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ATXG Addentax

Filed: 14 Aug 20, 6:45am

 

 

 

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: June 30, 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 [  ]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 August 14, 2020, there were 25,346,004 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 Operations3
   
Item 3.Quantitative and Qualitative Disclosures About Market Risk12
   
Item 4.Controls and Procedures12
   
 PART II – OTHER INFORMATION 
   
Item 1.Legal Proceedings14
   
Item 1A.Risk Factors15
   
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds15
   
Item 3.Defaults Upon Senior Securities15
   
Item 4.Mine Safety Disclosures15
   
Item 5.Other Information15
   
Item 6.Exhibits15

 

2

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements and Supplementary Data

 

ADDENTAX GROUP CORP.

 

FINANCIAL STATEMENTS

 

For the three months ended June 30, 2020 and 2019

 

TABLE OF CONTENTS

 

Consolidated Balance sheets as of June 30, 2020 (unaudited) and March 31, 2020 (audited)F-2
Consolidated Statements of Income and Comprehensive Income for the three months ended June 2020 and 2019 (unaudited)F-3
Consolidated Statements of Changes in Equity for the three months ended June 30, 2020 and 2019F-4
Consolidated Statements of Cash Flows for the three months ended June 30, 2020 and 2019 (unaudited)F-5
Notes to Consolidated Financial Statements for the three months ended June 30, 2020 and 2019F-6 – F-19

 

F-1 

 

 

ADDENTAX GROUP CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

AS OF JUNE 30, 2020 (UNAUDITED) AND MARCH 31, 2020 (AUDITED)

 

  Note  June 30, 2020  March 31, 2020 
     (unaudited)  (audited) 
ASSETS            
             
CURRENT ASSETS            
Cash and cash equivalents     $1,549,409  $531,681 
Accounts receivables, net  4   1,676,946   4,500,116 
Inventories, net  7   596,793   347,531 
Other receivables  5   146,252   231,974 
Advances to suppliers  8   558,418   389,940 
Total current assets      4,527,818   6,001,242 
             
NON-CURRENT ASSETS            
Plant and equipment, net  9   692,490   585,019 
Operating lease right of use asset  14   1,713,385   1,835,717 
Total non-current assets      2,405,875   2,420,736 
TOTAL ASSETS     $6,933,693  $8,421,978 
             
LIABILITIES AND EQUITY            
             
CURRENT LIABILITIES            
Short-term loan  10  $353,854  $353,114 
Accounts payable      1,532,905   3,620,583 
Amount due to related parties  6   5,796,059   5,429,440 
Advances from customers      164,486   18,931 
Accrued expenses and other payables  13   240,283   230,917 
Lease liabilities, current portion  14   428,198   443,543 
Total current liabilities      8,515,785   10,096,528 
             
NON-CURRENT LIABILITIES            
Operating lease liability, net of current portion  14   1,285,187   1,392,174 
Total non-current liabilities      1,285,187   1,392,174 
TOTAL LIABILITIES     $9,800,972  $11,488,702 
             
COMMITMENTS AND CONTINGENCIES  17         
             
EQUITY            
Common stock ($0.001 par value, 25,346,004 shares issued and outstanding for the three months ended June 30, 2020 and 2019 respectively)     $25,346  $25,346 
Additional paid-in capital      61,050   61,050 
Retained earnings      (3,029,222)  (3,233,122)
Statutory reserve  15   23,514   23,514 
Accumulated other comprehensive loss  15   52,033   (56,488)
Total deficit      (2,867,279)  (3,066,724)
TOTAL LIABILITIES AND EQUITY     $6,933,693  $8,421,978 

 

See accompany notes to the consolidated financial statements.

 

F-2 

 

 

ADDENTAX GROUP CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

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

FOR THE THREE MONTHS ENDED JUNE 30, 2020 AND 2019

 

     For the three months ended June 30, 
  Note  2020  2019 
     (unaudited)  (unaudited) 
REVENUES     $5,918,215  $2,209,492 
             
COST OF REVENUES      (5,120,576)  (1,851,560)
             
GROSS PROFIT      797,639   357,932 
             
OPERATING EXPENSES            
Selling and marketing      (153,245)  (7,227)
General and administrative      (455,962)  (704,446)
Total operating expenses      (609,207)  (711,673)
             
INCOME (LOSS) FROM OPERATIONS      188,432   (353,741)
             
FINANCE COST, NET      (4,918)  (4,390)
             
OTHER INCOME/(EXPENSES)      23,745   (7,005)
             
INCOME (LOSS) BEFORE INCOME TAX EXPENSE      207,259   (365,136)
             
INCOME TAX EXPENSE  11   (3,359)  (2,212)
             
NET INCOME (LOSS)      203,900   (367,348)
Foreign currency translation gain or loss  15   (4,455)  37,002 
TOTAL COMPREHENSIVE INCOME (LOSS)     $199,445  $(330,346)
             
EARNINGS (LOSS) PER SHARE            
Basic and diluted      0.01   (0.00)
Weighted average number of shares outstanding – Basic and diluted      25,346,004   25,346,004 

 

See accompany notes to the consolidated financial statements.

 

F-3 

 

 

ADDENTAX GROUP CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

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

FOR THE THREE MONTHS ENDED JUNE 30, 2020(UNADUDITED) AND 2019 (AUDITED)

 

  Common Stock  Additional  Retained earnings  Accumulated other    
  Shares  Amount  

paid-in

capital

  Unrestricted  Statutory reserve  comprehensive loss  Total Equity 
BALANCE AT MARCH 31, 2019  25,346,004  $25,346  $61,050  $(1,775,767) $21,779  $(34,955) $(1,702,547)
Transfer to Statutory reserve  -   -   -   -   -   -   - 
Foreign currency translation  -   -   -   -   -   37,003   37,003 
Net loss for the period  -   -   -   (367,348)  -   -   (367,348)
BALANCE AT JUNE 30, 2019  25,346,004  $25,346  $61,050  $(2,143,115) $21,779  $2,048) $(2,032,892)
                             
BALANCE AT MARCH 31, 2020  25,346,004  $25,346  $61,050  $(3,233,122) $23,514  $56,488  $(3,066,724)
Transfer to Statutory reserve  -   -   -   -   -   -   - 
Foreign currency translation  -   -   -   -   -   (4,455)  (4,455)
Net loss for the period  -   -   -   203,900   -   -   203,900 
BALANCE AT JUNE 30, 2020  25,346,004  $25,346  $61,050  $(3,029,222) $23,514  $52,033  $(2,867,279)

 

See accompany notes to the consolidated financial statements.

