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ADDENTAX GROUP CORP. - Quarter Report: 2020 December (Form 10-Q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: December 31, 2020

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____________ to _________________

 

Commission File No. 333-206097

 

ADDENTAX GROUP CORP.

(Exact name of registrant as specified in its charter)

 

Nevada   35-2521028
(State or other jurisdiction of   (I.R.S. Employer
incorporation or formation)   Identification Number)

 

Kingkey 100, Block A, Room 4805,

Luohu District, Shenzhen City, China 518000

(Address of principal executive offices)

 

+ (86) 755 86961 405

(Registrant’s telephone number)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock   ATXG   OTC Markets

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

[X] Yes [  ] No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

[X] Yes [  ] No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [X] Smaller reporting company [X]
Emerging growth [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 pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [  ] Yes [X] No

 

As of February 22, 2021, there were 26,093,004 shares outstanding of the registrant’s common stock.

 

 

 

 

 

 

TABLE OF CONTENTS

 

  PART I – FINANCIAL INFORMATION  
     
Item 1. Financial Statements (Unaudited) F-1
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 3
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
     
Item 4. Controls and Procedures 17
     
  PART II – OTHER INFORMATION  
     
Item 1. Legal Proceedings 18
     
Item 1A. Risk Factors 18
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
     
Item 3. Defaults Upon Senior Securities 18
     
Item 4. Mine Safety Disclosures 18
     
Item 5. Other Information 18
     
Item 6. Exhibits 18

 

2

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements and Supplementary Data

 

ADDENTAX GROUP CORP.

 

FINANCIAL STATEMENTS

 

For the nine months ended December 31, 2020 and 2019

 

TABLE OF CONTENTS

 

Condensed Consolidated Balance sheets as of December 31, 2020 (unaudited) and March 31, 2020 (unaudited) F-2
Condensed Consolidated Statements of Income and Comprehensive Income for the Nine months ended December 31, 2020 and 2019 (unaudited) F-3
Condensed Consolidated Statements of Changes in Equity for the nine months ended December 31, 2020 and 2019 (unaudited) F-4
Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2020 and 2019 (unaudited) F-5
Notes to Condensed Consolidated Financial Statements for the nine months ended December 31, 2020 and 2019 (unaudited) F-6 – F-15

 

F-1

 

 

ADDENTAX GROUP CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In U.S. Dollars, except share data or otherwise stated)

AS OF DECEMBER 31, 2020 AND MARCH 31, 2020 (UNAUDITED)

 

   December 31, 2020   March 31, 2020 
         
ASSETS          
           
CURRENT ASSETS          
Cash and cash equivalents  $356,728   $531,681 
Accounts receivables, net   3,024,627    4,500,116 
Inventories   163,233    347,531 
Other receivables - disposal of subsidiaries   822,933    - 
Other receivables - other   203,605    231,974 
Advances to suppliers   208,324    389,940 
Total current assets   4,779,450    6,001,242 
           
NON-CURRENT ASSETS          
Plant and equipment, net   894,388    585,019 
Operating lease right of use asset   11,604,526    1,835,717 
Total non-current assets   12,498,914    2,420,736 
TOTAL ASSETS  $17,278,364   $8,421,978 
           
LIABILITIES AND EQUITY          
           
CURRENT LIABILITIES          
Short-term loan  $153,172   $353,114 
Accounts payable   1,700,062    3,620,583 
Amount due to related parties   6,448,905    5,429,440 
Advances from customers   26,192    18,931 
Accrued expenses and other payables   411,316    230,917 
Operating lease liability current portion   3,922,214    443,543 
Total current liabilities   12,661,861    10,096,528 
           
NON-CURRENT LIABILITIES          
Operating lease liability   7,682,312    1,392,174 
TOTAL LIABILITIES  $20,344,173   $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 December 31, 2020 and March 31, 2020, respectively)  $26,093   $25,346 
Additional paid-in capital   3,815,933    61,050 
Retained earnings   (6,804,107)   (3,233,122)
Statutory reserve   13,663    23,514 
Accumulated other comprehensive loss   (117,391)   56,488 
Total deficit   (3,065,809)   (3,066,724)
TOTAL LIABILITIES AND EQUITY  $17,278,364   $8,421,978 

 

See accompany notes to the unaudited condensed 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 NINE MONTHS ENDED DECEMBER 31, 2020 AND 2019

 

   Three months ended
December 31,
   Nine months ended
December 31,
 
   2020   2019   2020   2019 
                 
REVENUES  $3,411,552   $4,027,902   $21,014,064   $8,182,396 
                     
COST OF REVENUES   (2,950,124)   (3,746,040)   (22,776,087)   (7,221,683)
                     
GROSS (LOSS) PROFIT   461,428    281,862    (1,762,023)   960,713 
                     
OPERATING EXPENSES                    
Selling and marketing   (217,942)   (960)   (376,975)   (11,826)
General and administrative   (532,012)   (526,194)   (1,454,017)   (1,857,288)
Total operating expenses   (749,954)   (527,154)   (1,830,992)   (1,869,113)
                     
LOSS FROM OPERATIONS   (288,526)   (245,292)   (3,593,015)   (908,400)
                     
Interest income   87    10    102    58 
Interest expenses   (631)   (3,974)   (6,586)   (16,304)
                     
Other income (expense), net   1,273    66    62,489    (10,753)
                     
LOSS BEFORE INCOME TAX EXPENSE   (287,797)   (249,190)   (3,537,010)   (935,399)
INCOME TAX EXPENSE   (15,784)   (9,022)   (23,196)   (12,086)
                     
NET LOSS   (303,581)   (258,212)   (3,560,206)   (947,485)
Foreign currency translation gain (loss)   (85,728)   (50,440)   (173,879)   58,715 
TOTAL COMPREHENSIVE LOSS  $(389,309)  $(308,652)   (3,734,085)   (888,770)
                     
LOSS PER SHARE                    
Basic and diluted   (0.01)   (0.01)   (0.14)   (0.04)
Weighted average number of shares outstanding – Basic and diluted   25,712,713    25,346,004    25,712,713    25,346,004 

 

See accompany notes to the unaudited condensed consolidated financial statements.

 

F-3

 

 

ADDENTAX GROUP CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In U.S. Dollars, except share data or otherwise stated)

FOR THE THREE AND NINE MONTHS ENDED DECEMBER 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 OCTOBER 1, 2019 (Restated)   25,346,004   $25,346   $61,050   $(2,940,044)  $21,779   $74,201   $(2,757,668)
Foreign currency translation   -    -    -    -    -    (50,440)   (50,440)
Movement of Statutory reserve   -    -    -    (1,735)   1,735    -    - 
Net loss for the period   -    -    -    (258,212)        -    (258,212)
BALANCE AT DECEMBER 31, 2019   25,346,004   $25,346   $61,050   $(3,199,991)  $23,514   $23,761   $(3,066,320)
                                    
BALANCE AT OCTOBER 1, 2020   25,346,004   $26,093   $3,795,303   $(6,489,747)  $23,514   $(31,663)  $(2,676,500)
Movement of Statutory reserve   -    -    20,630    (10,779)   (9,851)   -    - 
Foreign currency translation   -    -    -    -    -    (85,728)   (85,728)
Net loss for the period   -    -    -    (303,581)   -    -    (303,581)
BALANCE AT DECEMBER 31, 2020   26,093,004   $26,093   $3,815,933   $(6,804,107)  $13,663   $(117,391)  $(3,065,809)
                                    
