Item 2. Management’s Discussion and Analysis
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The
following discussion and analysis of our financial condition and results of operations for the three and nine months ended December 31,
2021 and 2020 should be read in conjunction with the Financial Statements and corresponding notes included in this Report on Form 10-Q.
Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our
plans, objectives, expectations, and intentions. Actual results and the timing of events could differ materially from those anticipated
in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors and Special
Note Regarding Forward-Looking Statements in this report. We use words such as “anticipate,” “estimate,” “plan,”
“project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,”
“may,” “will,” “should,” “could,” “target”, “forecast” and similar
expressions to identify forward-looking statements.
Overview
Our
Business
We
are a garment manufacturer and logistics services provider based in China. We are listed on the OTCQB under the symbol of “ATXG”.
We classify our businesses into four segments: Garment manufacturing, Logistics services, Property management and subleasing, and Epidemic
prevention supplies.
Our
garment manufacturing business consists of sales made principally to wholesaler located in the People’s Republic of China (“PRC”).
We have our own manufacturing facilities, with sufficient production capacity and skilled workers on production lines to ensure that
we meet our high quality control standards and timely delivery requirement for our customers. We conduct our garment manufacturing operations
through five wholly owned subsidiaries, namely Dongguan Heng Sheng Wei Garments Co., Ltd (“HSW”), Shantou Chenghai Dai Tou
Garments Co., Ltd (“DT”), Dongguan Yushang Clothing Co., Ltd (“YS”), and Shantou Yi Bai Yi Garments Co., Ltd
(“YBY”) which are located in the Guangdong province, China. In October 2020, the Company disposed of DT to a third party
at fair value, which was also its carrying value as of September 30, 2020.
Our
logistic business consists of delivery and courier services covering approximately 79 cities in approximately seven provinces and two
municipalities in China. Although we have our own motor vehicles and drivers, we currently outsource some of the business to our contractors.
We believe outsourcing allows us to maximize our capacity and maintain flexibility while reducing capital expenditures and the costs
of keeping drivers during slow seasons. We conduct our logistics services operations through four wholly owned subsidiaries, namely Shenzhen
Xin Kuai Jie Transportation Co., Ltd (“XKJ”), Shenzhen Yingxi Peng Fa Logistic Co., Ltd., which was incorporated in November
2020, and Shenzhen Hua Peng Fa Logistic Co., Ltd (“HPF”), Shenzhen Yingxi Tongda Logistic Co., Ltd (“TD”), which
are located in the Guangdong province, China. In November 2020, the Company disposed of HPF to a third party at fair value, which was
also its carrying value as of November 30, 2020.
The
business operations, customers and suppliers of DT and HPF were retained by the Company; therefore, the disposition of the two subsidiaries
did not qualify as discontinued operations.
Our
property management and subleasing provides shops subleasing and property management services for garment wholesalers and retailers in
garment market. We conduct our property management and subleasing operation through a wholly owned subsidiary, namely Dongguan Yingxi
Daying Commercial Co., Ltd (“DY”).
Our
epidemic prevention supplies business consists of manufacturing and distribution of epidemic prevention products and resale of epidemic
prevention supplies purchased from third party in both domestic and overseas markets. We conduct our manufacturing of the epidemic prevention
products in Dongguan Yushang Clothing Co., Ltd (“YS”). We conduct the trading of epidemic prevention suppliers through Addentax
Group Corp. (“ATXG”) and Shenzhen Qianhai Yingxi Industrial Chain Services Co., Ltd (“YX”), a wholly owned subsidiary
of the Company.
3
Business
Objectives
Garment
Manufacturing Business
We
believe the strength of our garment manufacturing business is mainly due to our consistent emphasis on exceptional quality and timely
delivery of our products. The primary business objective for our garment manufacturing segment is to expand our customer base and improve
our profit.
Logistics
Services Business
The
business objective and future plan for our logistics services segment is to establish an efficient logistic system and to build a nationwide
delivery and courier network in China. As of December 31, 2021, we provide logistics services to over 79 cities in approximately seven
provinces and two municipalities. We expect to develop an additional 20 logistics points in existing serving cities and improve the Company’s
profit in the year end of 2022.
Property
Management and Subleasing Business
The
business objective of our property management and subleasing segment is to integrate resources in shopping mall, develop e-commerce bases
and the Internet celebrity economy together to drive to increase the value of the stores in the area. The short-term goal for the year
is to increase the occupancy rate of stores in the mall to more than 70%.
Epidemic
Prevention Supplies Business
The
primary objective of our epidemic prevention supplies business is to take the advantage of our resource in supply chain from the garment
manufacturing business segment to facilitate and maximize the production, distribution and resale of epidemic prevention supplies, in
order to increase our revenue base and improve our net profit.
Seasonality
of Business
Our
business is affected by seasonal trends, with higher levels of garment sales in our second and third quarters and higher logistics services
revenue in our third and fourth quarters. These trends primarily result from the timing of seasonal garment manufacturing shipments and
holiday periods in the logistics services segment.
Collection
Policy
Garment
manufacturing business
For
our new customers, we generally require orders placed to be backed by advances or deposits. For our long-term and established customers
with good payment track records, we generally provide payment terms between 30 to 180 days following their acknowledgement of receipt
of goods.
Logistics
services business
For
logistics services, we generally receive payments from the customers between 30 to 90 days following the date of the registration of
our receipt of packages.
Property
management and subleasing business
For
property management and subleasing business, we generally collect rental and management fees of the following month each month in advance.