 

F-4 

 

 

ADDENTAX GROUP CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

FOR THE THREE MONTHS ENDED JUNE 30, 2020 AND 2019

 

  2020 (unaudited)  2019 (unaudited) 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net income $203,900  $(367,348)
Adjustments to reconcile net income to net cash used in operating activities:        
Depreciation  23,473   28,699 
Loss on disposal of plant and equipment  4,947   3,390 
Changes in operating assets and liabilities:        
(Increase) decrease in:        
Accounts receivable  2,823,170   50,621 
Inventories  (249,262)  (94,496)
Advances to suppliers  (168,478)  103,672 
Other receivables  85,722   81,656 
Accounts payables  (2,087,678)  (282,914)
Accrued expenses and other payables  17,042  198,354 
Advances from customers  145,555   (50,403)
Net cash provided by (used in) operating activities $798,391  $(328,769)
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Purchase of plant and equipment  (143,148)  (90,140)
Net cash used in investing activities $(143,148) $(90,140)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Proceeds from related party borrowings  3,302,608   650,679 
Repayment of related party borrowings  (2,942,222)  (209,699)
Net cash provided by financing activities $360,386  $440,980 
         
NET INCREASE IN CASH AND CASH EQUIVALENTS  1,015,629   22,071 
Effect of exchange rate changes on cash and cash equivalents  2,099   (766)
Cash and cash equivalents, beginning of the period  531,681   277,264 
CASH AND CASH EQUIVALENTS, END OF THE PERIOD $1,549,409  $298,569 
         
Supplemental disclosure of cash flow information:        
Cash paid during the year for interest  3,765   3,912 
Cash paid during the year for income tax  3,359   2,212 
Supplemental disclosure of non-cash investing and financing activities:        
Right-of-use assets obtained in exchange for operating lease obligations  -   551,117 

 

See accompany notes to the consolidated financial statements.

 

F-5 

 

 

ADDENTAX GROUP CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JUNE 30, 2020 AND 2019

 

1.ORGANIZATION AND BUSINESS ACQUISITIONS

 

Addentax Group Corp. (“ATXG”) was incorporated in Nevada on October 28, 2014, and before the transaction described below, ATXG is engaged in the field of producing images on multiple surfaces using heat transfer technology.

 

On December 28, 2016, ATXG acquired 250,000,000 shares of the issued and outstanding stock of Yingxi Industrial Chain Group Co., Ltd. (“Yingxi”). The 250,000,000 shares of Yingxi were acquired from the members of Yingxi in a share exchange transaction in return for the issuance of 500,000,000 shares of common stock of ATXG. The 250,000,000 shares of Yingxi constitute 100% of its issued and outstanding stock, and as a result of the transaction, Yingxi became a wholly-owned subsidiary of ATXG. And following the consummation of the reverse acquisition effective on September 25, 2017, and giving effect to the securities exchanged in the offering, the members of Yingxi will beneficially own approximately ninty-nine percent (99%) of the issued and outstanding common stock of ATXG. For accounting purposes, the Company was treated as an acquiree and Yingxi as an acquirer, as a result, the business and financial information contained in this report is that of the acquirer prior to the consummation date and that of the combined entity after that date.

 

Yingxi was incorporated in the Republic of Seychelles on August 4, 2016. ATXG, together with Yingxi and its subsidiaries (the “Company”) operates primarily in the People’s Republic of China (“PRC” or “China”) and is engaged in the business of garments manufacturing and providing logistic services.

 

On December 15, 2016, Yingxi entered into an equity transfer agreement with the shareholder of Yingxi Industrial Chain Investment Co., Ltd (“Yingxi HK”) under which Yingxi agreed to pay total consideration of RMB21,008,886 (approximately $3,048,936) in cash in exchange for a 100% ownership interest in Yingxi HK. Yingxi HK was incorporated in Hong Kong in 2016. Yingxi HK is a holding company with no assets other than a 100% equity interest of the following subsidiaries:

 

Qianhai Yingxi Textile & Garments Co., Ltd (“QYTG”), a wholly-owned subsidiary of Yingxi HK, was incorporated in the PRC in 2016.

 

Shenzhen Qianhai Yingxi Industrial Chain Services Co., Ltd (“YX”), a wholly-owned subsidiary of QYTG, was incorporated in the PRC in 2016.

 

Xin Kuai Jie Transport Co., Ltd (“XKJ”), a wholly-owned subsidiary of YX, was incorporated in the PRC in 2001. XKJ is engaged in the provision of logistic services.

 

Shenzhen Hua Peng Fa Logistics Co., Ltd (“HPF”), a wholly-owned subsidiary of YX, was incorporated in the PRC in 2006. HPF is engaged in the provision of logistic services.

 

Dongguan Heng Sheng Wei Garments Co., Ltd (“HSW”), a wholly-owned subsidiary of YX, was incorporated in the PRC in 2009. HSW is a garment manufacturer.

 

Shantou Chenghai Dai Tou Garments Co., Ltd (“DT”), a wholly-owned subsidiary of YX, was incorporated in the PRC in 2009. DT is a garment manufacturer.

 

Dongguan Yingxi Daying Commercial Co., Ltd (“DY”), a wholly-owned subsidiary of YX, was incorporated in the PRC in 2019. DY is a property management company for the garment manufacturing industry.

 

Dongguan Yushang Clothing Co., Ltd (“YS”), a wholly-owned subsidiary of YX, was incorporated in the PRC in 2019. YS is a garment manufacturer.

 

Shantou Yi Bai Yi Garments Co., Ltd (“YBY”), a wholly-owned subsidiary of YX, was incorporated in PRC in 2019, YBY is a garment manufacturer.

 

F-6 

 

 

2.BASIS OF PRESENTATION, LIQUIDITY

 

The accompanying consolidated financial statements of the Company and its subsidiaries are prepared pursuant to the rules and regulations of the U.S Securities and Exchanges Commission (“SEC”) and in conformity with generally accepted accounting principles in the U.S. (“US GAAP”). All material inter-company accounts and transactions have been eliminated in consolidation.

 

The accompanying consolidated financial statements are presented on the basis that the Company is a going concern. The going concern assumption contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

 

The Company incurred net income of $203,900, and net loss of $367,348 for the three months ended June 30, 2020 and 2019, respectively. As of June 30, 2020 and March 31, 2020, the Company had net current liability of $3,987,967 and $4,095,286, respectively, and a deficit on total equity of $2,867,279 and $3,066,724, respectively.

 

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.

 

These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s continuation as a going concern is dependent on the Company’s ability to meet obligations as they become due and to obtain additional equity or alternative financing required to fund operations until sufficient sources of recurring revenues can be generated. There can be no assurance that the Company will be successful in its plans described above or in attracting equity or alternative financing on acceptable terms, or if at all. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

(a)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.

 

F-7 

 

 

(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)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.

 

(d)Fair Value Measurement

 

Accounting Standards Codification (“ASC”) 820 “ Fair Value Measurements and Disclosures “, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The statement clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability. It also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and that market participant assumptions include assumptions about risk and effect of a restriction on the sale or use of an asset.

 

This ASC establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 

Level 2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

 

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

 

As at June 30, 2020, the Company has no financial assets or liabilities subject to recurring fair value measurements.