BALANCE AT MARCH 31, 2019 (Restated)   25,346,004   $25,346   $61,050   $(2,250,770)  $21,779   $(34,955)  $(2,177,550)
Movement of Statutory reserve   -    -    -    (1,735)   1,735    -    - 
Foreign currency translation   -    -    -    (1)   -    58,716    58,715 
Net loss for the period   -    -    -    (947,485)   -    -    (947,485)
BALANCE AT DECEMBER 31, 2019   25,346,004   $25,346   $61,050   $(3,199,991)  $23,514   $23,761   $(3,066,320)
                                    
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 
Movement of Statutory reserve   -    -    20,630    (10,779)   (9,851)   -      
Foreign currency translation   -    -    -    -    -    (173,879)   (173,879)
Net loss for the period   -    -    -    (3,560,206)   -    -    (3,560,206)
BALANCE AT DECEMBER 31, 2020   26,093,004   $26,093   $3,815,933   $(6,804,107)  $13,663   $(117,391)  $(3,065,809)

 

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 NINE MONTHS ENDED DECEMBER 31, 2020 AND 2019

(In U.S. Dollars, except share data or otherwise stated)

 

   2020   2019 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(3,560,206)  $(947,485)
Adjustments to reconcile net income to net cash used in operating activities:          
Depreciation   83,210    84,277 
Loss on disposal of plant and equipment   1,472    3,323 
Changes in operating assets and liabilities, net of effects from disposal of subsidiaries:          
Accounts receivable   1,367,371    (1,880,493)
Inventories   174,487    (924)
Advances to suppliers   (320,771)   (252,620)
Other receivables   (65,150)   (80,870)
Accounts payables   (1,688,272)   1,661,429 
Accrued expenses and other payables   173,582    373,429 
Advances from customers   52,161    (19,002)
Net cash provided by (used in) operating activities  $(3,782,116)  $(1,058,936)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of plant and equipment   (392,108)   (94,864)
Proceeds from sale of property and equipment   2,243    - 
Cash decreased in disposal of subsidiaries   (704,479)   - 
Net cash used in investing activities  $(1,094,344)  $(94,864)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from issuance of common stocks   3,735,000    - 
Proceeds from related party borrowings   7,697,827    1,828,042 
Repayment of related party borrowings   (6,605,044)   (665,323)
Proceeds from bank borrowings   86,886    515,816 
Repayment of bank borrowings   (196,456)   (372,135)
Net cash provided by financing activities  $4,718,213   $1,306,400 
           
NET INCREASE IN CASH AND CASH EQUIVALENTS   (158,247)   152,600 
Effect of exchange rate changes on cash and cash equivalents   (16,706)   (5,843)
Cash and cash equivalents, beginning of the period   531,681    277,264 
CASH AND CASH EQUIVALENTS, END OF THE PERIOD  $356,728   $424,021 
           
Supplemental disclosure of cash flow information:          
Cash paid during the year for interest  $4,523   $11,244 
Cash paid during the year for income tax  $23,196   $12,086 
Supplemental disclosure of non-cash investing and financing activities:          
Right-of-use assets obtained in exchange for operating lease obligations  $10,404,962   $1,966,535 
Net assets of subsidiaries disposed of recorded as Other Receivables  $118,454    - 

 

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 NINE MONTHS ENDED DECEMBER 31, 2020 AND 2019

 

1. ORGANIZATION AND BUSINESS ACQUISITIONS

 

ATXG and its subsidiaries (the “Company”) are engaged in the business of garments manufacturing, providing logistic services, property leasing and management service in the People’s Republic of China (“PRC” or “China”) 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.”) and Form S-1/A filed with SEC on January 22, 2021.

 

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.

 

F-6

 

 

The Company incurred net loss of $303,581 and $258,212 for the three months ended December 31, 2020 and 2019, respectively, and $3,560,206 and $947,485 for the nine months ended December 31, 2020 and 2019, respectively. As of December 31, 2020 and March 31, 2020, the Company had net current liability of $7,882,411 and $4,095,286, respectively, and a deficit on total equity of $3,065,809 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.

 

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) 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

 

The followings are the percentages of accounts receivable balance of the top five customers over accounts receivable for each segment as of December 31, 2020 and March 31, 2020.

 

Garment manufacturing segment

 

   December 31, 2020   March 31, 2020 
Customer A   97.2%   85.5%
Customer B   2.7%   Nil%

 

The high concentration as of 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

 

   December 31, 2020   March 31, 2020 
Customer A   24.9%   22.4%
Customer B   13.0%   0.0%
Customer C   11.4%   18.3%
Customer D   10.0%   0.6%
Customer E   7.6%   2.4%

 

Epidemic prevention supplies segment

 

No accounts receivables in this segment.

 

For the three months ended December 31, 2020, one customer from garment segment provided more than 10% of total revenue of the Company, represented 62.8% of total revenue of the Company for the three months. For the nine months ended December 31, 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 14.0% and 49.6% of total revenue of the Company for the nine months, respectively.

 

F-8

 

 

The high concentration in three and nine months ended December 31, 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.

 

The following tables summarized the purchases from five largest suppliers of each of the reportable segment for the three and nine months ended December 31, 2020 and 2019.

 

   Three months ended   Nine months ended 
   December 31,   December 31, 
   2020   2019   2020   2019 
Garment manufacturing segment   100.0%   98.7%   97.7%   91.2%
Logistics services segment   79.1%   90.4%   99.7%   69.0%
Property management and subleasing   100.0%   -%   100.0%   -%
Epidemic prevention supplies   100.0%   -%   100.0%   -%

 

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.

 

(d) Interest Rate Risk

 

The Company’s exposure to interest rate risk primarily relates to the interest expenses on our outstanding bank borrowings and the interest income generated by cash invested in cash deposits and liquid investments. As of December 31, 2020, the total outstanding borrowings amounted to $153,172 (RMB1,000,000) with various interest rate from 4.84% 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 three quarters 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. 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, became not a related party when HPF was disposed of in November, 2020
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.

 

In September, the Company disposed of $114,229 aged inventories in HSW to Mr. Jinlong Huang at cost with no gain or loss recognized.

 

F-9

 

 

The Company had the following related party balances as of December 31, 2020 and March 31, 2020:

 

Related parties borrowings  December 31, 2020   March 31, 2020 
Zhida Hong  $5,698,498   $5,043,489 
Bihua Yang   244,094    - 
Dewu Huang   379,253    81,287 
Zhongpeng Chen   -    160,427 
Jinlong Huang   127,060    144,237 
   $6,448,905   $5,429,440 

 

The borrowing balances with related parties are unsecured, non-interest bearing and repayable on demand.

 

6. INVENTORIES

 

Inventories consist of the following as of December 31, 2020 and March 31, 2020:

 

   December 31, 2020   March 31, 2020 
Raw materials  $122,354   $230,742 
Work in progress   11,745    62,150 
Finished goods   29,134    54,639 
Total inventories  $163,233   $347,531 

 

There is no inventory write-off for the three and nine months ended December 31, 2020 and 2019.

 

7. 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.