Epidemic
prevention supplies business
For
Epidemic prevention supplies business, we generally receive payment from the customers within 30 days following the delivery of finished
goods. We would also give our long-term customers with a 12 months long credit term policy to maintain a good business relationship.
4
Economic
Uncertainty
Our
business is dependent on consumer demand for our products and services. We believe that the significant uncertainty in the economy in
China has increased our clients’ sensitivity to the cost of our products and services. We have experienced continued pricing pressure.
If the economic environment becomes weak, the economic conditions could have a negative impact on our sales growth and operating margins,
cash position and collection of accounts receivable. Additionally, business credit and liquidity have tightened in China. Some of our
suppliers and customers may face credit issues and could experience cash flow problems and other financial hardships. These factors currently
have not had an impact on the timeliness of receivable collections from our customers. We cannot predict at this time how this situation
will develop and whether accounts receivable may need to be allowed for or written off in the coming quarters.
Despite
the various risks and uncertainties associated with the current economy in China, we believe our core strengths will continue to allow
us to execute our strategy for long-term sustainable growth in revenue, net income and operating cash flow.
Summary
of Critical Accounting Policies
We
have identified critical accounting policies that, as a result of judgments, uncertainties, uniqueness and complexities of the underlying
accounting standards and operation involved could result in material changes to our financial position or results of operations under
different conditions or using different assumptions.
Estimates
and Assumptions
We
regularly evaluate the accounting estimates that we use to prepare our financial statements. In general, management’s estimates
are based on historical experience, on information from third party professionals, and on various other assumptions that are believed
to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.
Revenue
Recognition
Revenue
is generated through sale of goods and delivery services. Revenue is recognized when a customer obtains control of promised goods or
services and is recognized in an amount that reflects the consideration that the Company expects to receive in exchange for those goods
or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising
from contracts with customers. The amount of revenue that is recorded reflects the consideration that the Company expects to receive
in exchange for those goods and services. The Company applies the following five-step model in order to determine this amount:
(i)
identification
of the promised goods and services in the contract;
(ii)
determination
of whether the promised goods and services are performance obligations, including whether they are distinct in the context of the
contract;
(iii)
measurement
of the transaction price, including the constraint on variable consideration;
(iv)
allocation
of the transaction price to the performance obligations; and
(v)
recognition
of revenue when (or as) the Company satisfies each performance obligation.
5
The
Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled
to in exchange for the goods or services it transfers to the customer. Once a contract is determined to be within the scope of ASC 606
at contract inception, the Company reviews the contract to determine which performance obligations the Company must deliver and which
of these performance obligations are distinct. The Company recognizes as revenues the amount of the transaction price that is allocated
to the respective performance obligation when the performance obligation is satisfied or as it is satisfied. Generally, the Company’s
performance obligations are transferred to customers at a point in time, typically upon delivery.
For all reporting
periods, the Company has not disclosed the value of unsatisfied performance obligations for all product and service revenue contracts
with an original expected length of one year or less, which is an optional exemption that is permitted under the adopted rules.
Leases
Lessee
The Company
determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”)
assets, other current liabilities, and operating lease liabilities in our consolidated balance sheets. Finance leases are included in
property and equipment, other current liabilities, and other long-term liabilities in the consolidated balance sheets.
ROU assets represent
the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising
from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments
over the lease term. As most of the leases do not provide an implicit rate, The Company generally use the incremental borrowing rate based
on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The operating
lease ROU asset also includes any lease payments made and excludes lease incentives. Lease expense for lease payments is recognized on
a straight-line basis over the lease term.
Lessor
As a lessor,
the Company’s leases are classified as operating leases under ASC 842. Leases, in which the Company is the lessor, are substantially
all accounted for as operating leases and the lease components and non-lease components are accounted for separately. Rental income from
operating leases is recognized on a straight line basis over the term of the relevant lease. Initial direct costs incurred in negotiating
and arranging an operating lease are added to the carrying amount of the leased asset and recognized on a straight line basis over the
lease term.
Recently
issued accounting pronouncements
In June 2016,
the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.
This standard requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount
expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the
financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. This standard will
be effective for the Company on April 1, 2023. The Company is currently evaluating the impact the adoption of this ASU will have on its
consolidated financial statements.
The Company
reviews new accounting standards as issued. Management has not identified any other new standards that it believes will have a significant
impact on the Company’s consolidated financial statements.
Results of
Operations for the three months ended December 31, 2021 and 2020
The following
tables summarize our results of operations for the three months ended December 31, 2021 and 2020. The table and the discussion below should
be read in conjunction with our consolidated financial statements and the notes thereto appearing elsewhere in this report.
Three Months Ended December 31,
Changes in 2021
2021
2020
compared to 2020
(In U.S. dollars, except for percentages)
Revenue
$
2,791,470
100.0
%
$
3,411,552
100
%
$
(620,082
)
(18.2
)%
Cost of revenues
(2,323,716
)
(83.2
)%
(2,950,124
)
(86.5
)%
626,408
21.2
%
Gross profit (loss)
467,754
16.8
%
461,428
13.5
%
6,326
1.4
%
Operating expenses
(495,430
)
(17.8
)%
(749,954
)
(22.0
)%
254,524
)
33.9
%
Loss from operations
(27,676
)
(1.0
)%
(288,526
)
(8.5
)%
260,850
90.4
%
Other income, net
43,958
1.6
%
1,273
0.0
%
42,685
3,353.4
%
Net finance cost
(2,454
)
(0.1
)%
(544
)
(0.0
)%
1,910
262.0
%
Income tax expense
(2,209
)
(0.1
)%
(15,784
)
(0.4
)%
13,575
86.0
%
Net income (loss)
$
11,619
0.4
%
$
(303,581
)
(8.9
)%
$
315,200
103.8
%
Revenue
Total revenue
for the three months ended December 31, 2021 decreased by approximately $0.6 million, or 18.2%, as compared with the three months ended
December 31, 2020. The significant decrease was mainly because of the decrease in garment manufacturing business offset by increases in
logistics services business and property management and leasing business.