 

The Company’s financial instruments include cash, accounts receivable, advances to suppliers, other receivables, accounts payable, other payables, taxes payables and related party receivables or payables. Management estimates that the carrying amounts of financial instruments approximate their fair values due to their short-term nature. The fair value of amounts with related parties is not practicable to estimate due to the related party nature of the underlying transactions.

 

(e)Cash and Cash Equivalents

 

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. All cash and cash equivalents relate to cash on hand and cash at bank at June 30, 2020 and March 31, 2020.

 

The Renminbi is not freely convertible into foreign currencies. Under the PRC Foreign Exchange Control Regulations and Administration of Settlement, Sales and Payment of Foreign Exchange Regulations, the Company is permitted to exchange Renminbi for foreign currencies through banks that are authorized to conduct foreign exchange business.

 

F-8 

 

 

(f)Accounts Receivable

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. The Company extends credit to its customers in the normal course of business and generally does not require collateral. The Company’s credit terms are dependent upon the segment, and the customer. The Company assesses the probability of collection from each customer at the outset of the arrangement based on a number of factors, including the customer’s payment history and its current creditworthiness. If in management’s judgment collection is not probable, the Company does not record revenue until the uncertainty is removed.

 

Management performs ongoing credit evaluations, and the Company maintains an allowance for potential credit losses based upon its loss history and its aging analysis. The allowance for doubtful accounts is the Company’s best estimate of the amount of credit losses in existing accounts receivable. Management reviews the allowance for doubtful accounts each reporting period based on a detailed analysis of trade receivables. In the analysis, management primarily considers the age of the customer’s receivable, and also considers the creditworthiness of the customer, the economic conditions of the customer’s industry, general economic conditions and trends, and the business relationship and history with its customers, among other factors. If any of these factors change, the Company may also change its original estimates, which could impact the level of the Company’s future allowance for doubtful accounts. If judgments regarding the collectability of receivables were incorrect, adjustments to the allowance may be required, which would reduce profitability.

 

Accounts receivable are recognized and carried at the original invoice amount less an allowance for any uncollectible amounts. An estimate for doubtful accounts receivable is made when collection of the full amount is no longer probable. Bad debts are written off as incurred. No allowance for doubtful accounts was made for the three months ended June 30, 2020 and 2019.

 

The followings are the percentages of accounts receivable balance of the top five customers over total accounts receivable as at June 30, 2020 and March 31, 2020.

 

  June 30, 2020  March 31, 2020 
Customer A  23.2%  5.3%
Customer B  17.2%  65.4%
Customer C  11.9%  4.3%
Customer D  8.9%  4.2%
Customer E  7.3%  Nil % 

 

(g)Inventories

 

Manufacturing segment inventories consist of raw materials, work in progress and finished goods and are stated at the lower of cost, determined on a weighted average basis, or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated costs necessary to make the sale. When inventories are sold, their carrying amount is charged to expense in the period in which the revenue is recognized. Write-downs for declines in net realizable value or for losses of inventories are recognized as an expense in the period the impairment or loss occurs. No allowance for obsolete finished goods for both periods ended June 30, 2020 and 2019.

 

During the three months ended June 30, 2020 and 2019, approximately 98% and 74% of total inventory purchases were from the Company’s five largest suppliers, respectively. Management believes that should the Company lose any one of its major suppliers, other suppliers are available that could provide similar products to the Company.

 

F-9 

 

 

(h)Plant and Equipment

 

Plant and equipment are carried at cost less accumulated depreciation. Depreciation is provided over the assets’ estimated useful lives, using the straight-line method. Estimated useful lives of the plant and equipment are as follows:

 

Production plant  5-10 years 
Motor vehicles  10-15 years 
Office equipment  5-10 years 

 

The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of income. The cost of maintenance and repairs is charged to the statement of income as incurred, whereas significant renewals and betterments are capitalized.

 

(i)Goodwill

 

Goodwill represents the excess of the purchase price over the net fair value of the identifiable tangible and intangible assets acquired and the fair value of liabilities assumed in acquisitions. ASC350-30-50 “Goodwill and Other Intangible Assets”, requires the testing of goodwill and indefinite-lived intangible assets for impairment at least annually. The Company tests goodwill for impairment in the fourth quarter of each years.

 

Under applicable accounting guidance, the goodwill impairment analysis is a two-step test. The first step of the goodwill impairment test involves comparing the fair value of each reporting unit with its carrying amount including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired; however, if the carrying amount of the reporting unit exceeds its fair value, the second step must be performed to measure potential impairment.

 

The second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated possible impairment. If the implied fair value of goodwill exceeds the goodwill assigned to the reporting unit, there is no impairment. If the goodwill assigned to a reporting unit exceeds the implied fair value of goodwill, an impairment charge is recorded for the excess.

 

The Company tested goodwill for impairment as of March 31, 2020 and it was determined that recoverable amount of one of the Company’s reporting units was lower than the carrying amount of the goodwill recorded. Therefore it was concluded that carrying amount of goodwill of $475,003 was impaired (Nil for 2019).

 

The balance of goodwill was Nil as of June 30, 2020 and March 31, 2020.

 

(j)Accounting for the Impairment of Long-Lived Assets

 

Long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. It is reasonably possible that these assets could become impaired as a result of technology or other industry changes. Determination of recoverability of assets to be held and used is by comparing the carrying amount of an asset to future net undiscounted cash flows to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

 

There was no impairment of long-lived assets as of June 30, 2020 and March 31, 2020.

 

F-10 

 

 

(k)Revenue Recognition

 

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

 

(i) identification of the promised goods and services in the contract;

 

(ii) determination of whether the promised goods and services are performance obligations, including whether they are distinct in the context of the contract;

 

(iii) measurement of the transaction price, including the constraint on variable consideration;

 

(iv) allocation of the transaction price to the performance obligations; and

 

(v) recognition of revenue when (or as) the Company satisfies each performance obligation.

 

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

 

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

 

Cost of revenues for manufacturing segment includes the direct raw material cost, direct labor cost, manufacturing overheads including depreciation of production equipment and rent. Cost of for service segment includes gasoline and diesel fuel, toll charges and subcontracting fees.

 

(l)Earnings Per Share

 

The Company reports earnings per share in accordance with ASC 260 “Earnings Per Share”, which requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average common shares outstanding during the reporting period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Further, if the number of common shares outstanding increases as a result of a stock dividend or stock split or decreases as a result of a reverse stock split, the computations of a basic and diluted earnings per share shall be adjusted retroactively for all periods presented to reflect that change in capital structure.

 

The Company’s basic earnings per share is computed by dividing the net income available to holders by the weighted average number of the Company’s ordinary shares outstanding. Diluted earnings per share reflects the amount of net income available to each ordinary share outstanding during the period plus the number of additional shares that would have been outstanding if potentially dilutive securities had been issued. The Company had no potentially dilutive ordinary shares as of June 30, 2020 and March 31, 2020.

 

F-11 

 

 

(m)Income Taxes

 

The Company accounts for income taxes using the asset and liability method prescribed by ASC 740 “Income Taxes”. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the years in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.