 

8. PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consists of the following as of December 31, 2020 and March 31, 2020:

 

   December 31, 2020   March 31, 2020 
Production plant  $84,685   $67,247 
Motor vehicles   1,228,746    868,743 
Office equipment   23,243    19,471 
    1,336,674    955,461 
Less: accumulated depreciation   (442,286)   (370,442)
Plant and equipment, net  $894,388   $585,019 

 

F-10

 

 

During the nine months ended December 31, 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 old machinery with original cost of $19,303 and accumulated depreciation of $18,661, and two old motor truckers 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 nine months ended December 31, 2020 and 2019 was $32,051 and $27,648, $83,210 and $84,277, respectively.

 

9. 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 $153,172 (RMB1,000,000) for daily operations. The loans are guaranteed at no cost by the legal representative of HSW. As of December 31, 2020, the Company has borrowed $153,172 (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 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). The loan was transferred to the buyer with the disposal of DT on September 30, 2020.

 

10. 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 nine months ended December 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 three and nine months ended December 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 three and nine months ended December 31, 2020 and 2019.

 

F-11

 

 

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   Nine months ended 
   December 31,   December 31, 
   2020   2019   2020   2019 
PRC statutory tax rate   25%   25%   25%   25%
Computed expected benefits   (71,949)   (62,297)   (884,253)   (233,850)
Temporary differences   29,440    22,942    629,954    32,028 
Permanent difference   6,640    -    131,595    - 
Changes in valuation allowance   51,653    48,377    145,900    213,908 
Income tax expense  $15,784   $9,022   $23,196   $ 12, 086 

 

(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.

 

11. CONSOLIDATED SEGMENT DATA

 

Segment information is consistent with how chief operating decision maker reviews the businesses, makes investing and resource allocation decisions and assesses operating performance. The segment data presented reflects this segment structure. The Company reports financial and operating information in the following four segments:

 

  (a) Garment manufacturing. Including manufacturing and distribution of garments;
     
  (b) Logistics services. Providing logistic services; and

 

  (c) Epidemic prevention supplies. Including manufacturing, distribution and trading of epidemic prevention supplies.

 

  (d) Property management and subleasing. Providing shops subleasing and property management services for garment wholesalers and retailers in garment market.

 

The Company also provides general corporate services to its segments and these costs are reported as “Corporate and others”.

 

Selected information in the segment structure is presented in the following tables:

 

F-12

 

 

Revenues by segment for the three and nine months ended December 31, 2020 and 2019 are as follows:

 

   Three months ended
December 31,
   Nine months ended
December 31,
 
Revenues  2020   2019   2020   2019 
Garments manufacturing segment  $2,287,981   $2,643,560   $5,186,042   $3,517,009 
Logistics services segment   824,025    1,384,342    3,664,409    4,665,387 
Property management and subleasing   294,759    -    294,759    - 
Epidemic prevention supplies segment   4,787    -    11,868,854    - 
Total of reportable segments and consolidated revenue  $3,411,552   $4,027,902   $21,014,064   $8,182,396 

 

Income from operations by segment for the three and nine months ended December 31, 2020 and 2019 are as follows:

 

   Three months ended   Nine months ended 
   December 31,   December 31, 
   2020   2019   2020   2019 
Garment manufacturing segment  $98,905   $158,268)  $240,423   $187,803 
Logistics services segment   57,222   (176,350)   92,506    (168,634)
Property management and subleasing   5,966    -    5,966    - 
Epidemic prevention supplies   (201,147)   -    (3,297,265)   - 
Total of reportable segments   (39,054)   (18,082)   (2,958,370)   19,169 
Reconciliation – Corporate   (249,472)   (227,210)   (634,645)   (927,569)
Total consolidated loss from operations  $(288,526)  $(245,292)  $(3,593,015)  $(908,400)

 

Total assets by segment as at December 31, 2020 and March 31, 2020 are as follows:

 

Total assets  December 31, 2020   March 31, 2020 
Garment manufacturing segment  $2,628,877   $4,098,758 
Logistics services segment   1,877,949    2,422,140 
Property management and subleasing   9,993,744    - 
Epidemic prevention supplies   243,075    - 
Total of reportable segments   14,743,645    6,520,898 
Reconciliation – Corporate   2,534,719    1,901,080 
Consolidated total assets  $17,278,364   $8,421,978 

 

F-13

 

 

12. ACCRUED EXPENSES AND OTHER PAYABLES

 

Accrued expenses and other payables consist of the following as of December 31, 2020 and March 31, 2020:

 

   December 31, 2020   March 31, 2020 
Accrued wages and welfare   58,874    61,776 
Other tax payable   51,387    25,206 
Rental payable   52,833    24,972 
Customers’ deposits   210,785    - 
Other payables   37,437    118,963 
   $411,316   $230,917 

 

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 December 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.

 

The Company leases its head office. The lease period is 5 years with an option to extend the lease. The Company leases its plant and dormitory for 4.5 years with an option to extend the lease. The Company leased several floors in a commercial building for its sublease business for 3 years with an option to extend the lease.

 

The Following table summarizes the components of lease expense:

 

   Three months ended
December 31,
   Nine months ended
December 31,
 
   2020   2019   2020   2019 
Operating lease cost   444,162    126,053    668,883    325,664 
Short-term lease cost   -    6,445    -    70,231 
   $444,162   $132,498    668,883    395,895 

 

The following table summarizes supplemental information related to leases:

 

   Three months ended
December 31,
   Nine months ended
December 31,
 
   2020   2019   2020   2019 
Cash paid for amounts included in the measurement of lease liabilities                    
Operating cash flow from operating leases  $444,162   $132,498   $668,883   $395,895 
Right-of-use assets obtained in exchange for new operating leases liabilities   10,378,042    65,527    10,404,962    1,966,535 
Weighted average remaining lease term - Operating leases (years)   3.1    4.5    3.1    4.5 
Weighted average discount rate - Operating leases   4.35%   4.35%   4.35%   4.35%

 

The following table summarizes the maturity of operating lease liabilities:

 

Years ending December 31  Lease cost 
2021  $4,092,830 
2022   4,107,892 
2023   4,145,246 
2024   310,197 
Total lease payments   12,656,165 
Less: Interest   (1,051,639)
Total  $11,604,526 

 

F-14

 

 

14. 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.

 

15. DISPOSITION OF SUBSIDIARIES

 

The Company sold its subsidiary DT, a manufacturing company in garment manufacturing segment on October 1 to a third party and sold HPF, a subsidiary in logistics services segment in November 2020 to another third party. After disposition, the two subsidiaries became third parties to the Company. The Company will not have any businesses with the two subsidiaries nor the buyers. The business operations, customers and suppliers of DT and HPF were retained by the Company; therefore, the disposition of the two subsidiaries did not qualify as discontinued operations.  

 

Financial position of the entities at disposal date and gain or loss on disposal:

 

Garment Manufacturing Segment

 

Financial position of DT  September 30, 2020, date of disposal 
Current assets  $675,515 
Noncurrent assets   - 
Current liabilities   (70,742)
Net assets  $604,773 

 

The consideration was at the fair value as of date of disposal, which was also the carrying value of DT, resulting no gain or loss recognized on the disposal.

 

Logistics Services Segment

 

Financial position of HPF  November 16, 2020, date of disposal 
Current assets  $742,798 
Noncurrent assets   42,816 
Current liabilities   (567,454)
Net assets  $218,160 

 

The consideration was at the fair value as of date of disposal, which was also the carrying value of HPF, resulting no gain or loss recognized on the disposal.