Revenue generated
from our garment manufacturing business contributed approximately $0.03 million (0.9%) and $2.3 million (67.1%) of total revenue for the
three months ended December 31, 2021 and 2021, respectively. The decrease of $2.3 million was mainly due to factory re-decoration, remaining
factories cannot provide as much capacity as before, we estimate the capacity will recover in early 2022.
6
Revenue generated
from our logistics services business contributed approximately $1.7 million or 61.6% of our total revenue for the three months ended December
31, 2021. Revenue generated from our logistic business contributed approximately $0.8 million or 24.2% of our total revenue for the three
months ended December 31, 2020. YXPF, the new subsidiary has developed the business to replace the business of HPF, which was disposed
of in September 2020.
Revenue generated
from our property management and subleasing business contributed approximately $1.0 million or 37.5% of our total revenue for the three
months ended December 31, 2021. This is a new business segment developed in current period. Revenue of the segment contributed approximately
$0.3 million, or 8.6% of our total revenue for the three months ended December 31, 2020.
There was no
revenue generated from our epidemic prevention supplies business for the three months ended December 31, 2021 because no orders were obtained
in the quarter. The Company accepted sales orders very cautiously to make sure the sales orders can be matched with stable suppliers to
secure profitability of each order. Revenue generated from our epidemic prevention supplies business contributed approximately $0.01 million,
or 0.1% of our total revenue for the three months ended December 31, 2020.
Cost of
revenue
Three months ended December 31,
Increase
(decrease) in
2021
2020
2021 compared
to 2020
(In U.S. dollars, except for percentages)
Net revenue for garment manufacturing
$
25,641
100.0
%
$
2,287,981
100
%
$
(2,262,340
)
(98.9
)%
Raw materials
8,829
34.4
%
1,620,775
70.8
%
(1,611,946
)
(99.5
)%
Labor
12,783
49.9
%
467,478
20.5
%
(454,695
)
(97.3
)%
Other and Overhead
6,306
24.6
%
16,747
0.7
%
(10,441
)
(62.3
)%
Total cost of revenue for garment manufacturing
27,918
108.9
%
2,105,000
92.0
%
(2,077,082
)
(98.7
)%
Gross profit for garment manufacturing
(2,277
)
(8.9
)%
182,981
8.0
%
(185,258
)
(101.2
)%
Net revenue for logistics services
1,719,202
100.0
%
824,025
100.0
%
895,177
108.6
%
Fuel, toll and other cost of logistics services
568,726
33.1
%
482,568
58.6
%
86,158
)
17.9
%
Subcontracting fees
842,510
49.0
%
85,766
10.4
%
756,744
882.3
%
Total cost of revenue for logistics services
1,411,236
82.1
%
568,334
69.0
%
842,902
148.3
%
Gross Profit for logistics services
307,967
17.9
%
255,691
31.0
%
52,276
20.4
%
Net revenue for property management and subleasing
1,046,627
100.0
%
294,759
100.0
%
751,868
255.1
%
Total cost of revenue for property management and subleasing
884,556
84.5
%
272,759
92.5
%
611,797
224.3
%
Gross Profit for property management and subleasing
162,071
15.5
%
22,000
7.5
%
140,071
636.7
%
Net revenue for epidemic prevention supplies
$
-
$
4,786
100.0
%
(4,786
)
(100.0
)%
Merchandise/Finished goods/Raw materials
6
4,030
84.2
%
(4,024
)
(99.9
)%
Total cost of revenue for epidemic prevention supplies
6
4,030
84.2
%
(4,024
)
(99.9
)%
Gross (loss) income for epidemic prevention supplies
(6
)
756
15.8
%
(762
)
(100.8
)%
Total cost of revenue
$
2,323,716
83.2
%
$
2,950,123
86.5
%
$
(626,407
)
(21.2
)%
Gross profit
$
467,754
16.8
%
$
461,428
13.5
%
$
6,326
1.4
%
7
For our garment
manufacturing business, we purchase the majority of our raw materials directly from numerous local fabric and accessories suppliers.
Raw material
costs for our garment manufacturing business were 34.4% of our total garment manufacturing business revenue in the three months ended
December 31, 2021, compared with 70.8% in the three months ended December 31, 2020. The decreased in percentages was mainly due to the
purchase cost of the raw materials dropped.
Labor costs
for our garment manufacturing business were 49.9% of our total garment manufacturing business revenue in the three months ended December
31, 2021, compared with 20.5% in the three months ended December 31, 2020. The increase in percentages was mainly due to the rising wages
in the PRC.
Overhead and
other expenses for our garment manufacturing business accounted for 24.6% of our total garment business revenue for the three months ended
December 31, 2021, compared with 0.7% of total garment business revenue for the three months ended December 31, 2020.