 

The Company has a history of tax losses and there is no convincing evidence that sufficient taxable income will be available against which the deferred tax asset can be utilised, therefore, the Company does not recognize any tax benefits for the three months ended June 30, 2020 & 2019.

 

The Company is governed by the Income Tax Laws of the PRC. The PRC federal statutory tax rate is 25%. The Company files income tax returns with the relevant government authorities in the PRC. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months.

 

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company does not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the three months ended June 30, 2020 and 2019. The Company’s effective tax rate differs from the PRC federal statutory rate primarily due to non-deductible expenses, temporary differences and preferential tax treatments.

 

New U.S. federal tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the “U.S. Tax Reform”), was signed into law on December 22, 2017. The U.S. Tax Reform modified the U.S. Internal Revenue Code by, among other things, reducing the statutory U.S. federal corporate income tax rate from 35% to 21% for taxable years beginning after December 31, 2017; limiting and/or eliminating many business deductions; migrating the U.S. to a territorial tax system with a one-time transaction tax on a mandatory deemed repatriation of previously deferred foreign earnings of certain foreign subsidiaries; subject to certain limitations, generally eliminating U.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain foreign earnings. Taxpayers may elect to pay the one-time transition tax over eight years, or in a single lump-sum payment. The Company measured the current and deferred taxes based on the provisions of the Tax legislation. After the Company’s measurement, no deferred tax benefit nor expense were recorded relating to the Tax Act changes for the months ended June 30, 2020 and 2019.

 

(n)Related party balances and transactions

 

A related party is generally defined as:

 

(i) any person that holds the Company’s securities including such person’s immediate families,

 

(ii) the Company’s management,

 

(iii) someone that directly or indirectly controls, is controlled by or is under common control with the Company, or

 

(iv) anyone who can significantly influence the financial and operating decisions of the Company.

 

A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties.

 

(o)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 June 30, 2020, the total outstanding borrowings amounted to $353,854 (RMB 2,500,000) with various interest rate from 4.84% to 6.96% p.a. (Note 10)

 

F-12 

 

 

(p)Leases

 

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

 

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

 

(q)Recently issued and adopted accounting pronouncements

 

In August 2018, the FASB issued ASU 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement to ASC Topic 820, Fair Value Measurement (“ASC 820”). ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing, modifying, and/or adding certain disclosures. ASU 2018-13 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2019. An entity is permitted to early adopt by modifying existing disclosures and delay adoption of the additional disclosures until the effective date. The Company adopted this guidance on April 1, 2020 and determined it had no impact on its consolidated financial statements and related disclosures.

 

In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. This standard was effective for the Company on September 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

 

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 December 15, 2019. The Company adopted this ASU on April 1, 2020 and determined it had no impact on its consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, “Lease (Topic 842) “, which amends recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases (with the exception of short-term leases) at the commencement date. This standard takes effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. According to this new standard, the Company recorded both right-of-use asset and lease liability of $1.7 million and $1.8 million on its consolidated financial statements as at June 30, 2020 and March 31, 2020.

 

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-13 

 

 

4.ACCOUNTS RECEIVABLES

 

The receivables and allowance balances at June 30, 2020 and March 31, 2020 are as follows:

 

  June 30, 2020  March 31, 2020 
  (unaudited)  (audited) 
Accounts receivable $1,676,946  $4,500,116 
Less: allowance for doubtful accounts  -   - 
Accounts receivable, net $1,676,946  $4,500,116 

 

No allowance for doubtful accounts was made for the three months ended June 30, 2020 and March 31, 2020.

 

5.OTHER RECEIVABLES

 

Other receivables primarily represent rental deposit; refundable security deposits to customers for quality assurance on the provision of logistic service; and unsecured and non-interest bearing short-term advances that the Company makes from time-to-time to employees. These advances are unsecured and due on demand.

 

6.RELATED PARTY TRANSACTIONS

 

Name of Related Parties Relationship with the Company
Zhida Hong President, CEO, and a director of the Company
Zhongpeng Chen A legal representative of HPF
Bihua Yang A legal representative of XKJ
Dewu Huang A legal representative of DT
Jinlong Huang A spouse of legal representative of HSW

 

The Company leases Shenzhen XKJ office rent-free from Bihua Yang.

 

The Company had the following related party balances as of June 30, 2020 and March 31, 2020:

 

Amounts due to related parties June 30, 2020  March 31, 2020 
  (unaudited)  (audited) 
Zhida Hong $5,161,562  $5,043,489 
Zhongpeng Chen  160,763   160,427 
Bihua Yang  337,462   - 
Dewu Huang  -   81,287 
Jinlong Huang  136,272   144,237 
  $5,796,059  $5,429,440 

 

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

 

7.INVENTORIES

 

Inventories consist of the following as of June 30, 2020 and March 31, 2020:

 

  June 30, 2020  March 31, 2020 
  (unaudited)  (audited) 
Raw materials $456,360  $230,742 
Work in progress  4,328   62,150 
Finished goods  136,105   54,639 
Total inventories, net $596,793  $347,531 

 

There is no inventory allowance for the three months ended June 30, 2020 and 2019.

 

F-14 

 

 

8.ADVANCES TO SUPPLIERS

 

The Company has made advances to third-party suppliers in advance of receiving inventory parts. These advances are generally made to expedite the delivery of required inventory when needed and to help to ensure priority and preferential pricing on such inventory. The amounts advanced to suppliers are fully refundable on demand.

 

The Company reviews a supplier’s credit history and background information before advancing a payment. If the financial condition of its suppliers were to deteriorate, resulting in an impairment of their ability to deliver goods or provide services, the Company would recognize bad debt expense in the period they are considered unlikely to be collected.

 

9.PLANT AND EQUIPMENT

 

Plant and equipment consists of the following as of June 30, 2020 and March 31, 2020:

 

  June 30, 2020  March 31, 2020 
  (unaudited)  (audited) 
Production plant $99,012  $67,247 
Motor vehicles  935,179   868,743 
Office equipment  19,512   19,471 
   1,053,703   955,461 
Less: accumulated depreciation  (361,213)  (370,442)
Plant and equipment, net $692,490  $585,019 

 

The Company acquired two production lines amounted to $54,327 to manufacture masks for the epidemic prevention supplies business and two new motor truckers amounted to $86,072 for the logistic service business. During the period, the Company disposed of an old motor trucker with original cost of $22,505 and accumulated depreciation of $15,791. The Company also replaced a few small items of old machinery and office equipment.

 

Depreciation expense for the three months ended June 30, 2020 and 2019 was $23,473 and $28,699, respectively.

 

10.SHORT-TERM BANK LOAN

 

In September 2018, HSW, a subsidiary of the Company entered into a facility agreement with Dongguan Agricultural Commercial Bank and obtained a line of credit, which allows the Company to borrow up to approximately $212,334 (RMB1,500,000) for daily operations. The loans are guaranteed at no cost by legal representative of HSW. As of June 30, 2020, the Company has borrowed $212,334 (RMB1,500,000) under this line of credit with fixed interest rate of 6.96% per annum. The line of credit is fully used. The outstanding loan balance will be due in September 2020.