 

F-15

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations for the three and nine months ended December 31, 2020 and 2019 should be read in conjunction with the Financial Statements and corresponding notes included in this Report on Form 10-Q. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors and Special Note Regarding Forward-Looking Statements in this report. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” “target”, “forecast” and similar expressions to identify forward-looking statements.

 

Overview

 

Our Business

 

We are a garment manufacturer and logistics services provider based in China. We are listed on the OTCQB under the symbol of “ATXG”. We classify our businesses into four segments: Garment manufacturing, Logistics services, Property management and subleasing, and Epidemic prevention supplies.

 

Our garment manufacturing business consists of sales made principally to wholesaler located in the People’s Republic of China (“PRC”). We have our own manufacturing facilities, with sufficient production capacity and skilled workers on production lines to ensure that we meet our high quality control standards and timely delivery requirement for our customers. We conduct our garment manufacturing operations through five wholly owned subsidiaries, namely Dongguan Heng Sheng Wei Garments Co., Ltd (“HSW”), Shantou Chenghai Dai Tou Garments Co., Ltd (“DT”), Dongguan Yushang Clothing Co., Ltd (“YS”), and Shantou Yi Bai Yi Garments Co., Ltd (“YBY”) which are located in the Guangdong province, China. In October, the Company disposed of DT to a third party at fair value, which was also its carrying value as of September 30, 2020.

 

Our logistic 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 logistics services operations through three wholly owned subsidiaries, namely Shenzhen Xin Kuai Jie Transportation Co., Ltd (“XKJ”), Shenzhen Yingxi Peng Fa Logistic Co., Ltd., which was incorporated in November 2020, and Shenzhen Hua Peng Fa Logistic Co., Ltd (“HPF”), which are located in the Guangdong province, China. In November, the Company disposed of HPF to a third party at fair value, which was also its carrying value as of November 30, 2020.

 

The business operations, customers and suppliers of DT and HPF were retained by the Company; therefore, the disposition of the two subsidiaries did not qualify as discontinued operations.

 

Our property management and subleasing provides shops subleasing and property management services for garment wholesalers and retailers in garment market. We conduct our property management and subleasing operation through a wholly owned subsidiary, namely Dongguan Yingxi Daying Commercial Co., Ltd (“DY”).

 

Our epidemic prevention supplies business consists of manufacturing and distribution of epidemic prevention products and resale of epidemic prevention supplies purchased from third party in both domestic and overseas markets. We conduct our manufacturing of the epidemic prevention products in Dongguan Yushang Clothing Co., Ltd (“YS”). We conduct the trading of epidemic prevention suppliers through Addentax Group Corp. (“ATXG”) and Shenzhen Qianhai Yingxi Industrial Chain Services Co., Ltd (“YX”), a wholly owned subsidiary of the Company.

 

Business Objectives

 

Garment Manufacturing Business

 

3

 

 

We believe the strength of our garment manufacturing business is mainly due to our consistent emphasis on exceptional quality and timely delivery of our products. The primary business objective for our garment manufacturing segment is to expand our customer base and improve our profit.

 

Logistics Services Business

 

The business objective and future plan for our logistics services segment is to establish an efficient logistic system and to build a nationwide delivery and courier network in China. As of December 31, 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 in the year end of 2021.

 

Property Management and Subleasing Business

 

The business objective of our property management and subleasing segment is to integrate resources in shopping mall, develop e-commerce bases and the Internet celebrity economy together to drive to increase the value of the stores in the area. The short-term goal for the year is to increase the occupancy rate of stores in the mall to more than 70%.

 

Epidemic Prevention Supplies Business

 

The primary objective of our epidemic prevention supplies business is to take the advantage of our resource in supply chain from the garment manufacturing business segment to facilitate and maximize the production, distribution and resale of epidemic prevention supplies, in order to increase our revenue base 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 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 segment.

 

Collection Policy

 

Garment manufacturing business

 

For our new customers, we generally require orders placed to be backed by advances or deposits. For our long-term and established customers with good payment track records, we generally provide payment terms between 30 to 180 days following their acknowledgement of receipt of goods.

 

Logistics services business

 

For logistics services, we generally receive payments from the customers between 30 to 90 days following the date of the registration of our receipt of packages.

 

Property management and subleasing business

 

For property management and subleasing business, we generally collect rental and management fees of the following month each month in advance.

 

Epidemic prevention supplies business

 

For 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.

 

4

 

 

Economic Uncertainty

 

Our business is dependent on consumer demand for our products and services. We believe that the significant uncertainty in the economy in China has increased our clients’ sensitivity to the cost of our products and services. We have experienced continued pricing pressure. If the economic environment becomes weak, the economic conditions could have a negative impact on our sales growth and operating margins, cash position and collection of accounts receivable. Additionally, business credit and liquidity have tightened in China. Some of our suppliers and customers may face credit issues and could experience cash flow problems and other financial hardships. These factors currently have not had an impact on the timeliness of receivable collections from our customers. We cannot predict at this time how this situation will develop and whether accounts receivable may need to be allowed for or written off in the coming quarters.

 

Despite the various risks and uncertainties associated with the current economy in China, we believe our core strengths will continue to allow us to execute our strategy for long-term sustainable growth in revenue, net income and operating cash flow.

 

Summary of Critical Accounting Policies

 

We have identified critical accounting policies that, as a result of judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operation involved could result in material changes to our financial position or results of operations under different conditions or using different assumptions.

 

Estimates and Assumptions

 

We regularly evaluate the accounting estimates that we use to prepare our financial statements. In general, management’s estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.

 

Revenue Recognition

 

Revenue is generated through sale of goods and delivery services. Revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amount of revenue that is recorded reflects the consideration that the Company expects to receive in exchange for those goods and services. The Company applies the following five-step model in order to determine this amount:

 

  (i) identification of the promised goods and services in the contract;
     
  (ii) determination of whether the promised goods and services are performance obligations, including whether they are distinct in the context of the contract;
     
  (iii) measurement of the transaction price, including the constraint on variable consideration;
     
  (iv) allocation of the transaction price to the performance obligations; and
     
  (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

 

5

 

 

The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. Once a contract is determined to be within the scope of ASC 606 at contract inception, the Company reviews the contract to determine which performance obligations the Company must deliver and which of these performance obligations are distinct. The Company recognizes as revenues the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied. Generally, the Company’s performance obligations are transferred to customers at a point in time, typically upon delivery.

 

For all reporting periods, the Company has not disclosed the value of unsatisfied performance obligations for all product and service revenue contracts with an original expected length of one year or less, which is an optional exemption that is permitted under the adopted rules.  

 

Leases

 

Lessee 

 

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities in our consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in the consolidated balance sheets.

 

ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the leases do not provide an implicit rate, The Company generally use the incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

 

Lessor 

 

As a lessor, the Company’s leases are classified as operating leases under ASC 842. Leases, in which the Company is the lessor, are substantially all accounted for as operating leases and the lease components and non-lease components are accounted for separately. Rental income from operating leases is recognized on a straight‑line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized on a straight‑line basis over the lease term. 

 

Recently issued accounting pronouncements

 

In 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.