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 29.9% and 10.4% of total cost of revenues for our service segment for the three
months ended December 31, 2021 and 2020, respectively. The percentage increased as we used more subcontractors than our own logistics
when COVID-19 epidemic was under controlled and aggregated subcontracting service to the largest supplier. We have not experienced any
disputes with our subcontractor and we believe we maintain good relationships with our contract logistics services provider.
Fuel, toll and
other costs for our service business for the three months ended December 31, 2021 were approximately $0.6 million compared with $0.5 million
for the three months ended December 31, 2020. Fuel, toll and other costs for our service business accounted for 33.1% of our total service
revenue for the three months ended December 31, 2021, compared with 58.6% for the three months ended December 31, 2020. The decrease in
percentages was primarily attributable to decrease of use of our own logistics.
Subcontracting
fees for our service business for the three months ended December 31, 2021 increased 8.8 times to approximately $0.8 million from $0.1
million for the three months ended December 31, 2020. Subcontracting fees accounted for 49.0% and 10.4% of our total service business
revenue in the three months ended December 31, 2021 and 2020, respectively. The significant increase in percentages was primarily because
the Company used more subcontractors when the epidemic was getting controlled.
8
For property
management and subleasing business, the cost of revenue was mainly the amortization of operating lease assets for the subleasing business.
For epidemic
prevention supplies business, we have trading and own production. The cost of revenue included cost of merchandise and cost of our own
products. The other cost of the quarter represented depreciation of machinery.
Gross
profit
Garment manufacturing
business gross loss for the three months ended December 31, 2021 was approximately $0.002 million, or -8.9% of our total Garment manufacturing
business revenue, as compared with gross profit of approximately $0.2 million, or 8.0% of our total Garment manufacturing business revenue
for the three months ended December 31, 2020. The gross margin was 16.9% lower due to higher raw material cost in the quarter ended December
31, 2021.
Gross profit
in our logistics services business for the three months ended December 31, 2021 was approximately $0.3 million and gross margin was 17.9%.
Gross profit in our logistics services business for the three months ended December 31, 2020 was approximately $0.3 million and gross
margin was 31.0%. The decrease of gross profit ratio was mainly because of the increased cost of subcontractors in recent period.
Gross profit
in our property management and subleasing business for the three months ended December 31, 2021 was approximately $0.2 million, or 15.5%
of our total property management and subleasing business revenue. Gross profit of the segment for the three months ended December 31,
2020 was approximately $0.02 million, or 7.5% of the revenue of the segment.
Three months ended December 31,
Increase
(decrease)
in
2021
2020
2021 compared
to 2020
(In U.S. dollars, except for percentages)
Gross profit
$
467,754
100
%
$
461,428
100
%
6,326
1.4
%
Operating expenses:
Selling expenses
(43,118
)
(9.2
)%
(217,942
)
(47.2
)%
174,824
80.2
%
General and administrative expenses
(452,312
)
(96.7
)%
(532,012
)
(115.3
)%
79,700
15.0
%
Total
$
(495,430
)
(105.9
)%
$
(749,954
)
(162.5
)%
254,524
33.9
%
Loss from operations
$
(27,676
)
(5.9
)%
$
(288,526
)
(62.5
)%
260,850
90.4
%
Selling,
General and administrative expenses
Our selling
expenses in our Garment manufacturing business segment for the three months ended December 31, 2021 and 2020 was approximately $0.001
million and $0.001 million, respectively. Our selling expenses in our logistics services segment was nil for the three months ended December
31, 2021 and 2020, respectively. Selling expenses in our property management and subleasing business was approximately $0.04 million and
$0.02 million for the three months ended December 31, 2021 and 2020, respectively. Selling expenses in our epidemic prevention supplies
segment was nil and approximately $0.2 million for the three months ended December 31, 2021 and 2020, respectively. Selling expenses consist
primarily of advertisement, local transportation, unloading charges and product inspection charges. Total selling expenses for the three
months ended December 31, 2021 decreased 80.2% to approximately $0.04 million from $0.2 million for the three months ended December 31,
2020. It was mainly due to decrease of marketing expenses of epidemic prevention supplies business.
Our general
and administrative expenses in our Garment manufacturing business segment for the three months ended December 31, 2021 and 2020 was approximately
$0.03 million and $0.08 million, respectively. Our general and administrative expenses in our logistics services segment, for the three
months ended December 31, 2021 and 2020 was both approximately $0.2 million. The general and administrative expenses in our property management
and subleasing business was approximately $0.1 million and $0.001 million for the three months ended December 31, 2021 and 2020, respectively.
Our general and administrative expenses in our epidemic prevention supplies segment was nil and approximately $0.001 million for the three
months ended December 31, 2021 and 2020, respectively. Our general and administrative expenses in our corporate office for the three months
ended December 31, 2021 and 2020 was approximately $0.1 million and $0.2 million, respectively. General and administrative expenses consist
primarily of administrative salaries, office expense, certain depreciation and amortization charges, repairs and maintenance, legal and
professional fees, warehousing costs and other expenses that are not directly attributable to our revenues.
9
Total general
and administrative expenses for the three months ended December 31, 2021 decreased by 15.0% to approximately $0.45 million from $0.53
million for the three months ended December 31, 2020.