 

In August 2019, HSW entered into a new facility agreement with Agricultural Bank of China and obtained a line of credit, which allows the Company to borrow up to approximately $141,543 (RMB1,000,000) for daily operations. The loans are guaranteed at no cost by the legal representative of HSW. As of June 30, 2020, the Company has borrowed $141,543 (RMB1,000,000) under this line of credit with various annual interest rates from 4.84% to 4.9%. The line of credit is fully used. The outstanding loan balance will be due in July 2020.

 

F-15 

 

 

11.INCOME TAXES

 

(a)Enterprise Income Tax (“EIT”)

 

The Company operates in the PRC and files tax returns in the PRC jurisdictions.

 

Yingxi Industrial Chain Group Co., Ltd was incorporated in the Republic of Seychelles and, under the current laws of the British Virgin Islands, is not subject to income taxes.

 

Yingxi HK was incorporated in Hong Kong and is subject to Hong Kong income tax at a 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 June 30, 2020 and 2019.

 

YX were incorporated in the PRC and is subject to the EIT tax rate of 25%. No provision for income taxes in the PRC has been made as YX had no taxable income for the three months ended June 30, 2020 and 2019.

 

The Company is governed by the Income Tax Laws of the PRC. Yingxi’s operating companies, QYTG, HSW, HPF, DT and YS were subject to an EIT rate of 25% in 2020 and 2019. XKJ enjoyed the preferential tax benefits and its EIT rate was 15% in 2020 and 2019.

 

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 months ended June 30, 2020 and 2019.

 

No deferred taxes were recognized for the three months ended June 30, 2020 and 2019.

 

The reconciliation of income taxes computed at the PRC federal statutory tax rate applicable to the PRC, to income tax expenses are as follows:

 

  Three months ended June 30 
  2020  2019 
  (unaudited)  (unaudited) 
PRC statutory tax rate  25%  25%
Computed expected benefits $51,815  $(91,284)
Temporary differences not recognized  (103,932)  (1,284)
Differed tax assets not recognized  55,476   94,779 
Income tax expense $3,359  $2,212 

 

(b)Value Added Tax (“VAT”)

 

In accordance with the relevant taxation laws in the PRC, the normal VAT rate for domestic sales is 17%, 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 11% under the relevant tax category for logistic company, except the branch of HPF enjoyed the preferential VAT rate of 3% in 2020 and 2019. The Company is required to pay the full amount of VAT calculated at the applicable VAT rate of the invoiced value of sales as required. A credit is available whereby VAT paid on gasoline and toll charges can be used to offset the VAT due on service income.

 

12.CONSOLIDATED SEGMENT DATA

 

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

 

 (a)Garments. Including manufacturing and distribution of garments;
 (b)Logistic service. Providing logistic services; and

 (c)

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

 

F-16 

 

 

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

 

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

 

Revenues by segment for the three months ended June 30, 2020 and 2019 are as follows:

 

  Three months ended June 30, 
Revenues 2020  2019 
  (unaudited)  (unaudited) 
Garments $1,274,806  $551,317 
Logistic service  1,533,381   1,658,175 
Epidemic prevention supplies  3,110,028   - 
  $5,918,215  $2,209,492 

 

Income from operations by segment for the three months ended June 30, 2020 and 2019 are as follows:

 

  Three months ended June 30, 
Operating income (loss) 2020  2019 
  (unaudited)  (unaudited) 
Garments $65,562  $46,217 
Logistic service  9,560   (18,311)
Epidemic prevention supplies  288,717   - 
Corporate and other  (175,407)  (381,647)
Income (loss) from operations $188,432  $(353,741)
Garments  21,158   (7,182)
Logistic service  (1,443)  (4,127)
Epidemic prevention supplies  1   - 
Corporate and other  (889)  (86)
Income (loss) before income tax $207,259  $(365,136)
Income tax expense  (3,359)  (2,212)
Net income (loss) $203,900  $(367,348)

 

Depreciation and amortization by segment for the three months ended June 30, 2020 and 2019 are as follows:

 

  Three months ended June 30, 
Depreciation 2020  2019 
  (unaudited)  (unaudited) 
Garments $1,839  $3,027 
Logistic service  20,728   25,672 
Epidemic prevention supplies  905   - 
  $23,473  $28,699 

 

Total assets by segment as at June 30, 2020 and March 31, 2020 are as follows:

 

Total assets June 30, 2020  March 31, 2020 
   (unaudited)   (audited) 
Garments $1,858,851  $4,098,758 
Logistic service  3,107,474   2,422,140 
Epidemic prevention supplies  200,178   - 
Corporate and other  1,767,190   1,901,080 
  $6,933,693  $8,421,978 

 

F-17 

 

 

13.ACCRUED EXPENSES AND OTHER PAYABLES

 

Accrued expenses and other payables consist of the following as of June 30, 2020 and March 31, 2020:

 

  June 30, 2020  March 31, 2020 
   (unaudited)   (audited) 
Accrued wages and welfare  105,882   61,776 
Other payables  134,401   169,141 
  $240,283  $230,917 

 

14.LEASE RIGHT-OF-USE ASSET AND LEASE LIABILITIES

 

The Company implemented new accounting policy according to the ASC 842, Leases, on April 1, 2019 on a modified retrospective basis and did not restate comparative periods. Under the new policy, the Company recognized approximately $0.06 million lease liability as well as right-of-use asset for all leases (with the exception of short-term leases) at the commencement date. Lease liabilities are measured at present value of the sum of remaining rental payments as of June 30, 2020, with discounted rate of 4.35%. A single lease cost is recognized over the lease term on a generally straight-line basis. All cash payments of operating lease cost are classified within operating activities in the statement of cash flows.

 

As of June 30, 2020 and March 31, 2020, the right-of use asset and lease liabilities are as follows:

 

  June 30, 2020  March 31, 2020 
    (unaudited)   (audited) 
Right-of-use asset – operating leases $1,713,385  $1,835,717 
        
Lease liabilities – current portion  428,198   443,543 
Lease liabilities – non-current portion  1,285,187   1,392,174 
  $1,713,385  $1,835,717 

 

Lease cost

 

  Three months ended June 30, 
  2020  2019 
  (unaudited)  (unaudited) 
Operating lease cost  111,706   56,833 
Short-term lease cost  -   57,507 
   111,706   114,340 

 

Other information

 

  Three months ended June 30, 
  2020  2019 
  (unaudited)  (unaudited) 
Cash paid for amounts included in the measurement of lease liabilities      
Operating cash flow from operating leases $111,706  $114,340 
Right-of-use assets obtained in exchange for new operating leases liabilities  -   551,117 
Weighted average remaining lease term - Operating leases (years)  4.0   1.8 
Weighted average discount rate - Operating leases  4.35%  4.35%

 

F-18 

 

 

15.RESERVES

 

(a)Statutory reserve

 

In accordance with the relevant laws and regulations of the PRC, the subsidiary of the Company established in the PRC is required to transfer 10% of its profit after taxation prepared in accordance with the accounting regulations of the PRC to the statutory reserve until the reserve balance reaches 50% of the subsidiary’s paid-up capital. Such reserve may be used to offset accumulated losses or increase the registered capital of the subsidiary, subject to the approval from the PRC authorities, and are not available for dividend distribution to the shareholders. The paid-up statutory reserve was $23,514 as of June 30, 2020 and March 31, 2020.