 

Results of Operations for the three months ended December 31, 2020 and 2019

 

The following tables summarize our results of operations for the three months ended December 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.

 

   Three Months Ended December 31,   Increase (decrease) in 2020 
   2020 2019   compared to 2019 
   (In U.S. dollars, except for percentages)        
Revenue  $3,411,552    100.0%  $4,027,902    100%  $(616,350)   (15.3)%
Cost of revenues   (3,150,124)   (92.3)%   (3,746,040)   (93.0)%   595,916    (15.9)%
Gross profit   261,428    7.7%   281,862    7.0%   (20,434    (7.2)%
Operating expenses   (549,954)   (16.1)%   (527,154)   (13.1)%   (22,800)   4.3%
Loss from operations   (288,526)   (8.5)%   (245,292)   (6.1)%   (43,234)   17.6%
Other income, net   1,273    0.0%   66    (0.0)%   1,207)   1,828.8%
Net finance cost   (544)   (0.0)%   (3,964)   (0.1)%   3,420    (86.3)%
Income tax expense   (15,784)   (0.5)%   (9,022)   (0.2)%   (6,762)   75.0%
Net loss  $(303,581)   (8.9)%  $(258,212)   (6.4)%  $(45,369)   17.6%

 

Revenue

 

Revenue generated from our garment manufacturing business contributed $2,287,981 or 67.1% of our total revenue for the three months ended December 31, 2020. Revenue generated from our garment manufacturing business contributed $2,643,560 or 65.6% of our total revenue for the three months ended December 31, 2019. The decrease of $0.4 million was mainly due to adverse effects of COVID-19.

 

6

 

 

Revenue generated from our logistics services business contributed $824,025 or 24.2% of our total revenue for the three months ended December 31, 2020. Revenue generated from our logistic business contributed $1,384,342 or 34.4% of our total revenue for the three months ended December 31, 2019. The decrease of $0.6 million mainly because of the adverse effects of COVID-19, we cannot smoothly go through the logistics business.

 

Revenue generated from our property management and subleasing business contributed $294,759 or 8.6% of our total revenue for the three months ended December 31, 2020. This is a new business segment developed in current period and there was no revenue for the three months ended December 31, 2019.

 

There was minor revenue generated from our epidemic prevention supplies business for the three months ended December 31, 2020 because no profitable orders were obtained in the quarter. The Company accepted sales orders very cautiously to make sure the sales orders can be matched with stable suppliers to secure profitability of each order. This is a new business developed and there was no revenue for the three months ended December 31, 2019.

 

Total revenue for the three months ended December 31, 2020 and 2019 were $3,411,552 and $4,027,902, respectively, a 15.3% decrease compared with the three months ended December 31, 2019. The decrease was mainly because of the decrease of logistics services business which was adversely affected by the COVID-19.

 

Cost of revenue

 

   Three months ended December 31,   Increase
(decrease) in
 
   2020   2019   2020 compared to 2019 
   (In U.S. dollars, except for percentages)         
Net revenue for garment manufacturing  $2,287,981    100.0%  $2,643,560    100%  $(355,579)   (13.5)%
Raw materials   1,620,775    70.8%   1,946,455    73.6%   (325,680)   (16.7)%
Labor   467,478    20.4%   469,268    17.8%   (1,790)   (0.4)%
Other and Overhead   16,747    0.7%   21,934    0.8%   (5,187)   (23.6)%
Total cost of revenue for garment manufacturing   2,105,000    92.0%   2,437,657    92.2%   (332,657)   (13.6)%
Gross profit for garment manufacturing   182,981    8.0%   205,903    7.8%   (22,922)   (11.1)%
                        0      
Net revenue for logistics services   824,025    100.0%   1,384,342    100.0%   (560,317)   (40.5)%
Fuel, toll and other cost of logistics services   482,568    58.6%   464,583    33.5%   17,985    3.9%
Subcontracting fees   85,766    10.4%   843,800    61.0%   (758,034)   (89.8)%
Total cost of revenue for logistics services   568,334    69.0%   1,308,383    94.5%   (740,049)   (56.6)%
Gross Profit for logistics services   255,691    31.0%   75,959    5.5%   179,732    236.6%
                               
Net revenue for property management and subleasing   294,759    100.0%   -    -    294,759      
Total cost of revenue for property management and subleasing   272,759    92.5%   -    -    272,759      
Gross Profit for property management and subleasing   22,000    7.5%   -    -    22,000      
                               
Net revenue for epidemic prevention supplies  $4,786    100.0%  $-    -    4,786      
Merchandise/Finished goods/Raw materials   4,030    84.2%   -    -    4,030      
Total cost of revenue for epidemic prevention supplies   4,030    84.2%   -    -    4,030      
Gross profit for epidemic prevention supplies   756    15.8%   -    -    756      
Total cost of revenue  $2,950,123    125.9%  $3,746,040    93.0%  $(795,917)   (21.2)%
Gross profit  $461,428    (25.9)%  $281,862    7.0%  $179,566    63.7%

 

7

 

 

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 100.0% and 98.7% of raw materials purchases for the three months ended December 31, 2020 and 2019, respectively. One supplier provided more than 10% of our raw materials purchases for the three months ended December 31, 2020 and 2019. 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 were 70.8% of our total garment manufacturing business revenue in the three months ended December 31, 2020, compared with 73.6% in the three months ended December 31, 2019. The decreased in percentages was mainly due to the purchase cost of the raw materials dropped.

 

Labor costs for our garment manufacturing business were 20.4% of our total garment manufacturing business revenue in the three months ended December 31, 2020, compared with 17.8% in the three months ended December 31, 2019. The increase in percentages was mainly due to the rising wages in the PRC.

 

Overhead and other expenses for our garment manufacturing business accounted for 0.7% of our total garment business revenue for the three months ended December 31, 2020, compared with 0.8% of total garment business revenue for the three months ended December 31, 2019.

 

For our logistic 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 approximately 10.4% and 61.0% of total cost of revenues for our service segment for the three months ended December 31  , 2020 and 2019, respectively. The percentage decreased as we used our own logistics more than the subcontractors under COVID-19 epidemic. We have not experienced any disputes with our subcontractor and we believe we maintain good relationships with our contract logistics services provider.

 

Fuel, toll and other costs for our service business for the three months ended December 31, 2020 were $482,568 compared with $464,583 for the three months ended December 31, 2019. Fuel, toll and other costs for our service business accounted for 58.6% of our total service revenue for the three months ended December 31, 2020, compared with 33.5% for the three months ended December 31, 2019. The increase in percentages was primarily attributable to decrease of use of subcontractors under the epidemic circumstance.

 

Subcontracting fees for our service business for the three months ended December 31, 2020 decreased 89.8% to $85,766 from $843,800 for the three months ended December 31, 2019. Subcontracting fees accounted for 10.4% and 61.0% of our total service business revenue in the three months ended December 31, 2020 and 2019, respectively. This decrease in percentages was primarily because the Company used less subcontractors under the epidemic circumstance.

 

8

 

 

For property management and subleasing business, the cost of revenue was mainly the amortization of operating lease assets for the subleasing business.

 

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 $4,030, represented 84.2% of total cost of revenue of the epidemic prevention supplies business.

