.4 million lower of net proceed from related parties and approximately $0.2 million less of net proceed from bank borrowings.
Financial Condition, Liquidity and Capital Resources
As of September 30, 2020, we had cash on hand of $1,178,394, total current assets of $4,085,447 and current liabilities of $8,129,385 . Currently, we finance our operations primarily from cash flows from borrowings from related parties and third parties. We also raised equity fund of $3,735,000 from the issuance of common stocks in August 2020. We aim to improve our operating cash flows and anticipate that cash flows from our operations and borrowings from related parties and third parties will continue to be our primary source of funds to finance our short-term cash needs. The Company’s financial conditions raise substantial doubt about the Company’s ability to continue as a going concern. The ability to continue as a going concern is dependent upon the Company’s profit generating operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they become due. The Company expects to finance operations primarily through cash flow from revenue and capital contributions from the CEO. During the year, the CEO has provided financial support for the operations of the Company. 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.
The growth and development of our business will require a significant amount of additional working capital. We currently have limited financial resources and based on our current operating plan, we will need to raise additional capital in order to continue as a going concern. We currently do not have adequate cash to meet our short or long-term objectives. In the event additional capital is raised, it may have a dilutive effect on our existing stockholders.
We are subject to all the substantial risks inherent in the development of a new business enterprise within an extremely competitive industry. Due to the absence of a long standing operating history and the emerging nature of the markets in which we compete, we anticipate operating losses until we can successfully implement our business strategy, which includes all associated revenue streams. Our revenue model is new and evolving, and we cannot be certain that it will be successful. The potential profitability of this business model is unproven. We may never ever achieve profitable operations. Our future operating results depend on many factors, including demand for our services, the level of competition, and the ability of our officers to manage our business and growth. As a result of the emerging nature of the market in which we compete, we may incur operating losses until such time as we can develop a substantial and stable revenue base. Additional development expenses may delay or negatively impact the ability of the Company to generate profits. Accordingly, we cannot assure you that our business model will be successful or that we can sustain revenue growth, achieve or sustain profitability, or continue as a going concern.
Foreign Currency Translation Risk
Our operations are located in the 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 the past years, RMB continued to appreciate against the U.S. dollar. As of September 30, 2020, the market foreign exchange rate had decreased to RMB 6.79 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 (loss) gain for the three and six months ended September 30, 2020 and 2019 was $(83,969) and $72,153, (88,151) and $49,162, 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 September 30, 2020 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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Results of Operations for the years ended March 31, 2020 and 2019
The following tables summarize our results of operations for the years ended March 31, 2020 and 2019. 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.
| Increase (decrease) in | ||||||||||||||||||||||||
| 2020 | 2019 | 2020 compared to 2019 | ||||||||||||||||||||||
| (Audited) | (Audited) | |||||||||||||||||||||||
| (In U.S. dollars, except for percentages) | ||||||||||||||||||||||||
| Revenue | $ | 10,172,379 | 100.0 | % | $ | 10,026,920 | 100 | % | $ | 145,459 | 1.5 | % | ||||||||||||
| Cost of revenues | (8,787,018 | ) | (86.4 | )% | (8,744,226 | ) | (87.2 | )% | (42,792 | ) | (0.5 | )% | ||||||||||||
| Gross profit | 1,385,361 | 13.6 | % | 1,282,694 | 12.8 | % | 102,667 | 8.0 | % | |||||||||||||||
| Operating expenses | (2,249,679 | ) | (22.1 | )% | (1,965,821 | ) | (19.6 | )% | 283,858 | 14.4 | % | |||||||||||||
| Loss from operations | (864,318 | ) | (8.5 | )% | (683,127 | ) | (6.8 | )% | (181,191 | ) | 26.5 | % | ||||||||||||
| Other income, net | (79,560 | ) | (0.8 | )% | 8,776 | (0.1 | % | (88,336 | ) | (1,006.6 | )% | |||||||||||||
| Net finance cost | (20,669 | ) | (0.2 | )% | (11,423 | ) | (0.1 | ) | (9,246 | ) | (80.9 | )% | ||||||||||||
| Income tax expense | (16,070 | ) | (0.2 | )% | (8,555 | ) | (6.9 | )% | (7,515 | ) | (87.9 | )% | ||||||||||||
| Net loss | $ | (980,617 | ) | (9.6 | )% | $ | (694,329 | ) | (87.2 | )% | $ | (286,288 | ) | (41.2 | )% | |||||||||
Revenue
Revenue generated from our garment manufacturing business segment contributed $4,298,518, or approximately 42.3%, of our total revenue for the year ended March 31, 2020. Revenue generated from our garment manufacturing business contributed $3,359,638 or approximately 33.5% of our total revenue for the year ended March 31, 2019. The increase of $938,880, or approximately 27.9%, was mainly attribute to the decrease of revenue in HSW by $2,103,618 while revenue in DT increased by $2,811,698.
Revenue generated from our logistics services business segment contributed $5,873,861, or approximately 57.7%, of our total revenue for the year ended March 31, 2020. Revenue generated from our logistics services business contributed $6,667,283, or approximately 66.5%, of our total revenue for the year ended March 31, 2019. The decrease of $793,422, or approximately 11.9%, mainly attribute to COVID-19, as we cannot smoothly go through with logistics services deliveries.
Total revenue for the year ended March 31, 2020 and 2019 were $10,172,379 and $10,026,920, respectively, representing approximately a 1.5% increase compared with the year ended March 31, 2019. The increase was mainly attribute to the increase of orders due to the increase in garment manufacturing business as our garment manufacturing business developed a new client but was offset by (i) our holding companies, YX and QYTG, as they did not have consulting service income in the year ended March 31, 2020; and (ii) one of our subsidiaries, HSW, was losing orders as some of its clients had market performance issue due to COVID-19 and they withdrew the orders placed with us, which resulted in the decrease of our revenue.
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Cost of revenue
| Increase (decrease) in | ||||||||||||||||||||||||
| 2020 | 2019 | 2020 compared to 2019 | ||||||||||||||||||||||
| (Audited) | (Audited) | |||||||||||||||||||||||
| (In U.S. dollars, except for percentages) | ||||||||||||||||||||||||
| Net revenue for garment manufacturing | $ | 4,298,518 | 100.0 | % | $ | 3,359,638 | 100 | % | $ | 938,880 | 27.9 | % | ||||||||||||
| Raw materials | 3,127,959 | 72.8 | % | 2,521,935 | 75.1 | % | ||||||||||||||||||
| Labor | 704,104 | 16.4 | % | 362,139 | 10.7 | % | ||||||||||||||||||
| Other and Overhead | 70,381 | 1.6 | % | 171,161 | 5.1 | % | ||||||||||||||||||
| Total cost of revenue for garment manufacturing | 3,902,444 | 90.8 | % | 3,055,235 | 90.9 | % | 847,209 | 27.7 | % | |||||||||||||||
| Gross profit for garment manufacturing | 396,074 | 9.2 | % | 304,403 | 9.1 | % | 91,671 | 30.1 | % | |||||||||||||||
| Net revenue for logistics services | 5,873,861 | 100.0 | % | 6,667,282 | 100 | % | (793,421 | ) | (11.9 | )% | ||||||||||||||
| Fuel, toll and other cost of logistics services | 1,932,149 | 32.9 | % | 2,445,439 | 36.7 | % | (513,290 | ) | (21.0 | )% | ||||||||||||||
| Subcontracting fees | 2,952,425 | 50.3 | % | 3,243,552 | 48.6 | % | (291,127 | ) | (9.0 | )% | ||||||||||||||
| Total cost of revenue for logistics services | 4,884,574 | 83.2 | % | 5,688,991 | 85.3 | % | (804,417 | ) | (14.1 | )% | ||||||||||||||
| Gross Profit for logistics services | 989,287 | 16.8 | % | 978,291 | 14.7 | % | 10,996 | 1.1 | % | |||||||||||||||
| Total cost of revenue | $ | 8,787,018 | 86.4 | % | $ | 8,744,226 | 87.2 | % | $ | 42,792 | 0.5 | % | ||||||||||||
| Gross profit | $ | 1,385,361 | 13.6 | % | $ | 1,282,694 | 12.8 | % | $ | 102,667 | 8.0 | % | ||||||||||||
Cost of revenue for our garment manufacturing business segment for the years ended March 31, 2020 and 2019 was $3,902,444 and $3,055,235, respectively, which included direct raw material costs, direct labor costs, manufacturing overheads including depreciation of production equipment and rent. Cost of revenue for our logistics services business segment for the years ended March 31, 2020 and 2019 was $4,884,574 and $5,688,991, respectively, which includes gasoline and diesel fuel, toll charges, other cost of logistics services and subcontracting fees.
For our garment manufacturing business segment, we purchased the majority of our raw materials directly from numerous local fabric and accessories suppliers. Aggregate purchases from our five largest raw material suppliers represented approximately 92.7% and 39.2% of raw materials purchases for the years ended March 31, 2020 and 2019, respectively. One supplier and two suppliers provided more than 10% of our raw materials purchases for the years ended March 31, 2020 and 2019, respectively. We have not experienced difficulty in obtaining raw materials essentials to our business as we believe we maintain good relationships with our suppliers.
For our logistics services business segment, we outsource some of the business to our subcontractors. The Company relied on a few subcontractors, in which the subcontracting fees to our largest subcontractor represented approximately 25.6% and 13.3% of total cost of revenues for our logistics services segment for the years ended March 31, 2020 and 2019, respectively. The increase in percentages was attributed to the increase usage of subcontracting services as compared to last year. We have not experienced any disputes with our subcontractor and we believe we maintain good relationships with our contract logistics services provider.
Raw material costs for our garment manufacturing business was approximately 72.8 % of our total garment manufacturing business revenue in the year ended March 31, 2020, compared with approximately 75.1% in the year ended March 31, 2019. The decrease in percentages was mainly due to the purchase cost of the raw materials remained consistent, while the labor costs continued to rise.
Labor costs for our garment manufacturing business was approximately 16.4% of our total garment manufacturing business revenue in the year ended March 31, 2020, compared with approximately 10.8% in the year ended March 31, 2019. The increase in percentages was mainly due to the rising wages in the PRC.
Overhead and other expenses for our manufacturing business accounted for approximately 1.6% of our total garment manufacturing business revenue for the year ended March 31, 2020, compared with approximately 5.1% of total garment manufacturing business revenue for the year ended March 31, 2019. The decrease in percentages was mainly attributed to the increased usage of sub-contractors in the manufacturing of garment products.
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Fuel, toll and other costs for our service business for the year ended March 31, 2020 was $1,932,149 compared with $2,445,439 for the year ended March 31, 2019. Fuel, toll and other costs for our service business accounted for approximately 32.9% of our total service revenue for the year ended March 31, 2020, compared with approximately 36.7% for the year ended March 31, 2019. The decrease in percentages was primarily attributable to the increase usage of subcontractors.
Subcontracting fees for our service business for the year ended March 31, 2020 decreased by approximately 9.0% to $2,952,425 from $3,243,552 for the year ended March 31, 2019. Subcontracting fees accounted for approximately 50.3% and 48.6% of our total service business revenue in the years ended March 31, 2020 and 2019, respectively. This increase in percentages was primarily attributed to the Company subcontracted more shipping orders to subcontractors in 2019 due to the increase in shipping orders to various destinations that were not covered by the Company’s own delivery and transportation networks. Moreover, the delivery cost of third-parties increased due to the market condition.
Total cost of revenue for the year ended March 31, 2020 was $8,787,018, which remained consistent with the year ended March 31, 2019. Total cost of sales as a percentage of total sales for the year ended March 31, 2020 was approximately 86.4%, compared with approximately 87.2% for the year ended March 31, 2019. Gross margin for the year ended March 31, 2020 was approximately 13.6% compared with approximately 12.8% for the year ended March 31, 2019.
Gross profit
| Increase (decrease) in | ||||||||||||||||||||||||
| 2020 | 2019 | 2020 compared to 2019 | ||||||||||||||||||||||
| (Audited) | (Audited) | |||||||||||||||||||||||
| (In U.S. dollars, except for percentages) | ||||||||||||||||||||||||
| Gross profit | $ | 1,385,361 | 100 | % | $ | 1,282,694 | 100 | % | 102,667 | 8.0 | % | |||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Selling expenses | (13,406 | ) | (1.0 | )% | (17,905 | ) | (1.4 | )% | (4,499 | ) | (25.1 | )% | ||||||||||||
| General and administrative expenses | (2,236,273 | ) | (161.4 | )% | (1,947,916 | ) | (151.9 | )% | 288,357 | 14.8 | % | |||||||||||||
| Total | $ | (2,249,679 | ) | (162.4 | )% | $ | (1,965,821 | ) | (153.3 | )% | 283,858 | 14.4 | % | |||||||||||
| Loss from operations | $ | (864,318 | ) | (62.4 | )% | $ | (683,127 | ) | (53.3 | )% | 181,191 | 26.5 | % | |||||||||||
Garment manufacturing business gross profit for the year ended March 31, 2020 was $396,074 compared with $304,403 for the year ended March 31, 2019. Gross profit accounted for approximately 9.2% of our total garment manufacturing business revenue for the year ended March 31, 2020, compared with approximately 9.1% for the year ended March 31, 2019.
Gross profit in our logistics services business segment for the year ended March 31, 2020 was $989,287 and gross margin was 16.8%. Gross profit in our logistics services business segment for the year ended March 31, 2019 was $978,291 and gross margin was approximately 14.7%.
The increase in gross margin was due to our focus on high margin customers, implementation of cost cutting measures and the effective controls on our costs during the fiscal year.
Selling, General and administrative expenses
Our selling expenses in our garment manufacturing business segment for the years ended March 31, 2020 and 2019 was $13,406 and $17,905, respectively. Our selling expenses in our logistics services business segment for the year ended March 31, 2020 and 2019 was nil and nil, respectively. Selling expenses consist primarily of local transportation charges, unloading charges and product inspection charges. Total selling expenses for the year ended March 31, 2020 decreased by approximately 25.1% to $13,406 from $17,905 for the year ended March 31, 2019.
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Our general and administrative expenses in our garment manufacturing business segment for the years ended March 31, 2020 and 2019 was $167,344 and $278,407, respectively. Our general and administrative expenses in our logistics services business segment, for the year ended March 31, 2020 and 2019 was $909,159 and $959,471, respectively. Our general and administrative expenses in our corporate office for the year ended March 31, 2020 and 2019 was $1,159,770 and $710,038, respectively. General and administrative expenses consist 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.
Total general and administrative expenses for the year ended March 31, 2020 increased approximately 14.8% to $2,236,273 from $1,947,916 for the year ended March 31, 2019. The increase was mainly due to the increase in legal and professional fees to comply with the SEC accounting, disclosures and reporting requirements, new office rental expense, overseas traveling expense and expense of general meetings.
Loss from operations
Loss from operations for the years ended March 31, 2020 and 2019 was $864,318 and $683,127, respectively. For the year ended March 31, 2020, the Company impaired goodwill was $475,003. The Company reperformed the test on goodwill for impairment as of March 31, 2020 and it was determined that recoverable amount of one of the Company’s reporting units was lower than the carrying amount of the goodwill recorded as of March 31, 2018. Therefore, it was concluded that total carrying amount of goodwill should had been fully impaired as of March 31, 2018. The Company has restated the impairment of goodwill as if it was impaired for the year ended March 31, 2018. Income from operations of $215,324 and $8,092 was attributed from our manufacturing segment for the years ended March 31, 2020 and 2019, respectively. Income/(Loss) from operations of $80,128 and ($10) was attributed from our logistics services business segment for the years ended March 31, 2020 and 2019, respectively. We incurred a loss from operations in corporate office of $980,617 and $691,209 for the years ended March 31, 2020 and 2019, respectively. The loss from our corporate office was mainly due to increase in legal and professional fees to comply with the SEC accounting, disclosures and reporting requirements.
Income Tax Expenses
Income tax expense for the years ended March 31, 2020 and 2019 was $16,070 and $8,555, respectively, representing approximately an 87.9% increase compared to 2019. 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 years ended March 31, 2020 and 2019.
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 years ended March 31, 2020 and 2019.
The Company is governed by the Income Tax Laws of the PRC. Yingxi’s operating companies, HSW, HPF, DT and YS were subject to an EIT rate of 25% in 2020. XKJ enjoyed the preferential tax benefits and its EIT rate was 15% in 2020.
The Company’s parent entity, Addentax Group Corp. is an 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 years ended March 31, 2020 and 2019.
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Net Loss
We incurred a net loss of $980,617 and $694,329 for the years ended March 31, 2020 and 2019, respectively. Our basic and diluted earnings per share were $0.04 and $0.03 for the year ended March 31, 2020 and 2019, respectively.
Financial Condition, Liquidity and Capital Resources
As of March 31, 2020, we had cash on hand of $531,681, total current assets of $6,001,242 and current liabilities of $10,096,528. The financial condition raised the substantial doubt about the Company’s ability to continue as a going concern. We presently finance our operations primarily from cash flows from borrowings from related parties and third parties. We aim to improve our operating cash flows and anticipate that cash flows from our operations and borrowings from related parties and third parties will continue to be our primary source of funds to finance our short-term cash needs.
The growth and development of our business will require a significant amount of additional working capital. We currently have limited financial resources and based on our current operating plan, we will need to raise additional capital in order to continue as a going concern. We currently do not have adequate cash to meet our short or long-term objectives. In the event additional capital is raised, it may have a dilutive effect on our existing stockholders.
We are subject to all the substantial risks inherent in the development of a new business enterprise within an extremely competitive industry. Due to the absence of a long standing operating history and the emerging nature of the markets in which we compete, we anticipate operating losses until we can successfully implement our business strategy, which includes all associated revenue streams. Our revenue model is new and evolving, and we cannot be certain that it will be successful. The potential profitability of this business model is unproven. We may never ever achieve profitable operations. Our future operating results depend on many factors, including demand for our services, the level of competition, and the ability of our officers to manage our business and growth. As a result of the emerging nature of the market in which we compete, we may incur operating losses until such time as we can develop a substantial and stable revenue base. Additional development expenses may delay or negatively impact the ability of the Company to generate profits. Accordingly, we cannot assure you that our business model will be successful or that we can sustain revenue growth, achieve or sustain profitability, or continue as a going concern.
Foreign Currency Translation Risk
Our operations are located in the 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 the past years, RMB continued to appreciate against the U.S. dollar. As of March 31, 2020, the market foreign exchange rate had increased to RMB 7.08 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 (loss) gain for the years ended March 31, 2020 and 2019 was $91,443 and $96,716, 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 March 31, 2020 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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Overview
Addentax Group Corp. was incorporated in the State of Nevada on October 28, 2014. We were principally engaged in the business of producing images on multiple surfaces, such as glass, leather, plastic, ceramic, textile, and others, using a three-dimensional sublimation vacuum heat transfer machine (“Original Business”).
On December 28, 2016, we entered into a Sale and Purchase Agreement (“SPA”) with Yingxi Industrial Chain Group Co., Ltd. (“YICG”), which was incorporated under the laws of the Republic of Seychelles and principally engaged in garment manufacture, where we agreed to acquire 100% of the equity interest in YICG and to issue five hundred million (500,000,000) restricted common shares of the Company to YICG. The completion of the SPA took place on September 25, 2017.
Following the completion of the SPA, we are now a garment manufacturer and logistics services provider based in the PRC. We are listed on the OTCQB under the symbol of “ATXG”. We no longer pursue our Original Business.
Our garment manufacturing business consists of sales made principally to wholesaler located in China. 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 delivery requirement for our customers. We conduct our garment manufacturing operations through five indirect wholly owned subsidiaries of the Company, namely Dongguan Heng Sheng Wei Garments Co., Ltd (“HSW”), Shantou Chenghai Dai Tou Garments Co., Ltd (“DT”), Dongguan Yingxi Daying Commercial Co., Ltd (“DY”), Dongguan Yushang Clothing Co., Ltd (“YS”), and Shantou Yi Bai Yi Garments Co., Ltd (“YBY”) which are located in the Guangdong province, China. We manufacture garments for various high-end fashion brands through HSW, HSW and DTDT, which are located in Guangdong, the PRC .
Our logistics services business consists of delivery and courier services covering approximately 79 cities in approximately seven provinces and two 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 two wholly owned subsidiaries, namely Shenzhen Xin Kuai Jie Transportation Co., Ltd (“XKJ”) and Shenzhen Hua Peng Fa Logistic Co., Ltd (“HPF”), which are located in the Guangdong province, China.
During the fiscal year 2021, we developed an epidemic prevention supplies business segment, which consists of manufacturing and distribution of epidemic prevention products and reselling of epidemic prevention supplies purchased from third parties in both domestic and overseas markets
Our epidemic prevention supplies business consists of manufacturing and distribution of epidemic prevention products and trading of epidemic prevention supplies in both domestic and overseas markets. We conduct our manufacturing of the epidemic prevention products in YS. We conduct the trading of epidemic prevention suppliers through Addentax Group Corp. (“ATXG”) and Shenzhen Qianhai Yingxi Industrial Chain Services Co., Ltd (“YX”), an indirect wholly owned subsidiary of the Company.
Total revenue and net loss for the year ended March 31, 2019 were $10,026,920 and $694,329, respectively. Total revenue and net loss for the year ended March 31, 2020 were $10, 172,379 and $980,617, respectively.
Total revenue and net loss for the six months ended September 30, 2020 were $17,602,512 and $3,256,625, respectively. Total revenue and net loss for the six months ended September 30, 2019 were $4,154,494 and $689,273, respectively.
Business Objectives
Garment Manufacturing Business
We believe the strength of our garment manufacturing business segment is mainly due to our consistent emphasis on exceptional quality and timely delivery of our products. The primary business objective for our garment manufacturing business segment is to expand our customer base and improve our profit.
Logistics Services Business
The business objective and future plan for our logistics services business segment is to establish an efficient logistics system and to build a nationwide delivery and courier network in China. As of September 30, 2020, we provide logistics services to over 79 cities in approximately seven provinces and two municipalities. We expect to develop an additional 20 logistics points in existing serving cities and improve the Company’s profit for the fiscal year ending 2021.
Epidemic Prevention Supplies Business
The primary business objective of our epidemic prevention supplies business segment is to take the advantage of our resources in supply chain from our garment manufacturing business segment to facilitate and maximize the production, distribution and resale of epidemic prevention supplies, in order to increase our revenue and improve our net profit.
Competitive Strengths
We believe we have the following competitive strengths:
Cost-effective production. We have adopted a vertical integration production process. We produce garments in our own production facilities and employ our in-house transport teams to deliver garments to our customers. This one-stop service optimizes production efficiency and saves costs by lowering the cost per unit, thereby achieving economies of scale.
Stringent quality control process. As of September 30, 2020, we had 7 employees in the production department that are responsible for conducting our quality control process. We implement a stringent quality control process which monitors various stages of our garment manufacturing business, including sampling checks of semi-finished products and finished products. We prepare inspection reports to address the quality problems and make recommendations to improve the quality of our products. During final product inspection, we pay special attention to the measurements, workmanship, ironing and packaging of our products to help best ensure that the quality of our products comply with the specifications, standards and requirements of our customers.
Strong design capabilities. Our design team works closely with our customers to understand their needs and make recommendations to them. Our design team also conducts market research and attends industry exhibitions to understand the latest market trends. As of September 30, 2020, our design team consisted of five members.
Extensive delivery network. Our logistics services business has nine routes and covers 79 cities in approximately seven provinces and two municipalities in the PRC.
Business Strategies
Key elements of our business and growth strategies include the following:
Sales of raw materials. We intend to enter into exclusive agreements with textile and garment suppliers in Southeast China to be their exclusive agent and supply their textiles and garments to our customers. To execute this plan, we intend to set up several retailers for the sales of textiles and garments to retail customers and supply the textiles and garments exclusively to various high-end fashion brands.
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Development of our own brands. We intend to develop our own brands that focus on fast fashion with teenagers being our primary target customers are teenagers. We plan to adopt a low cost strategy at the early stage and improve the quality of our products after increasing our market share. We are in the process of registering a trademark for our own brand and intend to start our advertising campaign after the registration of this trademark. We plan to distribute our products in different channels, including our own retailers, co-operative retailers and franchisees.
Develop our logistics services management application. We intend to develop our own mobile application and integrate with to replace our old internal system. We expect this mobile application to improve our routes optimization, courier goods tracking, security of courier goods , booking time required by our customers, and customer care.
Expand our delivery network. As of September 30, 2020, we provide logistics services to over 79 cities in approximately seven provinces and two municipalities. We expect to develop an additional 20 logistics points in existing serving cities and improve the Company’s profit for the fiscal year ending 2021.
Develop international logistics services and warehousing services. We intend to develop international logistics services for customers located all over the world and international warehousing services.
Seasonality of Business
Our business is affected by seasonal trends, with higher levels of garment sales in our second and third quarters and higher logistics services revenue in our third and fourth quarters. These trends primarily result from the timing of seasonal garment manufacturing shipments and holiday periods in the logistics services business 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 the delivery of finished goods.
Logistics Services business
For our logistics services business, we generally receive payments from the customers between 30 to 90 days following the date of the register receipt of packages.
Epidemic Prevention Supplies Business
For our epidemic prevention supplies business, we generally receive payment from customers within 30 days following the delivery of finished goods. We would also provide our long-term customers with a 12 months long credit term policy to maintain a good business relationship.
Economic Uncertainty
Our business is dependent on consumer demands 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 strategies for long-term sustainable growth in revenue, net income and operating cash flow.
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Customers and Suppliers
Customers
Our customer base is diverse. Our customers in garment manufacturing business are mainly garment wholesalers and retailers and our customers in logistics services business are mainly trading companies and logistic companies. During the six months ended September 30, 2020 and 2019, approximately 54.5% and 34.6% of total sales were from the Company’s five largest customers, respectively. For the six months ended September 30, 2020, two customers provided more than 10% of our total revenue, with one from garments manufacturing business segment and the other one from epidemic prevention supplies business segment, which represented approximately 14.7% and 59.3% of total revenue of the Company for the six months, respectively. The high concentration in the six months ended September 30, 2020 was mainly due to concentration of distributors in trading of epidemic prevention supplies. Our management believes that should the Company lose any one of its major customers, it will able to sell similar products to other customers.
Suppliers
We procured our garments through various textile companies in our garment manufacturing business segment. In our logistics services business segment, we procured our garments from packing companies and transportation companies. During the six months ended September 30, 2020 and 2019, approximately 88.4% and 74.5% of total inventory purchases were from the Company’s five largest suppliers, respectively. Our management believes that should the Company lose any one of its major suppliers, other suppliers are available to provide similar products to the Company.
Inventory
Garment manufacturing business. We maintain our raw materials in our storage facilities. We review our inventory levels in order to identify slow-moving materials and broken assortments.
Logistics services business. Since we deliver products as soon as we receive orders from customers, we do not operate distribution centers and hence do not need to carry a significant amount of inventory.
Epidemic prevention supplies business. Since we procured and manufactured epidemic prevention supplies on order basis, we maintain low level of inventories and do not have slow-moving items.
Intellectual Property
We currently do not own any intellectual property rights. We are in the process of registering trademarks and copyright in relation to our garment manufacturing business pending approval from the PRC government.
Competition
While the PRC is still the world’s largest clothing manufacturer with enormous production capacity, oversupply, increasing labor costs and rising local protectionism have eroded its competitiveness.
The principal competitive factors in the garment manufacturing market include:
| ● | brand awareness and focus; | |
| ● | breadth of product offerings; and | |
| ● | quality control. |
The principal competitive factors in the logistics market include:
| ● | delivery time; and | |
| ● | network coverage. |
The principal competitive factors in the epidemic prevention supplies market include:
| ● | delivery time; | |
| ● | cost control; and | |
| ● | quality control. |
We believe we compete favorably with our competitors on the basis of the above factors as a result of our market position and customer base. By offering one-stop-shop services and affordable price points, we provide services to our customers that are difficult for other competitors to address.
Employees
As of September 30, 2020, we had 133 employees and there was no labor union established by our employees. The following table sets out a breakdown of the number of employees by function as of September 30, 2020:
| Function | Number of employees | |||
| Administration | 18 | |||
| Finance | 20 | |||
| Logistics | 11 | |||
| Management | 29 | |||
| Marketing | 8 | |||
| Production | 7 | |||
| Operation | 40 | |||
| Total | 133 | |||
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According to PRC regulations, we must participate in various employee social security plans organized by local governments, including pension, unemployment insurance, childbirth insurance, work-related injury insurance and medical insurance. We are also required under PRC law to contribute to employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the local government from time to time.
We believe that we maintain a good working relationship with our employees, and to date we have not experienced any significant labor disputes.
Government Regulations
Currently, apart from customary business laws and regulations, the PRC government does not regulate the garment manufacturing business and logistics services business. The PRC government may, however, from time to time institute rules and regulations on such businesses which makes it difficult or impossible for us to operate successfully, if at all, in the PRC. Please see the section on “Risk Factors” for further details.
The PRC government encourages small to medium-sized companies in traditional industries, such as garment manufacturing, to modernize their business models with technological updates in order to sharpen their competitive edge in global markets.
Properties
Our principal place of business is Kingkey 100, Block A, Room 4805, Luohu District, Shenzhen City, China 518000, the PRC. We also lease three properties in the PRC from third parties which properties serve as our manufacturing factory and an additional office. The following table sets forth a summary of certain information regarding our leased properties.
| Property Type | Address | Monthly Rental (RMB) | Size (Square Meter) | |||||||
| Principal Office | Kingkey
100, Block A, Room 4805, Luohu District, Shenzhen, Guangdong, China | 245,827 | 910 | |||||||
| Plant and dormitory | No.
22 Maan Road, Shuiwei, Tangjiao Village, Chashan Town, Dongguan, Guangdong, PRC | 18,018 | 1,260 | |||||||
| Office | No.
42-46, Floor 1, Block D, District B, Jinpeng Distribution Center, No. 536, Sha Ping North Rd, Danping Committee, Nanwan St, Longgang, Shenzhen, Guangdong, PRC | 44,880 | 720 | |||||||
| Office | No.
3 Ping’an Avenue, Pinghu Street, Longgang District, Shenzhen, Guangdong, PRC | 28,725 | 605 | |||||||
We also have over 400 logistics points and they are located in seven provinces and two municipalities in the PRC.
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.
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DIRECTORS AND EXECUTIVE OFFICERS
The name, address, age and titles of our executive officers and director are as follows:
| Name & Address | Age | Title | Date of First Appointment | |||
| Hong Zhida | 30 | Chairman of the Board, Chief Executive Officer, President and Secretary | March 10, 2017 | |||
| Huang Chao | 27 | Chief Financial Officer and Treasurer | March 8, 2019 | |||
| Cui Shan (1) | 39 | Independent Director | August 10, 2020 | |||
| Yu Jiaxin (1)(2)(3) | 38 | Independent Director | March 13, 2019 | |||
| Li Weilin (1)(2)(3) | 39 | Independent Director | March 13, 2019 | |||
| Hong Zhiwang | 26 | Director | March 13, 2019 |
| (1) | Member of the Audit Committee | |
| (2) | Member of the Compensation Committee | |
| (3) | Member of the Nominating and Corporate Governance Committee |
Hong Zhida, Chairman, CEO, President and Secretary
Mr. Hong Zhida received his Bachelor’s Degree in Electronic Information Science and Technology from Sun Yat-sen University in July 2013. From June 2014 to Present, he served as the Director of China Huiying Joint Supply Chain Group Co. Ltd. He was responsible for assisting the company’s chairman to plan development strategy. From September 2013 to May 2014, he served as Head of Membership Department of the Guangzhou Haifeng Chamber of Commerce. In that position he was responsible for the membership management of the institution.
Mr. Huang Chao, Chief Financial Officer and Treasurer
Mr. Huang Chao earned two bachelor’s degrees, one in marketing from Shaoguan University, China in 2014 and the other in international logistics and trade finance from University of Northampton, United Kingdom in 2015. He earned his master’s degree in finance and investment management from University of Liverpool, United Kingdom in 2016 to broaden and deepen his knowledge in the accounting and finance field. After his graduation in 2016, he was appointed as a secretary to Chairman in Addentax Group Corp. He handles all Company’s filings to ensure the Company complies with regulation and advising on good corporate governance practice. Huang Chao interacts with the directors, general manager of each business unit, various regulatory and professional bodies such as the SEC, auditors and attorneys to ensure the compliance. His managing experiences, and profound knowledge in finance make him well positioned for his role as Chief Financial Officer and Treasurer.
Cui Shan, Independent Director
Ms. Cui earned her bachelor’s degree in English from Qingdao Ocean University in 1991 and a master’s degree in finance from Georgia State University, the United States in 1995. Ms. Cui is currently the CFO of First Capital International Limited engaging in funding, investment evaluation, pre-IPO advisory post IPO capital market activities. Ms. Cui is also the independent Director and audit chair of WIMI Hologram Inc. since May 2020. Since August 2018, Ms. Cui has been an independent director and the chairwoman of the audit committee and compensation committee of Fuqin Fintech Limited. From April 2019 to October 2019, Ms. Cui was an independent director and the chairwoman of the audit committee of Greenland Acquisition Corp.. From 2011 to 2013, Ms. Cui as the chief financial officer of Lizhan Environmental Corporation, a then Nasdaq-listed company engaged in the business of green leather material manufacturing. She has accumulated sufficient accounting and finance reporting and risk management experience by working at multiple publicly listed companies since 1995. She has seasoned executive expertise in capital markets, investor relations, SOX, financial planning and analysis, SEC reporting, financial systems , CFO services, and project management . She brings to the Board in-depth finance, audit and business experiences.
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Yu Jiaxin, Independent Director
Ms. Yu Jiaxin earned her bachelor’s degree in business management from Nankai University, China in 2006. Ms. Yu currently is the senior human resources director of Kingkey Capital Management Co., Ltd., a Group which offers real estate development, commercial operation, financial investment, and other services in Shenzhen, China. She has worked for Kingkey Group since 2008, initially as a human resources officer and now as senior human resources director. She assisted in the set-up of Kingkey’s annual operating plan and budget in accordance with the company’s annual goals and strategies, building the company’s organizational structure and coordinating Human Resource and Administration, establishing the sound comprehensive personnel administrative management system which is adaptable to the company’s development, and implementing and supervising the system. Bringing over ten years of human resources administration experience, she brings to the Board insights on compensation and benefits.