 

(b)Currency translation reserve

 

The currency translation reserve represents translation differences arising from translation of foreign currency financial statements into the Company’s functional currency.

 

16.REVERSE STOCK SPLIT

 

On January 24, 2019, the Board of Directors of the Company approved a reverse stock split of the Company’s issued and outstanding shares of common stock, par value $0.001 per share (the “Common Stock”), at a ratio of 1-for-20 (the “Reverse Stock Split”). The Reverse Stock Split was effective on February 27, 2019 (the “Effective Date”). As a result of the filing of the Certificate, the number of shares of the Company’s authorized Common Stock was reduced from 1,000,000,000 shares to 50,000,000 shares and the issued and outstanding number of shares of the Company’s Common Stock was correspondingly decreased to 25,346,004. There was no change to the par value of the Company’s Common Stock. The decrease of Share Capital was transferred to and increased the Additional Paid In Capital. The Company has adjusted all references to number of share and loss per share amounts in the accompanying consolidated financial statements and notes to reflect the reverse stock split.

 

17.SUBSEQUENT EVENTS

 

No subsequent events have occurred that would require recognition or disclosure in the financial statements.

 

F-19 

 

 

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 months ended June 30, 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 logistic service provider based in China. We are listed on the OTCQB under the symbol of “ATXG”. We classify our businesses into three segments: Garment, Logistics services and Epidemic prevention supplies.

 

Our garment 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 Yingxi Daying Commercial Co., Ltd (“DY”), Dongguan Yushang Clothing Co., Ltd (“YS”), and Shantou Yi Bai Yi Garments Co., Ltd (“YBY”) which are located in the Guangdong province, China.

 

Our 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 logistic operations through two wholly owned subsidiaries, namely Shenzhen Xin Kuai Jie Transportation Co., Ltd (“XKJ”) and Shenzhen Hua Peng Fa Logistic Co., Ltd (“HPF”), which are located in the Guangdong province, China.

 

Our epidemic prevention supplies business consists of manufacturing and distribution of epidemic prevention products and trading of epidemic prevention supplies 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”).

 

Business Objectives

 

Garment Business

 

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

 

Logistic Business

 

The business objective and future plan for our logistic service segment is to establish an efficient logistic system and to build a nationwide delivery and courier network in China. As of June 30, 2020, we provide logistic service to over 66 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 2020.

 

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 segment to facilitate the production, distribution and trading of epidemic prevention supplies, 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 logistic service revenue in our third and fourth quarters. These trends primarily result from the timing of seasonal garment shipments and holiday periods in the logistic segment.

 

Collection Policy

 

Garment business

 

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

 

 3 

 

 

Logistic business

 

For logistic service, we generally receive payments from the customers between 30 to 90 days following the date of the register receipt of packages.

 

Epidemic prevention supplies business

 

For 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 an installment policy which would provide them 12 months installment to maintain a good business relationship.

 

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.

 

 4 

 

 

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.

 

Concentrations of Credit Risk

 

Cash held in banks: We maintain cash balances at the financial institutions in China. We have not experienced any losses in such accounts.

 

Accounts Receivable: Customer accounts typically are collected within a short period of time, and based on its assessment of current conditions and its experience collecting such receivables, management believes it has no significant risk related to its concentration within its accounts receivable.

 

Leases

 

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

 

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

 

Recently issued and adopted accounting pronouncements

 

In August 2018, the FASB issued ASU 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement to ASC Topic 820, Fair Value Measurement (“ASC 820”). ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing, modifying, and/or adding certain disclosures. ASU 2018-13 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2019. An entity is permitted to early adopt by modifying existing disclosures and delay adoption of the additional disclosures until the effective date. The Company adopted this guidance on April 1, 2020 and determined it had no impact on its consolidated financial statements and related disclosures.

 

In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. This standard was effective for the Company on September 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

 

 5 

 

 

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 December 15, 2019. The Company adopted this ASU on April 1, 2020 and determined it had no impact on its consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, “Lease (Topic 842) “, which amends recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases (with the exception of short-term leases) at the commencement date. This standard takes effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. According to this new standard, the Company recorded both right-of-use asset and lease liability of $1.7 million and $1.8 million on its consolidated financial statements as at June 30, 2020 and March 31, 2020.

 

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 June 30, 2020 and 2019

 

The following tables summarize our results of operations for the three months ended June 30, 2020 and 2019. The table and the discussion below should be read in conjunction with our consolidated financial statements and the notes thereto appearing elsewhere in this report.

 

        Increase (decrease) in 
  2020  2019  

2020 compared to

2019

 
  (In U.S. dollars, except for percentages)       
Revenue $5,918,215   100.0% $2,209,492   100% $3,708,723   167.9%
Cost of revenues  (5,120,576)  (86.5)%  (1,851,560)  (83.8)%  (3,269,016)  (176.6)%
Gross profit  797,639   13.5%  357,932   16.2%  439,707   122.8%
Operating expenses  (609,207)  (10.3)%  (711,673)  (32.2)%  102,466   14.4%
Income (Loss) from operations  188,432   3.2%  (353,741)  (16.0)%  542,173   153.3%
Other income, net  23,745   0.4%  (7,005)  (0.3)%  30,750   439.0%
Net finance cost  (4,918)  (0.1)%  (4,390)  (0.2)%  (528)  (11.0)%
Income tax expense  (3,359)  (0.1)%  (2,212)  (0.1)%  (1,147)  (51.9)%
Net income (loss) $203,900   3.4% $(367,348)  (16.6)% $571,248   155.5%

  

Revenue

 

Revenue generated from our garment business contributed $1,274,806 or 21.5% of our total revenue for the three months ended June 30, 2020. Revenue generated from our garment business contributed $551,317 or 25.0% of our total revenue for the three months ended June 30, 2019. The increase of $0.7 million was mainly because revenue in HSW decreased by $0.4 million while revenue in DT increased by $0.9 million and revenue in YBY increased by $0.2 million.

 

 6 

 

 

Revenue generated from our logistic business contributed $1,533,381 or 25.9% of our total revenue for the three months ended June 30, 2020. Revenue generated from our logistic business contributed $1,658,175 or 75.0% of our total revenue for the three months ended June 30, 2019. The decrease mainly due to COVID-19, we cannot smoothly go through the logistics business.