 

Total cost of revenue for the three months ended December 31, 2020 was $2,950,123, compared with the amount of $3,746,040 for the three months ended December 31, 2019. Total cost of sales as a percentage of total sales for the three months ended December 31, 2020 was 86.5%, compared with 93.0% for the three months ended December 31, 2019. Gross margin for the three months ended December 31, 2020 was 13.5% compared with 7.0% for the three months ended December 31, 2019.

 

Gross profit

 

Garment manufacturing business gross profit for the three months ended December 31, 2020 was $182,981 compared with $205,903 for the three months ended December 31, 2019. Gross profit accounted for 8.0% of our total Garment manufacturing business revenue for the three months ended December 31, 2020, compared with 7.8% for the three months ended December 31, 2019. The gross margin was slightly the same for both periods.

 

Gross profit in our logistics services business for the three months ended December 31, 2020 was $255,691 and gross margin was 31.0%. Gross profit in our logistics services business for the three months ended December 31, 2019 was $75,959 and gross margin was 5.5%. The increase of gross margin was mainly due to use less subcontractors, strict control of logistic cost and focus on high profitable customers.

 

Gross profit in our property management and subleasing business for the three months ended December 31, 2020 was $22,000, or 7.5% of our total property management and subleasing business revenue. This is a new business developed in current period.

 

Gross profit in our epidemic prevention supplies business for the three months ended December 31, 2020 was $756.

 

   Three months ended December 31,  

Increase

(decrease) in

 
   2020   2019   2020 compared to 2019 
   (In U.S. dollars, except for percentages)         
Gross profit  $461,428    100%  $281,862    100%   179,566    63.7%
Operating expenses:                              
Selling expenses   (217,942)   (47.2)%   (960)   (0.3)%   (216,982)   22,602.3%
General and administrative expenses   (532,012)   (115.3)%   (526,194)   (186.7)%   (5,818)   1.1%
Total  $(749,954)   (162.5)%  $(527,154)   (187.0)%   (222,800)   42.3%
Loss from operations  $(288,526)   (62.5)%  $(245,292)   (87.0)%   (43,234)   17.6%

 

Selling, General and administrative expenses

 

Our selling expenses in our Garment manufacturing business segment for the three months ended December 31, 2020 and 2019 was $883 and $960, respectively. Our selling expenses in our logistics services segment was $nil for the three months ended December 31, 2020 and 2019, respectively. Selling expenses in our property management and subleasing business was $15,490 and nil for the three months ended December 31, 2020 and 2019, respectively. Selling expenses in our epidemic prevention supplies segment was $201,569 and nil for the three months ended December 31, 2020 and 2019, respectively. The selling expense for the three months ended December 31, 2020 mainly was consist of $200,000 free goods to customers as a marketing expense. Selling expenses consist primarily of advertisement, local transportation, unloading charges and product inspection charges. Total selling expenses for the three months ended December 31, 2020 increased 22.6 times to $217,942 from $960 for the three months ended December 31, 2019. It was mainly due to increase of marketing expenses of epidemic prevention supplies business and the marketing expenses in the new property management and subleasing business segment.

 

Our general and administrative expenses in our Garment manufacturing business segment for the three months ended December 31, 2020 and 2019 was $83,188 and $46,675, respectively. Our general and administrative expenses in our logistics services segment, for the three months ended December 31, 2020 and 2019 was $198,469 and $252,309, respectively. The general and administrative expenses in our property management and subleasing business was $544 for the three months ended December 31, 2020. Our general and administrative expenses in our epidemic prevention supplies segment was $338 for the three months ended December 31, 2020. Our general and administrative expenses in our corporate office for the three months ended December 31, 2020 and 2019 was $249,473 and $227,210, 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.

 

9

 

 

Total general and administrative expenses for the three months ended December 31, 2020 increased slightly by 1.1% to $532,012 from $526,194 for the three months ended December 31, 2019.

 

Income (loss) from operations

 

Loss from operations for the three months ended December 31, 2020 and 2019 was $288,526 and $245,292, respectively. Income from operations of $98,905 and $158,268 was attributed from our garment manufacturing segment for the three months ended December 31, 2020 and 2019, respectively. Income (loss) from operations of $57,222 and $(176,350) was attributed from our logistics services segment for the three months ended December 31, 2020 and 2019, respectively. Income from operations of $5,966 was attributed from our newly developed property management and subleasing business. Loss from operations of $(201,147) was attributed from our epidemic prevention supplies segment for the three months ended December 31, 2020. We incurred a loss from operations in corporate office of $249,472 and $227,210   for the three months ended December 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, disclosure and reporting requirements.

 

Income Tax Expenses

 

Income tax expense for the three months ended December 31, 2020 and 2019 was $15,784 and $9,022, respectively, a 74.9% 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 three months ended December 31, 2020 and 2019.

 

QYTG and YX were incorporated in the PRC and is subject to the PRC Enterprise Income Tax (EIT) rate is 25%. No provision for income taxes in the PRC has been made as QYTG and YX had no taxable income for the three months ended December 31, 2020 and 2019.

 

The Company is governed by the Income Tax Laws of the PRC. All Yingxi’s operating companies are subject to progressive EIT rates from 5% to 15% in 2020. The preferential tax rates 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 a U.S entity and is subject to the United States federal income tax. No provision for income taxes in the United States has been made as Addentax Group Corp. had no United States taxable income for the three months ended December 31, 2020 and 2019.

 

Net Loss

 

We incurred a net loss of $303,581 and $258,212 for the three months ended December 31, 2020 and 2019, respectively. Our basic and diluted loss per share were $(0.01) and $(0.01) for the three months ended December 31, 2020 and 2019, respectively.

 

10

 

 

Results of Operations for the nine months ended December 31, 2020 and 2019

 

The following tables summarize our results of operations for the nine months ended December 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.

 

   Nine months Ended December 31,   Increase (decrease) in 
   2020   2019   2020 compared to 2019 
   (In U.S. dollars, except for percentages)         
Revenue  $21,014,064    100.0%  $8,182,396    100%  $12,831,668    156.8%
Cost of revenues   (22,776,087)   (108.4)%   (7,221,683)   (88.3)%   15,554,404    215.4%
Gross profit   (1,762,023)   (8.4)%   960,713    11.7%   (2,722,736)   (283.4)%
Operating expenses   (1,830,992)   (8.7)%   (1,869,113)   (22.8)%   (38,121)   (2.0)%
(Loss) Income from operations   (3,593,015)   (17.1)%   (908,400)   (11.1)%   (2,684,615)   (295.5)%
Other income, net   62,489    0.3%   (10,753)   (0.1)%   73,242    681.1%
Net finance cost   (6,484)   0.0%   (16,246)   (0.2)%   (9,762)   (60.1)%
Income tax expense   (23,196)   (0.1)%   (12,086)   (0.1)%   11,110    91.9%
Net loss  $(3,560,206)   (16.9)%  $(947,485)   (11.6)%  $(2,612,721)   (275.8)%

 

Revenue

 

Revenue generated from our garment manufacturing business contributed $5,186,042 or 24.7% of our total revenue for the nine months ended December 31, 2020. Revenue generated from our garment manufacturing business contributed $3,517,009 or 34.0% of our total revenue for the nine months ended December 31, 2019. The increase of $1.7 million was mainly because revenue in production capacity increased from newly setup subsidiary YBY.