Li Weilin, Independent Director
Mr. Li Weilin earned his bachelor’s degree in Computer Science & Technology from Sun Yat-sen University, China in 2005 and earned his master’s degree in Software Engineering from the same University in 2011. Mr. Li currently is the information and network center director in Xinhua College of Sun Yat-sen University since 2005 and is responsible for information service management for all faculties and students. He also is the leader of Computer Application & Technology program in Guangdong Polytechnic College and is responsible for major IT planning and management of the College since 2015. In 2017, he is appointed as a technology expert in Guangzhou City, providing technology consults and projects examination and verification for the information construction of Guangzhou authorities. His studies cover Network & System Safety, Image Processing, Data Mining, Business Intelligence, Big Data Management and Network Physical System. He brings to the Board deep information technology experience.
Hong Zhiwang, Director
Mr. Hong Zhiwang earned his bachelor’s degree in Automation Engineering from Beijing Institute of Technology University Zhuhai Campus, China in 2014. Mr. Hong has been the brand marketing manager at Addentax Group Corp. since 2018 and is responsible for e-commerce marketing covering design website, brand marketing, market investigation and development, and expanding marketing channels to develop new clients, designing the company’s logo and registering copyrights. In 2014, he was the PDM Software Engineer for Hongfan Computer & Technology Co., Ltd. and was responsible for developing software, on-site inspection and guidance and software maintenance, in assistance of ERP to manage the system and create brand new demands design and in charge of R&D of PLM System, surface model design and function model development, structure development and communications technology development. He brings to the Board deep brand marketing experience.
Board Committees
Our board of directors has established standing committees in connection with the discharge of its responsibilities. These committees include an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee. Our board of directors has adopted written charters for each of these committees. Upon completion of this offering, copies of the charters will be available on our website. Our board of directors may establish other committees as it deems necessary or appropriate from time to time.
Audit Committee
Our Audit Committee was established on March 8, 2019 and is comprised of three of our independent directors: Ms. Cui Shan (Chairperson), Ms. Yu Jiaxin and Mr. Li Weilin. Ms. Cui Shan qualifies as the Audit Committee financial expert as defined in Item 407(d)(5) of Regulation S-K promulgated under the Securities Act.
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According to its charter, the Audit Committee consists of at least three members, each of whom shall be a non-employee director who has been determined by the Board to meet the independence requirements of NASDAQ, and also Rule 10A-3(b)(1) of the SEC, subject to the exemptions provided in Rule 10A-3(c). We do not have a website containing a copy of the Audit Committee Charter. The Audit Committee Charter describes the primary functions of the Audit Committee, including the following:
| ● | Oversee the Company’s accounting and financial reporting processes; | |
| ● | Oversee audits of the Company’s financial statements; | |
| ● | Discuss policies with respect to risk assessment and risk management, and discuss the Company’s major financial risk exposures and the steps management has taken to monitor and control such exposures; | |
| ● | Review and discuss with management the Company’s audited financial statements and review with management and the Company’s independent registered public accounting firm the Company’s financial statements prior to the filing with the SEC of any report containing such financial statements. | |
| ● | Recommend to the board that the Company’s audited financial statements be included in its annual report on Form 10-K for the last fiscal year; | |
| ● | Meet separately, periodically, with management, with the Company’s internal auditors (or other personnel responsible for the internal audit function) and with the Company’s independent registered public accounting firm; | |
| ● | Be directly responsible for the appointment, compensation, retention and oversight of the work of any independent registered public accounting firm engaged to prepare or issue an audit report for the Company; | |
| ● | Take, or recommend that the board take, appropriate action to oversee and ensure the independence of the Company’s independent registered public accounting firm; and | |
| ● | Review major changes to the Company’s auditing and accounting principles and practices as suggested by the Company’s independent registered public accounting firm, internal auditors or management. |
Compensation Committee
The Compensation Committee is responsible for, among other matters:
| ● | reviewing and approving, or recommending to the board of directors to approve the compensation of our CEO and other executive officers and directors reviewing key employee compensation goals, policies, plans and programs; | |
| ● | administering incentive and equity-based compensation; | |
| ● | reviewing and approving employment agreements and other similar arrangements between us and our executive officers; and | |
| ● | appointing and overseeing any compensation consultants or advisors. |
Our Compensation Committee was established on March 8, 2019 and is comprised of two of our independent directors: Ms. Yu Jiaxin (Chairperson) and Mr. Li Weilin.
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Corporate Governance and Nominating Committee
The Corporate Governance and Nominating Committee is responsible for, among other matters:
| ● | selecting or recommending for selection candidates for directorships; | |
| ● | evaluating the independence of directors and director nominees; | |
| ● | reviewing and making recommendations regarding the structure and composition of our board and the board committees; | |
| ● | developing and recommending to the board corporate governance principles and practices; | |
| ● | reviewing and monitoring the Company’s Code of Business Conduct and Ethics; and | |
| ● | overseeing the evaluation of the Company’s management. |
Our Corporate Governance and Nominating Committee was established on March 8, 2019 and is comprised of two of our independent directors: Ms. Yu Jiaxin and Mr. Li Weilin (Chairperson).
Board Leadership Structure and Role in Risk Oversight
Mr. Hong Zhida holds the positions of chief executive officer and chairman of the board of the Company. The board believes that Mr. Hong Zhida’s services as both chief executive officer and chairman of the board is in the best interest of the Company and its shareholders. Mr. Hong Zhida possesses detailed and in-depth knowledge of the issues, opportunities and challenges facing the Company in its business and is thus best positioned to develop agendas that ensure that the Board’s time and attention are focused on the most critical matters relating to the business of the Company. His combined role enables decisive leadership, ensures clear accountability, and enhances the Company’s ability to communicate its message and strategy clearly and consistently to the Company’s shareholders, employees and customers.
The board has not designated a lead director. Given the limited number of directors comprising the Board, the independent directors call and plan their executive sessions collaboratively and, between meetings of the Board, communicate with management and one another directly. Under these circumstances, the directors believe designating a lead director to take on responsibility for functions in which they all currently participate might detract from rather than enhance performance of their responsibilities as directors.
Management is responsible for assessing and managing risk, subject to oversight by the board of directors. The board oversees our risk management policies and risk appetite, including operational risks and risks relating to our business strategy and transactions. Various committees of the board assist the board in this oversight responsibility in their respective areas of expertise.
Code of Ethics
In September 2018, we adopted a Code of Ethical Business Conduct that applies to, among other persons, members of our board of directors, our Company’s officers including our Chief Executive Officer, employees, consultants and advisors. As adopted, our Code of Business Conduct and Ethics sets forth written standards that are designed to deter wrongdoing and to promote:
| 1. | honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; | |
| 2. | full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with, or submit to, the SEC and in other public communications made by us; | |
| 3. | compliance with applicable governmental laws, rules and regulations; | |
| 4. | the prompt internal reporting of violations of the Code of Ethical Business Conduct to an appropriate person or persons identified in the Code of Ethical Business Conduct; and | |
| 5. | accountability for adherence to the Code of Ethical Business Conduct. |
Our Code of Code of Ethical Business Conduct requires, among other things, that all of our company’s senior officers commit to timely, accurate and consistent disclosure of information; that they maintain confidential information; and that they act with honesty and integrity.
In addition, our Code of Ethical Business Conduct emphasizes that all employees, and particularly senior officers, have a responsibility for maintaining financial integrity within our company, consistent with generally accepted accounting principles, and federal and state securities laws. Any senior officer, who becomes aware of any incidents involving financial or accounting manipulation or other irregularities, whether by witnessing the incident or being told of it, must report it to our Company. Any failure to report such inappropriate or irregular conduct of others is to be treated as a severe disciplinary matter. It is against our Company policy to retaliate against any individual who reports in good faith the violation or potential violation of our company’s Code of Ethical Business Conduct by another.
Family Relationships
Mr. Hong Zhida, an executive officer of the Company, and Mr. Hong Zhiwang, a director of the Company, are brothers. Apart from this, there are no family relationships between any director or executive officer of the Company.
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The following tables set forth certain information about compensation paid, earned or accrued for services by our officers for the fiscal years ended March 31, 2020 and March 31, 2019:
Summary Compensation Table
| Summary
Compensation Table Name and Principal Position | Year | Salary
($) | Bonus
($) | Stock
Awards ($) | Option
Awards ($) | Non-Equity Incentive Plan Compensation ($) | Non-Qualified
Deferred Compensation Earnings ($) | All Other Compensation ($) | Totals
($) | |||||||||||||||||||||||||||
| Hong Zhida | 2020 | $ | 17,229 | 0 | 0 | 0 | 0 | 0 | 0 | $ | 17,229 | |||||||||||||||||||||||||
| CEO, President and Secretary | 2019 | $ | 16,589 | 0 | 0 | 0 | 0 | 0 | 0 | $ | 16,589 | |||||||||||||||||||||||||
| Huang Chao | 2020 | $ | 17,229 | 0 | 0 | 0 | 0 | 0 | 0 | $ | 17,229 | |||||||||||||||||||||||||
CFO | 2019 | $ | 11,496 | 0 | 0 | 0 | 0 | 0 | 0 | $ | 11,496 | |||||||||||||||||||||||||
Mr. Hong Zhida is the Company’s Chief Executive Officer, President and Secretary. Mr. Hong’s compensation is $1,436 per month. Mr. Hong may be entitled to options from time to time as authorized and approved by the Compensation Committee or the Board of Directors.
Mr. Huang Chao as the Company’s Chief Financial Officer and Treasurer. On April 15, 2019, the Company entered into an employment agreement with Mr. Huang. Mr. Huang’s compensation is $1,436 per month. Mr. Huang may be entitled to options from time to time as authorized and approved by the Compensation Committee or the Board of Directors.
Narrative Disclosure to Summary Compensation Table
There are no annuity, pension or retirement benefits proposed to be paid to the officer or director or employees in the event of retirement at normal retirement date pursuant to any presently existing plan provided or contributed to by the Company or any of its subsidiaries, if any.
Stock Option Plan
Currently, we do not have an equity incentive plan in place.
Grants of Plan-Based Awards
To date, there have been no grants or plan-based awards.
Outstanding Equity Awards
To date, there have been no outstanding equity awards.
Option Exercises and Stock Vested
To date, there have been no options exercised by our named officers.
Compensation of Directors
Each independent director has entered into an Independent Director Agreement with the Company, pursuant to which Ms. Cui Shan, Ms. Yu Jiaxin and Mr. Li Weilin will receive $17,142, $15,000 and $15,000 per year, respectively, in equal monthly installments of $1,429, $1,250 and $1,250, respectively, at the end of each month.
Pension, Retirement or Similar Benefit Plans
There are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers. We have no material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that stock options may be granted at the discretion of the board of directors or a committee thereof.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the years ended March 31, 2020 and 2019, and from the period from September 2020, to the date of this prospectus, we have not entered into any transactions with our officers or directors, or persons nominated for these positions, beneficial owners of 5% or more of our common stock, or family members of these persons wherein the amount involved in the transaction or a series of similar transactions exceeded the lesser of $120,000 or 1% of the average of our total assets, except as set forth below:
On April 18, 2017, the Company issued a total of 500,000,000 restricted shares of common stock as follows:
| ○ | Hengtian Group Co., Ltd.: (Beneficial Owner: Ma Huizhu) 215,000,000 shares of common stock; | |
| ○ | Hong Zhida (current Chief Executive Officer, President, Secretary and Chairman of the Company): 30,000,000 shares of common stock; and | |
| ○ | Hui Lian Group Ltd.: (Beneficial Owner: Ma Huijun) 255,000,000 shares of common stock. |
The 500,000,000 shares of common stock were issued pursuant to a Sale & Purchase Agreement (“S&P”) for the acquisition of 100% of the shares and assets of Yingxi Industrial Chain Group Co., Ltd., a company incorporated under the laws of the Republic of Seychelles. The Company agreed to issue five hundred million (500,000,000) shares of common stock to Yingxi Industrial Chain Group Co., Ltd. to acquire its shares and assets for a cost of US$0.30 per share or a total cost of US$150,000,000.
On August 1, 2018, our wholly-owned subsidiaries, Qianhai Yingxi Textile & Garments (Shenzhen) Co., Ltd and Shenzhen Qianhai Yingxi Industrial Chain Service Co., Ltd, each entered into a Triparty Agreement of Debt Transfer, whereby such entities agreed to transfer $1,428,572 and $1,640,072, respectively, of debt owed by the subsidiaries to a related party creditor (the “Creditor” and the “Debt”), to the Company’s Chief Executive Officer, Hong Zhida, who agreed to assume and be solely responsible for such Debt. As a result of the Agreements, Mr. Hong is now solely responsible for the repayment of the Debt to the Creditor.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of January 22, 2021, certain information concerning the beneficial ownership of our common stock by (i) each stockholder known by us to own beneficially five percent or more of our outstanding common stock or series a common stock; (ii) each director; (iii) each named executive officer; and (iv) all of our executive officers and directors as a group, and their percentage ownership and voting power. The column entitled “Percentage of Shares Beneficially Owned—Before Offering” is based on a total of 26,093,004 shares of our issued and outstanding common stock.
The information presented below regarding beneficial ownership of our voting securities has been presented in accordance with the rules of the Securities and Exchange Commission and is not necessarily indicative of ownership for any other purpose. Under these rules, a person is deemed to be a “beneficial owner” of a security if that person has or shares the power to vote or direct the voting of the security or the power to dispose or direct the disposition of the security. A person is deemed to own beneficially any security as to which such person has the right to acquire sole or shared voting or investment power within sixty (60) days through the conversion or exercise of any convertible security, warrant, option, or other right. More than one (1) person may be deemed to be a beneficial owner of the same securities. The percentage of beneficial ownership by any person as of a particular date is calculated by dividing the number of shares beneficially owned by such person, which includes the number of shares as to which such person has the right to acquire voting or investment power within sixty (60) days, by the sum of the number of shares outstanding as of such date. Consequently, the denominator used for calculating such percentage may be different for each beneficial owner. Except as otherwise indicated below and under applicable community property laws, we believe that the beneficial owners of our common stock listed below have sole voting and investment power with respect to the shares shown.
| Name and Address (1) | Number
of Shares Beneficially Owned | Percentage Ownership of Shares of Common Stock Before the Offering | Percentage Ownership of Shares of Common Stock After the Offering | |||||||||
| Directors and Officers | ||||||||||||
| Hong Zhida | 1,507,950 | 5.95 | % | 5.51 | % | |||||||
| Hong Zhiwang | 501,171 | 1.98 | % | 1.83 | % | |||||||
| Huang Chao | 25,720 | 0.1 | % | 0.09 | % | |||||||
Cui Shan | - | - | - | |||||||||
| Yu Jiaxin | - | - | - | |||||||||
| Li Weilin | - | - | - | |||||||||
| All Officers and Directors (six persons) | 2,034,841 | 8.03 | % | 7.44 | % | |||||||
| Owner of more than 5% of Class | - | - | - | |||||||||
| (1) | Except as otherwise set forth below, the address of each beneficial owner is c/o Addentax Group Corp., Kingkey 100, Block A, Room 4805, Luohu District, Shenzhen City, China 518000. |
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We have authorized capital stock consisting of 50,000,000 shares of common stock, $0.001 par value per share.
As of the date of this prospectus, we have 26,093,004 shares of our common stock outstanding.
The following description of our capital stock is a summary only and is subject to and qualified in its entirety by reference to the applicable provisions of the Nevada Revised Statutes, and our charter and Bylaws, copies of which have been filed as exhibits to the registration statement of which this prospectus is part. You should refer to, and read this summary together with, our Articles of Incorporation and Bylaws, each as amended and restated to date, to review all of the terms of our capital stock. Our Articles of Incorporation and amendments thereto are incorporated by reference as exhibits to the registration statement of which this prospectus is a part.
Common Stock
Each share of our common stock is entitled to equal dividends and distributions per share with respect to the common stock when, as and if declared by our Board of Directors. No holder of any shares of our common stock has a preemptive right to subscribe for any of our securities, nor are any shares of our common stock subject to redemption or convertible into other securities. Upon liquidation, dissolution or winding-up of the Company, and after payment to our creditors and preferred stockholders, if any, our assets will be divided pro rata on a share-for-share basis among the holders of our common stock. Each share of our common stock is entitled to one vote on all stockholder matters. Shares of our common stock do not possess any cumulative voting rights.
The presence of the persons entitled to vote a majority of the outstanding voting shares on a matter before the stockholders constitute the quorum necessary for the consideration of the matter at a stockholders’ meeting.
Except as otherwise required by law, the Articles of Incorporation, or any certificate of designations, (i) at all meetings of stockholders for the election of directors, a plurality of votes cast are sufficient to elect such directors; (ii) any other action taken by stockholders are be valid and binding upon the Company if the number of votes cast in favor of the action exceeds the number of votes cast in opposition to the action, at a meeting at which a quorum is present, except that adoption, amendment or repeal of the Bylaws by stockholders requires the vote of a majority of the shares entitled to vote; and (iii) broker non-votes and abstentions are considered for purposes of establishing a quorum but not considered as votes cast for or against a proposal or director nominee. Each stockholder has one vote for every share of stock having voting rights registered in his or her name, except as otherwise provided in any preferred stock designation setting forth the right of preferred stock stockholders.
The common stock does not have cumulative voting rights, which means that the holders of 51% of the common stock voting for election of directors can elect 100% of our directors if they choose to do so.
Anti-Takeover Provisions Under The Nevada Revised Statutes
Certain provisions of Nevada law, and our Articles of Incorporation and our Bylaws (subject, where applicable as described below, our opting out of certain provisions of Nevada law), contain provisions that could make the following transactions more difficult: acquisition of us by means of a tender offer; acquisition of us by means of a proxy contest or otherwise; or removal of our incumbent officers and directors. It is possible that these provisions could make it more difficult to accomplish or could deter transactions that stockholders may otherwise consider to be in their best interest or in our best interests, including transactions that might result in a premium over the market price for our shares.
These provisions, summarized below, are expected to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our Board of Directors. We believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging these proposals because negotiation of these proposals could result in an improvement of their terms.
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Business Combinations
Sections 78.411 to 78.444 of the Nevada revised statues (the “NRS”) prohibit a Nevada corporation from engaging in a “combination” with an “interested stockholder” for three years following the date that such person becomes an interested stockholder and place certain restrictions on such combinations even after the expiration of the three-year period. With certain exceptions, an interested stockholder is a person or group that owns 10% or more of the corporation’s outstanding voting power (including stock with respect to which the person has voting rights and any rights to acquire stock pursuant to an option, warrant, agreement, arrangement, or understanding or upon the exercise of conversion or exchange rights) or is an affiliate or associate of the corporation and was the owner of 10% or more of such voting stock at any time within the previous three years.
A Nevada corporation may elect not to be governed by Sections 78.411 to 78.444 by a provision in its Articles of Incorporation. We do not have such a provision in our Articles of Incorporation, as amended, pursuant to which we have elected to opt out of Sections 78.411 to 78.444; therefore, these sections apply to us.
Control Shares
Nevada law also seeks to impede “unfriendly” corporate takeovers by providing in Sections 78.378 to 78.3793 of the NRS that an “acquiring person” shall only obtain voting rights in the “control shares” purchased by such person to the extent approved by the other stockholders at a meeting. With certain exceptions, an acquiring person is one who acquires or offers to acquire a “controlling interest” in the corporation, defined as one-fifth or more of the voting power. Control shares include not only shares acquired or offered to be acquired in connection with the acquisition of a controlling interest, but also all shares acquired by the acquiring person within the preceding 90 days. The statute covers not only the acquiring person but also any persons acting in association with the acquiring person.
A Nevada corporation may elect to opt out of the provisions of Sections 78.378 to 78.3793 of the NRS. We do not have a provision in our Articles of Incorporation pursuant to which we have elected to opt out of Sections 78.378 to 78.3793; therefore, these sections apply to us.
Removal of Directors
Section 78.335 of the NRS provides that 2/3rds of the voting power of the issued and outstanding shares of the Company are required to remove a Director from office. As such, it may be more difficult for stockholders to remove Directors due to the fact the NRS requires greater than majority approval of the stockholders for such removal.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, only a limited public market for our common stock existed on the OTCQB. Future sales of substantial amounts of our common stock in the public market, including shares issued upon exercise of outstanding warrants, or the anticipation of such sales, could adversely affect prevailing market prices of our common stock from time to time and could impair our ability to raise equity capital in the future.
Upon the closing of this offering, we will have 31,093,004 shares of our common stock issued and outstanding. In addition, we will have 500,000 shares of common stock issuable upon the exercise of the Underwriter Warrants.
Lock-Up
For further details on the lock-up agreements, see the section entitled “Underwriting – Lock Up Agreements.”
Rule 144
In general, under Rule 144 of the Securities Act, as in effect on the date of this prospectus, any person who is not our affiliate at any time during the preceding three months, and who has beneficially owned their shares for at least six months, including the holding period of any prior owner other than one of our affiliates, would be entitled to sell an unlimited number of shares of our common stock provided current public information about us is available, and, after owning such shares for at least one year, including the holding period of any prior owner other than one of our affiliates, would be entitled to sell an unlimited number of shares of our common stock without restriction.
A person who is our affiliate or who was our affiliate at any time during the preceding three months, and who has beneficially owned restricted securities for at least six months, including the holding period of any prior owner other than one of our affiliates, is entitled to sell within any three-month period a number of shares that does not exceed the greater of:
| ● | 1% of the number of shares of our common stock then outstanding, which will equal approximately 273,460 shares immediately after this offering; or | |
| ● | the average weekly trading volume of our common stock during the four calendar weeks preceding the filing of a Notice of Proposed Sale of Securities pursuant to Rule 144 with respect to the sale. |
Sales under Rule 144 by our affiliates are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us.
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In connection with this offering, we will enter into an underwriting agreement with Network 1 Financial Securities, Inc., which we sometimes refer to herein as the Underwriter. The Underwriter may retain other brokers or dealers to act as sub-agents on its behalf in connection with this offering and may pay any sub-agent a solicitation fee with respect to any securities placed by it. The Underwriter has agreed to purchase, and we have agreed to sell to the Underwriter, the number of shares indicated below:
| Name | Number of shares | |||
| Network 1 Financial Securities, Inc. | 5,000,000 | |||
| Total | 5,000,000 | |||
The underwriting agreement provides that the Underwriter is obligated to purchase all shares in the offering if any are purchased, other than those shares covered by the over-allotment option described below.
We have agreed to indemnify the Underwriter and certain of their controlling persons against certain liabilities, including liabilities under the Securities Act, and to contribute to payments that the Underwriter may be required to make in respect of those liabilities.
We have granted to the Underwriter a 45-day option to purchase up to 750,000 additional shares from us at the initial public offering price less the underwriting discounts and commissions. The option may be exercised in whole or in part, and may be exercised more than once, during the 45-day option period. The Underwriter may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering contemplated by this prospectus.
Fees and Expenses
The Underwriter has advised us that it proposes to offer the shares to the public at the public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $0.375 per share. After this offering, the public offering price and concession to dealers may be reduced by the Underwriter. No such reduction shall change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. The securities are offered by the Underwriter as stated herein, subject to receipt and acceptance by it and subject to its right to reject any order in whole or in part. The Underwriter has informed us that it does not intend to confirm sales to any accounts over which it exercises discretionary authority.
We have agreed to pay the Underwriter a cash fee equal to seven and half percent (7.5%) of the aggregate gross proceeds raised in this offering. The following table shows the price per share and total public offering price, underwriting discounts and commissions, and proceeds before expenses to us. These amounts are shown assuming both no exercise and full exercise of the Underwriter’ over-allotment option.
| Total | ||||||||||||
| Per Share | No Exercise | Full Exercise | ||||||||||
| Public offering price | $ | 5.00 | $ | 25,000,000 | $ | 26,500,000 | ||||||
| Underwriting discounts and commissions to be paid by us: | $ | 0.375 | $ | 1,875,000 | $ | 1,987,500 | ||||||
| Proceeds, before expenses, to us | $ | 4.625 | $ | 23,125,000 | $ | 24,512,500 | ||||||
We will also pay to the Underwriter by deduction from the net proceeds of the offering contemplated herein, a non-accountable expense allowance equal to one and one-half percent (1.5%) of the gross proceeds received by us from the sale of the shares.
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We have agreed to reimburse the Underwriter up to a maximum of $150,000 for out-of-pocket accountable expenses. We have paid expense deposits of $75,000 to the Underwriter for its anticipated out-of-pocket expenses; any expense deposits will be returned to us to the extent the Underwriter’s out-of-pocket accountable expenses are not actually incurred in accordance with FINRA Rule 5110(g)(5)(A).
We have agreed to pay expenses relating to the offering, including, without limitation: the Company’s legal and accounting fees and disbursements; the costs of preparing, printing, mailing and delivering the Registration Statement, the preliminary and final prospectus contained therein and amendments thereto, post-effective amendments and supplements thereto, the underwriting agreement and related documents (all in such quantities as the Underwriter may reasonably require); preparing and printing stock certificates and warrant certificates; the costs of any “due diligence” meetings; all reasonable and documented fees and expenses for conducting a net road show presentation; all filing fees (including SEC filing fees) and communication expenses relating to the registration of the shares to be sold in the Offering, FINRA filing fees; the reasonable and documented fees and disbursements of the Underwriter’s counsel up to an amount of $60,000 (which maximum shall apply solely to such fees and disbursements of counsel and not to other fees and expenses); background checks of the Company’s officers and directors up to a maximum of $15,000; preparation of bound volumes and mementos in such quantities as the Underwriter may reasonably request up to an amount of $2,500; transfer taxes, if any, payable upon the transfer of securities from the Company to the Underwriter; and the fees and expenses of the transfer agent, clearing firm and registrar for the shares; provided that the actual accountable expenses of the Underwriter shall not exceed $150,000.
We estimate that the total expenses of the offering payable by us, excluding the total underwriting discount and commissions will be approximately $727,303, including a maximum aggregate reimbursement of $150,000 of the Underwriter’s accountable expenses.
Upon the closing of the offering, we will grant the Underwriter the right of first negotiation to co-manage any public underwriting or private placement of debt or equity securities (excluding (i) shares issued under any compensation or stock option plan approved by the stockholders of the Company, (ii) shares issued in payment of the consideration for an acquisition or as part of strategic partnerships and transactions and (iii) conventional banking arrangements and commercial debt financing) of the Company or any subsidiary or successor of the Company, with the Underwriter receiving the right to underwrite or place a number of the securities to be sold therein having an aggregate purchase price therein equal to a minimum of the aggregate purchase price of the base shares in the offering, until twelve (12) months after completion of the offering. If the Underwriter fails to accept in writing any such proposal for such public or private sale within ten (10) days after receipt of a written notice from the Company containing such proposal, then the Underwriter will have no claim or right with respect to any such sale contained in any such notice. If, thereafter, such proposal is modified in any material respect, the Company will adopt the same procedure as with respect to the original proposed public or private sale, and the Underwriter shall have the right of first negotiation with respect to such revised proposal in accordance with the above terms.
Underwriter Warrants
In addition, we have agreed to grant the underwriter non-redeemable warrants to purchase an amount equal to ten percent (10%) of the shares of common stock sold in the offering, which warrants will be exercisable six months after the closing of the offering, have a five (5) year term after the effective date of the registration statement, of which this prospectus forms part, and a cashless exercise feature. Such warrants are exercisable at a price of 125% of the public offering price of the shares of common stock offered pursuant to this offering. We will register the shares underlying the Underwriter Warrants and will file all necessary undertakings in connection therewith. The Underwriter Warrants may not be sold, transferred, assigned, pledged or hypothecated, or be the subject of any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the securities by any person for a period of 180 days immediately following the commencement of the offering, of which this prospectus forms a part (in accordance with FINRA Rule 5110), except that they may be assigned, in whole or in part, to any member participating in the offering and the officers or partners thereof, and that all securities so transferred remain subject to the lock-up restriction for the remainder of the time period. The Underwriter Warrants may be exercised as to all or a lesser number of shares, will provide for cashless exercise and will contain provisions for one demand registration of the sale of the underlying shares of Common Stock at the Company’s expense, an additional demand registration at the warrant holders’ expense, and unlimited “piggyback” registration rights for a period of five years after the effective date of the registration statement at the Company’s expense. The Underwriter’s Warrants shall further provide for adjustment in the number and price of such warrants (and the shares of Common Stock underlying such warrants) in the event of recapitalization, merger or other structural transaction to prevent dilution. The underwriter will have the option to exercise their warrants at any time, provided that such shares are not transferred during the lock-up period; the 180 day lock period will remain on these underlying shares.
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Electronic Offer, Sale and Distribution of Common Stock
A prospectus in electronic format may be made available on the websites maintained by the underwriter. In addition, the common stock may be sold by the underwriter to securities dealers who resell the common stock to online brokerage account holders. Other than the prospectus in electronic format, the information on the underwriter’s website and any information contained in any other website maintained by the underwriter is not part of the prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or the underwriter in its capacity as underwriter and should not be relied upon by investors.
Lock-up Agreements
We, each of our directors and officers and holders of ten percent or more of our common stock on a fully diluted basis immediately prior to the consummation of this offering have agreed or are otherwise contractually restricted for a period of 180 days after the date of this prospectus, without the prior written consent of the underwriter not to directly or indirectly:
| ● | issue (in the case of us), offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of any shares of our common stock or other capital stock or any securities convertible into or exercisable or exchangeable for our common stock or other capital stock; | |
| ● | in the case of us, file or cause the filing of any registration statement under the Securities Act with respect to any shares of our common stock or other capital stock or any securities convertible into or exercisable or exchangeable for our common stock or other capital stock, other than registration statements on Form S-8 filed with the SEC after the closing date of this offering; or | |
| ● | enter into any swap or other agreement, arrangement, hedge or transaction that transfers to another, in whole or in part, directly or indirectly, any of the economic consequences of ownership of our common stock or other capital stock or any securities convertible into or exercisable or exchangeable for our common stock or other capital stock, |
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whether any transaction described in any of the foregoing bullet points is to be settled by delivery of our common stock or other capital stock, other securities, in cash or otherwise, or publicly announce an intention to do any of the foregoing.
There are no existing agreements between the underwriter and any person who will execute a lock-up agreement in connection with this offering providing consent to the sale of shares prior to the expiration of the lock-up period. The lock up does not apply to the issuance of shares upon the exercise of rights to acquire shares of common stock pursuant to any existing stock option or the conversion of any of our preferred convertible stock.
Procedures and Requirements for Subscription
If you decide to subscribe for any shares in this offering, you must:
| ● | execute and deliver a subscription agreement; and | |
| ● | deliver the subscription price to the Company by cashier’s check or wire transfer of immediately available funds. |
The subscription agreement requires you to disclose your name, address, social security number, telephone number, email address, number of shares you are purchasing, and the price you are paying for your shares.
Upon the Company’s acceptance of a subscription and receipt of full payment, and subject to the timing qualification set forth above, the Company shall countersign the subscription agreement and issue a stock certificate along with a copy of the subscription agreement.
We have the right to accept or reject subscriptions in whole or in part, for any reason or for no reason. All monies from rejected subscriptions will be returned immediately by us to the subscriber, without interest or deductions. Subscriptions for securities will be accepted or rejected within three (3) business days after we receive them.
Stabilization
Upon the declaration of effectiveness of the registration statement of which this prospectus is a part, we will enter into an underwriting agreement with the Underwriter. The terms of the underwriting agreement provide that the obligations of the Underwriter are subject to certain conditions precedent, including the absence of any material adverse change in our business and the receipt of certain certificates, opinions and letters from us, our counsel and our auditors.
We have applied to list our shares on the NASDAQ Capital Market under the symbol “ATXG”.
Prior to this offering, there has been no public market for our shares. The initial public offering price was determined by negotiations among us and the Underwriter and will not necessarily reflect the market price of our common stock following this offering. The principal factors that were considered in determining the initial public offering price included:
| ● | the information presented in this prospectus and otherwise available to the Underwriter; | |
| ● | the history of, and prospects for, the industry in which we will compete; | |
| ● | the ability of our management; | |
| ● | the prospects for our future earnings; | |
| ● | the present state of our development, results of operations and our current financial condition | |
| ● | the general condition of the securities markets at the time of this offering; and | |
| ● | the recent market prices of, and the demand for, publicly traded common stock of generally comparable companies. |
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We cannot assure you that the initial public offering price will correspond to the price at which our common stock will trade in the public market subsequent to this offering or that an active trading market for our common stock will develop and continue after this offering.
In connection with the offering the Underwriter may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions, penalty bids and passive market making in accordance with Regulation M under the Securities Exchange Act of 1934 (the “Exchange Act”).
| ● | Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. | |
| ● | Over-allotment involves sales by the Underwriter of the common stock in excess of the number of shares the Underwriter are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the Underwriter is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The Underwriter may close out any covered short position by either exercising their over-allotment option and/or purchasing shares in the open market. | |
| ● | Syndicate covering transactions involve purchases of shares in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the Underwriter will consider, among other things, the price of our common stock available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. If the Underwriter sell more shares than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the Underwriter is concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering. | |
| ● | Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. | |
| ● | In passive market making, market makers in the shares who is the Underwriter or prospective Underwriter may, subject to limitations, make bids for or purchases of our common stock until the time, if any, at which a stabilizing bid is made. |
These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of the shares. As a result the price of our common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on NASDAQ Capital Market or otherwise and, if commenced, may be discontinued at any time.
A prospectus in electronic format may be made available on the web sites maintained by one or more of the Underwriter, or selling group members, if any, participating in this offering and the Underwriter may distribute prospectuses electronically. The Underwriter may agree to allocate a number of shares to selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the Underwriter and selling group members that will make internet distributions on the same basis as other allocations.