Loss from
operations
Loss from operations
for the three months ended December 31, 2021 and 2020 was approximately $0.03 million and $0.3 million, respectively. Loss from operations
of approximately $0.03 million and income of $0.1 million was attributed from our garment manufacturing segment for the three months ended
December 31, 2021 and 2020, respectively. Income from operations of approximately $0.1 million and $0.06 million was attributed from our
logistics services segment for the three months ended December 31, 2021 and 2020, respectively. Income from operations of approximately
$0.01 million and $0.006 million was attributed from our newly developed property management and subleasing business for the three months
ended December 31, 2021 and 2020, respectively. Income (loss) from operations of nil and approximately ($0.2) million was attributed from
our epidemic prevention supplies segment for the three months ended December 31, 2021 and 2020, respectively. We incurred a loss from
operations in corporate office of approximately $0.1 million and $0.2 million for the three months ended December 31, 2021 and 2020, respectively.
The loss from our corporate office was mainly due to increase in legal and professional fees to comply with the SEC accounting, disclosure
and reporting requirements.
Income
Tax Expenses
Income tax expense
for the three months ended December 31, 2021 and 2020 was approximately $0.002 million and $0.016 million, respectively, 86.0% decrease
compared to 2020. The Company operates in the PRC and files tax returns in the PRC jurisdictions.
Yingxi Industrial
Chain Group Co., Ltd was incorporated in the Republic of Seychelles and, under the current laws of the British Virgin Islands, is not
subject to income taxes.
Yingxi HK was
incorporated in Hong Kong and is subject to Hong Kong income tax at a progressive tax rate of 16.5%. No provision for income taxes in
Hong Kong has been made as Yingxi HK had no taxable income for the three months ended December 31, 2021 and 2020.
QYTG and YX
were incorporated in the PRC and is subject to the PRC Enterprise Income Tax (EIT) rate is 25%. No provision for income taxes in the PRC
has been made as QYTG and YX had no taxable income for the three months ended December 31, 2021 and 2020.
The Company
is governed by the Income Tax Laws of the PRC. All Yingxi’s operating companies are subject to progressive EIT rates from 5% to
15% in 2021. The preferential tax rates will be expired at end of year 2022 and the EIT rate will be 25% from year 2023.
The Company’s
parent entity, Addentax Group Corp. is a U.S entity and is subject to the United States federal income tax. No provision for income taxes
in the United States has been made as Addentax Group Corp. had no United States taxable income for the three months ended December 31,
2021 and 2020.
Net Income
(Loss)
We incurred
a net income of approximately $0.01 million and a net loss of $0.3 million for the three months ended December 31, 2021 and 2020, respectively.
Our basic and diluted earnings per share were $0.00 and ($0.01) for the three months ended December 31, 2021 and 2020, respectively.
10
Results of
Operations for the nine months ended December 31, 2021 and 2020
The following
tables summarize our results of operations for the nine months ended December 31, 2021 and 2020. The table and the discussion below should
be read in conjunction with our consolidated financial statements and the notes thereto appearing elsewhere in this report.
Nine months Ended December 31,
Changes in 2021
2021
2020
compared to 2020
(In U.S. dollars, except for percentages)
Revenue
$
9,835,733
100.0
%
$
21,014,064
100.0
%
$
(11,178,331
)
(53.2
)%
Cost of revenues
(8,314,149
)
(84.5
)%
(22,776,087
)
(108.4
)%
14,461,938
63.5
%
Gross profit (loss)
1,521,584
15.5
%
(1,762,023
)
(8.4
)%
3,283,607
(186.4
)%
Operating expenses
(1,510,823
)
(15.4
)%
(1,830,992
)
(8.7
)%
320,169
17.5
%
Income (loss) from operations
10,761
0.1
%
(3,593,015
)
(17.1
)%
3,603,776
100.3
%
Other income, net
132,959
1.3
%
62,489
0.3
%
70,470
112.8
%
Net finance cost
(3,240
)
(0.0
)%
(6,484
)
0.0
%
3,244
50.0
%
Income tax expense
(17,893
)
(0.2
)%
(23,196
)
(0.1
)%
5,303
)
22.9
%
Net income (loss)
$
122,587
1.2
%
$
(3,560,206
)
(16.9
)%
$
3,682,793
103.4
%
Revenue
Total revenue
for the nine months ended December 31, 2021 decreased by approximately $11.2 million, or 53.2%, as compared with the nine months ended
December 31, 2020. The significant decrease was mainly because of the decrease of epidemic supply business and garment manufacturing business
offset by increases in logistics services business and property management and leasing business.
Revenue generated
from our garment manufacturing business contributed approximately $2.5 million (25.3%) and $5.2 million (24.7%) of total revenue for the
nine months ended December 31, 2021 and 2020, respectively. The decrease of approximately $2.7 million mainly due to factory re-decoration
which caused a capacity decrease. We estimate the capacity will recover in the first quarter of 2022.
11
Revenue generated
from our logistics services business contributed approximately $4.1 million or 42.1% of our total revenue for the nine months ended December
31, 2021. Revenue generated from our logistic business contributed approximately $3.7 million or 17.4% of our total revenue for the nine
months ended December 31, 2020. The increase of $0.4 million was because YXPF, the new subsidiary was developing the business to replace
the business of HPF, which was disposed of in September 2020.
Revenue generated
from our property management and subleasing business contributed approximately $3.2 million or 32.6% of our total revenue for the nine
months ended December 31, 2021.
There was no
revenue generated from our epidemic prevention supplies business for the nine months ended December 31, 2021 because no profitable orders
were obtained in the period. The Company accepted sales orders very cautiously to make sure the sales orders can be matched with stable
suppliers to secure profitability of each order. Revenue generated from our epidemic prevention supplies business contributed approximately
$11.9 million, or 56.5% of our total revenue for the nine months ended December 31, 2020.