 

Revenue generated from our logistic business contributed $3,664,409 or 17.4% of our total revenue for the nine months ended December 31, 2020. Revenue generated from our logistic business contributed $4,665,387 or 57.0% of our total revenue for the nine months ended December 31, 2019. The decrease mainly due to adverse effects from COVID-19, we cannot smoothly go through the logistics business.

 

Revenue generated from our property management and subleasing business contributed $294,759 or 1.4% of our total revenue for the nine months ended December 31, 2020. This is a new business segment developed in current period and there was no revenue for the nine months ended December 31, 2019.

 

Revenue generated from our epidemic prevention supplies business contributed $11,868,854, or 56.5% of our total revenue for the nine months ended December 31, 2020. This is a new business developed in the current period. It included revenue from trading of merchandise and revenue from sales of our own products. The revenue from trading of merchandise was $11,791,672, representing 99.3% of total revenue from the epidemic prevention suppliers business.

 

Total revenue for the nine months ended December 31, 2020 and 2019 were $21,014,064 and $ 8,182,396, respectively, a 156.8% increase compared with the nine months ended December 31, 2019. The increase was mainly because the increase of garment manufacturing production capacity in YBY, a newly setup subsidiary, and the epidemic prevention supplies business newly developed in current period.

 

11

 

 

Cost of revenue

 

   Nine months ended December 31,   Increase (decrease) in     
   2020   2019  

2020 compared to

2019

     
   (In U.S. dollars, except for percentages)         
Net revenue for garment manufacturing  $5,186,042    100.0%  $3,517,009    100.0%  $1,669,034    47.5%
Raw materials   3,709,275    71.5%   2,551,508    72.5    1,157,767    45.4%
Labor   1,030,350    19.9%   570,182    16.2    460,169    80.7%
Other and Overhead   30,918    0.6%   53,992    1.5    (23,074)   (42.7)%
Total cost of revenue for garment manufacturing   4,770,543    92.0%   3,175,682    90.3%   1,594,862    50.2%
Gross profit for garment manufacturing   415,499    8.0%   341,327    9.7%   74,172    21.7%
                               
Net revenue for logistics services   3,664,409    100.0%   4,665,387    100.0%   (1,000,979)   (21.5)%
Fuel, toll and other cost of logistics services   1,367,753    37.3%   1,385,870    29.7%   (18,117)   (1.3)%
Subcontracting fees   1,576,228    43.0%   2,660,131    57.0%   (1,083,904)   (40.7)%
Total cost of revenue for logistics services   2,943,981    80.3%   4,046,001    86.7%   (1,102,021)   (27.2)%
Gross Profit for logistics services   720,428    19.7%   619,386    13.3%   101,042    16.3%
                               
Net revenue for property management and subleasing   294,759    100.0%   -    -    294,759      
Total cost of revenue for property management and subleasing   272,759    92.5%   -    -    272,759      
Gross Profit for property management and subleasing   22,000    7.5%   -    -    22,000      
                               
Net revenue for epidemic prevention supplies  $11,868,854    100%  $-    -%  $11,868,854      
Merchandise/Finished goods/Raw materials   14,684,284    123.8%   -    -%   14,684,284      
Labor   64,946    0.5%   -    -%   64,946      
Other and Overhead   39,574    0.3%   -    -%   39,574      
Total cost of revenue for epidemic prevention supplies   14,788,804    124.6%   -    -%   14,788,804      
Gross profit for epidemic prevention supplies   (2,919,950)   (24.6)%   -    -    (2,919,950)     
Total cost of revenue  $22,776,087    108.4%  $7,221,683    88.3%  $15,554,404    215.4%
Gross profit  $(1,762,023)   (8.4)%  $960,713    11.7%  $(2,722,736)   (283.4)%

 

12

 

 

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 97.7% and 91.2% of raw materials purchases for the nine months ended December 31, 2020 and 2019, respectively. One suppliers provided more than 10% of our raw materials purchases for both nine months ended December 31, 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 were 71.5% of our total garment manufacturing business revenue in the nine months ended December 31, 2020, compared with 72.5% in the nine months ended December 31, 2019. The decreased in percentages was mainly due to the purchase cost of the raw materials dropped.

 

Labor costs for our garment manufacturing business were 19.9% of our total garment manufacturing business revenue in the nine months ended December 31, 2020, compared with 16.2% in the nine months ended December 31, 2019. The increase in percentages was mainly due to the rising wages in the PRC.

 

Overhead and other expenses for our garment manufacturing business accounted for 0.6% of our total garment manufacturing business revenue for the nine months ended December 31, 2020, compared with 1.5% of total garment manufacturing business revenue for the nine months ended December 31, 2019.

 

For our logistic 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 approximately 43.0% and 57.0% of total cost of revenues for our service segment for the nine months ended December 31, 2020 and 2019, respectively. The percentage decreased as we used less subcontractors during the COVID-19 epidemic circumstance. We have not experienced any disputes with our subcontractor and we believe we maintain good relationships with our contract logistics services provider.

 

Fuel, toll and other costs for our service business for the nine months ended December 31, 2020 were $1,367,753 compared with $1,385,870 for the nine months ended December 31, 2019. Fuel, toll and other costs for our service business accounted for 37.3% of our total service revenue for the nine months ended December 31, 2020, compared with 29.7% for the nine months ended December 31, 2019. The increase in percentages was primarily attributable to decrease of use of subcontractors under the epidemic circumstance.

 

Subcontracting fees for our service business for the nine months ended December 31, 2020 decreased 40.7% to $1,576,228 from $2,660,132 for the nine months ended December 31, 2019. Subcontracting fees accounted for 43.0% and 57.0% of our total service business revenue in the nine months ended December 31, 2020 and 2019, respectively. This decrease in percentages was primarily because the Company used less subcontractors under the epidemic circumstance.

 

For property management and subleasing business, the cost of revenue was mainly the amortization of operating lease assets for the subleasing business.

 

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 $14,684,284, represented 99.3% of total cost of revenue of the epidemic prevention supplies business.

 

Total cost of revenue for the nine months ended December 31, 2020 was $22,776,087, compared with the amount of $7,221,683 for the nine months ended December 31, 2019. Total cost of sales as a percentage of total sales for the nine months ended December 31, 2020 was 108.4%, compared with 88.3% for the nine months ended December 31, 2019. Gross (loss) margin for the nine months ended December 31, 2020 was (8.4)% compared with 11.7% for the nine months ended December 31, 2019.

 

13

 

 

Gross profit

 

Gross profit of Garment manufacturing business for the nine months ended December 31, 2020 was $415,499 compared with $341,327 for the nine months ended December 31, 2019. Gross profit accounted for 8.0% of our total Garment manufacturing business revenue for the nine months ended December 31, 2020, compared with 9.7% for the nine months ended December 31, 2019. The decrease of gross margin was due to increase of labor cost.

 

Gross profit in our logistics services business for the nine months ended December 31, 2020 was $720,428 and gross margin was 19.7%. Gross profit in our logistics services business for the nine months ended December 31, 2019 was $619,386 and gross margin was 13.3%.

 

Gross profit in our property management and subleasing business for the nine months ended December 31, 2020 was $22,000, or 7.5% of our total property management and subleasing business revenue. This is a new business developed in current period.

 

Gross loss in our epidemic prevention supplies business for the nine months ended December 31, 2020 was $2,919,950 and gross margin was (24.6)%. The large lost was mainly because the cost of materials increased significantly and rapidly while the selling price was fixed in the sales agreement with the customers.