The Underwriter and their respective affiliates are full-service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. The Underwriter has, from time to time, performed, and may in the future perform, various financial advisory and investment banking services for us, for which it received or will receive customary fees and expenses.
In addition, in the ordinary course of the business activities, the Underwriter and their affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers. These investments and securities activities may involve securities and/or instruments of ours or our affiliates. The Underwriter and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.
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Offer Restrictions outside the United States
Other than in the United States, no action has been taken by us or the underwriter that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
Australia. This prospectus is not a product disclosure statement, prospectus or other type of disclosure document for the purposes of Corporations Act 2001 (Commonwealth of Australia) (the “Act”) and does not purport to include the information required of a product disclosure statement, prospectus or other disclosure document under Chapter 6D.2 of the Act. No product disclosure statement, prospectus, disclosure document, offering material or advertisement in relation to the offer of the shares has been or will be lodged with the Australian Securities and Investments Commission or the Australian Securities Exchange.
Accordingly, (1) the offer of the shares under this prospectus may only be made to persons: (i) to whom it is lawful to offer the shares without disclosure to investors under Chapter 6D.2 of the Act under one or more exemptions set out in Section 708 of the Act, and (ii) who are “wholesale clients” as that term is defined in section 761G of the Act, (2) this prospectus may only be made available in Australia to persons as set forth in clause (1) above, and (3) by accepting this offer, the offeree represents that the offeree is such a person as set forth in clause (1) above, and the offeree agrees not to sell or offer for sale any of the shares sold to the offeree within 12 months after their issue except as otherwise permitted under the Act.
Canada. The shares may not be offered, sold or distributed, directly or indirectly, in any province or territory of Canada other than the provinces of Ontario and Quebec or to or for the benefit of any resident of any province or territory of Canada other than the provinces of Ontario and Quebec, and only on a basis that is pursuant to an exemption from the requirement to file a prospectus in such province, and only through a dealer duly registered under the applicable securities laws of such province or in accordance with an exemption from the applicable registered dealer requirements.
Cayman Islands. This prospectus does not constitute a public offer of the shares, whether by way of sale or subscription, in the Cayman Islands. Each underwriter has represented and agreed that it has not offered or sold, and will not offer or sell, directly or indirectly, any shares to any member of the public in the Cayman Islands.
European Economic Area. In relation to each Member State of the European Economic Area that has implemented the Prospectus Directive, or a Relevant Member State, from and including the date on which the Prospectus Directive is implemented in that Relevant Member State, or the Relevant Implementation Date, an offer of the shares to the public may not be made in that Relevant Member State prior to the publication of a prospectus in relation to the shares that has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and the competent authority in that Relevant Member State has been notified, all in accordance with the Prospectus Directive, except that it may, with effect from and including the Relevant Implementation Date, make an offer of the shares to the public in that Relevant Member State at any time,
| ● | to legal entities that are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities; | |
| ● | to any legal entity that has two or more of (1) an average of at least 250 employees during the last financial year, (2) a total balance sheet of more than €43,000,000, and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts; | |
| ● | to fewer than 100 natural or legal persons (other than qualified investors as defined in the Prospectus Directive; or | |
| ● | in any other circumstances that do not require the publication by the company of a prospectus pursuant to Article 3 of the Prospectus Directive; |
provided that no such offer of shares shall result in a requirement for the publication by the company of a prospectus pursuant to Article 3 of the Prospectus Directive.
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For purposes of the above provision, the expression “an offer of shares to the public” in relation to any shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the shares to be offered so as to enable an investor to decide to purchase or subscribe the shares, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State, and the expression “Prospectus Directive” means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.
Hong Kong. The shares may not be offered or sold by means of this document or any other document other than (i) in circumstances that do not constitute an offer or invitation to the public within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong) or the Securities and Futures Ordinance (Cap.571, Laws of Hong Kong), or (ii) to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap.571, Laws of Hong Kong) and any rules made thereunder, or (iii) in other circumstances that do not result in the document being a “prospectus” within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), and no advertisement, invitation or document relating to the shares may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), that is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to shares which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder.
Malaysia
The shares have not been and may not be approved by the securities commission Malaysia, or SC, and this document has not been and will not be registered as a prospectus with the SC under the Malaysian capital markets and services act of 2007, or CMSA. Accordingly, no securities or offer for subscription or purchase of securities or invitation to subscribe for or purchase securities are being made to any person in or from within Malaysia under this document except to persons falling within any of paragraphs 2(g)(i) to (xi) of schedule 5 of the CMSA and distributed only by a holder of a capital markets services license who carries on the business of dealing in securities and subject to the issuer having lodged this prospectus with the SC within seven days from the date of the distribution of this prospectus in Malaysia. The distribution in Malaysia of this document is subject to Malaysian laws. Save as aforementioned, no action has been taken in Malaysia under its securities laws in respect of this document. This document does not constitute and may not be used for the purpose of a public offering or an issue, offer for subscription or purchase, invitation to subscribe for or purchase any securities requiring the approval of the sc or the registration of a prospectus with the SC under the CMSA.
People’s Republic of China. This prospectus may not be circulated or distributed in the PRC and the shares may not be offered or sold, and will not offer or sell to any person for re-offering or resale directly or indirectly to any resident of the PRC except pursuant to applicable laws and regulations of the PRC. For the purpose of this paragraph, PRC does not include Taiwan and the special administrative regions of Hong Kong and Macau.
Singapore
The securities represented may not be offered or sold, nor may any document or other material in connect with such securities be distributed, either directly or indirectly, (i) to persons in Singapore other than under circumstances in which such offer or sale does not constitute an offer or sale of such securities to the public in Singapore or (ii) to the public or any member of the public in Singapore other than pursuant to, and in accordance with the conditions of, an exemption invoked under division 5a or part iv of the companies act, chapter 50 of Singapore and to persons to whom the securities may be offered or sold under such exemption.
United Kingdom. An offer of the shares may not be made to the public in the United Kingdom within the meaning of Section 102B of the Financial Services and Markets Act 2000, as amended, or the FSMA, except to legal entities that are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities or otherwise in circumstances that do not require the publication by the company of a prospectus pursuant to the Prospectus Rules of the Financial Services Authority, or the FSA.
An invitation or inducement to engage in investment activity (within the meaning of Section 21 of FSMA) may only be communicated to persons who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 or in circumstances in which Section 21 of FSMA does not apply to the company.
All applicable provisions of the FSMA with respect to anything done by the underwriter in relation to the shares must be complied with in, from or otherwise involving the United Kingdom.
| -60- |
LEGAL MATTERS
The validity of the shares of our common stock offered hereby has been passed upon for us by Loeb & Loeb LLP, New York, New York. VCL LawLLP, is acting as counsel to the underwriter in connection with the securities offered hereby. Certain legal matters relating to the offering as to PRC law will be passed upon for us by Hiways Law Firm (Shenzhen) and for the underwriter by Dahui Lawyers. Loeb & Loeb LLP may rely upon Hiways Law Firm with respect to matters governed by PRC law. VCL Law LLP may rely upon Dahui Lawyers with respect to matters governed by PRC law.
BF Borgers CPA PC, independent registered public accounting firm, has audited our financial statements as of and for the years ended March 31, 2020 and 2019 as set forth in their report.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act, with respect to the shares of common stock being offered by this prospectus. This prospectus does not contain all of the information in the registration statement and its exhibits. For further information with respect to us and the common stock offered by this prospectus, we refer you to the registration statement and its exhibits. Statements contained in this prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and in each instance, we refer you to the copy of the contract or other document filed as an exhibit to the registration statement. Each of these statements is qualified in all respects by this reference.
You can read our SEC filings, including the registration statement, over the Internet at the SEC’s website at www.sec.gov. You may also read and copy any document we file with the SEC at its public reference facilities at 100 F Street NE, Washington, D.C. 20549. You may also obtain copies of these documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street NE, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities. You may also request a copy of these filings, at no cost, by writing us at Addentax Group Corp., Kingkey 100, Block A, Room 4805, Luohu District, Shenzhen City, China 518000.
We are subject to the information reporting requirements of the Exchange Act, and file reports, proxy statements and other information with the SEC. These reports, proxy statements and other information are available for inspection and copying at the public reference room and web site of the SEC referred to above. We also maintain a website at www.hyjf.com, at which, following the closing of this offering, you may access these materials free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The information contained in, or that can be accessed through, our website incorporated by reference in, and is not part of, this prospectus.
| -61- |
| F-1 |
ADDENTAX GROUP CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In U.S. Dollars, except share data or otherwise stated)
AS OF SEPTEMBER 30, 2020 AND MARCH 31, 2020 (UNAUDITED)
| September 30, 2020 | March 31, 2020 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 1,178,394 | $ | 531,681 | ||||
| Accounts receivables, net | 1,338,787 | 4,500,116 | ||||||
| Inventories | 634,901 | 347,531 | ||||||
| Other receivables | 215,566 | 231,974 | ||||||
| Advances to suppliers | 717,799 | 389,940 | ||||||
| Total current assets | 4,085,447 | 6,001,242 | ||||||
| NON-CURRENT ASSETS | ||||||||
| Plant and equipment, net | 934,223 | 585,019 | ||||||
| Operating lease right of use asset | 1,633,824 | 1,835,717 | ||||||
| Total non-current assets | 2,568,047 | 2,420,736 | ||||||
| TOTAL ASSETS | $ | 6,653,494 | $ | 8,421,978 | ||||
| LIABILITIES AND EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Short-term loan | $ | 234,149 | $ | 353,114 | ||||
| Accounts payable | 1,218,896 | 3,620,583 | ||||||
| Related party borrowings | 5,959,583 | 5,429,440 | ||||||
| Advances from customers | 56,472 | 18,931 | ||||||
| Accrued expenses and other payables | 227,070 | 230,917 | ||||||
| Operating lease liability current portion | 433,215 | 443,543 | ||||||
| Total current liabilities | 8,129,385 | 10,096,528 | ||||||
| NON-CURRENT LIABILITIES | ||||||||
| Operating lease liability, net of current portion | 1,200,609 | 1,392,174 | ||||||
| Total non-current liabilities | 1,200,609 | 1,392,174 | ||||||
| TOTAL LIABILITIES | $ | 9,329,994 | $ | 11,488,702 | ||||
| EQUITY | ||||||||
| Common stock ($0.001 par value, 50,000,000 shares authorized, 26,093,004 and 25,346,004 shares issued and outstanding at September 30, 2020 and March 31, 2020, respectively) | $ | 26,093 | $ | 25,346 | ||||
| Additional paid-in capital | 3,795,303 | 61,050 | ||||||
| Retained earnings | (6,489,747 | ) | (3,233,122 | ) | ||||
| Statutory reserve | 23,514 | 23,514 | ||||||
| Accumulated other comprehensive loss | (31,663 | ) | 56,488 | |||||
| Total deficit | (2,676,500 | ) | (3,066,724 | ) | ||||
| TOTAL LIABILITIES AND EQUITY | $ | 6,653,494 | $ | 8,421,978 | ||||
See accompany notes to the consolidated financial statements.
| F-2 |
ADDENTAX GROUP CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
(In U.S. Dollars, except share data or otherwise stated)
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
| Three months
ended September 30, | Six months
ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| REVENUES | $ | 11,684,297 | $ | 1,945,002 | $ | 17,602,512 | $ | 4,154,494 | ||||||||
| COST OF REVENUES | (14,705,387 | ) | (1,624,083 | ) | (19,825,963 | ) | (3,475,643 | ) | ||||||||
| GROSS (LOSS) PROFIT | (3,021,090 | ) | 320,919 | (2,223,451 | ) | 678,851 | ||||||||||
| OPERATING EXPENSES | ||||||||||||||||
| Selling and marketing | (5,788 | ) | (3,639 | ) | (159,033 | ) | (10,866 | ) | ||||||||
| General and administrative | (466,043 | ) | (626,647 | ) | (922,005 | ) | (1,331,094 | ) | ||||||||
| Total operating expenses | (471,831 | ) | (630,286 | ) | (1,081,038 | ) | (1,341,960 | ) | ||||||||
| LOSS FROM OPERATIONS | (3,492,921 | ) | (309,367 | ) | (3,304,489 | ) | (663,109 | ) | ||||||||
| Interest income | 4 | 10 | 15 | 50 | ||||||||||||
| Interest expenses | (1,026 | ) | (7, 902) | (5,955 | ) | (12,330 | ) | |||||||||
| Other income (expense), net | 37,471 | (3,814 | ) | 61,216 | (10,820 | ) | ||||||||||
| LOSS BEFORE INCOME TAX EXPENSE | (3,456,472 | ) | (321,073 | ) | (3,249,213 | ) | (686,209 | ) | ||||||||
| INCOME TAX EXPENSE | (4,053 | ) | (852 | ) | (7,412 | ) | (3,064 | ) | ||||||||
| NET LOSS | (3,460,525 | ) | (321,925 | ) | (3,256,625 | ) | (689,273 | ) | ||||||||
| Foreign currency translation gain (loss) | (83,696 | ) | 74,201 | (88,151 | ) | 109,156 | ||||||||||
| TOTAL COMPREHENSIVE LOSS | $ | (3,544,221 | ) | $ | (247,724 | ) | (3,344,776 | ) | (580,117 | ) | ||||||
| LOSS PER SHARE | ||||||||||||||||
| Basic and diluted | (0.14 | ) | (0.00 | ) | (0.13 | ) | (0.03 | ) | ||||||||
| Weighted average number of shares outstanding – Basic and diluted | 25,521,529 | 25,346,004 | 25,521,529 | 25,346,004 | ||||||||||||
See accompany notes to the 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)
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
| Common Stock | Additional | Retained earnings | Accumulated other | |||||||||||||||||||||||||
| Shares | Amount | paid-in capital | Unrestricted | Statutory reserve | comprehensive loss | Total Equity | ||||||||||||||||||||||
| BALANCE AT JULY 1, 2019 | 25,346,004 | $ | 25,346 | $ | 61,050 | $ | (2,143,115 | ) | $ | 21,779 | $ | 2,048 | $ | (2,032,892 | ) | |||||||||||||
| Foreign currency translation | - | - | - | - | - | 72,153 | 72,153 | |||||||||||||||||||||
| Net loss for the period | - | - | - | (321,925 | ) | - | - | (321,925 | ) | |||||||||||||||||||
| BALANCE AT SEPTEMBER 30, 2019 | 25,346,004 | $ | 25,346 | $ | 61,050 | $ | (2,465,040 | ) | 21,779 | 74,201 | (2,282,664 | ) | ||||||||||||||||
| BALANCE AT JULY 1, 2020 | 25,346,004 | $ | 25,346 | $ | 61,050 | $ | (3,029,222 | ) | $ | 23,514 | $ | 52,033 | $ | (2,867,279 | ) | |||||||||||||
| Issue of ordinary shares | 747,000 | 747 | 3,734,253 | - | - | - | 3,735,000 | |||||||||||||||||||||
| Foreign currency translation | - | - | - | - | - | (83,696 | ) | (83,696 | ) | |||||||||||||||||||
| Net loss for the period | - | - | - | (3,460,525 | ) | - | - | (3,460,525 | ) | |||||||||||||||||||
| BALANCE AT SEPTEMBER 30, 2020 | 26,093,004 | $ | 26,093 | $ | 3,795,303 | $ | (6,489,747 | ) | $ | 23,514 | $ | (31,663 | ) | $ | (2,676,500 | ) | ||||||||||||
| BALANCE AT MARCH 31, 2019 (Restated) | 25,346,004 | $ | 25,346 | $ | 61,050 | $ | (2,250,770 | ) | $ | 21,779 | $ | (34,955 | ) | $ | (2,177,550 | ) | ||||||||||||
| Foreign currency translation | - | - | - | - | - | 109,156 | 109,156 | |||||||||||||||||||||
| Net loss for the period | - | - | - | (689,273 | ) | - | - | (689,273 | ) | |||||||||||||||||||
| BALANCE AT SEPTEMBER 30, 2019 | 25,346,004 | $ | 25,346 | $ | 61,050 | $ | (2,940,043 | ) | 21,779 | 74,201 | (2,757,667 | ) | ||||||||||||||||
| BALANCE AT MARCH 31, 2020 | 25,346,004 | $ | 25,346 | $ | 61,050 | $ | (3,233,122 | ) | $ | 23,514 | $ | 56,488 | $ | (3,066,724 | ) | |||||||||||||
| Issuance of common stocks | 747,000 | 747 | 3,734,253 | - | - | - | 3,735,000 | |||||||||||||||||||||
| Foreign currency translation | - | - | - | - | - | (88,151 | ) | (88,151 | ) | |||||||||||||||||||
| Net loss for the period | - | - | - | (3,256,625 | ) | - | - | (3,256,625 | ) | |||||||||||||||||||
| BALANCE AT SEPTEMBER 30, 2020 | 26,093,004 | $ | 26,093 | $ | 3,795,303 | $ | (6,489,747 | ) | $ | 23,514 | $ | (31,663 | ) | $ | (2,676,500 | ) | ||||||||||||
See accompany notes to the unaudited condensed consolidated financial statements.
| F-4 |
ADDENTAX GROUP CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(In U.S. Dollars, except share data or otherwise stated)
| 2020 | 2019 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (3,256,625) | $ | (689,273) | ||||
| Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
| Depreciation | 78,079 | 56,630 | ||||||
| Loss on disposal of plant and equipment | 32,988 | 3,342 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 3,161,329 | 142,009 | ||||||
| Inventories | (287,370 | ) | (20,952 | ) | ||||
| Advances to suppliers | (327,859 | ) | (64,957 | ) | ||||
| Other receivables | 16,408 | 452 | ||||||
| Accounts payables | (2,500,432 | ) | (224,377 | ) | ||||
| Accrued expenses and other payables | (16,614 | ) | 13,514 | |||||
| Advances from customers | 37,541 | (98,256 | ) | |||||
| Net cash provided by (used in) operating activities | $ | (3,062,555 | ) | $ | (881,868 | ) | ||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of plant and equipment | (400,585 | ) | (95,445 | ) | ||||
| Proceeds from sale of property and equipment | 21,192 | - | ||||||
| Net cash used in investing activities | $ | (379,393 | ) | $ | (95,445 | ) | ||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from issuance of common stocks | 3,735,000 | - | ||||||
| Proceeds from related party borrowings | 6,079,859 | 1,268,124 | ||||||
| Repayment of related party borrowings | (5,621,945 | ) | (443,356 | ) | ||||
| Proceeds from bank borrowings | 86,886 | 461,151 | ||||||
| Repayment of bank borrowings | (205,850 | ) | (316,589 | ) | ||||
| Net cash provided by financing activities | $ | 4,073,950 | $ | 969,330 | ||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS | 632,002 | (7,983 | ) | |||||
| Effect of exchange rate changes on cash and cash equivalents | 14,711 | (890 | ) | |||||
| Cash and cash equivalents, beginning of the period | 531,681 | 277,264 | ||||||
| CASH AND CASH EQUIVALENTS, END OF THE PERIOD | $ | 1,178,394 | $ | 268,391 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid during the year for interest | $ | 4,441 | $ | 7,706 | ||||
| Cash paid during the year for income tax | $ | 7,412 | $ | 3,064 | ||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Right-of-use assets obtained in exchange for operating lease obligations | $ | 28,865 | $ | 1,901,008 | ||||
See accompany notes to the unaudited condensed consolidated financial statements.
| F-5 |
ADDENTAX GROUP CORP. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
| 1. | ORGANIZATION AND BUSINESS ACQUISITIONS |
Addentax Group Corp. (“ATXG”) was incorporated in Nevada on October 28, 2014. It is engaged in the business of garments manufacturing, providing logistics services in the People’s Republic of China (“PRC” or “China”) and epidemic prevention supplies manufacturing and distribution both in China and overseas markets.
On December 28, 2016, ATXG acquired 250,000,000 shares of the issued and outstanding stock of Yingxi Industrial Chain Group Co., Ltd. (“Yingxi”). The 250,000,000 shares of Yingxi were acquired from the members of Yingxi in a share exchange transaction in return for the issuance of 500,000,000 shares of common stock of ATXG. The 250,000,000 shares of Yingxi constitute 100% of its issued and outstanding stock, and as a result of the transaction, Yingxi became a wholly-owned subsidiary of ATXG. And following the consummation of the reverse acquisition effective on September 25, 2017, and giving effect to the securities exchanged in the offering, the members of Yingxi will beneficially own approximately ninty-nine percent (99%) of the issued and outstanding common stock of ATXG. For accounting purposes, the Company was treated as an acquiree and Yingxi as an acquirer, as a result, the business and financial information contained in this report is that of the acquirer prior to the consummation date and that of the combined entity after that date.
Yingxi was incorporated in the Republic of Seychelles on August 4, 2016.
ATXG, together with Yingxi and its subsidiaries (the “Company”) is engaged in the business of garments manufacturing, providing logistic services in the People’s Republic of China (“PRC” or “China”) and epidemic prevention supplies manufacturing and distribution both in China and overseas markets.
| 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 necessary 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, 2020 filed with the Securities and Exchange Commission (“SEC”) on June 29, 2020 (“2020 Form 10-K.”).
GOING CONCERN UNCERTAINTY
The accompanying unaudited condensed consolidated financial statements are presented on the basis that the Company is a going concern. The going concern assumption contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
The Company incurred net loss of $3,460,525 and $321,925 for the three months ended September 30, 2020 and 2019, respectively, and $3,256,625 and $689,273 for the six months ended September 30, 2020 and 2019, respectively. As of September 30, 2020 and March 31, 2020, the Company had net current liability of $4,043,938 and $4,095,286, respectively, and a deficit on total equity of $2,676,500 and $3,066,724, respectively. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The ability to continue as a going concern is dependent upon the Company’s profit generating operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they become due. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
| F-6 |
The Company expects to finance operations primarily through cash flow from revenue and capital contributions from the CEO. During the year, the CEO has provided financial support for the operations of the Company. 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.
| 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.
There is no change on the accounting policies from the year ended March 31, 2020.
Recently issued accounting pronouncements
In June 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.
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-7 |
| 4. | 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) | Concentration Risks |
During the three and six months ended September 30, 2020 and 2019, approximately 99.6% and 88.4%, 97.2% and 74.5% of total inventory purchases were from the Company’s five largest suppliers, respectively. Management believes that should the Company lose any one of its major suppliers, other suppliers are available that could provide similar products to the Company.
During the three and six months ended September 30, 2020 and 2019, approximately 93.6% and 54.5%, 86.8% and 34.6% of total sales were from the Company’s five largest customers, respectively. For the three months ended September 30, 2020, two customers provided more than 10% of total revenue of the Company, with one from garment segment and the other one from epidemic prevention supplies segment, represented 13.7% and 74.9% of total revenue of the Company for the three months, respectively. For the six months ended September 30, 2020, two customers provided more than 10% of our total revenue, with one from garments segment and the other one from epidemic prevention supplies segment, represented 14.7% and 59.3% of total revenue of the Company for the six months, respectively. The high concentration in three and six months ended September 30, 2020 was mainly due to concentration of distributors in trading of epidemic prevention supplies. Management believes that should the Company lose any one of its major customers, it was able to sell similar products to other customers.
| (c) | 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 September 30, 2020, the total outstanding borrowings amounted to $234,149 (RMB1,590,000) with various interest rate from 4.84% to 6.96% p.a. (Note 10)
| 5. | ACCOUNTS RECEIVABLES |
The receivables and allowance balances at September 30, 2020 and March 31, 2020 are as follows:
| September 30, 2020 | March 31, 2020 | |||||||
| Accounts receivable | $ | 1,338,787 | $ | 4,500,116 | ||||
| Less: allowance for doubtful accounts | - | - | ||||||
| Accounts receivable, net | $ | 1,338,787 | $ | 4,500,116 | ||||
No allowance for doubtful accounts was made for the three and six months ended September 30, 2020 and 2019.
| 6. | RELATED PARTY TRANSACTIONS |
| Name of Related Parties | Relationship with the Company | |
| Zhida Hong | President, CEO, and a director of the Company | |
| Zhongpeng Chen | A legal representative of HPF | |
| Bihua Yang | A legal representative of XKJ | |
| Dewu Huang | A legal representative of DT | |
| Jinlong Huang | A spouse of legal representative of HSW |
The Company leases Shenzhen XKJ office rent-free from Bihua Yang.
| F-8 |
In September, the Company disposed of $114,229 aged inventories in HSW to Mr. Jinlong Huang at cost with no gain or loss recognized.
The Company had the following related party balances as of September 30, 2020 and March 31, 2020:
| Related party borrowings | September 30, 2020 | March 31, 2020 | ||||||
| Zhida Hong | $ | 5,327,512 | $ | 5,043,489 | ||||
| Bihua Yang | 167,095 | - | ||||||
| Zhongpeng Chen | 167,262 | 160,427 | ||||||
| Dewu Huang | 135,630 | 81,287 | ||||||
| Jinlong Huang | 162,084 | 144,237 | ||||||
| $ | 5,959,583 | $ | 5,429,440 | |||||
The balances with related parties are unsecured, non-interest bearing and repayable on demand.
| 7. | INVENTORIES |
Inventories consist of the following as of September 30, 2020 and March 31, 2020:
| September 30, 2020 | March 31, 2020 | |||||||
| Raw materials | $ | 600,425 | $ | 230,742 | ||||
| Work in progress | 6,140 | 62,150 | ||||||
| Finished goods | 28,336 | 54,639 | ||||||
| Total inventories | $ | 634,901 | $ | 347,531 | ||||
There is no inventory write-off for the three and six months ended September 30, 2020 and 2019.
| F-9 |
| 8. | 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.
| 9. | PROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment consists of the following as of September 30, 2020 and March 31, 2020:
| September 30, 2020 | March 31, 2020 | |||||||
| Production plant | $ | 103,015 | $ | 67,247 | ||||
| Motor vehicles | 1,232,428 | 868,743 | ||||||
| Office equipment | 20,301 | 19,471 | ||||||
| 1,355,744 | 955,461 | |||||||
| Less: accumulated depreciation | (421,521 | ) | (370,442 | ) | ||||
| Plant and equipment, net | $ | 934,223 | $ | 585,019 | ||||
During the nine months ended September 30, 2020, the Company acquired two production lines amounted to $54,327 to manufacture masks for the epidemic prevention supplies business and seven new motor truckers amounted to $315,920 for the logistic service business . During the period, the Company disposed of an old motor trucker with original cost of $22,505 and accumulated depreciation of $15,791. The Company also replaced a few small items of old machinery and office equipment.
Depreciation expense for the three and six months ended September 30, 2020 and 2019 was $27,686 and $27,931, $51,159 and $29,238, respectively.
| 10. | SHORT-TERM BANK LOAN |
In September 2018, HSW, a subsidiary of the Company entered into a facility agreement with Dongguan Agricultural Commercial Bank and obtained a line of credit, which allows the Company to borrow up to approximately $212,334 (RMB1,500,000) for daily operations with fixed interest rate of 6.96% per annum. The loans are guaranteed at no cost by legal representative of HSW. In September 2020, the Company fully repaid the outstanding loan and this line of credit was cancelled (March 31, 2020: $211,868).
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 $147,264 (RMB1,000,000) for daily operations. The loans are guaranteed at no cost by the legal representative of HSW. As of September 30, 2020, the Company has borrowed $147,264 (RMB1,000,000) (March 31, 2020: $141,246) under this line of credit with various annual interest rates from 4.84% to 4.9%. The line of credit is fully used. The outstanding loan balance will be due on March 31, 2021.
In August 2020, DT entered into a new facility agreement with Webank and obtained a credit facility of $88,358 (RMB600,000) for daily operations with various annual interest rate from 16.2% to 16.29%. The loans are guaranteed at no cost by the legal representative of DT. The loan borrowing was $86,886 (RMB590,000) as of September 30, 2020 (March 31, 2020: Nil).
| F-10 |
| 11. | INCOME TAXES |
| (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.
Yingxi HK was incorporated in Hong Kong and is subject to Hong Kong income tax at a progressive 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 and six months ended September 30, 2020 and 2019.
YX were incorporated in the PRC and is subject to the EIT tax rate of 25%. No provision for income taxes in the PRC has been made as YX had no taxable income for the three and six months ended September 30, 2020 and 2019.
The Company is governed by the Income Tax Laws of the PRC. All Yingxi’s operating companies were subject to progressive EIT rates from 5% to 15% in 2020 and 2019. The preferential tax rate will be expired at end of year 2022 and the EIT rate will be 25% from year 2023.
The Company’s parent entity, Addentax Group Corp. is an 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 and six months ended September 30, 2020 and 2019.
The reconciliation of income taxes computed at the PRC statutory tax rate applicable to the PRC, to income tax expenses are as follows:
| Three months ended | Six months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| PRC statutory tax rate | 25 | % | 25 | % | 25 | % | 25 | % | ||||||||
| Computed expected expenses | (864,118 | ) | (80,268 | ) | (812,304 | ) | (171,552 | ) | ||||||||
| Temporary differences | 829,401 | 10,370 | 725,469 | 9,086 | ||||||||||||
| Change in valuation allowance | 38,770 | 70,750 | 94,247 | 165,530 | ||||||||||||
| Income tax expense | $ | 4,053 | $ | 852 | $ | 7,412 | $ | 3,064 | ||||||||
| (b) | Value Added Tax (“VAT”) |
In accordance with the relevant taxation laws in the PRC, the normal VAT rate for domestic sales is 13%, which is levied on the invoiced value of sales and is payable by the purchaser. The subsidiaries HSW, DT and YS enjoyed preferential VAT rate of 13%. The Companies are required to remit the VAT they collect to the tax authority. A credit is available whereby VAT paid on purchases can be used to offset the VAT due on sales.
For services, the applicable VAT rate is 9% under the relevant tax category for logistic company, except the branch of HPF enjoyed the preferential VAT rate of 3% in 2020 and 2019. The Company is required to pay the full amount of VAT calculated at the applicable VAT rate of the invoiced value of sales as required. A credit is available whereby VAT paid on gasoline and toll charges can be used to offset the VAT due on service income.
| 12. | 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 three revenue segments:
| (a) | Garment manufacturing . Including manufacturing and distribution of garments; | |
| (b) | Logistics services. Providing logistics services; and |
| (c) | Epidemic prevention supplies. Including manufacturing, distribution and trading of epidemic prevention supplies. |
| F-11 |
The Company also provides general corporate services to its segments and these costs are reported as “Corporate and others”.
Selected information in the segment structure is presented in the following tables:
Revenues by segment for the three and six months ended September 30, 2020 and 2019 are as follows:
| Three months ended September 30, | Six months ended September 30, | |||||||||||||||
| Revenues | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Garment manufacturing | $ | 1,623,255 | $ | 322,131 | $ | 2,898,061 | 873,448 | |||||||||
| Logistics services | 1,307,003 | 1,622,871 | 2,840,384 | 3,281,046 | ||||||||||||
| Epidemic prevention supplies | 8,754,039 | - | 11,864,067 | - | ||||||||||||
| $ | 11,684,297 | $ | 1,945,002 | $ | 17,602,512 | 4,154,494 | ||||||||||
Income from operations by segment for the three and six months ended September 30, 2020 and 2019 are as follows:
| Three months ended | Six months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Garment manufacturing | $ | 75,956 | $ | (16,682 | ) | $ | 141,518 | $ | 29,535 | |||||||
| Logistics services | 25,724 | 26,027 | 35,284 | 7,716 | ||||||||||||
| Epidemic prevention supplies | (3,384,835 | ) | - | (3,096,118 | ) | - | ||||||||||
| Corporate | (209,766 | ) | (318,712 | ) | (385,173 | ) | (700,360 | ) | ||||||||
| Income (loss) from operations | $ | (3,492,921 | ) | $ | (309,367 | ) | $ | (3,304,489 | ) | $ | (663,109 | ) | ||||
| Garment manufacturing | 9,503 | ) | (12,102 | ) | 30,661 | (19,284 | ) | |||||||||
| Logistics services | 27,165 | 420 | 25,722 | (3,707 | ) | |||||||||||
| Epidemic prevention supplies | (4 | ) | - | (3 | ) | - | ||||||||||
| Corporate | (215 | ) | (24 | ) | (1,104 | ) | (109 | ) | ||||||||
| Income (loss) before income tax | $ | (3,456,472 | ) | (321,073 | ) | (3,249,213 | ) | (686,209 | ) | |||||||
| Income tax expense | (4,053 | ) | (852 | ) | (7,412 | ) | (3,064 | ) | ||||||||
| Net income (loss) | $ | (3,460,525 | ) | $ | (321,925 | ) | $ | (3,256,625 | ) | $ | (689,273 | ) | ||||
Total assets by segment as at September 30, 2020 and March 31, 2020 are as follows:
| Total assets | September 30, 2020 | March 31, 2020 | ||||||
| Garment manufacturing | $ | 1,647,452 | $ | 4,098,758 | ||||
| Logistics services | 2,851,451 | 2,422,140 | ||||||
| Epidemic prevention supplies | 197,058 | - | ||||||
| Corporate | 1,957,533 | 1,901,080 | ||||||
| $ | 6,653,494 | $ | 8,421,978 | |||||
| F-12 |
| 13. | ACCRUED EXPENSES AND OTHER PAYABLES |
Accrued expenses and other payables consist of the following as of September 30, 2020 and March 31, 2020:
| September 30, 2020 | March 31, 2020 | |||||||
| Accrued wages and welfare | 64,372 | 61,776 | ||||||
| Other tax payable | - | 25,206 | ||||||
| Rental payable | 44,108 | 24,972 | ||||||
| Other payables | 118,590 | 118,963 | ||||||
| $ | 227,070 | $ | 230,917 | |||||
| 14. | LEASE RIGHT-OF-USE ASSET AND LEASE LIABILITIES |
The Company implemented new accounting policy according to the ASC 842, Leases, on April 1, 2019 on a modified retrospective basis and did not restate comparative periods. Under the new policy, the Company recognized approximately $0.06 million lease liability as well as right-of-use asset for all leases (with the exception of short-term leases) at the commencement date. Lease liabilities are measured at present value of the sum of remaining rental payments as of September 30, 2020, with discounted rate of 4.35%. A single lease cost is recognized over the lease term on a generally straight-line basis. All cash payments of operating lease cost are classified within operating activities in the statement of cash flows.