Cost of
revenue
Nine months ended December 31,
Increase
(decrease) in
2021
2020
2021 compared
to 2020
(In U.S. dollars, except for percentages)
Net revenue for garment manufacturing
$
2,488,173
100.0
%
$
5,186,042
100.0
%
$
(2,697,869
)
(52.0
)%
Raw materials
1,719,420
69.1
%
3,709,275
71.5
%
(1,989,855
)
(53.6
)%
Labor
542,118
21.8
%
1,030,350
19.9
%
(488,232
)
(47.4
)%
Other and Overhead
23,124
0.9
%
30,918
0.6
%
(7,794
)
(25.2
)%
Total cost of revenue for garment manufacturing
2,284,662
91.8
%
4,770,543
92.0
%
(2,485,881
)
(52.1
)%
Gross profit for garment manufacturing
203,511
8.2
%
415,499
8.0
%
(211,988
)
(51.0
)%
Net revenue for logistics services
4,144,604
100.0
%
3,664,409
100.0
%
480,195
13.1
%
Fuel, toll and other cost of logistics services
1,410,231
34.0
%
1,367,753
37.3
%
42,478
3.1
%
Subcontracting fees
1,868,648
45.1
%
1,576,228
43.0
%
292,420
18.6
%
Total cost of revenue for logistics services
3,278,879
79.1
%
2,943,981
80.3
%
334,898
11.4
%
Gross Profit for logistics services
865,725
20.9
%
720,428
19.7
%
145,297
20.2
%
Net revenue for property management and subleasing
3,202,956
100.0
%
294,759
100
%
2,908,197
986.6
%
Total cost of revenue for property management and subleasing
2,749,114
85.8
%
272,759
92.5
%
2,476,355
907.9
%
Gross Profit for property management and subleasing
453,842
14.2
%
22,000
7.5
%
431,842
1,962.9
%
Net revenue for epidemic prevention supplies
$
-
$
11,868,854
100.0
%
(11,868,854
)
(100.0
)%
Merchandise/Finished goods/Raw materials
-
14,684,284
123.7
%
(14,684,284
)
(100.0
)%
Labor
-
64,946
0.5
%
(64,946
)
(100.0
)%
Other and Overhead
1,494
39,574
0.3
%
(38,080
)
(96.2
)%
Total cost of revenue for epidemic prevention supplies
1,494
14,788,804
124.6
%
(14,787,310
)
(100.0
)%
Gross loss for epidemic prevention supplies
(1,494
)
(2,919,950
)
(24.6
)%
2,918,456
(99.9
)%
Total cost of revenue
$
8,314,149
84.5
%
$
22,776,087
108.4
%
$
(14,461,938
)
(63.5
)%
Gross profit
$
1,521,584
15.5
%
$
(1,762,023
)
(8.4
)%
$
3,283,607
186.4
%
12
For our garment
manufacturing business, we purchase the majority of our raw materials directly from numerous local fabric and accessories suppliers.
Raw material
costs for our garment manufacturing business were 69.1% of our total garment manufacturing business revenue in the nine months ended December
31, 2021, compared with 71.5% in the nine months ended December 31, 2020. The decreased in percentages was mainly due to the purchase
cost of the raw materials dropped.
Labor costs
for our garment manufacturing business were 21.8% of our total garment manufacturing business revenue in the nine months ended December
31, 2021, compared with 19.9% in the nine months ended December 31, 2020. The increase in percentages was mainly due to the rising wages
in the PRC.
Overhead and
other expenses for our garment manufacturing business accounted for 8.2% of our total garment business revenue for the nine months ended
December 31, 2021, compared with 8.0% of total garment business revenue for the nine months ended December 31, 2020.
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 30.3% and 43.0% of total cost of revenues for our service segment for the nine
months ended December 31, 2021 and 2020, respectively. The percentage decreased as we used our own logistics more than the subcontractors
under COVID-19 epidemic. We have not experienced any disputes with our subcontractor and we believe we maintain good relationships with
our contract logistics services provider.
Fuel, toll and
other costs for our service business for the nine months ended December 31, 2021 were approximately $1.4 million compared with $1.4 million
for the nine months ended December 31, 2020. Fuel, toll and other costs for our service business accounted for 34.0% of our total service
revenue for the nine months ended December 31, 2021, compared with 37.3% for the nine months ended December 31, 2020.
Subcontracting
fees for our service business for the nine months ended December 31, 2021 increased 18.6% to approximately $1.9 million from $1.6 million
for the nine months ended December 31, 2020. Subcontracting fees accounted for 45.1% and 43.0% of our total service business revenue in
the nine months ended December 31, 2021 and 2020, respectively.
13
For property
management and subleasing business, the cost of revenue was mainly the amortization of operating lease assets for the subleasing business.
For epidemic
prevention supplies business, we have trading and own production. The cost of revenue included cost of merchandise and cost of our own
products. The other cost of the quarter represented depreciation of machinery.
Gross
profit
Garment manufacturing
business gross profit was approximately $0.2 million, accounted for 8.2% of our total Garment manufacturing business revenue for the nine
months ended December 31, 2021 and approximately $0.4 million, accounted for 8.0% of our total Garment manufacturing business revenue
for the nine months ended December 31, 2020. The gross margin was 0.2% higher due to lower raw material cost in the months ended December
31, 2021.