 

Revenue generated from our epidemic prevention supplies business contributed $3,110,028, or 52.6% of our total revenue for the three months ended June 30, 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 $3,041,672, representing 97.8% of total revenue from the epidemic prevention suppliers business.

 

Total revenue for the three months ended June 30, 2020 and 2019 were $5,918,215 and $2,209,492, respectively, a 167.9% increase compared with the three months ended June 30, 2019. The increase was mainly because the increase of garment business in DT and YBY and the epidemic prevention supplies business newly developed in current period.

 

Cost of revenue

 

  Three months ended June 30,  Increase (decrease) in 
  2020  2019  

2020 compared to

2019

 
  (In U.S. dollars, except for percentages)    
Net revenue for garment $1,274,806   100.0% $551,317   100% $723,489   131.2%
Raw materials  945,284   74.2%  376,486   68.3%  

568,78

   

151.1

%
Labor  229,096   18.0%  53,520   9.7%  

175,576

   328.1%
Other and Overhead  8,427   0.7%  19,596   3.6%  

(11,169

)  

(57.0

)%
Total cost of revenue for garment  1,182,807   92.8%  449,602   81.6%  733,205   163.1%
Gross profit for garment  91,999   7.2%  101,715   18.4%  (9,716)  (9.6)%
Net revenue for logistic service  1,533,381   100.0%  1,658,175   100.0%  (124,794)  (7.5)%
Fuel, toll and other cost of logistic service  384,229   25.1%  564,507   34.0%  

(180,278

)  

(31.9

)%
Subcontracting fees  902,065   58.8%  837,451   50.5%  

64,614

   

7.7

%
Total cost of revenue for logistic service  1,286,294   83.9%  1,401,958   84.5%  (115,664)  (8.3)%
Gross Profit for logistic service  247,087   16.1%  256,217   15.5%  (9,130)  (3.6)%
Net revenue for epidemic prevention supplies $3,110,028   100% $-   -% $

3,110,028

    
Merchandise/Finished goods/Raw materials  2,546,955   81.9%  -   -%  

2,546,955

     
Labor  64,946   2.1%  -   -%  

64,946

     
Other and Overhead  39,574   1.3%  -   -%  

39,574

     
Total cost of revenue for epidemic prevention supplies  2,651,475   85.3%  -   -%  

2,651,475

    
Gross profit for epidemic prevention supplies  458,553   14.7   -   -   

458,553

     
Total cost of revenue $5,120,576   86.5% $1,851,560   83.8% $3,269,016   176.6%
Gross profit $797,639   13.5% $357,932   16.2% $439,707   122.8%

 

 7 

 

 

Cost of revenue for our garment segment for the three months ended June 30, 2020 and 2019 was $1,182,807 and $449,602, respectively, which includes direct raw material cost, direct labor cost, manufacturing overheads including depreciation of production equipment and rent. Cost of revenue for our service segment for the three months ended June 30, 2020 and 2019 was $1,286,294 and $1,401,958, respectively, which includes gasoline and diesel fuel, toll charges, other cost of logistic service and subcontracting fees. Cost of revenue for our new epidemic prevention supplies segment for the three months ended June 30, 2020 was $2,651,475.

 

For our garment 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 97.9% and 73.8% of raw materials purchases for the three months ended June 30, 2020 and 2019, respectively. Two suppliers provided more than 10% of our raw materials purchases for both three months ended June 30, 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 business were 74.2% of our total garment business revenue in the three months ended June 30, 2020, compared with 68.3% in the three months ended June 30, 2019. The increased in percentages was mainly due to the purchase cost of the raw materials as the continuing high demand from epidemic prevention supplies industry drove up the prices of cotton fabrics.

 

Labor costs for our garment business were 18.0% of our total garment business revenue in the three months ended June 30, 2020, compared with 9.7% in the three months ended June 30, 2019. The increase in percentages was mainly due to the rising wages in the PRC.

 

Overhead and other expenses for our garment business accounted for 0.7% of our total garment business revenue for the three months ended June 30, 2020, compared with 3.6% of total garment business revenue for the three months ended June 30, 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 34.4% and 36.2% of total cost of revenues for our service segment for the three months ended June 30, 2020 and 2019, respectively. The percentage decreased as we used new suppliers after evaluation of suppliers’ performance. We have not experienced any disputes with our subcontractor and we believe we maintain good relationships with our contract logistic service provider.

 

Fuel, toll and other costs for our service business for the three months ended June 30, 2020 were $384,229 compared with $564,507 for the three months ended June 30, 2019. Fuel, toll and other costs for our service business accounted for 25.1% of our total service revenue for the three months ended June 30, 2020, compared with 34.0% for the three months ended June 30, 2019. The decrease in percentages was primarily attributable to increase of use of subcontractors.

 

Subcontracting fees for our service business for the three months ended June 30, 2020 increased 7.7% to $902,065 from $837,451 for the three months ended June 30, 2019. Subcontracting fees accounted for 58.8% and 50.5% of our total service business revenue in the three months ended June 30, 2020 and 2019, respectively. This increase in percentages was primarily because the Company subcontracted more shipping orders to subcontractors in 2019 due to the increase in shipping orders with the destination that were not covered by the Company’s own delivery and transportation networks. Moreover, the delivery cost of third-party has raised due to the market condition.

 

 8 

 

 

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 $2,457,227, represented 92.7% of total cost of revenue of the epidemic prevention supplies business.

 

Total cost of revenue for the three months ended June 30, 2020 was $5,120,576, compared with the amount of $1,851,560 for the three months ended June 30, 2019. Total cost of sales as a percentage of total sales for the three months ended June 30, 2020 was 86.5%, compared with 83.8% for the three months ended June 30, 2019. Gross margin for the three months ended June 30, 2020 was 13.5% compared with 16.2% for the three months ended June 30, 2019.

 

Gross profit

 

  Three months ended June 30,  

Increase

(decrease) in

 
  2020  2019  2020 compared to 2019 
  (In U.S. dollars, except for percentages)       
Gross profit $797,639   100% $357,932   100%  439,707   122.8%
Operating expenses:                        
Selling expenses  (153,245)  (23.1)%  (7,227)  (2.0)%  (146,018)  (2020.4)%
General and administrative expenses  (455,962)  (68.9)%  (704,446)  (196.8)%  248,484   35.3%
Total $(609,207)  (92.0)% $(711,673)  (198.8)%  102,466   14.4%
Income (Loss) from operations $188,432   8.0% $(353,741)  (98.8)%  542,173   153.3%

 

Garment business gross profit for the three months ended June 30, 2020 was $91,999 compared with $101,715 for the three months ended June 30, 2019. Gross profit accounted for 7.2% of our total manufacturing business revenue for the three months ended June 30, 2020, compared with 18.4% for the three months ended June 30, 2019. The decrease of gross margin was due to increase of raw materials cost and labor cost.

 

Gross profit in our service business for the three months ended June 30, 2020 was $247,087 and gross margin was 16.1%. Gross profit in our service business for the three months ended June 30, 2019 was $256,217 and gross margin was 15.5%.