Lease cost
| Three months ended September 30, | Six months ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Operating lease cost | 113,015 | 142,779 | 224,721 | 199,612 | ||||||||||||
| Short-term lease cost | - | 6,278 | - | 63,785 | ||||||||||||
| $ | 113,015 | $ | 149,057 | 224,721 | 263,397 | |||||||||||
Other information
| Three months ended September 30, | Six months ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||||||||||
| Operating cash flow from operating leases | $ | 113,015 | $ | 149,057 | $ | 224,721 | $ | 263,397 | ||||||||
| Right-of-use assets obtained in exchange for new operating leases liabilities | 28,865 | 1,633,055 | 28,865 | 1,901,008 | ||||||||||||
| Weighted average remaining lease term - Operating leases (years) | 3.8 | 4.7 | 3.8 | 4.7 | ||||||||||||
| Weighted average discount rate - Operating leases | 4.35 | % | 4.35 | % | 4.35 | % | 4.35 | % | ||||||||
15. SHARE CAPITAL
In August 2020, the Company offered 747,000 common stocks to an individual investor. The subscription price was $5.00 per share. The proceeds were all received in August 2020.
16. SUBSEQUENT EVENTS
In November 2020, the Company disposed of $194,164 inventories in HSW to Mr. Huang and a third party at cost for cash with no gain or loss recognized. Such cash was received in November 2020.
In November 2020, the Company disposed of one of its subsidiaries in logistic service segment, HPF, with a consideration of $173,170, equals to the carrying amount of its net assets.
On December 31, 2020, the Company offered 600,000 common stocks to an individual investor. The subscription price was $5.00 per share. The proceeds to be received will be used for working capital and other general corporate purposes.
No other subsequent events have occurred that would require recognition or disclosure in the financial statements.
| F-13 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Addentax Group Corp.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Addentax Group Corp. (the “Company”) as of March 31, 2020 and 2019, and the related consolidated statements of loss and comprehensive loss, changes in equity, and cash flows for each of the two years in the period ended March 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial positions of the Company as of March 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended March 31, 2020, in conformity with accounting principles generally accepted in the United States.
Going concern uncertainty
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company incurred recurring losses from operations, has net current liabilities and an accumulated deficit that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Emphasis of Matter
The Company has significant transactions with related parties, which are described in Note 6 to the financial statements. Transactions involving related parties cannot be presumed to be carried out on an arm’s length basis, as the requisite conditions of competitive, free market dealings may not exist.
| /s/ B F Borgers CPA PC | |
| We have served as the Company’s auditor since 2020. | |
| Lakewood, Colorado | |
| January 22, 2021 |
| F-14 |
ADDENTAX GROUP CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In U.S. Dollars, except share data or otherwise stated)
AS OF MARCH 31, 2020 AND 2019
| 2020 | 2019
(Restated) |
|||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 531,681 | $ | 277,264 | ||||
| Accounts receivables | 4,500,116 | 1,798,489 | ||||||
| Inventories | 347,531 | 318,047 | ||||||
| Other receivables | 231,974 | 178,128 | ||||||
| Advances to suppliers | 389,940 | 230,484 | ||||||
| Total current assets | 6,001,242 | 2,802,412 | ||||||
| NON-CURRENT ASSETS | ||||||||
| Plant and equipment, net | 585,019 | 694,431 | ||||||
| Operating lease right of use asset | 1,835,717 | - | ||||||
| Total non-current assets | 2,420,736 | 694,431 | ||||||
| TOTAL ASSETS | $ | 8,421,978 | $ | 3,496,843 | ||||
| LIABILITIES AND EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Short-term loan | $ | 353,114 | $ | 223,502 | ||||
| Accounts payable | 3,620,583 | 884,251 | ||||||
| Related party borrowings | 5,429,440 | 4,204,130 | ||||||
| Advances from customers | 18,931 | 102,673 | ||||||
| Accrued expenses and other payables | 230,917 | 259,837 | ||||||
| Lease liabilities, current portion | 443,543 | - | ||||||
| Total current liabilities | 10,096,528 | 5,674,393 | ||||||
| NON-CURRENT LIABILITIES | ||||||||
| Lease liability, net of current portion | 1,392,174 | - | ||||||
| TOTAL LIABILITIES | 11,488,702 | 5,674,393 | ||||||
| EQUITY | ||||||||
| Common stock ($0.001 par value, 50,000,000 shares authorized, 25,346,004 shares issued and outstanding as of March 31, 2020 and 2019 respectively) | $ | 25,346 | $ | 25,346 | ||||
| Additional paid-in capital | 61,050 | 61,050 | ||||||
| Accumulated deficits | (3,233,122 | ) | (2,250,770 | ) | ||||
| Statutory reserve | 23,514 | 21,779 | ||||||
| Accumulated other comprehensive income (loss) | 56,488 | (34,955 | ) | |||||
| Total deficit | (3,066,724 | ) | (2,177,550 | ) | ||||
| TOTAL LIABILITIES AND EQUITY | $ | 8,421,978 | $ | 3,496,843 | ||||
See accompany notes to the consolidated financial statements.
| F-15 |
ADDENTAX GROUP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
(In U.S. Dollars, except share data or otherwise stated)
FOR THE YEARS ENDED MARCH 31, 2020 AND 2019
| 2020 (Restated) | 2019 | |||||||
| REVENUES | $ | 10,172,379 | $ | 10,026,920 | ||||
| COST OF REVENUES | (8,787,018 | ) | (8,744,226 | ) | ||||
| GROSS PROFIT | 1,385,361 | 1,282,694 | ||||||
| OPERATING EXPENSES | ||||||||
| Selling and marketing | (13,406 | ) | (17,905 | ) | ||||
| General and administrative | (2,236,273 | ) | (1,947,916 | ) | ||||
| Total operating expenses | (2,249,679 | ) | (1,965,821 | ) | ||||
| LOSS FROM OPERATIONS | (864,318 | ) | (683,127 | ) | ||||
| Interest income | 130 | 112 | ||||||
| Interest expenses | (20,799 | ) | (11,535 | ) | ||||
| OTHER (EXPENSES)/INCOME | (79,560 | ) | 8,776 | |||||
| LOSS BEFORE INCOME TAX EXPENSE | (964,547 | ) | (685,774 | ) | ||||
| INCOME TAX EXPENSE | (16,070 | ) | (8,555 | ) | ||||
| NET LOSS | (980,617 | ) | (694,329 | ) | ||||
| Foreign currency translation gain | 91,443 | 96,716 | ||||||
| TOTAL COMPREHENSIVE LOSS | $ | (889,174 | ) | $ | (597,613 | ) | ||
| LOSS PER SHARE | ||||||||
| Basic and diluted | (0.04 | ) | (0.03 | ) | ||||
| Weighted average number of shares outstanding – Basic and diluted | 25,346,004 | 25,346,004 | ||||||
See accompany notes to the consolidated financial statements.
| F-16 |
ADDENTAX GROUP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In U.S. Dollars, except share data or otherwise stated)
FOR THE YEARS ENDED MARCH 31, 2020 AND 2019
| Common Stock | Additional | Retained earnings | Accumulated other | |||||||||||||||||||||||||
| Shares | Amount | paid-in
capital | Unrestricted | Statutory reserve | comprehensive loss | Total Equity | ||||||||||||||||||||||
| BALANCE AT MARCH 31, 2018 (Restated) | 25,346,004 | $ | 25,346 | $ | 61,050 | $ | (1,556,201 | ) | $ | 21,539 | $ | (131,671 | ) | $ | (1,579,937 | ) | ||||||||||||
| Transfer to Statutory reserve | - | - | - | (240 | ) | 240 | - | - | ||||||||||||||||||||
| Foreign currency translation | - | - | - | - | - | 96,716 | 96,716 | |||||||||||||||||||||
| Net loss for the year | - | - | - | (694,329 | ) | - | - | (694,329 | ) | |||||||||||||||||||
| BALANCE AT MARCH 31, 2019 (Restated) | 25,346,004 | $ | 25,346 | $ | 61,050 | $ | (2,250,770 | ) | $ | 21,779 | $ | (34,955 | ) | $ | (2,177,550 | ) | ||||||||||||
| Transfer to Statutory reserve | - | - | - | (1,735 | ) | 1,735 | - | - | ||||||||||||||||||||
| Foreign currency translation | - | - | - | - | - | 91,443 | 91,443 | |||||||||||||||||||||
| Net loss for the year (Restated) | - | - | - | (980,617 | ) | - | - | (980,617 | ) | |||||||||||||||||||
| BALANCE AT MARCH 31, 2020 | 25,346,004 | $ | 25,346 | $ | 61,050 | $ | (3,233,122 | ) | $ | 23,514 | $ | 56,488 | $ | (3,066,724 | ) | |||||||||||||
See accompany notes to the consolidated financial statements.
| F-17 |
ADDENTAX GROUP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In U.S. Dollars, except share data or otherwise stated)
FOR THE YEARS ENDED MARCH 31, 2020 AND 2019
2020 (Restated) | 2019 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (980,617 | ) | $ | (694,329 | ) | ||
| Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
| Depreciation | 114,391 | 115,673 | ||||||
| Loss on disposal of plant and equipment | 87,305 | 10,324 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (2,701,627 | ) | 1,618,129 | |||||
| Inventories | (29,484 | ) | (78,818 | ) | ||||
| Advances to suppliers | (159,456 | ) | 35,893 | |||||
| Amounts due from related parties | - | 202,426 | ||||||
| Other receivables | (53,846 | ) | 1,926,637 | |||||
| Accounts payables | 2,736,332 | (608,244 | ) | |||||
| Accrued expenses and other payables | (80,109 | ) | 130,721 | |||||
| Advances from customers | (83,742 | ) | (1,459,187 | ) | ||||
| Taxes payable | - | (6,064 | ) | |||||
| Net cash (used in) provided by operating activities | $ | (1,150,853 | ) | $ | 1,193,161 | |||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of plant and equipment | (136,001 | ) | (229,240 | ) | ||||
| Net cash used in investing activities | $ | (136,001 | ) | $ | (229,240 | ) | ||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from related party borrowings | 2,475,728 | 2,253,680 | ||||||
| Repayment of related party borrowings | (1,063,323 | ) | (3,368,969 | ) | ||||
| Proceeds from bank borrowings | 515,447 | 223,502 | ||||||
| Repayment of bank borrowings | (371,868 | ) | - | |||||
| Repayment of third party borrowings | - | (56,739 | ) | |||||
| Net cash provided by (used in) financing activities | $ | 1,555,984 | $ | (948,526 | ) | |||
| NET INCREASE IN CASH AND CASH EQUIVALENTS | 269,130 | 15,395 | ||||||
| Effect of exchange rate changes on cash and cash equivalents | (14,713 | ) | (2,937 | ) | ||||
| Cash and cash equivalents, beginning of year | 277,264 | 264,806 | ||||||
| CASH AND CASH EQUIVALENTS, END OF YEAR | $ | 531,681 | $ | 277,264 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid during the year for interest | 15,143 | 9,593 | ||||||
| Cash paid during the year for income tax | 16,070 | 8,555 | ||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Right-of-use assets obtained in exchange for operating lease obligations | 1,982,393 | - | ||||||
See accompany notes to the consolidated financial statements.
| F-18 |
ADDENTAX GROUP CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2020 AND 2019
| 1. | ORGANIZATION AND BUSINESS ACQUISITIONS |
Addentax Group Corp. (“ATXG”) was incorporated in Nevada on October 28, 2014. It is engaged in the business of garments manufacturing, providing logistic services in the People’s Republic of China (“PRC” or “China”) and epidemic prevention supplies manufacturing and distribution both in China and overseas markets.
On December 28, 2016, ATXG acquired 250,000,000 shares of the issued and outstanding stock of Yingxi Industrial Chain Group Co., Ltd. (“Yingxi”). The 250,000,000 shares of Yingxi were acquired from the members of Yingxi in a share exchange transaction in return for the issuance of 500,000,000 shares of common stock of ATXG. The 250,000,000 shares of Yingxi constitute 100% of its issued and outstanding stock, and as a result of the transaction, Yingxi became a wholly-owned subsidiary of ATXG. And following the consummation of the reverse acquisition effective on September 25, 2017, and giving effect to the securities exchanged in the offering, the members of Yingxi will beneficially own approximately ninty-nine percent (99%) of the issued and outstanding common stock of ATXG. For accounting purposes, the Company was treated as an acquiree and Yingxi as an acquirer, as a result, the business and financial information contained in this report is that of the acquirer prior to the consummation date and that of the combined entity after that date.
Yingxi was incorporated in the Republic of Seychelles on August 4, 2016. ATXG, together with Yingxi and its subsidiaries (the “Company”) operates primarily in the People’s Republic of China (“PRC” or “China”) and is engaged in the business of garments manufacturing and providing logistic services.
On December 15, 2016, Yingxi entered into an equity transfer agreement with the shareholder of Yingxi Industrial Chain Investment Co., Ltd (“Yingxi HK”) under which Yingxi agreed to pay total consideration of RMB21,008,886 (approximately $3,048,936) in cash in exchange for a 100% ownership interest in Yingxi HK. Yingxi HK was incorporated in Hong Kong in 2016. Yingxi HK is a holding company with no assets other than a 100% equity interest of the following subsidiaries:
Qianhai Yingxi Textile & Garments Co., Ltd (“QYTG”), a wholly-owned subsidiary of Yingxi HK, was incorporated in the PRC in 2016.
Shenzhen Qianhai Yingxi Industrial Chain Services Co., Ltd (“YX”), a wholly-owned subsidiary of QYTG, was incorporated in the PRC in 2016.
Xin Kuai Jie Transport Co., Ltd (“XKJ”), a wholly-owned subsidiary of YX, was incorporated in the PRC in 2001. XKJ is engaged in the provision of logistic services.
Shenzhen Hua Peng Fa Logistics Co., Ltd (“HPF”), a wholly-owned subsidiary of YX, was incorporated in the PRC in 2006. HPF is engaged in the provision of logistic services.
Dongguan Heng Sheng Wei Garments Co., Ltd (“HSW”), a wholly-owned subsidiary of YX, was incorporated in the PRC in 2009. HSW is a garment manufacturer.
Shantou Chenghai Dai Tou Garments Co., Ltd (“DT”), a wholly-owned subsidiary of YX, was incorporated in the PRC in 2009. DT is a garment manufacturer.
Dongguan Yingxi Daying Commercial Co., Ltd (“DY”), a wholly-owned subsidiary of YX, was incorporated in the PRC in 2019. DY is a property management company for the garment manufacturing industry.
Dongguan Yushang Clothing Co., Ltd (“YS”), a wholly-owned subsidiary of YX, was incorporated in the PRC in 2019. YS is a garment manufacturer.
Shantou Yi Bai Yi Garments Co., Ltd (“YBY”), a wholly-owned subsidiary of YX, was incorporated in PRC in 2019, YBY is a garment manufacturer.
| F-19 |
| 2. | BASIS OF PRESENTATION, LIQUIDITY |
The accompanying consolidated financial statements of the Company and its subsidiaries are prepared pursuant to the rules and regulations of the U.S Securities and Exchanges Commission (“SEC”) and in conformity with generally accepted accounting principles in the U.S. (“US GAAP”). All material inter-company accounts and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements are presented on the basis that the Company is a going concern. The going concern assumption contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
The Company incurred net loss of $980,617, $694,329 for the years ended March 31, 2020 and 2019, respectively. As of March 31, 2020 and 2019, the Company had net current liability of $4,095,286 and $2,871,981, respectively, and a deficit on total equity of $3,066,724 and $2,177,550, respectively. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The ability to continue as a going concern is dependent upon the Company’s profit generating operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they become due. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company expects to finance operations primarily through cash flow from revenue and capital contributions from the CEO. During the year, the CEO has provided financial support for the operations of the Company. 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. There can be no assurance that the Company will be successful in its plans described above or in attracting equity or alternative financing on acceptable terms, or if at all. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| 3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
| (a) | 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.
| (b) | Fair Value Measurement |
Accounting Standards Codification (“ASC”) 820 “ Fair Value Measurements and Disclosures “, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The statement clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability. It also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and that market participant assumptions include assumptions about risk and effect of a restriction on the sale or use of an asset.
This ASC establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
At March 31, 2020, the Company has no financial assets or liabilities subject to recurring fair value measurements.
The Company’s financial instruments include cash, accounts receivable, advances to suppliers, other receivables, accounts payable, other payables, taxes payables and related party receivables or payables. Management estimates that the carrying amounts of financial instruments approximate their fair values due to their short-term nature. The fair value of amounts with related parties is not practicable to estimate due to the related party nature of the underlying transactions.
| F-20 |
| (c) | Cash and Cash Equivalents |
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. All cash and cash equivalents relate to cash on hand and cash at bank at March 31, 2020 and 2019.
The Renminbi is not freely convertible into foreign currencies. Under the PRC Foreign Exchange Control Regulations and Administration of Settlement, Sales and Payment of Foreign Exchange Regulations, the Company is permitted to exchange Renminbi for foreign currencies through banks that are authorized to conduct foreign exchange business.
| (d) | Accounts Receivable |
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. The Company extends credit to its customers in the normal course of business and generally does not require collateral. The Company’s credit terms are dependent upon the segment, and the customer. The Company assesses the probability of collection from each customer at the outset of the arrangement based on a number of factors, including the customer’s payment history and its current creditworthiness. If in management’s judgment collection is not probable, the Company does not record revenue until the uncertainty is removed.
Management performs ongoing credit evaluations, and the Company maintains an allowance for potential credit losses based upon its loss history and its aging analysis. The allowance for doubtful accounts is the Company’s best estimate of the amount of credit losses in existing accounts receivable. Management reviews the allowance for doubtful accounts each reporting period based on a detailed analysis of trade receivables. In the analysis, management primarily considers the age of the customer’s receivable, and also considers the creditworthiness of the customer, the economic conditions of the customer’s industry, general economic conditions and trends, and the business relationship and history with its customers, among other factors. If any of these factors change, the Company may also change its original estimates, which could impact the level of the Company’s future allowance for doubtful accounts. If judgments regarding the collectability of receivables were incorrect, adjustments to the allowance may be required, which would reduce profitability.
Accounts receivable are recognized and carried at the original invoice amount less an allowance for any uncollectible amounts. An estimate for doubtful accounts receivable is made when collection of the full amount is no longer probable. Bad debts are written off as incurred. No allowance for doubtful accounts was made for the years ended March 31, 2020 and 2019.
| (e) | Inventories |
Manufacturing segment inventories consist of raw materials, work in progress and finished goods and are stated at the lower of cost, determined on a weighted average basis, or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated costs necessary to make the sale. When inventories are sold, their carrying amount is charged to expense in the period in which the revenue is recognized. Write-downs for declines in net realizable value or for losses of inventories are recognized as an expense in the period the impairment or loss occurs. No write-downs for obsolete finished goods for both years ended March 31, 2020 and 2019.
| F-21 |
| (f) | Plant and Equipment |
Plant and equipment are carried at cost less accumulated depreciation. Depreciation is provided over the assets’ estimated useful lives, using the straight-line method. Estimated useful lives of the plant and equipment are as follows:
| Production plant | 5-10 years |
| Motor vehicles | 10-15 years |
| Office equipment | 5-10 years |
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of loss and comprehensive loss. The cost of maintenance and repairs is charged to the statement of income as incurred, whereas significant renewals and betterments are capitalized.
| (g) | Accounting for the Impairment of Long-Lived Assets and Goodwill |
In previous, the Company early adopted ASU 2017-04. Under the new accounting guidance, the Company should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. In previous financial statements for the year ended March 31, 2020, the Company impaired goodwill of $475,003. The Company reperformed the test on The Company has restated the impairment of goodwill as if it was impaired during the year ended March 31, 2018.
Long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. It is reasonably possible that these assets could become impaired as a result of technology or other industry changes. Determination of recoverability of assets to be held and used is by comparing the carrying amount of an asset to future net undiscounted cash flows to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
There was no impairment of long-lived assets as of March 31, 2020 and 2019.
| F-22 |
| (h) | 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.
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 of the good or service.
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 as of March 31, 2020 & 2019.
Cost of revenues for garment manufacturing segment includes the direct raw material cost, direct labor cost, manufacturing overheads including depreciation of production equipment and rent. Cost of revenue for logistics services segment includes gasoline and diesel fuel, toll charges and subcontracting fees. Cost of revenue for epidemic prevention supplies business includes cost of merchandise and cost of direct raw materials, direct labor, and manufacturing overheads of our own products.
| (i) | Earnings Per Share |
The Company reports earnings (loss) per share in accordance with ASC 260 “Earnings Per Share”, which requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average common shares outstanding during the reporting period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Further, if the number of common shares outstanding increases as a result of a stock dividend or stock split or decreases as a result of a reverse stock split, the computations of a basic and diluted earnings per share shall be adjusted retroactively for all periods presented to reflect that change in capital structure.
The Company had no potentially dilutive ordinary shares as of March 31, 2020 and 2019.
| F-23 |
| (j) | Income Taxes |
The Company accounts for income taxes using the asset and liability method prescribed by ASC 740 “Income Taxes”. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the years in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.
The Company has a history of tax losses and there is no convincing evidence that sufficient taxable income will be available against which the deferred tax asset can be utilized, therefore, the Company does not recognize any tax benefits for the year ended March 31, 2020 & 2019.
The Company’s Chinese subsidiaries are governed by the Income Tax Laws of the PRC. The PRC federal statutory tax rate is 25%. The Company files income tax returns with the relevant government authorities in the PRC. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months.
The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company does not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the years ended March 31, 2020 and 2019. The Company’s effective tax rate differs from the PRC federal statutory rate primarily due to non-deductible expenses, temporary differences and preferential tax treatments.
New U.S. federal tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the “U.S. Tax Reform”), was signed into law on December 22, 2017. The U.S. Tax Reform modified the U.S. Internal Revenue Code by, among other things, reducing the statutory U.S. federal corporate income tax rate from 35% to 21% for taxable years beginning after December 31, 2017; limiting and/or eliminating many business deductions; migrating the U.S. to a territorial tax system with a one-time transaction tax on a mandatory deemed repatriation of previously deferred foreign earnings of certain foreign subsidiaries; subject to certain limitations, generally eliminating U.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain foreign earnings. Taxpayers may elect to pay the one-time transition tax over eight years, or in a single lump-sum payment. The Company measured the current and deferred taxes based on the provisions of the Tax legislation. After the Company’s measurement, no deferred tax benefit nor expense was recorded relating to the Tax Act changes for the years ended March 31, 2020 and 2019.
| (k) | Leases |
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.
| (l) | Restatement of prior years’ consolidated financial statements |
During the preparation of the Company’s March 31, 2020 and 2019 consolidated financial statements, the prior years’ consolidated financial statements have been restated on following matter:
| F-24 |
Impairment of goodwill
In previous financial statements for the year ended March 31, 2020, the Company impaired goodwill of $475,003. The Company reperformed the test on goodwill for impairment as of March 31, 2020 and it was determined that recoverable amount of one of the Company’s reporting units was lower than the carrying amount of the goodwill recorded as of March 31, 2018. Therefore, it was concluded that total carrying amount of goodwill should has been fully impaired as of March 31, 2018. The Company has restated the impairment of goodwill as if it was impaired during the year ended March 31, 2018. The Comprehensive loss for the year ended March 31, 2020 decreased by $475,003. The long live assets as of March 31, 2019 decreased by $475,003. The accumulated deficits as of March 31, 2019 increased by the same amount. The restatement has no impact on previously reported “cash flows” amount.
| (m) | Recently issued and adopted accounting pronouncements |
In June 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.
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.
| 4. | 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 and revenue and expenses are translated at the average yearly exchange rates and equity is translated at historical exchange rates. Any translation adjustments resulting are not included in determining net income but are included in foreign exchange adjustments to other comprehensive loss, a component of equity.
| (c) | Concentration Risks |
During the years ended March 31, 2020 and 2019, approximately 92.7% and 39% of total inventory purchases were from the Company’s five largest suppliers, respectively. Management believes that should the Company lose any one of its major suppliers, other suppliers are available that could provide similar products to the Company.
The followings are the percentages of accounts receivable balance of the top five customers over accounts receivable for each segment as at March 31, 2020 and 2019.
Garment manufacturing segment
| 2020 | 2019 | |||||||
| Customer A | 85.5 | % | 0 | % | ||||
| Customer B | 10.2 | % | 28.7 | % | ||||
| Customer C | 2.0 | % | 0 | % | ||||
| Customer D | 0.7 | % | 0 | % | ||||
| Customer E | 0.5 | % | 0 | % | ||||
The high concentration as at March 31, 2020 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
| 2020 | 2019 | |||||||
| Customer A | 22.4 | % | 27.4 | % | ||||
| Customer B | 18.3 | % | 18.8 | % | ||||
| Customer C | 17.8 | % | 17.6 | % | ||||
| Customer D | 5.0 | % | 2.6 | % | ||||
| Customer E | 3.8 | % | 2.9 | % | ||||
| (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 March 31, 2020, the total outstanding borrowings amounted to $353,114 (RMB 2,500,000) with various interest rate from4.84% to 6.96% p.a. (Note 10)
(e) COVID-19
The Coronavirus Disease (COVID-19) outbreak and the measures taken to contain the spread of the pandemic have created a high level of uncertainty to global economic prospects and this has impacted the Company’s operations and its financial performance in the last two months of the financial year and subsequent to the financial year end.
As the situation continues to evolve with significant level of uncertainty, the Company is unable to reasonably estimate the full financial impact of the COVID-19 outbreak. The Company is monitoring the situation closely and to mitigate the financial impact, it is conscientiously managing its cost by adopting an operating cost reduction strategy and conserving liquidity by working with major creditors to align repayment obligations with receivable collections.
| 5. | ACCOUNTS RECEIVABLES |
The receivables and allowance balances at March 31, 2020 and 2019 are as follows:
| 2020 | 2019 | |||||||
| Accounts receivable | $ | 4,500,116 | $ | 1,798,489 | ||||
| Less: allowance for doubtful accounts | - | - | ||||||
| Accounts receivable, net | $ | 4,500,116 | $ | 1,798,489 | ||||
No allowance for doubtful accounts was made for the years ended March 31, 2020 and 2019.
| 6. | RELATED PARTY TRANSACTIONS |
| Name of Related Parties | Relationship with the Company | |
| Zhida Hong | President, CEO, and a director of the Company | |
| Zhongpeng Chen | A legal representative of HPF | |
| Bihua Yang | A legal representative of XKJ | |
| Dewu Huang | A legal representative of DT | |
| Jinlong Huang | A spouse of legal representative of HSW |
The Company leases Shenzhen XKJ office rent-free from Bihua Yang.
| F-25 |
The Company had the following related party debt at the end of the years:
| Related party debt | 2020 | 2019 | ||||||
| Zhida Hong | $ | 5,043,489 | $ | 3,989,382 | ||||
| Zhongpeng Chen | 160,427 | 169,235 | ||||||
| Dewu Huang | 81,287 | - | ||||||
| Jinlong Huang | 144,237 | 45,513 | ||||||
| $ | 5,429,440 | $ | 4,204,130 | |||||
The balances of related party debts are unsecured, non-interest bearing and repayable on demand.
| 7. | INVENTORIES |
Inventories consist of the following as of March 31, 2020 and 2019:
| 2020 | 2019 | |||||||
| Raw materials | $ | 230,742 | $ | 157,382 | ||||
| Work in progress | 62,150 | 160,665 | ||||||
| Finished goods | 54,639 | - | ||||||
| Total inventories | $ | 347,531 | $ | 318,047 | ||||
There is no inventory write-downs for the years ended March 31, 2020 and 2019.
| 8. | 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.
| 9. | PLANT AND EQUIPMENT |
Plant and equipment consists of the following as of March 31, 2020 and 2019:
| 2020 | 2019 | |||||||
| Production plant | $ | 67,247 |
$ | 107,173 |
||||
| Motor vehicles | 868,743 |
1,016,818 |
||||||
| Office equipment | 19,471 |
14,722 |
||||||
955,461 |
1,138,713 |
|||||||
| Less: accumulated depreciation | (370,442 |
) | (444,282 | ) | ||||
| Plant and equipment, net | $ | 585,019 |
$ | 694,431 |
||||
Depreciation expense for the years ended March 31, 2020 and 2019 was $114,391 and $115,673, respectively.
| F-26 |
| 10. | SHORT-TERM BANK LOAN |
In September 2018, HSW, a subsidiary of the Company entered into a facility agreement with Dongguan Agricultural Commercial Bank and obtained a line of credit, which allows the Company to borrow up to approximately $212,334 (RMB1,500,000) for daily operations with fixed interest rate of 6.96% per annum. The loans are guaranteed at no cost by legal representative of HSW. As of March 31, 2020, the Company has borrowed $211,868 (RMB1,500,000) under this line of credit. In September 2020, the Company fully repaid the outstanding loan and this line of credit was cancelled.
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 $147,264 (RMB1,000,000) for daily operations. The loans are guaranteed at no cost by the legal representative of HSW. As of March 31, 2020, the Company has borrowed $141,246 (RMB1,000,000) under this line of credit with various annual interest rates from 4.84% to 4.9%. The outstanding loan balance will be due on March 31, 2021.
| 11. | INCOME TAXES |
| (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.
Yingxi HK was incorporated in Hong Kong and is subject to Hong Kong income tax at a progressive rate of 16.5%. No provision for income taxes in Hong Kong has been made as Yingxi HK had no taxable income for the years ended March 31, 2020 and 2019.
YX were incorporated in the PRC and is subject to the EIT tax rate of 25%. No provision for income taxes in the PRC has been made as YX had no taxable income for the years ended March 31, 2020 and 2019.
The Company is governed by the Income Tax Laws of the PRC. All Yingxi’s operating companies were subject to progressive EIT rates from 5% to 15% in 2020 and 2019. The preferential tax rate will be expired at end of year 2022 and the EIT rate will be 25% from year 2023.
The Company’s parent entity, Addentax Group Corp. is an 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 years ended March 31, 2020 and 2019.
| F-27 |
The reconciliation of income taxes computed at the PRC federal statutory tax rate applicable to the PRC, to income tax expenses are as follows:
| 2020 | 2019 | |||||||
| PRC statutory tax rate | 25 | % | 25 | % | ||||
| Computed expected benefits | $ | (241,137 | ) | $ | (171,444 | ) | ||
| Temporary differences | (15,205 | ) | 19,291 | |||||
Changes in valuation allowance | 268,680 | 160,708 | ||||||
| Permanent difference | 3,732 | - | ||||||
| Reported income tax expense | $ | 16,070 | $ | 8,555 | ||||
| (b) | Value Added Tax (“VAT”) |
In accordance with the relevant taxation laws in the PRC, the normal VAT rate for domestic sales is 13%, which is levied on the invoiced value of sales and is payable by the purchaser. The subsidiaries HSW, DT and YS enjoyed preferential VAT rate of 13%. The Companies are required to remit the VAT they collect to the tax authority. A credit is available whereby VAT paid on purchases can be used to offset the VAT due on sales.
For services, the applicable VAT rate is 9% under the relevant tax category for logistic company, except the branch of HPF enjoyed the preferential VAT rate of 3% in 2020 and 2019. The Company is required to pay the full amount of VAT calculated at the applicable VAT rate of the invoiced value of sales as required. A credit is available whereby VAT paid on gasoline and toll charges can be used to offset the VAT due on service income.
| 12. | CONSOLIDATED SEGMENT DATA |
Segment information is consistent with how management 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 two segments:
| (a) | Manufacturing of garments (the “Garment manufacturing segment”); and | |
| (b) | Providing logistic services (the “Logistics services segment”). |
The Company also provides general corporate services to its segments and these costs are reported as “Corporate”.