Gross profit
in our logistics services business for the nine months ended December 31, 2021 was approximately $0.9 million and accounted for 20.9%
of our total Logistics services business revenue. Gross profit in our logistics services business for the nine months ended December 31,
2020 was approximately $0.7 million and accounted for 19.7% of our total Logistics services business revenue. The increase of gross profit
ratio was mainly because of a decrease of operating expenses due to replacement of old vehicles and shifting our strategic focus on high
margin customers.
Gross profit
in our property management and subleasing business for the nine months ended December 31, 2021 was approximately $0.5 million, or 14.2%
of our total property management and subleasing business revenue. Gross profit in our property management and subleasing business for
the nine months ended December 31, 2020 was $0.02 million, or 7.5% of our total property management and subleasing business revenue.
Nine months ended December 31,
Increase
(decrease) in
2021
2020
2021 compared
to 2020
(In U.S. dollars, except for percentages)
Gross profit
$
1,521,584
100
%
$
(1,762,023
)
(100
)%
3,283,607
186.4
%
Operating expenses:
Selling expenses
(135,310
)
(8.9
)%
(376,975
)
(21.4
)%
241,665
64.1
%
General and administrative expenses
(1,375,513
)
(90.4
)%
(1,454,017
)
(82.5
)%
78,504
)
5.4
%
Total
$
(1,510,823
)
(99.3
)%
$
(1,830,992
)
(103.9
)%
320,169
17.5
%
Income from operations
$
10,761
(0.7
)%
$
(3,593,015
)
(203.9
)%
3,603,776
100.3
%
Selling,
General and administrative expenses
Our selling
expenses in our Garment manufacturing business segment for the nine months ended December 31, 2021 and 2020 was $0.0003 million and approximately
$0.003 million, respectively. Our selling expenses in our logistics services segment was nil for the nine months ended December 31, 2021
and 2020, respectively. Selling expenses in our property management and subleasing business was $0.1 million for the nine months ended
December 31, 2021. Selling expenses in our epidemic prevention supplies segment was nil and approximately $0.4 million for the nine months
ended December 31, 2021 and 2020, respectively. Selling expenses consist primarily of advertisement, local transportation, unloading charges
and product inspection charges. Total selling expenses for the nine months ended December 31, 2021 decreased 64.1% to $0.1 million from
$0.4 million for the nine months ended December 31, 2020. It was mainly due to decrease of marketing expenses of epidemic prevention supplies
business.
Our general
and administrative expenses in our Garment manufacturing business segment for the nine months ended December 31, 2021 and 2020 was approximately
$0.1 million and $0.2 million, respectively. Our general and administrative expenses in our logistics services segment, for the nine months
ended December 31, 2021 and 2020 was approximately $0.7 million and $0.6 million. The general and administrative expenses in our property
management and subleasing business was approximately $0.3 million and $0.001 million for the nine months ended December 31, 2021 and 2020,
respectively. Our general and administrative expenses in our epidemic prevention supplies segment was nil and approximately $0.02 million
for the nine months ended December 31, 2021 and 2020, respectively. Our general and administrative expenses in our corporate office for
the nine months ended December 31, 2021 and 2020 was approximately $0.3 million and $0.6 million, respectively. General and administrative
expenses consist primarily of administrative salaries, office expense, certain depreciation and amortization charges, repairs and maintenance,
legal and professional fees, warehousing costs and other expenses that are not directly attributable to our revenues.
14
Total general
and administrative expenses for the nine months ended December 31, 2021 and 2020 was approximately $1.4 million and $1.5 million, respectively.
Income
(loss) from operations
Income from
operations for the nine months ended December 31, 2021 was approximately $0.01 million and loss from operations for the nine months ended
December 31, 2020 was approximately $3.6 million. Income from operations of approximately $0.1 million and $0.2 million was attributed
from our garment manufacturing segment for the nine months ended December 31, 2021 and 2020, respectively. Income from operations of approximately
$0.2 million and $0.1 million was attributed from our logistics services segment for the nine months ended December 31, 2021 and 2020,
respectively. Income from operations of approximately $0.05 million and $0.006 million was attributed from our property management and
subleasing business for the nine months ended December 31, 2021 and 2020, respectively. Income (loss) from operations of nil and approximately
($3.3) million was attributed from our epidemic prevention supplies segment for the nine months ended December 31, 2021 and 2020, respectively.
We incurred a loss from operations in corporate office of approximately $0.3 million and $0.6 million for the nine months ended December
31, 2021 and 2020, respectively. The loss from our corporate office was mainly due to increase in legal and professional fees to comply
with the SEC accounting, disclosure and reporting requirements.
Income
Tax Expenses
Income tax expense
for the nine months ended December 10, 2021 and 2020 was approximately $0.018 million and $0.023 million, respectively, 22.9% decrease
compared to 2020. The Company operates in the PRC and files tax returns in the PRC jurisdictions.
Yingxi Industrial
Chain Group Co., Ltd was incorporated in the Republic of Seychelles and, under the current laws of the British Virgin Islands, is not
subject to income taxes.
Yingxi HK was
incorporated in Hong Kong and is subject to Hong Kong income tax at a progressive tax rate of 16.5%. No provision for income taxes in
Hong Kong has been made as Yingxi HK had no taxable income for the nine months ended December 31, 2021 and 2020.
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 nine months ended December 31, 2021 and 2020.