 

Gross profit in our epidemic prevention supplies business for the three months ended June 30, 2020 was $458,553 and gross margin was 14.7%.

 

Selling, General and administrative expenses

 

Our selling expenses in our manufacturing segment for the three months ended June 30, 2020 and 2019 was $611 and $7,227, respectively. Our selling expenses in our service segment was $nil for the three months ended June 30, 2020 and 2019, respectively. Selling expenses in our epidemic prevention supplies segment was $152,634 for the three months ended June 30, 2020. Selling expenses consist primarily of local transportation, unloading charges and product inspection charges. Total selling expenses for the three months ended June 30, 2020 increased 2020.4% to $153,245 from $7,227 for the months ended June 30, 2019.

 

Our general and administrative expenses in our manufacturing segment for the three months ended June 30, 2020 and 2019 was $25,825 and $48,271, respectively. Our general and administrative expenses in our service segment, for the three months ended June 30, 2020 and 2019 was $237,526 and $274,528, respectively. Our general and administrative expenses in our epidemic prevention supplies segment was $17,202 for the three months ended June 30, 2020. Our general and administrative expenses in our corporate office for the three months ended June 30, 2020 and 2019 was $175,409 and $381,647, 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 June 30, 2020 decreased 35.3% to $455,962 from $704,446 for the three months ended June 30, 2019. The amount was $248,483 higher in the three months ended June 30, 2019 was mainly due to the professional fees for Form S1 filing.

 

Income (loss) from operations

 

Income (loss) from operations for the three months ended June 30, 2020 and 2019 was $188,432 and $(353,741), respectively. Income from operations of $65,562 and $46,217 was attributed from our garment segment for the three months ended June 30, 2020 and 2019, respectively. Income (loss) from operations of $9,560 and $(18,311) was attributed from our service segment for the three months ended June 30, 2020 and 2019, respectively. Income from operations of $369,578 was attributed from our epidemic prevention supplies segment for the three months ended June 30, 2020. We incurred a loss from operations in corporate office of $256,268 and $381,647 for the three months ended June 30, 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 June 30, 2020 and 2019 was $3,359 and $2,212, respectively, a 51.9% 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 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 June 30, 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 June 30, 2020 and 2019.

 

The Company is governed by the Income Tax Laws of the PRC. Yingxi’s operating companies, HSW, HPF, DT, YS and YBY were subject to an EIT rate of 25% in 2020. XKJ enjoyed the preferential tax benefits and its EIT rate was 15% in 2020.

 

The Company’s parent entity, Addentax Group Corp. is an U.S entity and is subject to the United States federal income tax. No provision for income taxes in the United States has been made as Addentax Group Corp. had no United States taxable income for the three months ended June 30, 2020 and 2019.

 

Net Income (Loss)

 

We incurred a net income of $203,900 and a net loss of $367,348 for the three months ended June 30, 2020 and 2019, respectively. Our basic and diluted earnings per share were $0.01 and $0.00 for the three months ended June 30, 2020 and 2019, respectively.

 

Summary of cash flows

 

Summary cash flows information for the three months ended June 30, 2020 and 2019 is as follow:

 

  Three months ended June 30, 
  2020  2019 
  (In U.S. dollars) 

Net cash provided by (used in) operating activities

 $798,391  $(328,769)
Net cash used in investing activities $(143,148) $(90,140)

Net cash provided by financing activities

 $360,386  $440,980 

 

 10 

 

 

Net cash used in operating activities consist of net income of $203,900, increased by depreciation of $23,473, loss on disposal of property and equipment of $4,947, and decrease in change of operating assets and liabilities of $566,071. 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.

 

Net cash used in investing activities consist of purchase of plant and equipment of $143,148.

 

Net cash provided by financing activities consist of repayment of related party borrowings of $2,942,222 and we received related party proceeds of $3,302,608.

 

Financial Condition, Liquidity and Capital Resources

 

As of June 30, 2020, we had cash on hand of $1,549,409, total current assets of $4,527,818 and current liabilities of $8,515,785. We presently finance our operations primarily from cash flows from borrowings from related parties and third parties. We aim to improve our operating cash flows and anticipate that cash flows from our operations and borrowings from related parties and third parties will continue to be our primary source of funds to finance our short-term cash needs.

 

The growth and development of our business will require a significant amount of additional working capital. We currently have limited financial resources and based on our current operating plan, we will need to raise additional capital in order to continue as a going concern. We currently do not have adequate cash to meet our short or long-term objectives. In the event additional capital is raised, it may have a dilutive effect on our existing stockholders.

 

We are subject to all the substantial risks inherent in the development of a new business enterprise within an extremely competitive industry. Due to the absence of a long standing operating history and the emerging nature of the markets in which we compete, we anticipate operating losses until we can successfully implement our business strategy, which includes all associated revenue streams. Our revenue model is new and evolving, and we cannot be certain that it will be successful. The potential profitability of this business model is unproven. We may never ever achieve profitable operations. Our future operating results depend on many factors, including demand for our services, the level of competition, and the ability of our officers to manage our business and growth. As a result of the emerging nature of the market in which we compete, we may incur operating losses until such time as we can develop a substantial and stable revenue base. Additional development expenses may delay or negatively impact the ability of the Company to generate profits. Accordingly, we cannot assure you that our business model will be successful or that we can sustain revenue growth, achieve or sustain profitability, or continue as a going concern.

 

Foreign Currency Translation Risk

 

Our operations are located in the China, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility in foreign exchange rates between the U.S. dollar and the Chinese Renminbi (“RMB”). All of our sales are in RMB. In the past years, RMB continued to appreciate against the U.S. dollar. As of June 30, 2020, the market foreign exchange rate had decreased to RMB 7.07 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 months ended June 30, 2020 and 2019 was $(4,455) and $37,002, 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 June 30, 2020 that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

 11 

 

 

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 June 30, 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.

 

 12 

 

 

Management’s Report on Internal Control over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2020 using the criteria established in “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

 

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of internal control over financial reporting as of June 30, 2020, the Company determined that there were control deficiencies that constituted material weaknesses, as described below.

 

We did not maintain a sufficient complement of personnel with an appropriate level of knowledge of accounting, experience, and training commensurate with its financial reporting requirements.

 

Accordingly, the Company concluded that these control deficiencies resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls.

 

 13 

 

 

As a result of the material weaknesses described above, management has concluded that the Company did not maintain effective internal control over financial reporting as of June 30, 2020 based on criteria established in Internal Control- Integrated Framework issued by COSO.

 

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.

 

Limitations on the Effectiveness of Controls

 

Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

 

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.

 

 14 

 

 

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: August 14, 2020By:/s/ Hong Zhida
  Hong Zhida
  President, Chief Executive Officer and Director,
  (Principal Executive Officer)
   
Date: August 14, 2020By:/s/ Huang Chao
  Huang Chao
  Chief Financial Officer and Treasurer
  (Principal Financial and Accounting Officer)

 

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