Selected information in the segment structure is presented in the following tables:
Revenues by segment for the years ended March 31, 2020 and 2019 are as follows:
| Revenues | 2020 | 2019 | ||||||
| Garment manufacturing segment | $ | 4,298,518 | $ | 3,359,637 | ||||
| Logistics services segment | 5,873,861 | 6,667,283 | ||||||
| Total of reportable segments | 10,172,379 | 10,026,920 | ||||||
| Reconciliation – Corporate | - | - | ||||||
| Total consolidated revenue | $ | 10,172,379 | $ | 10,026,920 | ||||
Income from operations by segment for the years ended March 31, 2020 and 2019 are as follows:
| Operating income (loss) | 2020 | 2019 | ||||||
| Garment manufacturing segment | $ | 215,324 | $ | 8,091 | ||||
| Logistics services segment | 80,128 | (10 | ) | |||||
| Total of reportable segments | 295,452 | 8,081 | ||||||
| Reconciliation – Corporate | (1,159,770 | ) | (691,208 | ) | ||||
| Total consolidated loss from operations | $ | (864,318 | ) | $ | (683,127 | ) | ||
| Garment manufacturing segment | (26,686 | ) | (12,762 | ) | ||||
| Logistics services segment | (72,750 | ) | 10,118 | |||||
| Total of reportable segments | (99,436 | ) | (2,644 | ) | ||||
| Reconciliation – Corporate | (793 | ) | (3 | ) | ||||
| Total consolidated loss before income tax | $ | (964,547 | ) | $ | (685,774 | ) | ||
| Income tax expense | (16,070 | ) | (8,555 | ) | ||||
| Net loss | $ | (980,617 | ) | $ | (694,329 | ) | ||
| F-28 |
Depreciation and amortization by segment for the years ended March 31, 2020 and 2019 are as follows:
| Depreciation | 2020 | 2019 | ||||||
| Garment manufacturing segment | $ | 9,739 | $ | 23,036 | ||||
| Logistics service segment | 104,652 | 92,637 | ||||||
| Total of reportable segments | 114,391 | 115,673 | ||||||
| Reconciliation – Corporate | - | - | ||||||
| Total consolidated depreciation | $ | 114,391 | $ | 115,673 | ||||
Expenditure for addition of long lived assets for the years ended March 31, 2020 and 2019 are as follows:
| Expenditure for additions to long lived assets | 2020 | 2019 | ||||||
| Garment manufacturing segment | $ | 6,526 | $ | - | ||||
| Logistics services segment | 129,476 | 228,618 | ||||||
| Total of reportable segments | 136,002 | 228,618 | ||||||
| Reconciliation – Corporate | - | - | ||||||
| Total consolidated expenditure for additions to long lived assets | $ | 136,002 | $ | 228,618 | ||||
Total assets by segment at March 31, 2020 and 2019 are as follows:
| Total assets | 2020 | 2019 | ||||||
| Garment manufacturing segment | $ | 4,098,758 | $ | 1,242,335 | ||||
| Logistics services segment | 2,422,140 | 2,253,308 | ||||||
| Total of reportable segments | 6,520,898 | 3,495,643 | ||||||
| Reconciliation – Corporate | 1,901,080 | 476,203 | ||||||
| Total consolidated total assets | $ | 8,421,978 | $ | 3,971,846 | ||||
| 12. | ACCRUED EXPENSES AND OTHER PAYABLES |
Accrued expenses and other payables consist of the following as of March 31, 2020 and 2019:
| 2020 | 2019 | |||||||
| Accrued wages and welfare | 61,776 | 84,677 | ||||||
| Other tax payable | 25,206 | 47,445 | ||||||
| Rental payable | 24,972 | - | ||||||
| Other payables | 118,963 | 127,715 | ||||||
| $ | 230,917 | $ | 259,837 | |||||
| 13. | LEASE RIGHT-OF-USE ASSET AND LEASE LIABILITIES |
The Company implemented new accounting policy according to the ASC 842, Leases, on April 1, 2019 on a modified retrospective basis and did not restate comparative periods. Under the new policy, the Company recognized approximately $0.06 million lease liability as well as right-of-use asset for all leases (with the exception of short-term leases) at the commencement date. Lease liabilities are measured at present value of the sum of remaining rental payments as of March 31, 2020, with discounted rate of 4.35%. A single lease cost is recognized over the lease term on a generally straight-line basis. All cash payments of operating lease cost are classified within operating activities in the statement of cash flows.
| F-29 |
As of March 31, 2020 and March 31, 2019, the right-of use asset and lease liabilities are as follows:
| March 31, 2020 | March 31, 2019 | |||||||
| Right-of-use asset – operating leases | $ | 1,835,717 | $ | - | ||||
| Lease liabilities – current portion | 443,543 | - | ||||||
| Lease liabilities – non-current portion | 1,392,174 | - | ||||||
| $ | 1,835,717 | $ | - | |||||
Lease cost
| 2020 | 2019 | |||||||
| Operating lease cost | 451,685 | 94,986 | ||||||
| Short-term lease cost | 63,785 | - | ||||||
| 515,470 | 94,986 | |||||||
Other information
| 2020 | 2019 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||
| Operating cash flow from operating leases | $ | 515,470 | $ | - | ||||
| Right-of-use assets obtained in exchange for new operating leases liabilities | 1,982,393 | - | ||||||
| Weighted average remaining lease term - Operating leases (years) | 4.2 | - | ||||||
| Weighted average discount rate - Operating leases | 4.35 | % | - | |||||
| 14. | RESERVES |
| Statutory reserve |
In accordance with the relevant laws and regulations of the PRC, the subsidiary of the Company established in the PRC is required to transfer 10% of its profit after taxation prepared in accordance with the accounting regulations of the PRC to the statutory reserve until the reserve balance reaches 50% of the subsidiary’s paid-up capital. Such reserve may be used to offset accumulated losses or increase the registered capital of the subsidiary, subject to the approval from the PRC authorities, and are not available for dividend distribution to the shareholders. The amount appropriated to statutory reserve for the years ended March 31, 2020 and 2019 were $1,735 and $240, respectively. The balance of paid-up statutory reserve was $23,514 and $21,779 as of March 31, 2020 and 2019, respectively.
| F-30 |
| 15. | REVERSE STOCK SPLIT |
On January 24, 2019, the Board of Directors of the Company approved a reverse stock split of the Company’s issued and outstanding shares of common stock, par value $0.001 per share (the “Common Stock”), at a ratio of 1-for-20 (the “Reverse Stock Split”). The Reverse Stock Split was effective on February 27, 2019 (the “Effective Date”). As a result of the filing of the Certificate, the number of shares of the Company’s authorized Common Stock was reduced from 1,000,000,000 shares to 50,000,000 shares and the issued and outstanding number of shares of the Company’s Common Stock was correspondingly decreased to 25,346,004. There was no change to the par value of the Company’s Common Stock. The decrease of Share Capital was transferred to and increased the Additional Paid In Capital. The Company has adjusted all references to number of share and loss per share amounts in the accompanying consolidated financial statements and notes to reflect the reverse stock split.
| 16. | SUBSEQUENT EVENTS |
In April 2020, the Company developed a new business segment: epidemic prevention supplies. The new business consists of manufacturing and distribution of epidemic prevention products and reselling of epidemic prevention supplies purchased from third parties in both domestic and overseas markets.
In November 2020, the Company disposed of $194,164 inventories to Mr. Huang and a third party at cost for cash with no gain or loss recognized. Such cash was received in November 2020.
In November 2020, the Company disposed of one of its subsidiaries in logistic service segment, HPF, with a consideration of $173,170, equals to the carrying amount of its net assets.
On December 31, 2020, the Company offered 600,000 common stocks to an individual investor. The subscription price was $5.00 per share. The proceeds to be received will be used for working capital and other general corporate purposes.
There is no other subsequent events have occurred that would require recognition or disclosure in the financial statements.
| F-31 |
ADDENTAX GROUP CORP.
5,000,000 Shares of Common Stock
PROSPECTUS
You should rely only on the information contained in this prospectus. No dealer, salesperson or other person is authorized to give information that is not contained in this prospectus. This prospectus is not an offer to sell nor is it seeking an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. The information contained in this prospectus is correct only as of the date of this prospectus, regardless of the time of the delivery of this prospectus or the sale of these securities.
Until , 2019, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriter with respect to their unsold subscriptions.
The date of this prospectus is , 2021
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JANUARY 22, 2021
PRELIMINARY PROSPECTUS
Addentax Group Corp.
987,000 Shares of Common Stock
This prospectus relates to the resale of 987,000 shares of our common stock by the selling stockholders named in this prospectus.
We are a reporting company under Section 15(d) of the Securities Exchange Act of 1934, as amended. Our common stock is currently quoted on the OTCQB Marketplace (the “OTCQB”) under the symbol “ATXG.” The closing price for our common stock on January 21, 2021, was $7.00 per share. There is a limited public trading market for our common stock. We are applying to list our common stock on the Nasdaq Capital Market under the symbol “ATXG.”
Investing in our securities involves risks. You should carefully consider the risk factors beginning on page 8 of this prospectus and set forth in the documents incorporated by reference herein before making any decision to invest in our securities.
Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this registration statement. Any representation to the contrary is a criminal offense.
The date of this prospectus is , 2021
THE OFFERING
| Common stock offered by us: | 0 shares | ||
| Common Stock offered by the selling stockholders | 987,000 shares | ||
| Common stock outstanding before the offering: | 26,093,004 shares as of January 22, 2021 | ||
| Common stock to be outstanding after the offering: | 31,093,004 shares (1) | ||
| Use of proceeds: | We will not receive any of the proceeds from the sale of the common stock by the selling stockholders named in this prospectus. |
(1) Assumes no issuance by us of our common stock pursuant to the public offering prospectus filed contemporaneously herewith.
| SS-1 |
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares of common stock by the selling stockholders.
| SS-2 |
SELLING STOCKHOLDERS
The following table sets forth the names of the selling stockholders, the number of shares of common stock owned by each selling stockholder immediately prior to the date of this prospectus and the number of shares to be offered by the selling stockholder pursuant to this prospectus. The table also provides information regarding the beneficial ownership of our common stock by the Selling Stockholder as adjusted to reflect the assumed sale of all of the shares offered under this prospectus.
Percentage of beneficial ownership before this offering is based on 26,093,004 shares of our common stock outstanding as January 22, 2021. Beneficial ownership is based on information furnished by the selling stockholders. Unless otherwise indicated and subject to community property laws where applicable, the selling stockholder named in the following table has, to our knowledge, sole voting and investment power with respect to the shares beneficially owned by him.
None of the selling stockholders has had any position, office or other material relationship within past three years with the Company. None of the selling stockholders is a broker dealer or an affiliate of a broker dealer. None of the selling stockholders has an agreement or understanding to distribute any of the shares being registered. Each selling stockholder may offer for sale from time to time any or all of the shares, subject to the lock up agreements described in the “Plan of Distribution.” The table below assumes that the selling shareholders will sell all of the shares offered for sale hereby. A selling stockholder is under no obligation to sell any shares pursuant to this prospectus.
Name of Selling Stockholder |
Shares Beneficially Owned Prior to Offering |
Maximum Number of Shares to be Sold | Number of Shares Owned After Offering | Percentage Ownership After Offering |
||||||||||||
| ZENG Zeyang | 747,000 | 747,000 | - | - | % | |||||||||||
| DING Yinping | 336,515 | 10,000 | 326,515 | 1.05 | % | |||||||||||
| ZHOU Zhiyong | 262,531 | 10,000 | 252,531 | 0.81 | % | |||||||||||
| YANG Bihua | 262,531 | 10,000 | 252,531 | 0.81 | % | |||||||||||
| ZHANG Junze | 261,500 | 5,000 | 256,500 | 0.82 | % | |||||||||||
| HUANG Jinlong | 209,344 | 10,000 | 199,344 | 0.64 | % | |||||||||||
| WU Bo | 123,000 | 5,000 | 118,000 | 0.38 | % | |||||||||||
| CHEN Yikui | 116,000 | 10,000 | 106,000 | 0.34 | % | |||||||||||
| CHEN Zhongpeng | 107,778 | 10,000 | 97,778 | 0.31 | % | |||||||||||
| HUANG Xijuan | 103,542 | 10,000 | 93,542 | 0.30 | % | |||||||||||
| LIU Miaozhi | 91,930 | 5,000 | 86,930 | 0.28 | % | |||||||||||
| ZHAO Sairui | 54,015 | 5,000 | 49,015 | 0.16 | % | |||||||||||
| SS-3 |
| ZHAN Mingqiang | 51,500 | 10,000 | 41,500 | 0.13 | % | |||||||||||
| WU Xiaolei | 39,000 | 2,000 | 37,000 | 0.12 | % | |||||||||||
| CHEN Zengyao | 32,000 | 5,000 | 27,000 | 0.09 | % | |||||||||||
| ZHAN Hejiang | 32,000 | 2,000 | 30,000 | 0.10 | % | |||||||||||
| ZHANG Lihe | 24,000 | 4,000 | 20,000 | 0.06 | % | |||||||||||
| CHEN Chujuan | 21,330 | 2,000 | 19,330 | 0.06 | % | |||||||||||
| CHEN Xinfeng | 15,000 | 5,000 | 10,000 | 0.03 | % | |||||||||||
| LU Qiuzhe | 15,000 | 5,000 | 10,000 | 0.03 | % | |||||||||||
WU Sihua |
15,000 | 3,000 | 12,000 | 0.03 | % | |||||||||||
| XU Weike | 12,500 | 5,000 | 7,500 | 0.02 | % | |||||||||||
| LIU Sikun | 12,500 | 5,000 | 7,500 | 0.02 | % | |||||||||||
| ZHOU Lifang | 12,250 | 3,000 | 9,250 | 0.03 | % | |||||||||||
| QIU Shaoyang | 12,000 | 2,000 | 10,000 | 0.03 | % | |||||||||||
| XU Hailiang | 12,000 | 7,000 | 5,000 | 0.02 | % | |||||||||||
| CHEN Bijian | 12,000 | 2,000 | 10,000 | 0.03 | % | |||||||||||
| DING Yunfeng | 11,365 | 5,000 | 6,365 | 0.02 | % | |||||||||||
| ZHAO Zhiming | 11,000 | 3,000 | 8,000 | 0.03 | % | |||||||||||
| DENG Anlie | 11,000 | 5,500 | 5,500 | 0.02 | % | |||||||||||
| CHEN Yousong | 10,000 | 10,000 | - | - | % | |||||||||||
| LI Xiaomei | 10,000 | 10,000 | - | - | % | |||||||||||
| GAN Chao | 10,000 | 5,000 | 5,000 | 0.02 | % | |||||||||||
| WANG Dongan | 9,000 | 2,000 | 7,000 | 0.02 | % | |||||||||||
| XU Qunfang | 7,850 | 2,000 | 5,850 | 0.02 | % | |||||||||||
| LIN Zerun | 7,800 | 1,000 | 6,800 | 0.02 | % |
| SS-4 |
| WU Hanyan | 7,800 | 1,000 | 6,800 | 0.02 | % | |||||||||||
| PENG Miao | 7,500 | 1,000 | 6,500 | 0.02 | % | |||||||||||
| ZHANG Jiuhua | 7,500 | 6,000 | 1,500 | 0.00 | % | |||||||||||
| LIU Yong | 6,000 | 1,000 | 5,000 | 0.02 | % | |||||||||||
| MA Yaonan | 6,000 | 1,000 | 5,000 | 0.02 | % | |||||||||||
| LIN Shaoqi | 6,000 | 1,000 | 5,000 | 0.02 | % | |||||||||||
| LIU Chengzuo | 6,000 | 1,000 | 5,000 | 0.02 | % | |||||||||||
| CHENG Wei | 5,500 | 1,000 | 4,500 | 0.01 | % | |||||||||||
| YAN Xiaodan | 5,000 | 1,000 | 4,000 | 0.01 | % | |||||||||||
| HUANG Lifeng | 5,000 | 1,000 | 4,000 | 0.01 | % | |||||||||||
| HUANG Kexin | 5,000 | 1,000 | 4,000 | 0.01 | % | |||||||||||
| HUANG Jiancheng | 5,000 | 1,000 | 4,000 | 0.01 | % | |||||||||||
| LOU Huiqian | 5,000 | 1,000 | 4,000 | 0.01 | % | |||||||||||
| YING Binman | 5,000 | 1,000 | 4,000 | 0.01 | % | |||||||||||
| LIAO Qiaoxi | 4,500 | 1,000 | 3,500 | 0.01 | % | |||||||||||
| HUANG Shaojie | 4,155 | 1,000 | 3,155 | 0.01 | % | |||||||||||
| LI Ruixiong | 4,000 | 4,000 | - | - | % | |||||||||||
| CAO Lubin | 4,000 | 2,000 | 2,000 | 0.01 | % | |||||||||||
| HUANG Lizhen | 4,000 | 1,000 | 3,000 | 0.01 | % | |||||||||||
| LAN Lanjing | 4,000 | 1,000 | 3,000 | 0.01 | % | |||||||||||
| HE Longchi | 3,750 | 1,000 | 2,750 | 0.01 | % | |||||||||||
| XU Xiaoliang | 3,500 | 1,000 | 2,500 | 0.01 | % | |||||||||||
| LIU Liping | 3,500 | 1,000 | 2,500 | 0.01 | % | |||||||||||
| LIU Dan | 3,500 | 1,000 | 2,500 | 0.01 | % |
| SS-5 |
| BIN Xiaohong | 3,000 | 1,000 | 2,000 | 0.01 | % | |||||||||||
| ZHONG Saiqin | 2,500 | 1,000 | 1,500 | 0.00 | % | |||||||||||
| CHEN Qinghuang | 2,500 | 1,000 | 1,500 | 0.00 | % | |||||||||||
| LIU Ping | 2,500 | 1,000 | 1,500 | 0.00 | % | |||||||||||
| LIU Chaoli | 2,500 | 1,000 | 1,500 | 0.00 | % | |||||||||||
| LI Chan | 2,500 | 1,000 | 1,500 | 0.00 | % | |||||||||||
| PENG Can | 1,700 | 1,000 | 700 | 0.00 | % | |||||||||||
| CHEN Weibo | 1,500 | 500 | 1,000 | 0.00 | % | |||||||||||
| LIAO Yejun | 1,000 | 500 | 500 | 0.00 | % | |||||||||||
| HU Yao | 1,000 | 1,000 | - | - | % | |||||||||||
| YANG Siyuan | 1,000 | 1,000 | - | - | % | |||||||||||
| LIN Nan | 1,000 | 500 | 500 | 0.00 | % | |||||||||||
| YANG Chengjiu | 1,000 | 1,000 | - | - | % | |||||||||||
| Total | 987,000 |
(1) Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, securities that are currently convertible or exercisable into shares of our common stock, or convertible or exercisable into shares of our common stock within 60 days of the date hereof are deemed outstanding. Such shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person. Except as indicated in the footnotes to the following table, each stockholder named in the table has sole voting and investment power with respect to the shares set forth opposite such stockholder’s name.
| SS-6 |
SELLING STOCKHOLDERS PLAN OF DISTRIBUTION
The selling stockholders and any of their pledgees, donees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock being offered under this prospectus on any stock exchange, market or trading facility on which shares of our common stock are traded or in private transactions. These sales may be at fixed or negotiated prices. The selling stockholders may use any one or more of the following methods when disposing of shares:
| ● | ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; | |
| ● | block trades in which the broker-dealer will attempt to sell the shares as agent but may position; and resell a portion of the block as principal to facilitate the transaction; | |
| ● | purchases by a broker-dealer as principal and resales by the broker-dealer for its account; | |
| ● | an exchange distribution in accordance with the rules of the applicable exchange; | |
| ● | privately negotiated transactions; | |
| ● | to cover short sales made after the date that the registration statement of which this prospectus is a part is declared effective by the SEC; | |
| ● | broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share; | |
| ● | a combination of any of these methods of sale; and | |
| ● | any other method permitted pursuant to applicable law. |
The shares may also be sold under Rule 144 under the Securities Act of 1933, as amended, if available for a selling stockholder, rather than under this prospectus. The selling stockholders have the sole and absolute discretion not to accept any purchase offer or make any sale of shares if they deem the purchase price to be unsatisfactory at any particular time.
The selling stockholders may pledge their shares to their brokers under the margin provisions of customer agreements. If a selling stockholder defaults on a margin loan, the broker may, from time to time, offer and sell the pledged shares.
Broker-dealers engaged by the selling stockholders may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated, which commissions as to a particular broker or dealer may be in excess of customary commissions to the extent permitted by applicable law.
If sales of shares offered under this prospectus are made to broker-dealers as principals, we would be required to file a post-effective amendment to the registration statement of which this prospectus is a part. In the post-effective amendment, we would be required to disclose the names of any participating broker-dealers and the compensation arrangements relating to such sales.
The selling stockholders and any broker-dealers or agents that are involved in selling the shares offered under this prospectus may be deemed to be “underwriters” within the meaning of the Securities Act in connection with these sales. Commissions received by these broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Any broker-dealers or agents that are deemed to be underwriters may not sell shares offered under this prospectus unless and until we set forth the names of the underwriters and the material details of their underwriting arrangements in a supplement to this prospectus or, if required, in a replacement prospectus included in a post-effective amendment to the registration statement of which this prospectus is a part.
The selling stockholders and any other persons participating in the sale or distribution of the shares offered under this prospectus will be subject to applicable provisions of the Exchange Act, and the rules and regulations under that act, including Regulation M. These provisions may restrict activities of, and limit the timing of purchases and sales of any of the shares by, the selling stockholders or any other person. Furthermore, under Regulation M, persons engaged in a distribution of securities are prohibited from simultaneously engaging in market making and other activities with respect to those securities for a specified period of time prior to the commencement of such distributions, subject to specified exceptions or exemptions. All of these limitations may affect the marketability of the shares.
| SS-7 |
Rule 2710 requires members firms to satisfy the filing requirements of Rule 2710 in connection with the resale, on behalf of selling stockholders, of the securities on a principal or agency basis. NASD Notice to Members 88-101 states that in the event a Selling Stockholder intends to sell any of the shares registered for resale in this prospectus through a member of FINRA participating in a distribution of our securities, such member is responsible for insuring that a timely filing, if required, is first made with the Corporate Finance Department of FINRA and disclosing to FINRA the following:
| ● | it intends to take possession of the registered securities or to facilitate the transfer of such certificates; | |
| ● | the complete details of how the selling stockholders’ shares are and will be held, including location of the particular accounts; | |
| ● | whether the member firm or any direct or indirect affiliates thereof have entered into, will facilitate or otherwise participate in any type of payment transaction with the selling stockholders, including details regarding any such transactions; and | |
| ● | in the event any of the securities offered by the selling stockholders are sold, transferred, assigned or hypothecated by any Selling Stockholder in a transaction that directly or indirectly involves a member firm of FINRA or any affiliates thereof, that prior to or at the time of said transaction the member firm will timely file all relevant documents with respect to such transaction(s) with the Corporate Finance Department of FINRA for review. |
No FINRA member firm may receive compensation in excess of that allowable under FINRA rules, including Rule 2710, in connection with the resale of the securities by the selling shareholders, which total compensation may not exceed 8%.
If any of the shares of common stock offered for sale pursuant to this prospectus are transferred other than pursuant to a sale under this prospectus, then subsequent holders could not use this prospectus until a post-effective amendment or prospectus supplement is filed, naming such holders. We offer no assurance as to whether any of the selling stockholders will sell all or any portion of the shares offered under this prospectus.
We have agreed to pay all fees and expenses we incur incident to the registration of the shares being offered under this prospectus. However, each selling stockholder and purchaser is responsible for paying any discounts, commissions and similar selling expenses they incur.
We and the selling stockholders have agreed to indemnify one another against certain losses, damages and liabilities arising in connection with this prospectus, including liabilities under the Securities Act.
| SS-8 |
LEGAL MATTERS
The validity of the common stock offered in this offering and legal matters as to Nevada law will be passed upon for us by Loeb & Loeb LLP, New York, New York.
| SS-9 |
ADDENTAX GROUP CORP.
987,000 Shares of Common Stock
PROSPECTUS
You should rely only on the information contained in this prospectus. No dealer, salesperson or other person is authorized to give information that is not contained in this prospectus. This prospectus is not an offer to sell nor is it seeking an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. The information contained in this prospectus is correct only as of the date of this prospectus, regardless of the time of the delivery of this prospectus or the sale of these securities.
Until , 2021, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriter with respect to their unsold subscriptions.
The date of this prospectus is , 2021
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses, all of which will be borne by us, in connection with the sale and distribution of the securities being registered, other than the underwriter commissions. All amounts shown are estimates except for the Securities and Exchange Commission registration fee and the FINRA filing fee.
| Description | Amount | |||
| Filing Fee - Securities and Exchange Commission | $ | 4,231 | ||
| FINRA Filing Fee | 6,318 | |||
| NASDAQ Application and Listing Fee | 75,000 | |||
| Attorney’s fees and expenses | 350,000 | |||
| Accountant’s fees and expenses | 125,000 | * | ||
| Transfer agent’s and registrar fees and expenses | 5,000 | * | ||
| Printing and engraving expenses | 7,500 | * | ||
| Miscellaneous expenses | 2,500 | * | ||
| Total | $ | 575,549 | * | |
* Estimated expenses.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
We are a Nevada corporation and generally governed by the Nevada Private Corporations Code, Title 78 of the Nevada Revised Statutes, or NRS.
Section 78.138 of the NRS provides that, unless the corporation’s articles of incorporation provide otherwise, a director or officer will not be individually liable unless it is proven that (i) the director’s or officer’s acts or omissions constituted a breach of his or her fiduciary duties, and (ii) such breach involved intentional misconduct, fraud, or a knowing violation of the law. Our articles of incorporation provide the personal liability of our directors is eliminated to the fullest extent permitted under the NRS.
Section 78.7502 of the NRS permits a company to indemnify its directors and officers against expenses, judgments, fines, and amounts paid in settlement actually and reasonably incurred in connection with a threatened, pending, or completed action, suit, or proceeding, if the officer or director (i) is not liable pursuant to NRS 78.138, or (ii) acted in good faith and in a manner the officer or director reasonably believed to be in or not opposed to the best interests of the corporation and, if a criminal action or proceeding, had no reasonable cause to believe the conduct of the officer or director was unlawful. Section 78.7502 of the NRS requires a corporation to indemnify a director or officer that has been successful on the merits or otherwise in defense of any action or suit. Section 78.7502 of the NRS precludes indemnification by the corporation if the officer or director has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals, to be liable to the corporation or for amounts paid in settlement to the corporation, unless and only to the extent that the court determines that in view of all the circumstances, the person is fairly and reasonably entitled to indemnity for such expenses and requires a corporation to indemnify its officers and directors if they have been successful on the merits or otherwise in defense of any claim, issue, or matter resulting from their service as a director or officer.
Section 78.751 of the NRS permits a Nevada company to indemnify its officers and directors against expenses incurred by them in defending a civil or criminal action, suit, or proceeding as they are incurred and in advance of final disposition thereof, upon determination by the stockholders, the disinterested board members, or by independent legal counsel. If so provided in the corporation’s articles of incorporation, bylaws, or other agreement, Section 78.751 of the NRS requires a corporation to advance expenses as incurred upon receipt of an undertaking by or on behalf of the officer or director to repay the amount if it is ultimately determined by a court of competent jurisdiction that such officer or director is not entitled to be indemnified by the company. Section 78.751 of the NRS further permits the company to grant its directors and officers additional rights of indemnification under its articles of incorporation, bylaws, or other agreement.
| II-1 |
Section 78.752 of the NRS provides that a Nevada company may purchase and maintain insurance or make other financial arrangements on behalf of any person who is or was a director, officer, employee, or agent of the company, or is or was serving at the request of the company as a director, officer, employee, or agent of another company, partnership, joint venture, trust, or other enterprise, for any liability asserted against him and liability and expenses incurred by him in his capacity as a director, officer, employee, or agent, or arising out of his status as such, whether or not the company has the authority to indemnify him against such liability and expenses.
Neither our Bylaws nor our Articles of Incorporation include any specific indemnification provisions for our officers or directors against liability under the Securities Act. Additionally, insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
During January 2016, the Company sold a total of 18,500 common shares for cash contributions of $555 at $0.03 per share.
During February 2016, the Company sold a total of 74,000 common shares for cash contributions of $2,220 at $0.03 per share.
During March 2016, the Company sold a total of 333,000 common shares for cash contributions of $9,862 at $0.03 per share.
On April 18, 2017, the Company issued a total of 500,000,000 common shares as follows:
| ○ | Hengtian Group Co., Ltd.: (Beneficial Owner: Ma Huizhu) 215,000,000 restricted common shares. | |
| ○ | Hong Zhida*: 30,000,000 restricted common shares. | |
| ○ | Hui Lian Group Ltd.: (Beneficial Owner: Ma Huijun) 255,000,000 restricted common shares. |
The 500,000,000 common shares were issued pursuant to a Sale & Purchase Agreement (“S&P”) for the acquisition of 100% of the shares and assets of Yingxi Industrial Chain Group Co., Ltd., a company incorporated under the laws of the Republic of Seychelles. The Company agreed to issue five hundred million (500,000,000) shares of common stock to Yingxi Industrial Chain Group Co., Ltd. to acquire its shares and assets for a cost of US$0.30 per share or a total cost of US$150,000,000.
During August 2020, the Company sold a total of 747,000 common shares for cash contributions of $3,735,000 at $5.00 per share.
*Hong Zhida is the President, Secretary and a Director of the Company.
We claim an exemption from registration pursuant to Section 4(a)(2) and/or Rule 506(b) of Regulation D of the Securities Act, and the rules and regulations promulgated thereunder in connection with the sales and issuances described above since the foregoing issuances and sales did not involve a public offering, the recipients were (a) “accredited investors”, and/or (b) had access to similar documentation and information as would be required in a Registration Statement under the Securities Act. With respect to the transactions described above, no general solicitation was made either by us or by any person acting on our behalf. The transactions were privately negotiated, and did not involve any kind of public solicitation. No underwriters or agents were involved in the foregoing issuances and we paid no underwriting discounts or commissions. The securities sold are subject to transfer restrictions, and the certificates evidencing the securities contain an appropriate legend stating that such securities have not been registered under the Securities Act and may not be offered or sold absent registration or pursuant to an exemption therefrom.
| II-2 |
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
Pursuant to Item 601 of Regulation S-K:
A list of exhibits filed with this registration statement on Form S-1 is set forth on the Exhibit Index and is incorporated herein by reference.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act;
(ii) Reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and
(iii) Include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date
(5) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
| II-3 |
EXHIBIT INDEX
| * | Filed herewith. |
| ** | Previously filed |
| II-4 |
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Luohu District, Shenzhen City, China, on January 22, 2021.
| ADDENTAX GROUP CORP. | |
| /s/ Hong Zhida | |
| Hong Zhida | |
| CEO, President, Secretary and Director | |
| (Principal Executive Officer) |
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Hong Zhida | CEO, President, Secretary and Director | January 22, 2021 | ||
| Hong Zhida | (Principal Executive Officer) | |||
| /s/ Huang Chao | CFO and Treasurer | January 22, 2021 | ||
| Huang Chao | (Principal Financial and Accounting Officer) | |||
* |
January 22, 2021 | |||
Cui Shan |
Independent Director | |||
* |
January 22, 2021 | |||
| Yu Jiaxin | Independent Director | |||
* |
January 22, 2021 | |||
| Li Weilin | Independent Director | |||
* |
January 22, 2021 | |||
| Hong Zhiwang | Director |
| */s/ Hong Zhida | |
| Hong Zhida | |
| Attorney-in-Fact |
| II-5 |
Exhibit 1.1
UNDERWRITING AGREEMENT
[●], 2021
Network 1 Financial Securities, Inc.
The Galleria, Building 2
Penthouse 2 Bridge Avenue
Red Bank, New Jersey 07701-1106
As the Underwriter
Ladies and Gentlemen:
The undersigned, Addentax Group Corp., a corporation formed under the laws of the State of Nevada (the “Company”), hereby confirms its agreement (this “Agreement”) with Network 1 Financial Securities, Inc. (hereinafter the “Underwriter”) as follows:
1. Purchase and Sale of Shares.
(a) Shares.
(i) Nature and Purchase of Shares.
(A) On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, the Company agrees to issue and sell to the Underwriter an aggregate of [●] shares of its common stock, par value $0.001 per share (the “Common Stock”). The [●] shares of Common Stock referred to in this Section 1(a) are hereinafter referred to as the “Firm Shares.”
(B) The Underwriter agrees to purchase from the Company the number of Firm Shares set forth on Schedule 1 attached hereto and made a part hereof at a purchase price of $[●] (the “Purchase Price”) per Firm Share (or 92.5% of the public offering price per Firm Share). The Firm Shares are to be offered initially to the public at the offering price set forth on the cover page of the Prospectus (as defined in Section 2(a)(i)(A) hereof).
(C) The Company agrees to engage the Underwriter for the period beginning on the date hereof and ending on June 30, 2020 (the “Engagement Period”), to act as the lead or managing underwriter and/or book runner and investment banker in connection with the proposed offering of the Firm Shares. Until the end of the Engagement Period or until the Closing Date (as defined in 1(a)(ii)(A) hereof), whichever occurs first, and as long as the Underwriter is reasonably proceeding in good faith with preparations for the offering of the Firm Shares, the Company agrees not to solicit, negotiate with or enter into any agreement with any other source of financing (whether equity, debt or otherwise), any underwriter, potential underwriter, placement agent, financial advisor or any other person or entity in connection with an offering of the Company’s securities or any other financing by the Company.
(ii) Firm Share Payment and Delivery; Escrow.
(A) Delivery and payment for the Firm Shares shall be made no later than 2:00 p.m., Eastern time, on the second (2nd) Business Day following the effective date (the “Effective Date”) of the Registration Statement (as defined in Section 2(a)(i)(A) below) (or the third (3rd) Business Day following the Effective Date if the Registration Statement is declared effective after 4:01 p.m., Eastern time) or at such earlier time as shall be agreed upon by the Underwriter and the Company, at the offices of VCL Law LLP, 8300 Boone Boulevard, Suite 500 Vienna, VA 22182 (“Underwriter Counsel”), or at such other place (or by electronic transmission) as shall be agreed upon by the Underwriter and the Company. The hour and date of delivery and payment for the Firm Shares is called the “Closing Date.”
(B) Payment for the Firm Shares shall be made on the Closing Date by wire transfer in federal (same day) funds, payable to the order of the Company upon delivery of the certificates (in form and substance satisfactory to the Underwriter) representing the Firm Shares (or through the facilities of the Depository Trust Company (“DTC”) or via a DWAC transfer), for the account of the Underwriter. The Firm Shares shall be registered in such name or names and in such authorized denominations as the Underwriter may request in writing two full Business Days prior to the Closing Date. The Company shall not be obligated to sell or deliver the Firm Shares except upon tender of payment by the Underwriter for all of the Firm Shares or via delivery versus payment for the Firm Shares. The term “Business Day” means any day other than a Saturday, a Sunday or a legal holiday or a day on which banking institutions are authorized or obligated by law to close in New York, New York.
(iii) Over-allotment Option.
(A) Option Shares. For the purposes of covering any over-allotments in connection with the distribution and sale of the Firm Shares, the Company hereby grants to the Underwriter an option (the “Over-allotment Option”) to purchase, in the aggregate, up to [●] additional shares of Common Stock (the “Option Shares”), representing fifteen percent (15%) of the Firm Shares sold in the offering, from the Company. The purchase price to be paid per Option Share shall be equal to $[●] (or 92.5% of the public offering price). The Firm Shares and the Option Shares are collectively referred to as the “Securities.” The Securities, Underwriter’s Warrants (as set forth below) and the shares of Common Stock issuable upon exercise of the Underwriter’s Warrants, are collectively referred to as the “Public Securities.” The Public Securities shall be issued directly by the Company and shall have the rights and privileges described in the Registration Statement, the Pricing Disclosure Package and the Prospectus referred to below. The offering and sale of the Securities is herein referred to as the “Offering.”