The Company
is governed by the Income Tax Laws of the PRC. All Yingxi’s operating companies are subject to progressive EIT rates from 5% to
15% in 2021. The preferential tax rates will be expired at end of year 2022 and the EIT rate will be 25% from year 2023.
The Company’s
parent entity, Addentax Group Corp. is a U.S entity and is subject to the United States federal income tax. No provision for income taxes
in the United States has been made as Addentax Group Corp. had no United States taxable income for the nine months ended December 31,
2021 and 2020.
Net Income
(Loss)
We incurred
a net income of approximately $0.1 million and a net loss of $3.6 million for the nine months ended December 31, 2021 and 2020, respectively.
Our basic and diluted earnings per share were $0.00 and ($0.14) for the nine months ended December 31, 2021 and 2020, respectively.
Summary of
cash flows
Summary cash
flows information for the nine months ended December 31, 2021 and 2020 is as follow:
Nine months ended December 31,
2021
2020
(In U.S. dollars)
Net cash provided by (used in) operating activities
$
383,825
$
(3,782,116
)
Net cash used in investing activities
$
(176,268
)
$
(1,094,344
)
Net cash (used in) provided by financing activities
$
(1,543,573
)
$
4,718,213
Net cash used
in operating activities in the nine months ended December 31, 2021 was approximately $4.2 million more than that of the nine months ended
December 31, 2020. It was mainly because the net income of the nine months ended December 31, 2021 was approximately $0.1 million while
it was a net loss of approximately $3.6 million for the nine months ended December 31, 2020. The movement of operating assets and liabilities
of the nine months ended December 31, 2021 resulted in cash inflow of approximately $0.1 million, while the movement of operating assets
and liabilities of the nine months ended December 31, 2020 resulted in cash outflow of approximately $0.3 million. 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.
15
Net cash used
in investing activities for the nine months ended December 31, 2021 was approximately $0.9 million less than that of the nine months ended
December 31, 2020. It was mainly because the purchase of plant and equipment and other assets in the nine months ended December 31, 2021
was approximately $0.2 million less than the purchase of plant and equipment in the nine months ended December 31, 2020. Moreover, there
was a cash decrease of approximately $0.7 million due to disposal of two subsidiaries in the nine months ended December 31, 2020.
Net cash of
financing activities for the nine months ended December 31, 2021 was approximately $6.2 million less than the nine months ended December
31, 2020. It was mainly because there was proceeds of $3.7 million from issue of ordinary shares in the nine months ended December 31,
2020; the net repayment of related party borrowings in current period was approximately $2.6 million more than that of the nine months
ended December 31, 2020; and there was repayment of bank borrowing of $0.1 million in the nine months ended December 31, 2020.
Financial
Condition, Liquidity and Capital Resources
As of December
31, 2021, we had cash on hand of approximately $0.5 million, total current assets of approximately $4.8 million and current liabilities
of approximately $9.5 million. We presently finance our operations by using the cash flows borrowed 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 Company’s financial conditions
raise substantial doubt about the Company’s ability to continue as a going concern. The ability to continue as a going concern is
dependent upon the Company’s profit generating operations in the future and/or obtaining the necessary financing to meet its obligations
and repay its liabilities arising from normal business operations when they become due. The Company expects to finance operations primarily
through cash flow from revenue and capital contributions from the CEO. During the year, the CEO has provided financial support for the
operations of the Company. In the event that the Company requires additional funding to finance the growth of the Company’s current
and expected future operations as well as to achieve our strategic objectives, the CEO has indicated the intent and ability to provide
additional equity financing.
The
growth and development of our business will require a significant amount of additional working capital. We currently have limited financial
resources and based on our current operating plan, we will need to raise additional capital in order to continue as a going concern. We
currently do not have adequate cash to meet our short or long-term objectives. In the event additional capital is raised, it may have
a dilutive effect on our existing stockholders.
We
are subject to all the substantial risks inherent in the development of a new business enterprise within an extremely competitive industry.
Due to the absence of a long standing operating history and the emerging nature of the markets in which we compete, we anticipate operating
losses until we can successfully implement our business strategy, which includes all associated revenue streams. Our revenue model is
new and evolving, and we cannot be certain that it will be successful. The potential profitability of this business model is unproven.
We may never ever achieve profitable operations. Our future operating results depend on many factors, including demand for our services,
the level of competition, and the ability of our officers to manage our business and growth. As a result of the emerging nature of the
market in which we compete, we may incur operating losses until such time as we can develop a substantial and stable revenue base. Additional
development expenses may delay or negatively impact the ability of the Company to generate profits. Accordingly, we cannot assure you
that our business model will be successful or that we can sustain revenue growth, achieve or sustain profitability, or continue as a going
concern.
Foreign Currency
Translation Risk
Our operations
are located in China, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility in foreign
exchange rates between the U.S. dollar and the Chinese Renminbi (“RMB”). All of our sales are in RMB. In the past years, RMB
continued to appreciate against the U.S. dollar. As of December 31, 2021, the market foreign exchange rate was RMB 6.355 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 for the nine months ended December 31, 2021 and 2020 was approximately $0.06 million and $0.2 million respectively.
Off-Balance
Sheet Arrangements
We have no off-balance
sheet arrangements (as that term is defined in Item 303(a)(4)(ii) of Regulation S-K) as of December 31, 2021 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.
16
Item 3. Quantitative
and Qualitative Disclosures About Market Risk
Not applicable
to smaller reporting companies.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.