 

   Nine months ended December 31,  

Increase

(decrease) in

 
   2020   2019  

2020 compared to 2019

 
   (In U.S. dollars, except for percentages)         
Gross (loss) profit  $(1,762,023)   100%  $960,713    100%   (2,722,736)   (283.4)%
Operating expenses:                              
Selling expenses   (376,975)   21.4%   (11,825)   (1.2)%   365,150    3,087.8%
General and administrative expenses   (1,454,017)   82.5%   (1,857,288)   (193.3)%   (403,271)   (21.7)%
Total  $(1,830,992)   103.9%  $(1,869,113)   (194.6)%   (38,121)   (2.0)%
Loss from operations  $(3,593,015)   203.9%  $(908,400)   (94.6)%   2,684,615    295.5%

 

Selling, General and administrative expenses

 

Our selling expenses in our Garment manufacturing business segment for the nine months ended December 31, 2020 and 2019 was $2,606 and $11,826, respectively. Our selling expenses in our logistics services segment was $nil for the nine months ended December 31, 2020 and 2019, respectively. Selling expenses in our property management and subleasing business was $15,490 and nil for the nine months ended December 31, 2020 and 2019, respectively. Selling expenses in our epidemic prevention supplies segment was $358,879 for the nine months ended December 31, 2020. Selling expenses consist primarily of advertisement, local transportation, unloading charges and product inspection charges. Total selling expenses for the nine months ended December 31, 2020 increased 30.9 times to $376,975 from $11,825 for the nine months ended December 31, 2019, mainly due to the selling and marketing expenses in the newly developed epidemic prevention supplies segment and property management and subleasing segment.

 

Our general and administrative expenses in our Garment manufacturing business segment for the nine months ended December 31, 2020 and 2019 was $172,138 and $141,698, respectively. Our general and administrative expenses in our logistics services segment, for the nine months ended December 31, 2020 and 2019 was $627,922 and $788,021, respectively. The general and administrative expenses in our property management and subleasing business was $544 for the nine months ended December 31, 2020. Our general and administrative expenses in our epidemic prevention supplies segment was $18,767 for the nine months ended December 31, 2020. Our general and administrative expenses in our corporate office for the nine months ended December 31, 2020 and 2019 was $634,645 and $927,569, 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.

 

14

 

 

Total general and administrative expenses for the nine months ended December 31, 2020 decreased 21.7% to $1,454,017 from $1,857,288 for the nine months ended December 31, 2019. The amount was $403,271 higher than in the nine months ended December 31, 2019 was mainly due to the professional fees for Form S1 filing.

 

Income (loss) from operations

 

Loss from operations for the nine months ended December 31, 2020 and 2019 was $(3,593,015) and $(908,400), respectively. Income from operations of $240,423 and $187,803 was attributed from our garment manufacturing segment for the nine months ended December 31, 2020 and 2019, respectively. Income (loss) from operations of $92,506 and $(168,634) was attributed from our logistics services segment for the nine months ended December 31, 2020 and 2019, respectively. Income from operations of $5,966 was attributed from our newly developed property management and subleasing business for the nine months ended December 31, 2020. Loss from operations of $3,297,265   was attributed from our epidemic prevention supplies segment for the nine months ended December 31, 2020. We incurred a loss from operations in corporate office of $634,645 and $927,569   for the nine months ended December 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, disclosure and reporting requirements.

 

Income Tax Expenses

 

Income tax expense for the nine months ended December 31, 2020 and 2019 was $23,196 and $12,086, respectively, a 91.9% 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, HXPF, HPF and YS had no taxable income for the nine months ended December 31, 2020 and 2019.

 

Net Income (Loss)

 

We incurred a net loss of $3,560,206 and $947,485 for the nine months ended December 31, 2020 and 2019, respectively. Our basic and diluted (loss) per share were $(0.14) and $(0.04) for the nine months ended December 31, 2020 and 2019, respectively.

 

Summary of cash flows

 

Summary cash flows information for the nine months ended December 31, 2020 and 2019 is as follow:

 

   Nine months ended December 31, 
   2020   2019 
   (In U.S. dollars) 
Net cash used in operating activities  $(3,782,116)  $(1,058,936)
Net cash used in investing activities  $(1,094,344)  $(94,864)
Net cash provided by financing activities  $4,718,213   $1,306,400 

 

Net cash used in operating activities consist of net loss of $3,560,206, increased by depreciation and amortization of $83,210, loss on disposal of property and equipment of $1,472, and decrease in change of operating assets and liabilities of $306,592. We will continue to improve our operating cash flow by closely monitoring the timely collection of accounts and other receivables. We generally do not hold any significant inventory for more than ninety days, as we typically manufacture upon customers’ order.

 

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Net cash used in investing activities consist of purchase of plant and equipment of $392,108 and proceeds from disposal of plant and equipment of $2,243, and cash decreased of $704,479 in disposal of two subsidiaries.

 

Net cash provided by financing activities consist of repayment of related party borrowings of $6,605,044 and we received related party proceeds of $7,697,827; Repayment of bank loan of $196,456 and draw down of new bank loan of $86,886; and Proceeds of $3,735,000 from subscription of ordinary shares offered to a shareholder.

 

Financial Condition, Liquidity and Capital Resources

 

As of December 31, 2020, we had cash on hand of $356,728, total current assets of $4,779,450 and current liabilities of $12,661,861. We presently finance our operations primarily from cash flows from borrowings from related parties and third parties. We also raised equity fund of $3,735,000 by 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 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 December 31, 2020, the market foreign exchange rate had decreased to RMB 6.53 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 nine months ended December 31, 2020 and 2019 was $(85,728) and $(50,440), (173,879) and $58,715, respectively.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements (as that term is defined in Item 303(a)(4)(ii) of Regulation S-K) as of December 31, 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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Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable to smaller reporting companies.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of December 31, 2020. Based on the evaluation of these disclosure controls and procedures, and in light of the material weaknesses found in our internal controls over financial reporting, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective.

 

Changes in Internal Controls over Financial Reporting

 

There was no change in the Company’s internal control over financial reporting period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We are not presently a party to any legal proceedings that in the opinion of our management, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition, or cash flows.

 

Item 1A. Risk Factors

 

As a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act), we are not required to provide the information called for by this Item 1A.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None. 

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

 

Item 5. Other Information

 

There is no other information required to be disclosed under this item, which was not previously disclosed.

 

Item 6. Exhibits

 

Exhibit

Number

  Description
(31)   Rule 13a-14 (d)/15d-14d) Certifications
31.1*   Section 302 Certification by the Principal Executive Officer
31.2*   Section 302 Certification by the Principal Financial Officer and Principal Accounting Officer
(32)   Section 1350 Certifications
32.1*   Section 906 Certification by the Principal Executive Officer
32.2*   Section 906 Certification by the Principal Financial Officer and Principal Accounting Officer
101*   Interactive Data File
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

*Filed herewith.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Addentax Group Corp.
     
Date: February 22, 2021 By: /s/ Hong Zhida
    Hong Zhida
    President, Chief Executive Officer and Director,
    (Principal Executive Officer)
     
Date: February 22, 2021 By: /s/ Huang Chao
    Huang Chao
    Chief Financial Officer and Treasurer
    (Principal Financial and Accounting Officer)

 

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