(B) Exercise of Option. The Over-allotment Option granted pursuant to Section 1(a)(iii)(A) hereof may be exercised by the Underwriter as to all (at any time) or any part (from time to time) for any number of the Option Shares within 45 days after the Effective Date. The Underwriter shall not be under any obligation to purchase any of the Option Shares prior to the exercise of the Over-allotment Option. The Over-allotment Option granted hereby may be exercised by the giving of oral notice to the Company from the Underwriter, which must be confirmed in writing by overnight mail or email or facsimile or other electronic transmission setting forth the number of the Option Shares to be purchased and the date and time for delivery of and payment for the Option Shares (the “Option Closing Date”), which shall not be later than five (5) full Business Days after the date of the notice or such other time as shall be agreed upon by the Company and the Underwriter, at the offices of Underwriter Counsel or at such other place (including remotely by facsimile or other electronic transmission) as shall be agreed upon by the Company and the Underwriter. If such delivery and payment for the Option Shares does not occur on the Closing Date, the Option Closing Date will be as set forth in the notice. Upon exercise of the Over-allotment Option with respect to all or any portion of the Option Shares subject to the terms and conditions set forth herein, (i) the Company shall become obligated to sell to the Underwriter the number of the Option Shares specified in such notice and (ii) the Underwriter shall purchase that portion of the total number of the Option Shares as set forth in Schedule 1 opposite the name of such Underwriter bears to the total number of Firm Shares.
(C) Payment and Delivery. Payment for the Option Shares shall be made on the Option Closing Date by wire transfer in Federal (same day) funds, payable to the order of the Company upon delivery to the Underwriter of certificates (in form and substance satisfactory to the Underwriter) representing the Option Shares (or through the facilities of DTC or DWAC transfer) for the account of the Underwriter. The Option Shares shall be registered in such name or names and in such authorized denominations as the Underwriter may request in writing at least two full Business Days prior to the Option Closing Date. The Company shall not be obligated to sell or deliver the Option Shares except upon tender of payment by the Underwriter for applicable Option Shares.
(iv) Underwriter’s Warrant.
(A) Warrant Amount; Term. The Company hereby agrees to issue and sell to the Underwriter (and/or its designees) on the Closing Date or Option Closing Date, as applicable, a five-year warrant for the purchase of a number of the shares of Common Stock equal to 10% of the number of the Firm Shares and Option Shares, if any, issued in the Offering, pursuant to a warrant in the form attached hereto as Exhibit A (the “Underwriter’s Warrant”), at an initial exercise price of $[●], which is equal to 125% of the public offering price per Firm Share. The Underwriter’s Warrant and the shares of Common Stock issuable upon exercise of the Underwriter’s Warrant are hereinafter referred to together as the “Underwriter’s Securities.” The Underwriter understands and agrees that there are significant restrictions pursuant to FINRA Rule 5110 against transferring the Underwriter’s Securities during the one hundred eighty (180) days after the Effective Date and by its acceptance thereof shall agree that it will not sell, transfer, assign, pledge or hypothecate the Underwriter’s Securities, or any portion thereof, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of such securities for a period of one hundred eighty (180) days following the Effective Date to anyone other than (i) an Underwriter or a selected dealer in connection with the Offering, or (ii) a bona fide officer or partner of the Underwriter or of any such Underwriter or selected dealer; or as otherwise expressly permitted by Rule 5110(g), and only if any such transferee agrees to the foregoing lock-up restrictions.
(B) Delivery. Delivery of the Underwriter’s Warrant shall be made on the Closing Date, and the Option Closing Date, as applicable, and shall be issued in the name or names and in such authorized denominations as the Underwriter may reasonably request.
2. Representations and Warranties of the Company. The Company represents and warrants to the Underwriter as of the Applicable Time (as defined below) and as of the Closing Date and as of the Option Closing Date, if any, as follows (unless otherwise indicated, all references to the Company in this Section 2 shall refer to the Company, its subsidiaries and its variable interest entity through which it conducts its operations in the PRC):
(a) Filing of Registration Statement.
(i) Pursuant to the Securities Act.
(A) The Company has filed with the U.S. Securities and Exchange Commission (the “Commission”) a registration statement, and an amendment or amendments thereto, on Form S-1 (File No. 333-230943), including any related prospectus or prospectuses, for the registration of the Public Securities under the Securities Act of 1933, as amended (the “Securities Act”), which registration statement and amendment or amendments have been prepared by the Company in conformity in all material respects with the requirements of the Securities Act and the rules and regulations of the Commission under the Securities Act (the “Securities Act Regulations”) and, as of the Effective Date thereof, will contain all material statements that are required to be stated therein in accordance with the Securities Act and the Securities Act Regulations. Except as the context may otherwise require, such registration statement, as amended, on file with the Commission at the time the registration statement became effective (including the Preliminary Prospectus included in the registration statement, financial statements, schedules, exhibits and all other documents filed as a part thereof or incorporated therein by reference and all information deemed to be a part thereof as of the Effective Date pursuant to paragraph (b) of Rule 430A of the Securities Act Regulations (the “Rule 430A Information”)), is referred to herein as the “Registration Statement.” If the Company files any registration statement pursuant to Rule 462(b) of the Securities Act Regulations, then after such filing, the term “Registration Statement” shall include such registration statement filed pursuant to Rule 462(b). The Registration Statement has been declared effective by the Commission as of the Applicable Time (as defined below).
(B) Each prospectus used prior to the effectiveness of the Registration Statement, and each prospectus that omitted the Rule 430A Information that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a “Preliminary Prospectus.” The Preliminary Prospectus that was included in the Registration Statement immediately prior to the Applicable Time is hereinafter called the “Pricing Prospectus.” The final prospectus in the form first furnished to the Underwriter for use in the Offering is hereinafter called the “Prospectus.” Any reference to the “most recent Preliminary Prospectus” shall be deemed to refer to the latest Preliminary Prospectus included in the Registration Statement.
(C) “Applicable Time” means 4:30 p.m., Eastern time, on the date of this Agreement.
(D) “Issuer Free Writing Prospectus” means any “issuer free writing prospectus,” as defined in Rule 433 of the Securities Act Regulations (“Rule 433”), including without limitation any “free writing prospectus” (as defined in Rule 405 of the Securities Act Regulations) relating to the Public Securities that is (i) required to be filed with the Commission by the Company, (ii) a “road show that is a written communication” within the meaning of Rule 433(d)(8)(i), whether or not required to be filed with the Commission, or (iii) exempt from filing with the Commission pursuant to Rule 433(d)(5)(i) because it contains a description of the Public Securities or of the Offering that does not reflect the final terms, in each case in the form filed or required to be filed with the Commission or, if not required to be filed, in the form retained in the Company’s records pursuant to Rule 433(g).
(E) “Issuer General Use Free Writing Prospectus” means any Issuer Free Writing Prospectus that is intended for general distribution to prospective investors (other than a “bona fide electronic road show,” as defined in Rule 433) (the “Bona Fide Electronic Road Show”).
(F) “Issuer Limited Use Free Writing Prospectus” means any Issuer Free Writing Prospectus that is not an Issuer General Use Free Writing Prospectus.
(G) “Pricing Disclosure Package” means any Issuer General Use Free Writing Prospectus issued at or prior to the Applicable Time, and the Pricing Prospectus, all considered together.
(ii) Pursuant to the Exchange Act. The Company has filed with the Commission a Form 8-A providing for the registration pursuant to Section 12(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), of the Common Stock. The registration of the Common Stock under the Exchange Act has been declared effective by the Commission on or prior to the date hereof. The Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act, nor has the Company received any notification that the Commission is contemplating terminating such registration.
(b) Stock Exchange Listing. The Common Stock has been approved for listing on The NASDAQ Capital Market (the “Exchange”), subject to official notice of issuance, and the Company has taken no action designed to, or likely to have the effect of, delisting the Common Stock from the Exchange, nor has the Company received any notification that the Exchange is contemplating terminating such listing.
(c) No Stop Orders, etc. Neither the Commission nor, to the Company’s knowledge, any state regulatory authority has issued any order preventing or suspending the use of the Registration Statement, any Preliminary Prospectus or the Prospectus or has instituted or, to the Company’s knowledge, threatened to institute, any proceedings with respect to such an order. The Company has complied with each request (if any) from the Commission for additional information.
(d) Disclosures in Registration Statement.
(i) Compliance with Securities Act and 10b-5 Representation.
(A) Each of the Registration Statement and any post-effective amendment thereto, at the time it became effective, complied in all material respects with the requirements of the Securities Act and the Securities Act Regulations. Each Preliminary Prospectus, including the prospectus filed as part of the Registration Statement as originally filed or as part of any amendment or supplement thereto, and the Prospectus, at the time each was filed with the Commission, complied in all material respects with the requirements of the Securities Act and the Securities Act Regulations. Each Preliminary Prospectus delivered to the Underwriter for use in connection with this Offering and the Prospectus was or will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(B) Neither the Registration Statement nor any amendment thereto, at its effective time, as of the Applicable Time, at the Closing Date or at any Option Closing Date (if any), contained, contains or will contain an untrue statement of a material fact or omitted, omits or will omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that this representation and warranty shall not apply to statements made or statements omitted in reliance upon and in conformity with written information furnished to the Company with respect to the Underwriter by the Underwriter expressly for use in the Registration Statement, the Pricing Prospectus or the Prospectus or any amendment thereof or supplement thereto. The parties acknowledge and agree that such information provided by or on behalf of any Underwriter consists solely of the disclosure contained in the included in the “Underwriting” section of the Prospectus (the “Underwriter’ Information”); and
(C) The Pricing Disclosure Package, as of the Applicable Time, at the Closing Date or at any Option Closing Date (if any), did not, does not and will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and each Issuer Limited Use Free Writing Prospectus does not conflict in any material respect with the information contained in the Registration Statement, any Preliminary Prospectus, the Pricing Prospectus or the Prospectus, and each such Issuer Limited Use Free Writing Prospectus, as supplemented by and taken together with the Pricing Prospectus as of the Applicable Time, did not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to the Underwriter’ Information.
(D) Neither the Prospectus nor any amendment or supplement thereto (including any prospectus wrapper), as of its issue date, at the time of any filing with the Commission pursuant to Rule 424(b), at the Closing Date or at any Option Closing Date, included, includes or will include an untrue statement of a material fact or omitted, omits or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to the Underwriter’ Information.
(ii) Disclosure of Agreements. The agreements and documents described in the Registration Statement, the Pricing Disclosure Package and the Prospectus conform in all material respects to the descriptions thereof contained therein and there are no agreements or other documents required by the Securities Act and the Securities Act Regulations to be described in the Registration Statement, the Pricing Disclosure Package and the Prospectus or to be filed with the Commission as exhibits to the Registration Statement, that have not been so described or filed. Each agreement or other instrument (however characterized or described) to which the Company is a party or by which it is or may be bound or affected and (i) that is referred to in the Registration Statement, the Pricing Disclosure Package and the Prospectus, and (ii) is material to the Company’s business, has been duly authorized and validly executed by the Company, is in full force and effect in all material respects and is enforceable against the Company and, to the Company’s knowledge, the other parties thereto, in accordance with its terms, except (x) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors’ rights generally, (y) as enforceability of any indemnification or contribution provision may be limited under the federal and state securities laws, and (z) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. None of such agreements or instruments has been assigned by the Company, and neither the Company nor, to the Company’s knowledge, any other party is in material default thereunder and, to the Company’s knowledge, no event has occurred that, with the lapse of time or the giving of notice, or both, would constitute a material default thereunder, except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus. To the Company’s knowledge, performance by the Company of the material provisions of such agreements or instruments will not result in a violation of any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court, domestic or foreign, having jurisdiction over the Company or any of its assets or business (each, a “Governmental Entity”), including, without limitation, those relating to environmental laws and regulations, that would reasonably be expected to constitute a Material Adverse Change.
(iii) Prior Securities Transactions. Since inception, no securities of the Company have been sold by the Company or by or on behalf of, or for the benefit of, any person or persons controlling, controlled by or under common control with the Company, except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Preliminary Prospectus.
(iv) Regulations. The disclosures in the Registration Statement, the Pricing Disclosure Package and the Prospectus concerning the effects of federal, state, local and all foreign laws, rules and regulations relating to the Company’s business as currently contemplated are correct in all material respects and no other such regulations are required to be disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus which are not so disclosed.
(e) Changes after Dates in Registration Statement.
(i) No Material Adverse Change. Since the respective dates as of which information is given in the Registration Statement, the Pricing Disclosure Package and the Prospectus, except as otherwise specifically stated therein: (i) there has been no material adverse change in the financial position or results of operations of the Company, nor to the Company’s knowledge, any change or development that, singularly or in the aggregate, would involve a material adverse change, in or affecting the condition (financial or otherwise), results of operations, business, assets or prospects of the Company (a “Material Adverse Change”); (ii) there have been no material transactions entered into by the Company, other than as contemplated pursuant to this Agreement; and (iii) no officer or director of the Company has resigned from any position with the Company.
(ii) Recent Securities Transactions, etc. Subsequent to the respective dates as of which information is given in the Registration Statement, the Pricing Disclosure Package and the Prospectus, and except as may otherwise be indicated or contemplated herein or disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company has not: (i) issued any securities (other than (i) grants under any stock compensation plan and (ii) shares of common stock issued upon exercise or conversion of option, warrants or convertible securities described in the Registration Statement, the Pricing Disclosure Package and the Prospectus) or incurred any liability or obligation, direct or contingent, for borrowed money; or (ii) declared or paid any dividend or made any other distribution on or in respect to its capital stock.
(f) Independent Accountants. To the knowledge of the Company, Pan-China Singapore PAC, (the “Auditor”), whose report is filed with the Commission as part of the Registration Statement, the Pricing Disclosure Package and the Prospectus, is an independent registered public accounting firm as required by the Securities Act and the Securities Act Regulations and the Public Company Accounting Oversight Board. Except as may otherwise be disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Auditor has not, during the periods covered by the financial statements included in the Registration Statement, the Pricing Disclosure Package and the Prospectus, provided to the Company any non-audit services, as such term is used in Section 10A(g) of the Exchange Act.
(g) Financial Statements, etc. The financial statements, including the notes thereto and supporting schedules included in the Registration Statement, the Pricing Disclosure Package and the Prospectus, fairly present in all material respects the financial position and the results of operations of the Company at the dates and for the periods to which they apply; and such financial statements have been prepared in conformity with United States generally accepted accounting principles (“GAAP”), consistently applied throughout the periods involved (provided that unaudited interim financial statements are subject to year-end audit adjustments that are not expected to be material in the aggregate and do not contain all footnotes required by GAAP); and the supporting schedules included in the Registration Statement present fairly in all material respects the information required to be stated therein. Except as included therein, no historical or pro forma financial statements are required to be included in the Registration Statement, the Pricing Disclosure Package or the Prospectus under the Securities Act or the Securities Act Regulations. The pro forma and pro forma as adjusted financial information and the related notes, if any, included in the Registration Statement, the Pricing Disclosure Package and the Prospectus have been properly compiled and prepared in all material respects in accordance with the applicable requirements of the Securities Act and the Securities Act Regulations and present fairly in all material respects the information shown therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. All disclosures contained in the Registration Statement, the Pricing Disclosure Package or the Prospectus regarding “non-GAAP financial measures” (as such term is defined by the rules and regulations of the Commission), if any, comply with Regulation G of the Exchange Act and Item 10 of Regulation S-K of the Securities Act, to the extent applicable. Each of the Registration Statement, the Pricing Disclosure Package and the Prospectus discloses all material off-balance sheet transactions, arrangements, obligations (including contingent obligations), and other relationships of the Company with unconsolidated entities or other persons that may have a material current or future effect on the Company’s financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenues or expenses. Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, (a) the Company has not incurred any material liabilities or obligations, direct or contingent, or entered into any material transactions other than in the ordinary course of business, (b) the Company has not declared or paid any dividends or made any distribution of any kind with respect to its capital stock, (c) there has not been any change in the capital stock of the Company (other than (i) grants under any stock compensation plan and (ii) shares of common stock issued upon exercise or conversion of option, warrants or convertible securities described in the Registration Statement, the Pricing Disclosure Package and the Prospectus), and (d) there has not been any Material Adverse Change in the Company’s long-term or short-term debt.
(h) Authorized Capital; Options, etc. The Company had, at the date or dates indicated in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the duly authorized, issued and outstanding capitalization as set forth therein. Based on the assumptions stated in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company will have on the Closing Date the adjusted stock capitalization set forth therein. Except as set forth in, or contemplated by, the Registration Statement, the Pricing Disclosure Package and the Prospectus, on the Effective Date, as of the Applicable Time, on the Closing Date and any Option Closing Date, there are no stock options, warrants, or other rights to purchase or otherwise acquire any authorized, but unissued shares of Common Stock of the Company or any security convertible or exercisable into shares of Common Stock of the Company, or any contracts or commitments to issue or sell shares of Common Stock or any such options, warrants, rights or convertible securities.
(i) Valid Issuance of Securities, etc.
(i) Outstanding Securities. All issued and outstanding securities of the Company issued prior to the transactions contemplated by this Agreement have been duly authorized and validly issued and are fully paid and non-assessable; the holders thereof have no contractual rights of rescission with respect thereto, and are not subject to personal liability by reason of being such holders; and except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, none of such securities were issued in violation of the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company. The authorized shares of Common Stock and other securities of the Company to be outstanding upon consummation of the Offering conform in all material respects to all statements relating thereto contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus. The offers and sales of the outstanding shares of Common Stock were at all relevant times either registered under the Securities Act and the applicable state securities or “blue sky” laws or, based in part on the representations and warranties of the purchasers of such shares, exempt from such registration requirements.
(ii) Securities Sold Pursuant to this Agreement. The Public Securities have been duly authorized for issuance and sale and, when issued and paid for, will be validly issued, fully paid and non-assessable; the holders thereof are not and will not be subject to personal liability by reason of being such holders; the Public Securities are not and will not be subject to the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company; and all corporate action required to be taken for the authorization, issuance and sale of the Public Securities has been duly and validly taken; the shares of Common Stock issuable upon exercise of the Underwriter’s Warrants (the “Underlying Common Stock”) have been duly authorized and reserved for issuance by all necessary corporate action on the part of the Company and when paid for and issued in accordance with such Underwriter’s Warrants or exercised on a cashless basis as set forth in such Underwriter’s Warrants, as the case may be, such shares of Underlying Common Stock will be validly issued, fully paid and non-assessable; the Public Securities conform in all material respects to all statements with respect thereto contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus.
(j) Registration Rights of Third Parties. Except as set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus, no holders of any securities of the Company or any rights exercisable for or convertible or exchangeable into securities of the Company have the right to require the Company to register any such securities of the Company under the Securities Act or to include any such securities in a registration statement to be filed by the Company (except for any such rights that have been waived).
(k) Validity and Binding Effect of Agreements. This Agreement and the Underwriter’s Warrant have been duly and validly authorized by the Company, and, when executed and delivered and assuming due execution and delivery by the other parties thereto, will constitute, the valid and binding agreements of the Company, enforceable against the Company in accordance with their respective terms, except: (i) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors’ rights generally; (ii) as enforceability of any indemnification or contribution provision may be limited under the federal and state securities laws; and (iii) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought.
(l) No Conflicts, etc. The execution, delivery and performance by the Company of this Agreement, the Underwriter’s Warrant and all ancillary documents, the consummation by the Company of the transactions herein and therein contemplated and the compliance by the Company with the terms hereof and thereof do not and will not, with or without the giving of notice or the lapse of time or both: (i) result in a breach of, or conflict with any of the terms and provisions of, or constitute a material default under, or result in the creation, modification, termination or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to the terms of any agreement or instrument to which the Company is a party; (ii) result in any violation of the provisions of the Company’s Articles of Incorporation (as the same may be amended or restated from time to time, the “Charter”) or the by-laws of the Company (as the same may be amended or restated from time to time, the “Bylaws”); or (iii) violate any existing applicable law, rule, regulation, judgment, order or decree of any Governmental Entity having jurisdiction over the Company as of the date hereof, except in the cases of clauses (i) and (iii) for such breaches, conflicts or violations which would not reasonably be expected to have a Material Adverse Change.
(m) Regulatory. Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus or as would not reasonably be expected to result, individually or in the aggregate, in a Material Adverse Change: (i) the Company has not received notice from any Governmental Entity alleging or asserting noncompliance with any Applicable Laws (as defined in clause (ii) below) or Authorizations (as defined in clause (iii) below); (ii) the Company is and has been in material compliance with federal, state or foreign statutes, laws, ordinances, rules and regulations applicable to the Company (collectively, “Applicable Laws”); (iii) the Company possesses all material licenses, certificates, approvals, clearances, consents, authorizations, qualifications, registrations, permits, and supplements or amendments thereto required by any such Applicable Laws and/or to carry on its businesses as now conducted (“Authorizations”) and to the Company’s knowledge, such Authorizations are valid and in full force and effect and the Company is not in violation of any term of any such Authorizations; (iv) the Company has not received notice of any claim, action, suit, proceeding, hearing, enforcement, investigation, arbitration or other action from any Governmental Entity or third party alleging that any product, operation or activity is in violation of any Applicable Laws or Authorizations or has any knowledge that any such Governmental Entity or third party is considering any such claim, litigation, arbitration, action, suit, investigation or proceeding, nor, to the Company’s knowledge, has there been any material noncompliance with or violation of any Applicable Laws by the Company that could reasonably be expected to require the issuance of any such communication or result in an investigation, corrective action, or enforcement action by any Governmental Entity; and (v) the Company has not received notice that any Governmental Entity has taken, is taking or intends to take action to limit, suspend, modify or revoke any Authorizations or has any knowledge that any such Governmental Entity has threatened or is considering such action. Neither the Company nor, to the Company’s knowledge, any of its directors, officers, employees or agents has been convicted of any crime under any Applicable Laws.
(n) No Defaults; Violations. To the Company’s knowledge, no material default exists in the due performance and observance of any term, covenant or condition of any material license, contract, indenture, mortgage, deed of trust, note, loan or credit agreement, or any other agreement or instrument evidencing an obligation for borrowed money, or any other material agreement or instrument to which the Company is a party or by which the Company may be bound or to which any of the properties or assets of the Company is subject. The Company is not, to its knowledge, (i) in violation of any term or provision of its Charter or Bylaws, or (ii) in violation of any franchise, license, permit, applicable law, rule, regulation, judgment or decree of any Governmental Entity applicable to the Company, except for such defaults or violations the consequences of which would not reasonably be expected to result in a Material Adverse Change.
(o) Corporate Power; Licenses; Consents.
(i) Conduct of Business. Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company has all requisite corporate power and authority, and has all necessary authorizations, approvals, orders, licenses, certificates and permits of and from all governmental regulatory officials and bodies that it needs as of the date hereof to conduct its business purpose as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, except where such failure would not reasonably be expected to result in a Material Adverse Change.
(ii) Transactions Contemplated Herein. The Company has all corporate power and authority to enter into this Agreement and to carry out the provisions and conditions hereof, and all consents, authorizations, approvals and orders required in connection therewith have been obtained. No consent, authorization or order of, and no filing with, any court, government agency or other body is required for the valid issuance, sale and delivery of the Public Securities and the consummation of the transactions and agreements contemplated by this Agreement, and the Underwriter’s Warrant and as contemplated by the Registration Statement, the Pricing Disclosure Package and the Prospectus, except with respect to applicable federal and state securities laws and the rules and regulations of the Financial Industry Regulatory Authority, Inc. (“FINRA”).
(p) D&O Questionnaires. To the Company’s knowledge, all information contained in the questionnaires (the “Questionnaires”) completed by each of the Company’s directors, officers and 10% shareholders immediately prior to the Offering (the “Insiders”) as supplemented by all information concerning the Company’s directors, officers and principal stockholders as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, provided to the Underwriter, is true and correct in all material respects and the Company has not become aware of any information which would cause the information disclosed in the Questionnaires to become materially inaccurate and incorrect.
(q) Litigation; Governmental Proceedings. There is no material action, suit, proceeding, inquiry, arbitration, investigation, litigation or governmental proceeding pending or, to the Company’s knowledge, threatened against, or involving the Company or, to the Company’s knowledge, any executive officer or director which has not been disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus which is required to be disclosed, in each case which individually or in the aggregate, is reasonably expected to result in a Material Adverse Change.
(r) Good Standing. The Company has been duly organized and is validly existing as a corporation and is in good standing under the laws of the State of Nevada as of the date hereof, and is duly qualified to do business and is in good standing in each other jurisdiction in which its ownership or lease of property or the conduct of business requires such qualification, except where the failure to qualify, singularly or in the aggregate, would not have or reasonably be expected to result in a Material Adverse Change.
(s) Insurance. The Company will carry insurance in such amounts and covering such risks which the Company believes are reasonably adequate and as is customary for companies engaged in similar businesses in similar industries. The Company has no reason to believe that it will not be able to obtain comparable coverage from insurers as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not reasonably be expected to result in a Material Adverse Change.
(t) Transactions Affecting Disclosure to FINRA.
(i) Finder’s Fees. Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, there are no claims, payments, arrangements, agreements or understandings relating to the payment of a finder’s, consulting or origination fee by the Company or any Insider with respect to the sale of the Public Securities hereunder or any other arrangements, agreements or understandings of the Company or, to the Company’s knowledge, any of its stockholders that may affect the Underwriter’ compensation, as determined by FINRA.
In the event that at any time prior to the second (2nd) anniversary of the final Closing the Company, or any of its affiliates, shall enter into any transaction (including, without limitation, any merger, consolidation, acquisition, financing, joint venture or other arrangement) with any party introduced to the Company by the Underwriter, directly or indirectly, during such period, the Underwriter will be paid a transaction fee, payable at the closing thereof, equal to a percentage of the consideration or value received by the Company and/or its stockholders as follows:
5% of the first $1,000,000,
4% of the next $1,000,000,
3% of the next $1,000,000,
2% of the next $1,000,000, and
1% of all amounts in excess of $4,000,000.
The Company agrees to pay to the Underwriter the aforementioned finder’s fee during the aforementioned time period, even in situations where the consummation of the transaction at issue culminated not directly from the finder’s initial introduction but indirectly from a chain of introductions initiated by the finder’s introduction.
(ii) Payments Within 180 Days. Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company has not made any direct or indirect payments (in cash, securities or otherwise) to: (i) any person, as a finder’s fee, consulting fee or otherwise, in consideration of such person raising capital for the Company or introducing to the Company persons who raised or provided capital to the Company; (ii) any FINRA member; or (iii) any person or entity that has any direct or indirect affiliation or association with any FINRA member, within the 180-day period immediately preceding the original filing date of the Registration Statement, other than the payment to the Underwriter as provided hereunder in connection with the Offering.
(iii) Use of Proceeds. None of the net proceeds of the Offering will be paid by the Company to any participating FINRA member or its affiliates, except as specifically authorized herein.
(iv) FINRA Affiliation. There is no (i) officer or director of the Company, (ii) to the Company’s knowledge, beneficial owner of 5% or more of any class of the Company’s securities or (iii) to the Company’s knowledge, beneficial owner of the Company’s unregistered equity securities which were acquired during the 180-day period immediately preceding the original filing of the Registration Statement that, in each case, is an affiliate or associated person of a FINRA member participating in the Offering (as determined in accordance with the rules and regulations of FINRA).
(v) Information. All information provided by the Company in its FINRA Questionnaire to Underwriter Counsel specifically for use by Underwriter Counsel in connection with its Public Offering System filings (and related disclosure) with FINRA is true, correct and complete in all material respects.
(u) Foreign Corrupt Practices Act. Neither the Company nor, to the Company’s knowledge, any director, officer, agent, employee or affiliate of the Company or any other person acting on behalf of the Company, has, directly or indirectly, given or agreed to give any money, gift or similar benefit (other than legal price concessions to customers in the ordinary course of business) to any customer, supplier, employee or agent of a customer or supplier, or official or employee of any governmental agency or instrumentality of any government (domestic or foreign) or any political party or candidate for office (domestic or foreign) or other person who was, is, or may be in a position to help or hinder the business of the Company (or assist it in connection with any actual or proposed transaction) that (i) might subject the Company to any damage or penalty in any civil, criminal or governmental litigation or proceeding, (ii) if not given in the past, might have had a Material Adverse Change or (iii) if not continued in the future, might adversely affect the assets, business, operations or prospects of the Company. The Company has taken reasonable steps to ensure that its accounting controls and procedures are sufficient to cause the Company to comply in all material respects with the Foreign Corrupt Practices Act of 1977, as amended.
(v) Compliance with OFAC. Neither the Company nor, to the Company’s knowledge, any director, officer, agent, employee or affiliate of the Company or any other person acting on behalf of the Company, is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury (“OFAC”), and the Company will not, directly or indirectly, use the proceeds of the Offering hereunder, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other person or entity, for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC.
(w) Money Laundering Laws. The operations of the Company are and have been conducted at all times in compliance with applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the money laundering statutes of all applicable jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any Governmental Entity (collectively, the “Money Laundering Laws”); and no action, suit or proceeding by or before any Governmental Entity involving the Company with respect to the Money Laundering Laws is pending or, to the knowledge of the Company, threatened.
(x) Officers’ Certificate. Any certificate signed by any duly authorized officer of the Company and delivered to the Underwriter or to Underwriter Counsel shall be deemed a representation and warranty by the Company to the Underwriter as to the matters covered thereby.
(y) Lock-Up Agreements. Schedule 2 hereto contains a complete and accurate list of the Company’s officers, directors and certain shareholders (collectively, the “Lock-Up Parties”). The Company has caused each of the Lock-Up Parties to deliver to the Underwriter an executed Lock-Up Agreement, in the form attached hereto as Exhibit B (the “Lock-Up Agreement”), prior to the execution of this Agreement.
(z) Subsidiaries. Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company has no direct or indirect subsidiaries or variable interest entities and does not hold any equity interests in any other entity.
(aa) Related Party Transactions. There are no business relationships or related party transactions involving the Company or any other person required to be described in the Registration Statement, the Pricing Disclosure Package and the Prospectus that have not been described as required.
(bb) Board of Directors. The Board of Directors of the Company is comprised of the persons set forth under the heading of the Pricing Prospectus and the Prospectus captioned “Directors and Executive Officers.” The qualifications of the persons serving as board members and the overall composition of the board comply with the Exchange Act, the rules and regulations promulgated under the Exchange Act (the “Exchange Act Regulations”), the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder (the “Sarbanes-Oxley Act”) applicable to the Company and the listing rules of the Exchange. At least one member of the Audit Committee of the Board of Directors of the Company qualifies as an “audit committee financial expert,” as such term is defined under Regulation S-K and the listing rules of the Exchange. In addition, at least a majority of the persons serving on the Board of Directors qualify as “independent,” as defined under the listing rules of the Exchange.
(cc) Sarbanes-Oxley Compliance.
(i) Disclosure Controls. The Company has developed and currently maintains disclosure controls and procedures that will comply with Rule 13a-15 or 15d-15 under the Exchange Act Regulations applicable to it, and such controls and procedures are effective to ensure that all material information concerning the Company will be made known on a timely basis to the individuals responsible for the preparation of the Company’s Exchange Act filings and other public disclosure documents.
(ii) Compliance. The Company is, or at the Applicable Time and on the Closing Date will be, in material compliance with the provisions of the Sarbanes-Oxley Act applicable to it, and has implemented or will implement such programs and taken reasonable steps to ensure the Company’s future compliance (not later than the relevant statutory and regulatory deadlines therefor) with all of the material provisions of the Sarbanes-Oxley Act.
(dd) Accounting Controls. The Company maintains systems of “internal control over financial reporting” (as defined under Rules 13a-15 and 15d-15 under the Exchange Act Regulations) that comply in all material respects with the requirements of the Exchange Act and have been designed by, or under the supervision of, its principal executive and principal financial officers, or persons performing similar functions, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, including, but not limited to, internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company is not aware of any material weaknesses in its internal controls. The Company’s auditors and the Audit Committee of the Board of Directors of the Company have been advised of: (i) all significant deficiencies and material weaknesses, if any, in the design or operation of internal controls over financial reporting which are known to the Company’s management and that have adversely affected or are reasonably likely to adversely affect the Company’ ability to record, process, summarize and report financial information; and (ii) any fraud, if any, known to the Company’s management, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls over financial reporting.
(ee) No Investment Company Status. The Company is not and, after giving effect to the Offering and the application of the proceeds thereof as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, will not be, required to register as an “investment company,” as defined in the Investment Company Act of 1940, as amended.
(ff) No Labor Disputes. No labor dispute with the employees of the Company exists or, to the knowledge of the Company, is imminent.
(gg) Intellectual Property Rights. To the Company’s knowledge, the Company has, or can acquire on reasonable terms, ownership of and/or license to, or otherwise has the right to use, all inventions, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), patents and patent rights trademarks, service marks and trade names, copyrights, (collectively “Intellectual Property”) material to carrying on its businesses as described in the Pricing Prospectus. The Company has not received any correspondence relating to any Intellectual Property, including notice of: (A) infringement or misappropriation of, or conflict with, any Intellectual Property of a third party; (B) asserted rights of others with respect to any Intellectual Property of the Company; or (C) assertions that any Intellectual Property of the Company is invalid or otherwise inadequate to protect the interest of the Company, that in each case (if the subject of any unfavorable decision, ruling or finding), individually or in the aggregate, would have or would reasonably be expected to have a Material Adverse Change. There are no third parties who have been able to establish any material rights to any Intellectual Property, except for the retained rights of the owners or licensors of any Intellectual Property that is licensed to the Company. There is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others: (A) challenging the validity, enforceability or scope of any Intellectual Property of the Company or (B) challenging the Company’s rights in or to any Intellectual Property or (C) that the Company materially infringes, misappropriates or otherwise violates or conflicts with any Intellectual Property or other proprietary rights of others.
(hh) Taxes. The Company has filed all returns (as hereinafter defined) required to be filed with taxing authorities prior to the date hereof or has duly obtained extensions of time for the filing thereof. Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company has paid all taxes (as hereinafter defined) shown as due on such returns that were filed and has paid all taxes imposed on or assessed against the Company, except for such exceptions as would not reasonably be expected, individually or in the aggregate, to have a Material Adverse Change. The provisions for taxes payable, if any, shown on the financial statements filed with or as part of the Registration Statement are sufficient for all accrued and unpaid taxes, whether or not disputed, and for all periods to and including the dates of such consolidated financial statements. Except as disclosed in writing to the Underwriter, (i) no issues have been raised (and are currently pending) by any taxing authority in connection with any of the returns or taxes asserted as due from the Company, and (ii) no waivers of statutes of limitation with respect to the returns or collection of taxes have been given by or requested from the Company. The term “taxes” mean all federal, state, local, foreign and other net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall profits, customs, duties or other taxes, fees, assessments or charges of any kind whatever, together with any interest and any penalties, additions to tax or additional amounts with respect thereto. The term “returns” means all returns, declarations, reports, statements and other documents required to be filed in respect to taxes.
(ii) Employee Benefit Laws. To its knowledge, the Company is not in violation of or has not received notice of any violation with respect to any federal or state law relating to discrimination in the hiring, promotion or pay of employees, nor any applicable federal or state wages and hours law, nor any state law precluding the denial of credit due to the neighborhood in which a property is situated, the violation of any of which could reasonably be expected to have a Material Adverse Change.
(jj) [INTENTIONALLY OMITTED]
(kk) Industry Data. The statistical and market-related data included in each of the Registration Statement, the Pricing Disclosure Package and the Prospectus are based on or derived from sources that the Company reasonably and in good faith believes are reliable and accurate or represent the Company’s good faith estimates that are made on the basis of data derived from such sources.
(ll) Forward-Looking Statements. No forward-looking statement (within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act) contained in the Registration Statement, the Pricing Disclosure Package or the Prospectus has been made or reaffirmed without a reasonable basis or has been disclosed other than in good faith.
(mm) Export and Import Laws. The Company, and, to the Company’s knowledge, each of its affiliates, and any director, officer, agent or employee of, or other person associated with or acting on behalf of the Company, has acted at all times in compliance with applicable Export and Import Laws (as defined below) and there are no claims, complaints, charges, investigations or proceedings pending or expected or, to the knowledge of the Company, threatened between the Company or any of its Subsidiaries and any governmental authority under any Export or Import Laws. The term “Export and Import Laws” means the Arms Export Control Act, the International Traffic in Arms Regulations, the Export Administration Act of 1979, as amended, the Export Administration Regulations, and all other laws and regulations of the United States government regulating the provision of services to non-U.S. parties or the export and import of articles or information from and to the United States of America, and all similar laws and regulations of any foreign government regulating the provision of services to parties not of the foreign country or the export and import of articles and information from and to the foreign country to parties not of the foreign country.
(nn) Integration. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would cause the Offering to be integrated with prior offerings by the Company for purposes of the Securities Act that would require the registration of any such securities under the Securities Act.
(oo) Confidentiality and Non-Competition. To the Company’s knowledge, no director, officer, key employee or consultant of the Company is subject to any confidentiality, non-disclosure, non-competition agreement or non-solicitation agreement with any employer or prior employer that could reasonably be expected to materially affect his ability to be and act in his respective capacity with the Company or be expected to result in a Material Adverse Change.
(pp) Smaller Reporting Company. As of the time of filing of the Registration Statement, the Company was a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act Regulations.
(qq) Compliance. (i) At the earliest time after the filing of the Registration Statement that the Company made a bona fide offer (within the meaning of Rule 164(h)(2) of the Securities Act) and (ii) at the date of this Agreement, neither the Company nor any subsidiary of the Company in the preceding three years has: (w) been convicted of a felony or misdemeanor or has been made the subject of a judicial or administrative decree or order as described in Rule 405, (x) been the subject of a bankruptcy petition or insolvency or similar proceeding, (y) had a registration statement be the subject of a proceeding under Section 8 of the Securities Act, or (z) been, and is not currently, the subject of a proceeding under Section 8A of the Securities Act in connection with the offering of the Securities, all as described in Rule 405.
(rr) Controlled Entities. The principal subsidiaries and consolidated entities listed on Exhibit 21 of the Registration Statement shall be referred to hereinafter each as a “Controlled Entity” and collectively as “Controlled Entities.” Each Controlled Entity has been duly organized and is validly existing under the laws of the jurisdiction of its organization (to the extent such concept exists in such jurisdiction), with power and authority (corporate and other) to own its properties and conduct its business as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus; and, to the extent applicable, each Controlled Entity is duly qualified to do business as a foreign corporation in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not be reasonably likely to result in any change or effect in the business, operations, results of operations, assets, capitalization, financial condition, rights or liabilities of the Company which is materially adverse to the business, operations or financial condition of the Company (a “Material Adverse Effect”); the constitutive documents of each Controlled Entity comply with the requirements of applicable laws of the jurisdiction of its organization and are in full force and effect. Except as may not be required by applicable law, all of the issued and outstanding share capital of each Controlled Entity has been duly authorized and validly issued and is fully paid (to the extent such concept exists or is applicable in such jurisdiction), and such share capital is owned, directly or indirectly, by the Company (or controlled by the Company in the case of the variable interest entities) as set forth in the Registration Statement, the Pricing Disclosure Package and Prospectus, free from liens, encumbrances and claims, except to the extent that such liens, encumbrances or claims would not have a Material Adverse Effect. Except as disclosed in the Registration Statement, the Pricing Disclosure and the Prospectus, (i) no Controlled Entities is currently prohibited, directly or indirectly, from paying any dividends to the Company (or the Company’s subsidiary that holds the outstanding equity interest of such Controlled Entity); and (ii) no Controlled Entity is prohibited, directly or indirectly, from making any other distribution on such Controlled Entity’s equity capital, from repaying to the Company any loans or advances to such Controlled Entity from the Company or any of the Company’s subsidiaries. To the Company’s knowledge, none of the Controlled Entities or any of their properties, assets or revenues are entitled to any right of immunity on the grounds of sovereignty from any legal action, suit or proceeding, from set-off or counterclaim, from the jurisdiction of any court, from services of process, from attachment prior to or in aid of execution of judgment, or from any other legal process or proceeding for the giving of any relief or for the enforcement of any judgment.
(ss) Recording. It is not necessary that this Agreement, the Registration Statement, the Pricing Disclosure Package, the Prospectus or any other document be filed or recorded with any governmental agency, court or other authority in the PRC.
(tt) No Underwriter Stamp or Transfer Tax. No transaction, stamp, capital or other issuance, registration, transaction, transfer or withholding taxes or duties are payable in the PRC by or on behalf of the Underwriter to any PRC taxing authority in connection with (i) the issuance, sale and delivery of the Securities by the Company, and the delivery of the Securities to or for the account of the Underwriter, (ii) the purchase from the Company and the initial sale and delivery by the Underwriter of the Securities to purchasers thereof, or (iii) the execution and delivery of this Agreement.
(uu) SAFE Rules and Regulations. Each of the Company and the Controlled Entities has complied, and complies, in all material respects, with the applicable rules and regulations of the State Administration of Foreign Exchange of the PRC (the “SAFE Rules and Regulations”). With respect to the shareholding of each direct shareholder that is, to the Company’s knowledge, a PRC resident or PRC citizen, each of the Company and the Controlled Entities has taken all reasonable steps to procure any registration and other procedures required under applicable SAFE Rules and Regulations.
(vv) Certificates. Any certificate signed by or on behalf of the Company and delivered to the Underwriter or to Underwriter Counsel pursuant to this Agreement shall be deemed to be a representation and warranty of the Company, as if set forth herein, to each Underwriter listed on Schedule 1 hereto as to the matters covered thereby.
3. Covenants of the Company. The Company covenants and agrees as follows:
(a) Amendments to Registration Statement. The Company shall deliver to the Underwriter, prior to filing, any amendment or supplement to the Registration Statement or Prospectus proposed to be filed after the Effective Date and not file any such amendment or supplement to which the Underwriter shall reasonably object in writing; provided however, that this Section 3(a) shall not be applicable with respect to any supplements to the Registration Statement filed solely for the purpose of supplementing the Registration Statement or Prospectus with a report filed with the Commission by the Company pursuant to the Exchange Act.
(b) Federal Securities Laws.
(i) Compliance. The Company, subject to Section 3 (b)(ii), shall comply with the requirements of Rule 430A of the Securities Act Regulations, and will notify the Underwriter promptly, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective or any amendment or supplement to the Prospectus shall have been filed; (ii) of the receipt of any comments from the Commission; (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information; (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus, or of the suspension of the qualification of the Public Securities for offering or sale in any jurisdiction, or of the initiation or, to the Company’s knowledge, threatening, of any proceedings for any of such purposes or of any examination pursuant to Section 8(d) or 8(e) of the Securities Act concerning the Registration Statement and (v) if the Company becomes the subject of a proceeding under Section 8A of the Securities Act in connection with the Offering of the Public Securities. The Company shall effect all filings required under Rule 424(b) of the Securities Act Regulations, in the manner and within the time period required by Rule 424(b) (without reliance on Rule 424(b)(8)), and shall take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company shall use its commercially reasonable efforts to prevent the issuance of any stop order, prevention or suspension and, if any such order is issued, to obtain the lifting thereof at the earliest possible moment.
(ii) Continued Compliance. The Company shall comply with the Securities Act, the Securities Act Regulations, the Exchange Act and the Exchange Act Regulations so as to permit the completion of the distribution of the Public Securities as contemplated in this Agreement and in the Registration Statement, the Pricing Disclosure Package and the Prospectus. If at any time when a prospectus relating to the Public Securities is (or, but for the exception afforded by Rule 172 of the Securities Act Regulations (“Rule 172”), would be) required by the Securities Act to be delivered in connection with sales of the Public Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the Underwriter or for the Company, to (i) amend the Registration Statement in order that the Registration Statement will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) amend or supplement the Pricing Disclosure Package or the Prospectus in order that the Pricing Disclosure Package or the Prospectus, as the case may be, will not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser or (iii) amend the Registration Statement or amend or supplement the Pricing Disclosure Package or the Prospectus, as the case may be, in order to comply with the requirements of the Securities Act or the Securities Act Regulations, the Company will promptly (A) give the Underwriter notice of such event; (B) prepare any amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement, the Pricing Disclosure Package or the Prospectus comply with such requirements and, a reasonable amount of time prior to any proposed filing or use, furnish the Underwriter with copies of any such amendment or supplement and (C) file with the Commission any such amendment or supplement; provided that the Company shall not file or use any such amendment or supplement to which the Underwriter or Underwriter Counsel shall reasonably object. The Company will furnish to the Underwriter such number of copies of such amendment or supplement as the Underwriter may reasonably request. The Company has given the Underwriter notice of any filings made pursuant to the Exchange Act or the Exchange Act Regulations within 48 hours prior to the Applicable Time. The Company shall give the Underwriter notice of its intention to make any such filing from the Applicable Time until the later of the Closing Date and the exercise in full or expiration of the Over-allotment Option specified in Section 1(a)(iii) hereof and will furnish the Underwriter with copies of the related document(s) a reasonable amount of time prior to such proposed filing, as the case may be, and will not file or use any such document to which the Underwriter or Underwriter Counsel shall reasonably object.
(iii) [Intentionally Omitted].
(c) Delivery to the Underwriter of Registration Statements. The Company has delivered or made available or shall deliver or make available to the Underwriter and the Underwriter Counsel, without charge, signed copies of the Registration Statement as originally filed and each amendment thereto (including exhibits filed therewith) and signed copies of all consents and certificates of experts, and will also deliver to the Underwriter, without charge, a conformed copy of the Registration Statement as originally filed and each amendment thereto (without exhibits) for each of the Underwriter. The copies of the Registration Statement and each amendment thereto furnished to the Underwriter will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(d) Delivery to the Underwriter of Prospectuses. The Company has delivered or made available or will deliver or make available to each Underwriter, without charge, as many copies of each Preliminary Prospectus as such Underwriter reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the Securities Act. The Company will furnish to each Underwriter, without charge, during the period when a prospectus relating to the Public Securities is (or, but for the exception afforded by Rule 172, would be) required to be delivered under the Securities Act, such number of copies of the Prospectus (as amended or supplemented) as such Underwriter may reasonably request. The Prospectus and any amendments or supplements thereto furnished to the Underwriter will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(e) Listing. The Company shall use its commercially reasonable efforts to maintain the listing of the Common Stock on the Exchange for three (3) years after the date of this Agreement.
(f) Reports to the Underwriter; Transfer Agent.
(i) Periodic Reports, etc. For a period of one (1) year after the date of this Agreement, at the Underwriter’s request, the Company shall furnish or make available to the Underwriter copies of such financial statements and other periodic and special reports as the Company from time to time furnishes generally to holders of any class of its securities and also promptly furnish or make available to the Underwriter: (i) a copy of each periodic report the Company shall be required to file with the Commission under the Exchange Act and the Exchange Act Regulations; (ii) a copy of every press release and every news item and article with respect to the Company or its affairs which was released by the Company and filed or furnished on a Current Report on Form 8-K; (iii) a copy of each Current Report on Form 8-K prepared and filed by the Company; and (iv) five copies of each registration statement filed by the Company under the Securities Act. Documents filed with the Commission pursuant to its EDGAR system or otherwise filed with the Commission or made publicly available shall be deemed to have been delivered to the Underwriter pursuant to this Section 3(f)(i).
(ii) Transfer Agent. The Company shall maintain a transfer agent and registrar for the Common Stock.
(g) Payment of Expenses.
(i) General Expenses Related to the Offering. The Company hereby agrees to pay on each of the Closing Date and the Option Closing Date, if any, to the extent not paid at the Closing Date, all expenses incident to the performance of the obligations of the Company under this Agreement, including, but not limited to: (a) all filing fees and communication expenses relating to the registration of the Public Securities to be sold in the Offering with the Commission; (b) all actual Public Offering Filing System filing fees associated with the review of the Offering by FINRA; (c) all fees and expenses relating to the listing of the Common Stock on the Exchange; (d) all fees, expenses and disbursements, if any, relating to the registration or qualification of the Public Securities under the “blue sky” securities laws of such states and other jurisdictions as the Underwriter may reasonably designate (including, without limitation, all filing and registration fees, and the reasonable fees and disbursements of “blue sky” counsel); (e) all actual fees, expenses and disbursements relating to the registration, qualification or exemption of the Public Securities under the securities laws of such foreign jurisdictions as the Underwriter may reasonably designate; (f) the costs of all mailing and printing of the Registration Statements, Prospectuses and all amendments, supplements and exhibits thereto and as many preliminary and final Prospectuses as the Underwriter may reasonably deem necessary; (g) the costs of preparing, printing and delivering certificates representing the Public Securities; (h) fees and expenses of the transfer agent for the Common Stock; (i) stock transfer and/or stamp taxes, if any, payable upon the transfer of securities from the Company to the Underwriter; (j) the fees and expenses of the Company’s Auditor; (k) the fees and expenses of the Company’s legal counsel and other agents and Underwriters; and (l) the due diligence fees and expenses of the Underwriter (including, without limitation, domestic and foreign legal counsel, background checks, travel expenses and other diligence expenses) not to exceed a total of $150,000 (less amounts previously advanced, provided that any portion of the advance not utilized shall be returned). The Underwriter may deduct from the net proceeds of the Offering payable to the Company on the Closing Date, or any Option Closing Date, if any, the expenses set forth herein (as limited by this Section 3(g)(i)) to be paid by the Company to the Underwriter, provided, however, that in the event that the Offering is terminated, the Company agrees to reimburse the Underwriter pursuant to Section 8(c) hereof. The Underwriter acknowledges receipt of $75,000 (“Advance”) prior to the date hereof. Notwithstanding the foregoing, the Advance received by the Underwriter will be reimbursed to the Company to the extent that the expenses were not actually incurred in compliance with FINRA Rule 5110 (f)(2)(c).
(ii) Non-accountable Expenses. The Company further agrees that, in addition to the expenses payable pursuant to Section 3(g)(i), on the Closing Date it shall pay to the Underwriter, by deduction from the net proceeds of the Offering contemplated herein, a non-accountable expense allowance equal to one and half percent (1.5%) of the gross proceeds received by the Company from the sale of the Firm Shares.
(h) Application of Net Proceeds. The Company shall apply the net proceeds from the Offering received by it in a manner consistent with the application thereof described under the caption “Use of Proceeds” in the Registration Statement, the Pricing Disclosure Package and the Prospectus.
(i) Rule 158. The Company will timely file such reports pursuant to the Exchange Act as are necessary in order to make generally available to its security holders as soon as practicable an earnings statement for the purposes of, and to provide to the Underwriter the benefits contemplated by, Rule 158(a) under Section 11(a) of the Securities Act.
(j) Stabilization. Neither the Company nor, to its knowledge, any of its employees, directors or stockholders (without the consent of the Underwriter) has taken or shall take, directly or indirectly, any action designed to or that has constituted or that might reasonably be expected to cause or result in, under Regulation M of the Exchange Act, or otherwise, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Public Securities.
(k) Internal Controls. The Company shall maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management’s general or specific authorization; (ii) transactions are recorded as necessary in order to permit preparation of financial statements in accordance with GAAP and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
(l) Accountants. The Company shall retain an independent registered public accounting firm reasonably acceptable to the Underwriter, and the Company shall continue to retain an independent registered public accounting firm for a period of at least three (3) years after the date of this Agreement. The Underwriter acknowledges that the Auditor is acceptable to the Underwriter.
(m) FINRA. For a period of 90 days from the later of the Closing Date or the Option Closing Date, the Company shall advise the Underwriter (who shall make an appropriate filing with FINRA) if it is or becomes aware that (i) any officer or director of the Company, (ii) any beneficial owner of 5% or more of any class of the Company’s securities or (iii) any beneficial owner of the Company’s unregistered equity securities which were acquired during the 180 days immediately preceding the original filing of the Registration Statement is or becomes an affiliate or associated person of a FINRA member participating in the Offering (as determined in accordance with the rules and regulations of FINRA).
(n) No Fiduciary Duties. The Company acknowledges and agrees that the Underwriter’s responsibility to the Company is solely contractual in nature and that none of the Underwriter or their affiliates or any selling agent shall be deemed to be acting in a fiduciary capacity, or otherwise owes any fiduciary duty to the Company or any of its affiliates in connection with the Offering and the other transactions contemplated by this Agreement.
(o) Company Lock-Up Agreements. The Company, on behalf of itself and any successor entity, agrees that, without the prior written consent of the Underwriter, it will not, for a period of one hundred and eighty (180) days after the date of this Agreement (the “Lock-Up Period”), (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company; (ii) file or cause to be filed any registration statement with the Commission relating to the offering of any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company (other than pursuant to a registration statement on Form S-8 for employee benefit plans); or (iii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of capital stock of the Company, whether any such transaction described in clause (i), (ii) or (iii) above is to be settled by delivery of shares of capital stock of the Company or such other securities, in cash or otherwise. The restrictions contained in this section shall not apply to (i) the Public Securities to be sold hereunder; (ii) the issuance by the Company of shares of Common Stock upon the exercise of an outstanding stock option or warrant or the conversion of a security outstanding on the date hereof and disclosed in the Registration Statement and the Pricing Disclosure Package, (iii) the grant by the Company of stock options or other stock-based awards, or the issuance of shares of capital stock of the Company under any equity compensation plan of the Company disclosed in the Pricing Prospectus, or (iv) the issuance of securities in connection with mergers, acquisitions, joint ventures, licensing arrangements or any other similar non-capital raising transactions.
(p) Blue Sky Qualifications. The Company shall use its commercially reasonable efforts, in cooperation with the Underwriter, if necessary, to qualify the Public Securities for offering and sale under the applicable securities laws of such states and other jurisdictions (domestic or foreign) as the Underwriter may designate and to maintain such qualifications in effect so long as required to complete the distribution of the Public Securities; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject.
(q) Reporting Requirements. The Company, during the period when a prospectus relating to the Public Securities is (or, but for the exception afforded by Rule 172, would be) required to be delivered under the Securities Act, will file all documents required to be filed with the Commission pursuant to the Exchange Act within the time periods required by the Exchange Act and Exchange Act Regulations. Additionally, the Company shall report the use of proceeds from the issuance of the Public Securities as may be required under Rule 463 under the Securities Act Regulations.
4. Conditions of Underwriter’ Obligations. The obligations of the Underwriter to purchase and pay for the Securities, as provided herein, shall be subject to (i) the continuing accuracy of the representations and warranties of the Company as of the date hereof and as of each of the Closing Date and the Option Closing Date, if any; (ii) the accuracy of the statements of officers of the Company made pursuant to the provisions hereof; (iii) the performance by the Company of its obligations hereunder; and (iv) the following conditions:
(a) Regulatory Matters.
(i) Effectiveness of Registration Statement; Rule 430A Information. The Registration Statement has become effective not later than 5:00 p.m., Eastern time, on the date of this Agreement or such later date and time as shall be consented to in writing by the Underwriter, and, at each of the Closing Date and any Option Closing Date, no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto shall have been issued under the Securities Act, no order preventing or suspending the use of any Preliminary Prospectus or the Prospectus shall have been issued and no proceedings for any of those purposes have been instituted or are pending or, to the Company’s knowledge, contemplated by the Commission. The Company has complied with each request (if any) from the Commission for additional information. The Prospectus containing the Rule 430A Information shall have been filed with the Commission in the manner and within the time frame required by Rule 424(b) (without reliance on Rule 424(b)(8)) or a post-effective amendment providing such information shall have been filed with, and declared effective by, the Commission in accordance with the requirements of Rule 430A.
(ii) FINRA Clearance. On or before the date of this Agreement, the Underwriter shall have received clearance from FINRA as to the amount of compensation allowable or payable to the Underwriter as described in the Registration Statement.
(iii) Exchange Clearance. On the Closing Date, the Firm Shares shall have been approved for listing on the Exchange, subject only to official notice of issuance. On each Option Closing Date (if any), the Option Shares shall have been approved for listing on the Exchange, subject only to official notice of issuance.
(b) Company Counsel Matters.
(i) Closing Date Opinion of U.S. Counsel. On the Closing Date and on each Option Closing Date (if any), the Underwriter shall have received (i) the favorable opinion of Loeb & Loeb LLP, New York, U.S. counsel to the Company, dated the Closing Date or Option Closing Date, as applicable, and addressed to the Underwriter, and (ii) a written statement providing certain “10b-5” negative assurances, addressed to the Underwriter and dated the Closing Date and any Option Closing Date (if such date is other than the Closing Date), each in a form reasonably satisfactory to the Underwriter and Underwriter Counsel.
(ii) Closing Date Opinion of PRC Counsel for the Company. On the Closing Date and on each Option Closing Date (if any), the Underwriter shall have received the opinion of Hiways Law Firm (Shenzhen), PRC counsel for the Company, dated the Closing Date or Option Closing Date, as applicable, addressed to the Underwriter, substantially in form and substance reasonably satisfactory to the Underwriter.
(c) Comfort Letters.
(i) Comfort Letter. At the time this Agreement is executed, the Underwriter shall have received a cold comfort letter from the Auditor containing statements and information of the type customarily included in accountants’ comfort letters with respect to the financial statements and certain financial information contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus, addressed to the Underwriter and in form and substance satisfactory in all respects to the Underwriter and to the Auditor, dated as of the date of this Agreement.
(ii) Bring-down Comfort Letter. At the Closing Date and on each Option Closing Date (if any), the Underwriter shall have received from the Auditor, a letter, dated as of the Closing Date or Option Closing Date, as applicable, to the effect that such Auditor reaffirms the statements made in the letter furnished pursuant to Section 4(c)(i), except that the specified date referred to shall be a date not more than three (3) business days prior to the Closing Date or Option Closing Date, as applicable.
(d) Officers’ Certificates.
(i) Officers’ Certificate. The Company shall have furnished to the Underwriter a certificate, dated the Closing Date or Option Closing Date, as applicable, of its President and Chief Executive Officer, and its Chief Financial Officer stating on behalf of the Company and not in an individual capacity that (i) such officers have carefully examined the Registration Statement, the Pricing Disclosure Package, any Issuer Free Writing Prospectus and the Prospectus and, in their opinion, the Registration Statement and each amendment thereto, as supplemented or amended by information in an Issuer Free Writing Prospectus or a Prospectus, as of the Applicable Time and as of the Closing Date or Option Closing Date, as applicable, did not include any untrue statement of a material fact and did not omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Pricing Disclosure Package, as of the Applicable Time and as of the Closing Date or Option Closing Date, as applicable, any Issuer Free Writing Prospectus as of its date and as of the Closing Date or Option Closing Date, as applicable, the Prospectus and each amendment or supplement thereto, as of the respective date thereof and as of the Closing Date or Option Closing Date, as applicable, did not include any untrue statement of a material fact and did not omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances in which they were made, not misleading, (ii) since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement or amendment to the Registration Statement, the Pricing Disclosure Package or the Prospectus, (iii) to their knowledge after reasonable investigation, as of the Closing Date or Option Closing Date, as applicable, the representations and warranties of the Company in this Agreement are true and correct in all material respects (except for those representations and warranties qualified as to materiality, which shall be true and correct in all respects and except for those representations and warranties which refer to facts existing at a specific date, which shall be true and correct as of such date) and the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date and any Option Closing Date (if such date is other than the Closing Date), and (iv) there has not been, subsequent to the date of the most recent audited financial statements included in the Pricing Disclosure Package, any Material Adverse Change in the financial position or results of operations of the Company, or any change or development that, singularly or in the aggregate, would involve a Material Adverse Change, in or affecting the condition (financial or otherwise), results of operations, business, assets or prospects of the Company, except as set forth in the Prospectus.
(ii) Secretary’s Certificate. At each of the Closing Date and any Option Closing Date, the Underwriter shall have received a certificate of the Company signed by the Secretary of the Company, dated the Closing Date and Option Closing Date (if such date is other than the Closing Date), certifying: (i) that each of the Charter and Bylaws is true and complete, has not been modified and is in full force and effect; (ii) that the resolutions of the Company’s Board of Directors relating to the Offering are in full force and effect and have not been modified; (iii) the good standing of the Company; and (iv) as to the incumbency of the officers of the Company. The documents referred to in such certificate shall be attached to such certificate.
(e) No Material Changes. Prior to and on each of the Closing Date and each Option Closing Date: (i) there shall have been no Material Adverse Change or development involving a prospective Material Adverse Change in the condition or the business activities, financial or otherwise, of the Company or any subsidiary or variable interest entity of the Company from the latest dates as of which such condition is set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus; (ii) no action, suit or proceeding, at law or in equity, shall have been pending or threatened against the Company or any Insider before or by any court or federal or state commission, board or other administrative agency wherein an unfavorable decision, ruling or finding would reasonably be expected to result in a Material Adverse Change, except as set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus; (iii) no stop order shall have been issued under the Securities Act and no proceedings therefor shall have been initiated or threatened by the Commission; and (iv) the Registration Statement, the Pricing Disclosure Package and the Prospectus and any amendments or supplements thereto shall contain all material statements which are required to be stated therein in accordance with the Securities Act and the Securities Act Regulations and shall conform in all material respects to the requirements of the Securities Act and the Securities Act Regulations, and neither the Registration Statement, the Pricing Disclosure Package nor the Prospectus nor any amendment or supplement thereto shall contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.
(f) Lock-Up Agreements. On or before the date of this Agreement, the Company shall have delivered to the Underwriter executed copies of the Lock-Up Agreements from each of the persons listed in Schedule 2 hereto.
(g) Additional Documents. At the Closing Date, Underwriter Counsel shall have been furnished with such documents and opinions as they may require for the purpose of enabling Underwriter Counsel to deliver an opinion to the Underwriter, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Public Securities as herein contemplated shall be satisfactory in form and substance to the Underwriter and Underwriter Counsel.
5. Indemnification.
(a) Indemnification of the Underwriter. The Company agrees to indemnify and hold harmless each Underwriter, its affiliates and each person controlling such Underwriter (within the meaning of Section 15 of the Securities Act), and the directors, officers, agents and employees of each Underwriter, its affiliates and each such controlling person (each Underwriter, and each such entity or person hereafter is referred to as an “Underwriter Indemnified Person”) from and against any losses, claims, damages, judgments, assessments, costs and other liabilities (collectively, the “Liabilities”), and shall reimburse each Underwriter Indemnified Person for all fees and expenses (including the reasonable fees and expenses of counsel for the Underwriter Indemnified Persons, except as otherwise expressly provided in this Agreement) (collectively, the “Expenses”) as they are incurred in connection with such Indemnified Person’s enforcement of his or its rights under this Agreement, and agrees to advance payment of such Expenses as they are incurred by an Underwriter Indemnified Person in investigating, preparing, pursuing or defending any actions, whether or not any Indemnified Person is a party thereto, arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in (i) the Registration Statement, the Pricing Disclosure Package, the Preliminary Prospectus, the Prospectus or in any Issuer Free Writing Prospectus (as from time to time each may be amended and supplemented); (ii) any materials or information provided to investors by, or with the approval of, the Company in connection with the marketing of the Offering, including any “road show” or investor presentations made to investors by the Company (whether in person or electronically); or (iii) any application or other document or written communication (in this Section 5, collectively called “application”) executed by the Company or based upon written information furnished by the Company in any jurisdiction in order to qualify the Public Securities under the securities laws thereof or filed with the Commission, any state securities commission or agency, the Exchange or any other national securities exchange; or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, unless such statement or omission was made in reliance upon, and in conformity with, the Underwriter’ Information.
(b) Procedure. Upon receipt by an indemnified person under this section 5 (an “Indemnified Person”) of actual notice of an action against such Indemnified Person with respect to which indemnity may reasonably be expected to be sought under this Agreement, such Indemnified Person shall promptly notify the Company in writing; provided that failure by any Indemnified Person so to notify the Company shall not relieve the Company from any obligation or liability which the Company may have on account of this Section 5 or otherwise to such Indemnified Person, except to the extent the Company is materially prejudiced as a proximate result of such failure. An Indemnified Person shall have the right to require that the Company assume the defense of any such action (including the employment of counsel designated by the Company and reasonably satisfactory to the Underwriter). Any Indemnified Person shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless: (i) the Company has failed promptly to assume the defense and employ counsel reasonably satisfactory to the Underwriter for the benefit of the Underwriter and the other Indemnified Persons or (ii) such Indemnified Person shall have been advised that in the opinion of counsel that there is an actual or potential conflict of interest that prevents (or makes it imprudent for) the counsel engaged by the Company for the purpose of representing the Indemnified Person, to represent both such Indemnified Person and any other person represented or proposed to be represented by such counsel. The Company shall not be liable for the fees and expenses of more than one separate counsel (together with local counsel), representing all Indemnified Persons who are parties to such action), which counsel (together with any local counsel) for the Indemnified Persons shall be selected by the Underwriter, subject to the Company’s approval (which shall not be unreasonably withheld). The Company shall not be liable for any settlement of any action effected without its written consent (which shall not be unreasonably withheld). In addition, the Company shall not, without the prior written consent of each Indemnified Person, settle, compromise or consent to the entry of any judgment in or otherwise seek to terminate any pending or threatened action in respect of which advancement, reimbursement, indemnification or contribution may be sought hereunder (whether or not such Indemnified Person is a party thereto) unless such settlement, compromise, consent or termination (i) includes an unconditional release of that Indemnified Person, from all Liabilities arising out of such action for which indemnification or contribution may be sought hereunder and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any Indemnified Person. The advancement, reimbursement, indemnification and contribution obligations of the Company required hereby shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as every Liability and Expense is incurred and is due and payable, and in such amounts as fully satisfy each and every Liability and Expense as it is incurred (and in no event later than 30 days following the date of any invoice therefore).
(c) Indemnification of the Company. The Underwriter agrees to indemnify and hold harmless the Company, its directors, its officers who signed the Registration Statement and persons who control the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act against any and all Liabilities, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions made in the Registration Statement, any Preliminary Prospectus, the Pricing Disclosure Package or Prospectus or any amendment or supplement thereto or in any application, in reliance upon, and in strict conformity with, the Underwriter’ Information. In case any action shall be brought against the Company or any other person so indemnified based on any Preliminary Prospectus, the Registration Statement, the Pricing Disclosure Package or Prospectus or any amendment or supplement thereto or in any application, and in respect of which indemnity may be sought against any Underwriter, such Underwriter shall have the rights and duties given to the Company, and the Company and each other person so indemnified shall have the rights and duties given to the Underwriter by the provisions of Section 5(a). The Company agrees promptly to notify the Underwriter of the commencement of any litigation or proceedings against the Company or any of its officers, directors or any person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, in connection with the issuance and sale of the Public Securities or in connection with the Registration Statement, the Pricing Disclosure Package, the Prospectus or any Issuer Free Writing Prospectus; provided that failure by the Company so to notify the Underwriter shall not relieve any Underwriter from any obligation or liability which such Underwriter may have on account of this Section 5 or otherwise to the Company, except to the extent such Underwriter is materially prejudiced as a proximate result of such failure.
(d) Contribution. If the indemnification provided for in this Section 5 shall for any reason be unavailable to or insufficient to hold harmless an indemnified party under Section 5(a) or 5(c) in respect of any Liabilities and Expenses referred to therein, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such Liabilities and Expenses, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the Company, on the one hand, and each of the Underwriter, on the other hand, from the Offering, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, on the one hand, and the Underwriter, on the other hand, in connection with the matters as to which such Liabilities or Expenses relate, as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand, and the Underwriter, on the other hand, with respect to such Offering shall be deemed to be in the same proportion as the total proceeds from the Offering purchased under this Agreement (before deducting expenses) received by the Company bear to the total underwriting discount and commissions actually received by the Underwriter in connection with the Offering, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Company, on the one hand, and the Underwriter, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, on the one hand, or the Underwriter, on the other hand, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement, omission, act or failure to act; provided that the parties hereto agree that the written information furnished to the Company through the Underwriter by or on behalf of any Underwriter for use in any Preliminary Prospectus, any Registration Statement or the Prospectus, or in any amendment or supplement thereto, consists solely of the Underwriter’ Information. The Company and the Underwriter agree that it would not be just and equitable if contributions pursuant to this subsection (d) were determined by pro rata allocation (even if the Underwriter were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to above in this subsection (d). Notwithstanding the above, no person guilty of fraudulent misrepresentation within the meaning of Section 11(f) of the Securities Act shall be entitled to contribution from a party who was not guilty of fraudulent misrepresentation.
(e) Limitation. The Company also agrees that no Indemnified Person shall have any liability (whether direct or indirect, in contract or tort or otherwise) to the Company for or in connection with advice or services rendered or to be rendered by any Indemnified Person pursuant to this Agreement, the transactions contemplated thereby or any Indemnified Person’s actions or inactions in connection with any such advice, services or transactions, except to the extent that a court of competent jurisdiction has made a finding that Liabilities (and related Expenses) of the Company have resulted primarily from such Indemnified Person’s gross negligence or willful misconduct in connection with any such advice, actions, inactions or services.
(f) Survival & Third-Party Beneficiaries. The advancement, reimbursement, indemnity and contribution obligations set forth in this Section 5 shall remain in full force and effect regardless of any termination of, or the completion of any Indemnified Person’s services under or in connection with, this Agreement. Each Indemnified Person is an intended third-party beneficiary of this Section 5, and has the right to enforce the provisions of Section 5 as if he/she/it was a party to this Agreement.
6. Default by an Underwriter.
(a) Default Not Exceeding 10% of Securities. If any Underwriter or Underwriters shall default in its or their obligations to purchase the Firm Shares or the Option Shares, if the over-allotment is exercised, and if the number of the Firm Shares or Option Shares with respect to which such default relates does not exceed in the aggregate 10% of the number of Firm Shares or Option Shares that all Underwriter have agreed to purchase hereunder, then such Firm Shares or Option Shares to which the default relates shall be purchased by the non-defaulting Underwriter in proportion to their respective commitments hereunder.
(b) Default Exceeding 10% of Securities. In the event that the default addressed in Section 6(a) relates to more than 10% of the Firm Shares or Option Shares, the Underwriter may in its discretion arrange for itself or for another party or parties to purchase such Firm Shares or Option Shares to which such default relates on the terms contained herein. If, within one (1) Business Day after such default relating to more than 10% of the Firm Shares or Option Shares, the Underwriter does not arrange for the purchase of such Firm Shares or Option Shares, then the Company shall be entitled to a further period of one (1) Business Day within which to procure another party or parties satisfactory to the Underwriter to purchase said Firm Shares on such terms. In the event that neither the Underwriter nor the Company arrange for the purchase of the Firm Shares to which a default relates as provided in this Section 6, this Agreement will be terminated by the Underwriter or the Company without liability on the part of the Company (except as provided in Sections 3(g) and 5 hereof) or the Underwriter (except as provided in Section 5 hereof); provided, however, that if such default occurs with respect to the Option Shares, this Agreement will not terminate as to the Firm Shares; and provided, further, that nothing herein shall relieve a defaulting Underwriter of its liability, if any, to the other Underwriter and to the Company for damages occasioned by its default hereunder.
(c) Postponement of Closing Date. In the event that the Firm or Option Shares to which the default relates are to be purchased by the non-defaulting Underwriter, or are to be purchased by another party or parties as aforesaid, the Underwriter or the Company shall have the right to postpone the Closing Date or Option Closing Date for a reasonable period, but not in any event exceeding five (5) Business Days, in order to effect whatever changes may thereby be made necessary in the Registration Statement, the Pricing Disclosure Package or the Prospectus or in any other documents and arrangements, and the Company agrees to file promptly any amendment to the Registration Statement, the Pricing Disclosure Package or the Prospectus that in the opinion of Underwriter Counsel for the Underwriter may thereby be made necessary. The term “Underwriter” as used in this Agreement shall include any party substituted under this Section 6 with like effect as if it had originally been a party to this Agreement with respect to such Securities.
7. Additional Covenants.
(a) Prohibition on Press Releases and Public Announcements. The Company shall not issue press releases or engage in any other publicity, without the Underwriter’s prior written consent (such consent not to be unreasonably withheld), for a period ending at 5:00 p.m., Eastern time, on the first (1st) Business Day following the forty-fifth (45th) day after the Closing Date, other than normal and customary releases issued in the ordinary course of the Company’s business.
(b) Intentionally deleted.
8. Effective Date of this Agreement and Termination Thereof.
(a) Effective Date. This Agreement shall become effective when both the Company and the Underwriter have executed the same and delivered counterparts of such signatures to the other party.
(b) Termination. The Underwriter shall have the right to terminate this Agreement at any time prior to any Closing Date, (i) if any domestic or international event or act or occurrence has materially disrupted, or in Underwriter’s opinion will in the immediate future materially disrupt, general securities markets in the United States; or (ii) if trading on the New York Stock Exchange or the NASDAQ Stock Market LLC shall have been suspended or materially limited, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required by any United States national securities exchange or national securities association, FINRA or by order of the Commission or any other government authority having jurisdiction; or (iii) if the United States shall have become involved in a new war or an increase in major hostilities; or (iv) if a banking moratorium has been declared by a New York State or federal authority; or (v) if a moratorium on foreign exchange trading has been declared which materially adversely impacts the United States securities markets; or (vi) if the Company shall have sustained a material loss by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act which, whether or not such loss shall have been insured, will, in Underwriter opinion, make it inadvisable to proceed with the delivery of the Firm Shares; or (vii) if the Company is in material breach of any of its representations, warranties or covenants hereunder; or (viii) if the Underwriter shall have become aware after the date hereof of such a Material Adverse Change in the conditions of the Company, or such adverse material change in general market conditions as in the Underwriter’s judgment would make it impracticable to proceed with the offering, sale and/or delivery of the Public Securities or to enforce contracts made by the Underwriter for the sale of the Public Securities. Section 5 of this Agreement shall survive any termination of this Agreement.
(c) Expenses. Notwithstanding anything to the contrary in this Agreement, except in the case of a default by the Underwriter pursuant to Section (6)(b) above, in the event that this Agreement shall not be carried out for any reason whatsoever, within the time specified herein or any extensions thereof pursuant to the terms herein, the Company will, subject to demand by the Underwriter, reimburse the Underwriter for only those documented out-of-pocket expenses (including the reasonable fees and expenses of their counsel), actually incurred by the Underwriter in connection herewith as allowed under FINRA Rule 5110 less any amounts previously paid by the Company); provided, however, that all such expenses, including the costs and expenses set forth in Section 3(h) which were actually paid, shall not to exceed $150,000 in the aggregate.
(d) Survival of Indemnification, Advancement, Hold Harmless & Contribution Provisions. Notwithstanding any contrary provision contained in this Agreement, any election hereunder or any termination of this Agreement, and whether or not this Agreement is otherwise carried out, the provisions of Section 5 shall remain in full force and effect and shall not be in any way affected by, such election or termination or failure to carry out the terms of this Agreement or any part hereof.
(e) Representations, Warranties, Agreements to Survive. All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company submitted pursuant hereto, shall remain operative and in full force and effect regardless of (i) any investigation made by or on behalf of any Underwriter or its Affiliates or selling agents, any person controlling any Underwriter, its officers or directors or any person controlling the Company or (ii) delivery of and payment for the Public Securities.
9. Miscellaneous.
(a) Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of: (a) the date of transmission, if such notice or communication is delivered via e-mail attachment at the email address set forth below at or prior to 5:30 p.m. (New York City time) on a Business Day, (b) the next Business Day after the date of transmission, if such notice or communication is delivered via e-mail attachment at the e-mail address as set forth below on a day that is not a Business Day or later than 5:30 p.m. (New York City time) on any Business Day, (c) the second (2nd) Business Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service or (d) upon actual receipt by the party to whom such notice is required to be given.
If to the Underwriter:
Network 1 Financial Securities, Inc.
The Galleria, Building 2
Penthouse 2 Bridge Avenue
Red Bank, New Jersey 07701-1106
Attention: Damon Testaverde, Managing Director
Email: ddtestaverde@netw1.com
with copies to (which shall not constitute notice):
VCL Law LLP
8300 Boone Boulevard, Suite 500
Vienna, VA 22182
Attention: Fang Liu, Esq.
Email: fliu@vcllegal.com
If to the Company:
Addentax Group Corp.
Kingkey 100, Block A, Room 4805
Luohu District, Shenzhen City, China 518000
Attention: Hong Zhida, Chief Executive Officer
Email: zdhong@zgyingxi,com
with copies to (which shall not constitute notice):
Loeb & Loeb LLP
345 Park Avenue
New York, NY 10154
Attention: Mitchell S. Nussbaum, Esq. and Tahra Wright, Esq.
Email: mnussbaum@loeb.com
twright@loeb.com
(b) Headings. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Agreement.
(c) Amendment. This Agreement may only be amended by a written instrument executed by each of the parties hereto.
(d) Entire Agreement. This Agreement (together with the other agreements and documents being delivered pursuant to or in connection with this Agreement) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and thereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof. This Agreement shall replace and supersede the letter of intent dated August 28, 2019, by and between the Company and the Underwriter, as amended, including, without limitation, any terms which survive termination thereof pursuant to Section 16 thereof.
(e) Binding Effect. This Agreement shall inure solely to the benefit of and shall be binding upon the Underwriter, the Underwriter, each Indemnified Person referred to in Section 5, the Company and the controlling persons, directors and officers referred to in Section 5 hereof, and their respective successors, legal Underwriters, heirs and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provisions herein contained. The term “successors and assigns” shall not include a purchaser, in its capacity as such, of securities from any of the Underwriter.
(f) Governing Law; Consent to Jurisdiction; Trial by Jury. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving effect to conflict of laws principles thereof. The Company hereby agrees that any action, proceeding or claim against it arising out of, or relating in any way to this Agreement shall be brought and enforced in the New York Supreme Court, County of New York, or in the United States District Court for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. Any such process or summons to be served upon the Company may be served by transmitting a copy thereof by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 9(a) hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the Company in any action, proceeding or claim. The Company agrees that the prevailing party(ies) in any such action shall be entitled to recover from the other party(ies) all of its reasonable attorneys’ fees and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor. The Company (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates) and each of the Underwriter hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.
(g) Execution in Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement, and shall become effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto. Delivery of a signed counterpart of this Agreement by email/pdf transmission shall constitute valid and sufficient delivery thereof.
(h) Waiver, etc. The failure of any of the parties hereto to at any time enforce any of the provisions of this Agreement shall not be deemed or construed to be a waiver of any such provision, nor to in any way effect the validity of this Agreement or any provision hereof or the right of any of the parties hereto to thereafter enforce each and every provision of this Agreement. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Agreement shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment.
[Signature Page Follows]
If the foregoing correctly sets forth the understanding between the Underwriter and the Company, please so indicate in the space provided below.
Very truly yours,
Addentax Group Corp.
By:
Name:
Title:
Confirmed as of the date first written above mentioned, on behalf of itself and as Underwriter named on Schedule 1 hereto:
Network 1 Financial Securities, Inc.
By:
Name:
Title:
SCHEDULE 1
| Underwriter | Total Number of Shares to be Purchased | Number of Shares to be Purchased if the Allotment Option is Fully Exercised | ||
| Network 1 Financial Securities, Inc. | ||||
| Total |
SCHEDULE 2
List of Lock-Up Parties
EXHIBIT A
Form of Underwriter’s Warrants
EXHIBIT B
Form of Lock-Up Agreement
Exhibit 4.1
THE REGISTERED HOLDER OF THIS UNDERWRITER’S WARRANT BY ITS ACCEPTANCE HEREOF, AGREES THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS UNDERWRITER’S WARRANT EXCEPT AS HEREIN PROVIDED AND THE REGISTERED HOLDER OF THIS UNDERWRITER’S WARRANT AGREES THAT IT WILL NOT SELL, TRANSFER, ASSIGN, PLEDGE OR HYPOTHECATE THIS UNDERWRITER’S WARRANT OR CAUSE IT TO BE THE SUBJECT OF ANY HEDGING, SHORT SALE, DERIVATIVE, PUT, OR CALL TRANSACTION THAT WOULD RESULT IN THE EFFECTIVE ECONOMIC DISPOSITION OF THE UNDERWRITER WARRANT BY ANY PERSON FOR A PERIOD BEGINNING FROM THE EFFECTIVENESS OF THE REGISTRATION STATEMENT (DEFINED BELOW) UNTIL 180 DAYS AFTER THE EFFECTIVE DATE OF THE OFFERING TO ANYONE OTHER THAN (I) NETWORK 1 FINANCIAL SECURITIES, INC. (“NETWORK 1”) OR AN UNDERWRITER OR A SELECTED DEALER IN CONNECTION WITH THE OFFERING, OR (II) A BONA FIDE OFFICER OR PARTNER OF NETWORK 1 OR OF ANY SUCH UNDERWRITER OR SELECTED DEALER AND IN ACCORDANCE WITH FINRA RULE 5110(G)(2).
UNDERWRITER’S WARRANT
Warrant Certificate No: ___
Original Issue Date: ___
For the Purchase of
___ Shares
of
ADDENTAX GROUP CORP.
1. Underwriter’s Warrant.
THIS CERTIFIES THAT, for value received, [NAME OF HOLDER], a [JURISDICTION AND TYPE OF ENTITY], or its registered assigns (“Holder”), as registered owner of this Underwriter’s Warrant, to ADDENTAX GROUP CORP. (“Company”), Holder is entitled, at any time or from time to time from ______, 2021 the effective date of the offering (the “Offering”), as set forth in the Company’s registration statement on Form S-1 (No. 333-230943) (the “Registration Statement”), and at or before 5:00 p.m., Eastern Time, [date], (the five-year anniversary of the effective date of the Offering) (the “Expiration Date”) but not thereafter, to subscribe for, purchase and receive, in whole or in part, up to ___ (___) Shares of the Company. If the Expiration Date is a day on which banking institutions are authorized by law to close, then this Underwriter’s Warrant may be exercised on the next succeeding day which is not such a day in accordance with the terms herein. During the period ending on the Expiration Date, the Company agrees not to take any action that would terminate the Underwriter’s Warrant. This Underwriter’s Warrant is initially exercisable at $[price] per Share (125% of the price of the Shares at the effective date of the Offering) so purchased; provided, however, that upon the occurrence of any of the events specified in Section 6 hereof, the rights granted by this Underwriter’s Warrant, including the exercise price per share and the number of Shares to be received upon such exercise, shall be adjusted as therein specified. The term “Exercise Price” shall mean the initial exercise price or the adjusted exercise price, depending on the context.
2. Exercise.
2.1 Exercise Form. In order to exercise this Underwriter’s Warrant, the exercise form attached hereto must be duly executed and completed and delivered to the Company, together with this Underwriter’s Warrant and payment of the Exercise Price for the Share being purchased payable in cash or by certified check or official bank check. If the subscription rights represented hereby shall not be exercised at or before 5:00 p.m., Eastern Time, on the Expiration Date, this Underwriter’s Warrant shall become and be void without further force or effect, and all rights represented hereby shall cease and expire.
2.2 Legend. Each certificate for the securities purchased under this Underwriter’s Warrant shall bear a legend as follows unless such securities have been registered under the Securities Act of 1933, as amended (“Act”):
“The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (“Act”) or applicable state law. The securities may not be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Act, or pursuant to an exemption from registration under the Act and applicable state law.”
2.3 Cashless Exercise.
2.3.1 Determination of Amount. In lieu of the payment of the Exercise Price multiplied by the number of Shares for which this Underwriter’s Warrant is exercisable in the manner required by Section 2.1, the Holder shall have the right (but not the obligation) to convert any exercisable but unexercised portion of this Underwriter’s Warrant into Shares (“Conversion Right”). Upon a “cashless exercise”, the Holder shall surrender this Warrant to the Company, together with the Election to Purchase, and the Company shall issue to the Holder the number of Shares determined as follows:
X = Y (A-B)/A
where:
| X | = | The number of Shares to be issued to the Holder. | |
| Y | = | The number of Shares with respect to which this Warrant is being exercised. | |
| A | = | The fair market value of one Share. | |
| B | = | The Exercise Price. |
For purposes of this Section 2.3, the fair market value of one Share shall be determined by the first of the following clauses that applies:
(i) if the Common Stock is traded on a national securities exchange, the fair market value shall be the last sale price on the trading day immediately prior to the Date of Exercise or, if no sale of the Company’s Common Stock took place on the trading day immediately prior to the Date of Exercise, then the fair market value shall be the last sale price on the most recent day prior to the Date of Exercise on which trades were made and reported;
(ii) if the Common Stock is traded over-the-counter, the fair market value shall be deemed to be the last sale price on the trading day immediately prior to the Date of Exercise or, if no sale of the Company’s Common Stock took place on the trading day immediately prior to the Date of Exercise, then the fair market value shall be the last sale price on the most recent day prior to the Date of Exercise on which trades were made and reported; or
(iii) if there is no active public market for the Common Stock, the fair market value thereof shall be determined in good faith by the Company’s Board of Directors (the “Board”).
(a) For purposes of Rule 144 of the Act, it is intended, understood and acknowledged that the t Shares issued in a cashless exercise transaction shall be deemed to have been acquired by the Holder, and the holding period for the Shares shall be deemed to have been commenced, on the Issuance Date.
2.3.2 Mechanics of Cashless Exercise. The Cashless Exercise Right may be exercised by the Holder on any business day on or after the Commencement Date and not later than the Expiration Date by delivering the Underwriter’s Warrant with a duly executed exercise form attached hereto with the cashless exercise section completed to the Company, exercising the Cashless Exercise Right and specifying the total number of Shares the Holder will purchase pursuant to such Cashless Exercise Right.
2.4 No Obligation to Net Cash Settle. Notwithstanding anything to the contrary contained in this Underwriter Warrant, in no event will the Company be required to net cash settle the exercise of the Underwriter Warrant. The holder of the Underwriter Warrant will not be entitled to exercise the Underwriter Warrant unless it exercises such Purchase Warrant pursuant to the cashless exercise right or a registration statement is effective, or an exemption from the registration requirements is available at such time and, if the Holder is not able to exercise the Underwriter Warrant, the Underwriter Warrant will expire worthless.
3. Transfer.
3.1 General Restrictions. The registered Holder of this Underwriter’s Warrant agrees that it will not sell, transfer, assign, pledge or hypothecate this Underwriter’s Warrant, or any portion thereof, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of such securities for a period beginning from the effectiveness of the Registration Statement until 180 days after the effective date of the Offering to anyone other than (i) NETWORK 1 or an Underwriter or a selected dealer participating in the Offering, or (ii) a bona fide officer or partner of NETWORK 1 or of any such Underwriter or selected dealer. After a period of 180 days following the effective date of the Offering, transfers to others may be made subject to compliance with or exemptions from applicable securities laws. In order to make any permitted assignment, the Holder must deliver to the Company the assignment form attached hereto duly executed and completed, together with the Underwriter’s Warrant and payment of all transfer taxes, if any, payable in connection therewith. The Company shall within five business days transfer this Underwriter’s Warrant on the books of the Company and shall execute and deliver a new Underwriter’s Warrant or Underwriter’s Warrants of like tenor to the appropriate assignee(s) expressly evidencing the right to purchase the aggregate number of Shares purchasable hereunder or such portion of such number as shall be contemplated by any such assignment.
3.2 Restrictions Imposed by the Act. The securities evidenced by this Underwriter’s Warrant shall not be transferred unless and until (i) the Company has received the opinion of counsel for the Holder that the securities may be transferred pursuant to an exemption from registration under the Act and applicable state securities laws, the availability of which is established to the reasonable satisfaction of the Company (the Company hereby agreeing that the opinion of VCL Law LLP shall be deemed satisfactory evidence of the availability of an exemption), or (ii) a registration statement or a post-effective amendment to the Registration Statement relating to the offer and sale of such securities has been filed by the Company and declared effective by the Securities and Exchange Commission and compliance with applicable state securities law has been established.
4. New Underwriter’s Warrants to be Issued.
4.1 Partial Exercise or Transfer. Subject to the restrictions in Section 3 hereof, this Underwriter’s Warrant may be exercised or assigned in whole or in part. In the event of the exercise or assignment hereof in part only, upon surrender of this Underwriter’s Warrant for cancellation, together with the duly executed exercise or assignment form and funds sufficient to pay any Exercise Price and/or transfer tax if exercised pursuant to Section 2.1 hereto, the Company shall cause to be delivered to the Holder without charge a new Underwriter’s Warrant of like tenor to this Underwriter’s Warrant in the name of the Holder evidencing the right of the Holder to purchase the number of Shares purchasable hereunder as to which this Underwriter’s Warrant has not been exercised or assigned.
4.2 Lost Certificate. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Underwriter’s Warrant and of reasonably satisfactory indemnification or the posting of a bond, the Company shall execute and deliver a new Underwriter’s Warrant of like tenor and date. Any such new Underwriter’s Warrant executed and delivered as a result of such loss, theft, mutilation or destruction shall constitute a substitute contractual obligation on the part of the Company.
5. Registration Rights. The Company has filed the Registration Statement, including a related prospectus, with the Securities and Exchange Commission, which has been declared effective on Form S-1 (File No. 333-230943). The Registration Statement registers the Shares.
5.1 General Terms.
5.1.1 Indemnification. The Company shall indemnify the Holder(s) of the Registrable Securities to be sold pursuant to any registration statement hereunder and each person, if any, who controls such Holders within the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), against all loss, claim, damage, expense or liability (including all reasonable attorneys’ fees and other expenses reasonably incurred in investigating, preparing or defending against litigation, commenced or threatened, or any claim whatsoever) to which any of them may become subject under the Act, the Exchange Act or otherwise, arising from such registration statement but only to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify the Underwriters contained in Section 5 of the Underwriting Agreement in the Offering. The Holder(s) of the Registrable Securities to be sold pursuant to such registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Company, its officers and directors and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against all loss, claim, damage, expense or liability (including all reasonable attorneys’ fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such Holders, or their successors or assigns, in writing, for specific inclusion in such registration statement to the same extent and with the same effect as the provisions contained in Section 5 of the Underwriting Agreement pursuant to which the Underwriters have agreed to indemnify the Company.
5.1.2 Exercise of Underwriter’s Warrants. Nothing contained in this Underwriter’s Warrant shall be construed as requiring the Holder(s) to exercise their Underwriter’s Warrants prior to or after the initial filing of any registration statement or the effectiveness thereof.
5.1.5 Rule 144 Sale. Notwithstanding anything contained in this Section 5 to the contrary, the Company shall have no obligation to maintain the effectiveness of the Registration Statement covering the Shares held by any Holder, where such Holder would then be entitled to sell under Rule 144 within any three-month period (or such other period prescribed under Rule 144 as may be provided by amendment thereof) all of the Registrable Securities then held by such Holder.
5.1.6 Supplemental Prospectus. Each Holder agrees, that upon receipt of any notice from the Company of the happening of any event as a result of which the prospectus included in the Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, or that would otherwise require disclosure of material nonpublic information that, if disclosed at such time, would be materially harmful to the Company, such Holder will immediately discontinue disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such Holder’s receipt of the copies of a supplemental or amended prospectus, or the public disclosure and dissemination of such information, as the case may be, and, if so desired by the Company, such Holder shall deliver to the Company (at the expense of the Company) or destroy (and deliver to the Company a certificate of such destruction) all copies, other than permanent file copies then in such Holder’s possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice.
6. Adjustments.
6.1 Adjustments to Exercise Price and Number of Securities. The Exercise Price and the number of Shares underlying the Underwriter’s Warrant shall be subject to adjustment from time to time as hereinafter set forth:
6.1.1 Stock Dividends; Split Ups. If after the date hereof, and subject to the provisions of Section 6.3 below, the number of outstanding shares of Common Stock is increased by a stock dividend payable in shares of Common Stock or by a split up of shares of Common Stock or other similar event, then, on the effective day thereof, the number of Shares purchasable hereunder shall be increased in proportion to such increase in outstanding shares of Common Stock. For example, if the Company declares a two-for-one stock dividend and at the time of such dividend this Underwriter’s Warrant is for the purchase of one Share at $6.25 per Share, upon effectiveness of the dividend, this Underwriter’s Warrant will be adjusted to allow for the purchase of one Share for $3.125. In such example, the number of Shares purchasable hereunder would be doubled.
6.1.2 Aggregation of Shares. If after the date hereof, and subject to the provisions of Section 6.3, the number of outstanding shares of Common Stock is decreased by a consolidation, combination or reclassification of Shares or other similar event, then, on the effective date thereof, the number of Shares underlying this Underwriter’s Warrant each of purchasable hereunder shall be decreased in proportion to such decrease in outstanding shares.
6.1.3 Replacement of Securities upon Reorganization, etc. In case of any reclassification or reorganization of the outstanding shares of Common Stock other than a change covered by Section 6.1.1 or 6.1.2 hereof or that solely affects the par value of the shares of Common Stock, or in the case of any merger or consolidation of the Company with or into another corporation (other than a consolidation or merger in which the Company is the continuing corporation and that does not result in any reclassification or reorganization of the outstanding shares of Common Stock, or in the case of any sale or conveyance to another corporation or entity of the property of the Company as an entirety or substantially as an entirety in connection with which the Company is dissolved, the Holder of this Underwriter’s Warrant shall have the right thereafter (until the expiration of the right of exercise of this Underwriter’s Warrant) to receive upon the exercise hereof, for the same aggregate Exercise Price payable hereunder immediately prior to such event, the kind and amount of shares of stock or other securities or property (including cash) receivable upon such reclassification, reorganization, merger or consolidation, or upon a dissolution following any such sale or transfer, by a Holder of the number of shares of Common Stock of the Company obtainable upon exercise of this Underwriter’s Warrant immediately prior to such event; and if any reclassification also results in a change in the number of shares of Common Stock covered by Section 6.1.1 or 6.1.2, then such adjustment shall be made pursuant to Sections 6.1.1, 6.1.2 and this Section 6.1.3. The provisions of this Section 6.1.3 shall similarly apply to successive reclassifications, reorganizations, mergers or consolidations, sales or other transfers.
6.1.4 Changes in Form of Underwriter’s Warrant. This form of Underwriter’s Warrant need not be changed because of any change pursuant to this Section, and Underwriter’s Warrants issued after such change may state the same Exercise Price and the same number of Shares are stated in the Underwriter’s Warrants initially issued pursuant to this Agreement. The acceptance by any Holder of the issuance of new Underwriter’s Warrant reflecting a required or permissive change shall not be deemed to waive any rights to an adjustment occurring after the Commencement Date or the computation thereof.
6.2 Substitute Underwriter’s Warrant. In case of any consolidation of the Company with, or merger of the Company with or into, another corporation (other than a consolidation or merger which does not result in any reclassification or change of the outstanding Shares), the corporation formed by such consolidation or merger shall execute and deliver to the Holder a supplemental Underwriter’s Warrant providing that the holder of each Underwriter’s Warrant then outstanding or to be outstanding shall have the right thereafter (until the stated expiration of such Underwriter’s Warrant) to receive, upon exercise of such Underwriter’s Warrant, the kind and amount of Shares and other securities and property receivable upon such consolidation or merger, by a holder of the number of Shares of the Company for which such Underwriter’s Warrant might have been exercised immediately prior to such consolidation, merger, sale or transfer. Such supplemental Underwriter’s Warrant shall provide for adjustments which shall be identical to the adjustments provided in Section 6. The above provision of this Section shall similarly apply to successive consolidations or mergers.
6.3 Elimination of Fractional Interests. The Company shall not be required to issue certificates representing fractions of Shares upon the exercise of the Underwriter’s Warrant, nor shall it be required to issue scrip or pay cash in lieu of any fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up to the nearest whole number of Warrants, Shares or other securities, properties or rights.
7. Reservation and Listing. The Company shall at all times reserve and keep available out of its authorized Shares, solely for the purpose of issuance upon exercise of the Underwriter’s Warrants, such number of shares of Shares, or other securities, properties or rights as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of the Underwriter’s Warrants and payment of the Exercise Price therefor, in accordance with the terms hereby, all Shares and other securities issuable upon such exercise shall be duly and validly issued, fully paid and non-assessable and not subject to preemptive rights of any stockholder. As long as the Underwriter’s Warrants shall be outstanding, the Company shall use its commercially reasonable efforts to cause all Shares issuable upon exercise of the Underwriter’s Warrants, to be listed (subject to official notice of issuance) on all securities exchanges on which the Shares, issued to the public in the Offering may then be listed and/or quoted.
8. Certain Notice Requirements.
8.1 Holder’s Right to Receive Notice. Nothing herein shall be construed as conferring upon the Holders the right to vote or consent or to receive notice as a stockholder for the election of directors or any other matter, or as having any rights whatsoever as a stockholder of the Company. If, however, at any time prior to the expiration of the Underwriter’s Warrants and their exercise, any of the events described in Section 8.2 shall occur, then, in one or more of said events, the Company shall give written notice of such event at least fifteen days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the stockholders entitled to such dividend, distribution, conversion or exchange of securities or subscription rights, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of the closing of the transfer books, as the case may be. Notwithstanding the foregoing, the Company shall deliver to each Holder a copy of each notice given to the other stockholders of the Company at the same time and in the same manner that such notice is given to the stockholders.
8.2 Events Requiring Notice. The Company shall be required to give the notice described in this Section 8 upon one or more of the following events: (i) if the Company shall take a record of the holders of its Shares for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company, (ii) the Company shall offer to all the holders of its Shares any additional Shares of the Company or securities convertible into or exchangeable for Shares of the Company, or any option, right or warrant to subscribe therefor, or (iii) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or merger) or a sale of all or substantially all of its property, assets and business shall be proposed.
8.3 Notice of Change in Exercise Price. The Company shall, promptly after an event requiring a change in the Exercise Price pursuant to Section 6 hereof, send notice to the Holders of such event and change (“Price Notice”). The Price Notice shall describe the event causing the change and the method of calculating same and shall be certified as being true and accurate by the Company’s Chief Financial Officer.
8.4 Transmittal of Notices. All notices, requests, demands and other communications which are required or may be given under this Underwriter’s Warrant shall be in writing and shall be deemed to have been duly given: (a) when received, if personally delivered; (b) when transmitted, if transmitted by telecopy, electronic or digital transmission method with confirmation of transmission by the transmitting equipment; (c) the day after it is sent, if sent for next day delivery to a domestic address by a recognized overnight delivery service (e.g., Federal Express); and (d) upon receipt, if sent by certified or registered mail, return receipt requested. In each case, notice shall be sent to the parties at the following address (or to such other address as a party may have specified by notice given to the other party pursuant to this provision):
Addentax Group Corp.
Kingkey 100, Block A, Room 4805
Luohu District, Shenzhen City
China 518000
Attention: Chief Executive Officer
Facsimile:
E-mail:
with a copy to:
Loeb & Loeb LLP
345 Park Avenue, 19th Floor
New York, NY 10154
Attention: Mitchell S. Nussbaum, Esq.
Facsimile: 212-407-4990
Email: mnussbaum@loeb.com
9. Miscellaneous.
9.1 Amendments. The Company and NETWORK 1 may from time to time supplement or amend this Underwriter’s Warrant without the approval of any of the Holders in order to cure any ambiguity, to correct or supplement any provision contained herein that may be defective or inconsistent with any other provisions herein, or to make any other provisions in regard to matters or questions arising hereunder that the Company and NETWORK 1 may deem necessary or desirable and that the Company and NETWORK 1 deem shall not adversely affect the interest of the Holders. All other modifications or amendments shall require the written consent of and be signed by the party against whom enforcement of the modification or amendment is sought.
9.2 Headings. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Underwriter’s Warrant.
10. Entire Agreement. This Underwriter’s Warrant (together with the other agreements and documents being delivered pursuant to or in connection with this Underwriter’s Warrant) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof.
10.1 Binding Effect. This Underwriter’s Warrant shall inure solely to the benefit of and shall be binding upon, the Holder and the Company and their permitted assignees, respective successors, legal representative and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Underwriter’s Warrant or any provisions herein contained.
10.2 Governing Law; Submission to Jurisdiction. This Underwriter’s Warrant shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving effect to conflict of laws. The Company hereby agrees that any action, proceeding or claim against it arising out of, or relating in any way to this Underwriter’s Warrant shall be brought and enforced in the courts of the State of New York or of the United States of America for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. Any process or summons to be served upon the Company may be served by transmitting a copy thereof by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 8 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the Company in any action, proceeding or claim. The Company and the Holder agree that the prevailing party(ies) in any such action shall be entitled to recover from the other party(ies) all of its reasonable attorneys’ fees and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor.
10.3 Waiver, Etc. The failure of the Company or the Holder to at any time enforce any of the provisions of this Underwriter’s Warrant shall not be deemed or construed to be a waiver of any such provision, nor to in any way affect the validity of this Underwriter’s Warrant or any provision hereof or the right of the Company or any Holder to thereafter enforce each and every provision of this Underwriter’s Warrant. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Underwriter’s Warrant shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment.
10.4 Execution in Counterparts. This Underwriter’s Warrant may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement, and shall become effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto.
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IN WITNESS WHEREOF, the Company has caused this Underwriter’s Warrant to be signed by its duly authorized officer as of the ___ day of ____, 2021.
| ADDENTAX GROUP CORP. | ||
| By: | ||
| Name: | ||
| Title: | ||
[signature page of Addentax form of warrant]
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation in this Amendment No.6 to Registration Statement on Form S-1 (No. 333-230943) of our report dated January 22, 2021, relating to the consolidated financial statements of Addentax Group Corp. as of and for the years ended March 31, 2020 and 2019, to all references to our firm included in this Registration Statement filed with the U.S. Securities and Exchange Commission on January 22, 2021.
/s/ B F Borgers CPA PC
Lakewood, Colorado
January 22, 2021