ADDENTAX GROUP CORP. 10-Q

Item 1. Financial Statements and Supplementary Data ADDENTAX GROUP CORP. FINANCIAL STATEMENTS For the three months ended June 30, 2023 and 2022 TABLE OF CONTENTS Condensed Consolidated Balance sheets as of June 30, 2023 and March 31, 2023 (unaudited) F-2 Condensed Consolidated Statements of Income and Comprehensive Income for the Three months ended June 30, 2023 and 2022 (unaudited) F-3 Condensed Consolidated Statements of Changes in Equity for the three months ended June 30, 2023 and 2022 (unaudited) F-4 Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2023 and 2022 (unaudited) F-5 Notes to Condensed Consolidated Financial Statements for the three months ended June 30, 2023 and 2022 (unaudited) F-6 – F-14 F- 1 ADDENTAX GROUP CORP. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (In U.S. Dollars, except share data or otherwise stated) (UNAUDITED) June 30, 2023 March 31, 2023 ASSETS CURRENT ASSETS Cash and cash equivalents $ 487,215 $ 562,711 Restricted cash 5,750,000 - Accounts receivables, net 1,963,293 1,858,889 Debt securities held-to-maturity 17,828,125 17,718,750 Inventories 265,742 285,528 Prepayments and other receivables 8,506,690 959,196 Advances to suppliers 1,903,164 1,281,075 Amount due from related party 510,708 375,092 Total current assets 37,214,937 23,041,241 NON-CURRENT ASSETS Plant and equipment, net 586,492 649,120 Long-term prepayments 57,876 90,032 Restricted cash - 14,750,000 Long-term receivables 2,500,000 2,500,000 Operating lease right of use asset 232,350 272,488 Total non-current assets 3,376,718 18,261,640 TOTAL ASSETS $ 40,591,655 $ 41,302,881 LIABILITIES AND EQUITY CURRENT LIABILITIES Short-term loan $ 130,176 $ 137,468 Accounts payable 254,288 267,501 Amount due to related parties 2,093,025 2,384,633 Advances from customers - 2,152 Accrued expenses and other payables 462,469 606,843 Operating lease liability current portion 120,359 127,101 Total current liabilities 3,060,317 3,525,698 NON-CURRENT LIABILITIES Convertible debts 8,510,226 11,219,519 Derivative liabilities 4,582,560 2,290,483 Operating lease liability 111,991 145,387 Total non-current liabilities 13,204,777 13,655,389 TOTAL LIABILITIES $ 16,265,094 $ 17,181,087 EQUITY Common stock ($ 0.001 par value, 250,000,000 shares authorized, 3,739,581 and 35,454,670 shares issued and outstanding at June 30 and March 31, 2023, respectively) $ 3,740 $ 35,455 Additional paid-in capital 32,406,317 29,528,564 Accumulated Deficit ( 8,179,930 ) ( 5,451,209 ) Statutory reserve 28,457 28,457 Accumulated other comprehensive loss 67,977 ( 19,473 ) Total equity 24,326,561 24,121,794 ) TOTAL LIABILITIES AND EQUITY $ 40,591,655 $ 41,302,881 See accompany notes to the unaudited condensed consolidated financial statements. F- 2 ADDENTAX GROUP CORP. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (In U.S. Dollars, except share data or otherwise stated) 2023 2022 Three months ended June 30, 2023 2022 REVENUES $ 1,052,506 $ 2,386,384 COST OF REVENUES ( 815,597 ) ( 1,929,700 ) GROSS PROFIT 236,909 456,684 OPERATING EXPENSES Selling and marketing - ( 5,642 ) General and administrative ( 497,858 ) ( 404,940 ) Total operating expenses ( 497,858 ) ( 410,582 ) (LOSS) INCOME FROM OPERATIONS ( 260,949 ) 46,102 Fair value gain or loss ( 1,288,003 ) - Interest income 1,724 3,238 Interest expenses ( 1,292,715 ) ( 2,458 ) Other income (expense), net 112,486 51,083 (LOSS) INCOME BEFORE INCOME TAX EXPENSE ( 2,727,457 ) 97,965 INCOME TAX EXPENSE ( 1,264 ) ( 1,294 ) NET (LOSS) INCOME ( 2,728,721 ) 96,671 Foreign currency translation gain (loss) 87,450 105,149 TOTAL COMPREHENSIVE (LOSS) INCOME $ ( 2,641,271 ) $ 201,820 EARNINGS (LOSS) PER SHARE Basic and diluted ( 0.83 ) 0.00 Weighted average number of shares outstanding – Basic and diluted 3,273,964 26,693,004 See accompany notes to the unaudited condensed consolidated financial statements. F- 3 ADDENTAX GROUP CORP. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (In U.S. Dollars, except share data or otherwise stated) Common Stock Additional Retained earnings (accumulated deficit) Accumulated other Shares Amount paid-in capital Unrestricted Statutory reserve comprehensive loss Total Equity BALANCE AT MARCH 31, 2022 26,693,004 $ 26,693 $ 6,815,333 $ ( 6,756,230 ) $ 13,821 $ ( 170,984 ) $ ( 71,367 ) Foreign currency translation 105,149 105,149 Net income for the period - - - 96,671 - - 96,671 BALANCE AT JUNE 30, 2022 26,693,004 $ 26,693 $ 6,815,333 $ ( 6,659,559 ) $ 13,821 $ ( 65,835 ) $ 130,453 BALANCE AT MARCH 31, 2023 35,454,670 $ 35,455 $ 29,528,564 $ ( 5,451,209 ) $ 28,457 $ ( 19,473 ) $ 24,121,794 Balance, value 35,454,670 $ 35,455 $ 29,528,564 $ ( 5,451,209 ) $ 28,457 $ ( 19,473 ) $ 24,121,794 Issuance of new shares 1,940,750 1,941 ( 1,941 ) - - - - Reverse stock split ( 33,655,878 ) ( 33,656 ) 33,656 - - - - New shares for round up of fragmental shares 39 0 0 - - - - Additional paid-in capital from conversion of convertible debts - - 2,846,038 - - - 2,846,038 Foreign currency translation - - - - - 87,450 87,450 Net income for the period - - - ( 2,728,721 ) - - ( 2,728,721 ) BALANCE AT JUNE 30, 2023 3,739,581 $ 3,740 $ 32,406,317 $ ( 8,179,930 ) $ 28,457 $ 67,977 $ 24,326,561 Balance, value 3,739,581 $ 3,740 $ 32,406,317 $ ( 8,179,930 ) $ 28,457 $ 67,977 $ 24,326,561 See accompanying notes to the unaudited condensed consolidated financial statements. F- 4 ADDENTAX GROUP CORP. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In U.S. Dollars, except share data or otherwise stated) 2023 2022 Three Months Ended June 30 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ ( 2,728,721 ) $ 96,671 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation 74,783 35,883 Non-cash financial cost 1,290,818 - Investment income ( 109,375 ) - Fair value gain or loss 1,288,003 - Changes in operating assets and liabilities Accounts receivable ( 104,404 ) 27,217 Inventories 19,786 3,337 Advances to suppliers ( 622,089 ) 91,378 Other receivables ( 47,494 ) ( 443,140 ) Accounts payables ( 25,659 ) ( 83,529 ) Accrued expenses and other payables ( 144,374 ) 549,880 Advances from customers ( 2,152 ) 321 Net cash (used in) provided by operating activities $ ( 1,110,878 ) $ 278,018 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from related party borrowings 1,451,157 980,724 Repayment of related party borrowings ( 1,831,373 ) ( 364,452 ) Release of restricted cash 1,350,000 - Repayment of bank borrowings - ( 424 ) Net cash provided by financing activities $ 969,784 $ 615,848 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ( 141,094 ) 893,866 Effect of exchange rate changes on cash and cash equivalents 65,598 ( 52,162 ) Cash and cash equivalents, beginning of the period 562,711 1,390,644 CASH AND CASH EQUIVALENTS, END OF THE PERIOD $ 487,215 $ 2,232,348 Supplemental disclosure of cash flow information: Cash paid during the period for interest $ - $ - Cash paid during the period for income tax $ 1,264 $ 1,294 Supplemental disclosure of non-cash investing and financing activities: Right-of-use assets obtained in exchange for operating lease obligations $ 1,219 $ - See accompanying notes to the unaudited condensed consolidated financial statements. F- 5 ADDENTAX GROUP CORP. AND SUBSIDIARIES NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND BUSINESS ACQUISITIONS ATXG and its subsidiaries (the “Company”) are engaged in the business of garments manufacturing, providing logistic services, property leasing and management service in the People’s Republic of China (“PRC” or “China”). 2. BASIS OF PRESENTATION In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. All significant intercompany transactions and balances are eliminated in consolidation. However, the results of operations included in such financial statements may not necessarily be indicative of annual results. The Company uses the same accounting policies in preparing quarterly and annual financial statements. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2023 filed with the Securities and Exchange Commission (“SEC”) on June 29, 2023 (“2023 Form 10-K”). 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however actual results could differ materially from those estimates. There is no change in the accounting policies for the three months ended June 30, 2023. 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. Accounting for Convertible Instruments: In August 2020, FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. Among other changes, the new guidance removes from GAAP separation models for convertible debt that require the convertible debt to be separated into a debt and equity component, unless the conversion feature is required to be bifurcated and accounted for as a derivative or the debt is issued at a substantial premium. As a result, after adopting the guidance, entities will no longer separately present such embedded conversion features in equity and will instead account for the convertible debt wholly as debt. The new guidance also requires use of the “if-converted” method when calculating the dilutive impact of convertible debt on earnings per share, which is consistent with the Company’s current accounting treatment under the current guidance. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted, but only at the beginning of the fiscal year. The Company reviews new accounting standards as issued. Management has not identified any other new standards that it believes will have a significant impact on the Company’s consolidated financial statements. F- 6 4. RELATED PARTY TRANSACTIONS SUMMARY OF FINANCIAL POSITION OF ENTITIES AND GAIN OR LOSS ON DISPOSAL Name of Related Parties Relationship with the Company Zhida Hong President, CEO, and a director of the Company Hongye Financial Consulting (Shenzhen) Co., Ltd. A company controlled by CEO, Mr. Zhida Hong Bihua Yang A legal representative of XKJ Dewu Huang A legal representative of YBY Jinlong Huang Management 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, 2023 and March 31, 2023: SCHEDULE OF AMOUNT DUE FROM RELATED PARTY Amount due from related party June 30, 2023 March 31, 2023 Zhida Hong $ 58,079 $ - Bihua Yang 452,629 375,092 Amount due from related party $ 510,708 $ 375,092 SCHEDULE OF RELATED PARTIES BORROWINGS Related party borrowings June 30, 2023 March 31, 2023 Zhida Hong (1) $ - $ 901,110 Hongye Financial Consulting (Shenzhen) Co., Ltd. 84,901 45,841 Dewu Huang (2) 1,917,581 1,305,758 Jinlong Huang 90,543 131,924 Total Related party borrowings $ 2,093,025 $ 2,384,633 (1) Being interest free loan as financial support from Zhida Hong to daily operation of the Company. (2) Being interest free loan as financial support from Dewu Huang to pay for daily operating expenditures of YBY. The borrowing balances with related parties are unsecured, non-interest bearing and repayable on demand. 5. DEBT SECURITIES HELD-TO-MATURITY SCHEDULE OF DEBT SECURITIES HELD TO MATURITY June 30, 2023 March 31, 2023 Debt securities held-to-maturity $ 17,828,125 $ 17,718,750 The Company purchased a note issued by a third-party investment company on August 24, 2022. The principal amount of the note is $ 17,500,000 . The note is renewable with one-year tenor on August 23, 2023 and 2.5 % p.a. coupon. As of June 30, and March 31, 2023, the coupon receivable was $ 328,125 and $ 218,750 , respectively. 6. INVENTORIES Inventories consist of the following as of June 30, 2023 and March 31, 2023: SCHEDULE OF INVENTORIES June 30, 2023 March 31, 2023 Raw materials $ 16,147 $ 19,484 Work in progress 17,756 9,373 Finished goods 231,839 256,671 Total inventories $ 265,742 $ 285,528 F- 7 7. ADVANCES TO SUPPLIERS The Company has made advances to third-party suppliers in advance of receiving inventory parts. These advances are generally made to expedite the delivery of required inventory when needed and to help to ensure priority and preferential pricing on such inventory. The amounts advanced to suppliers are fully refundable on demand. The Company reviews a supplier’s credit history and background information before advancing a payment. If the financial condition of its suppliers were to deteriorate, resulting in an impairment of their ability to deliver goods or provide services, the Company would recognize bad debt expense in the period they are considered unlikely to be collected. 8. PREPAYMENTS AND OTHER RECEIVABLES Prepayments and other receivables consist of the following as of June 30, 2023 and March 31, 2023: SCHEDULE OF PREPAYMENTS AND OTHER RECEIVABLES June 30, 2023 March 31, 2023 Prepayment 16,031 10,913 Deposit 42,337 40,341 Receivable of consideration on disposal of subsidiaries 667,342 708,457 Receivable of consideration of convertible note issued (Note) 7,500,000 - Other receivables 280,980 199,485 Total Prepayment $ 8,506,690 $ 959,196 Note: In June, one of the holder of the convertible note withdrawn the consideration of $ 7.5 million paid for the convertible note issued from the escrow account. The Company was negotiating with the holder on this matter. In July, the Company entered into a Waiver and Ratification Agreement with this holder of the Convertible Note. According to the agreement, the holder redeemed the full amount of $ 7.5 million for the Convertible Note and irrevocably waives any past, present or future claims, rights and obligations under the Note and the Warrant. 9. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following as of June 30, 2023 and March 31, 2023: SCHEDULE OF PLANT AND EQUIPMENT June 30, 2023 March 31, 2023 Production plant $ 64,720 $ 68,345 Motor vehicles 1,042,298 1,100,683 Office equipment 24,645 26,025 Total gross 1,131,663 1,195,053 Less: accumulated depreciation ( 545,171 ) ( 545,933 ) Plant and equipment, net $ 586,492 $ 649,120 Depreciation expense for the three months ended June 30, 2023 and 2022 was $ 33,982 and $ 35,883 , respectively. F- 8 10. LONG-TERM RECEIVABLES The Company entered into a long-term loan agreement with an independent third party in September 2022. The principal to the borrower is $ 2.5 million. The loan is interest free and will be expired in August 2025 . 11. SHORT-TERM BANK LOAN In August 2019, HSW entered into a facility agreement with Agricultural Bank of China and obtained a line of credit, which allows the Company to borrow up to approximately $ 153,172 (RMB 1,000,000 ) for daily operations. The loans are guaranteed at no cost by the legal representative of HSW. As of June 30, 2023, the Company has borrowed $ 130,176 (RMB 944,255 ) (March 31, 2023: $ 137,468 ) under this line of credit with various annual interest rates from 4.34 % to 4.9 % . The outstanding loan balance was due on September 30, 2021. The Company was not able to renew the loan facility with the bank. The Company is negotiating with the bank on repayment schedule of the loan balance and interest payable. 12. TAXATION (a) Enterprise Income Tax (“EIT”) The Company operates in the PRC and files tax returns in the PRC jurisdictions. Yingxi Industrial Chain Group Co., Ltd was incorporated in the Republic of Seychelles and, under the current laws of the British Virgin Islands, is not subject to income taxes. It’s wholly owned subsidiary of Addentax Group Corp. Yingxi HK (Yingxi Industrial Chain Investment Co., Ltd.) was incorporated in Hong Kong which is indirectly wholly owned by Addentax Group Corp., and is subject to Hong Kong income tax at a progressive rate of 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, 2023 and 2022. YX, our wholly owned subsidiary, 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, 2023 and 2022. The Company is governed by the Income Tax Laws of the PRC. All Yingxi’s operating companies were subject to progressive EIT rates from 5 % to 15 % in 2023 and 2022. The preferential tax rate will be expired at end of year 2023 and the EIT rate will be 25% from year 2024. 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 June 30, 2023 and 2022. F- 9 The reconciliation of income taxes computed at the PRC statutory tax rate applicable to the PRC, to income tax expenses are as follows: SCHEDULE OF EFFECTIVE INCOME TAX RATE RECONCILIATION 2023 2022 Three months ended June 30, 2023 2022 PRC statutory tax rate 25 % 25 % Computed expected benefits (expense) ( 681,864 ) 24,491 Temporary differences 6,150 ( 40,566 ) Permanent difference 82,125 ( 2,561 Changes in valuation allowance 594,853 19,930 Income tax expense $ 1,264 $ 1,294 Deferred tax assets had not been recognized in respect of any potential tax benefit that may be derived from non-capital loss carry forward and property and equipment due to past negative evidence of previous cumulative net losses and uncertainty upon restructuring. The management will continue to assess at each reporting period to determine the realizability of deferred tax assets. (b) Value Added Tax (“VAT”) In accordance with the relevant taxation laws in the PRC, the normal VAT rate for domestic sales is 13 % , which is levied on the invoiced value of sales and is payable by the purchaser. The subsidiaries HSW, YBY, AOT, ZHJ and YS enjoyed preferential VAT rate of 13 % . The companies are required to remit the VAT they collect to the tax authority. A credit is available whereby VAT paid on purchases can be used to offset the VAT due on sales. For services, the applicable VAT rate is 9 % under the relevant tax category for logistic company, except the branch of YXPF enjoyed the preferential VAT rate of 3 % in 2023 and 2022. 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. 13. CONSOLIDATED SEGMENT DATA Segment information is consistent with how chief operating decision maker reviews the businesses, makes investing and resource allocation decisions and assesses operating performance. The segment data presented reflects this segment structure. The Company reports financial and operating information in the following four segments: (a) Garment manufacturing . Including manufacturing and distribution of garments; (b) Logistics services . Providing logistic services; and (c) Property management and subleasing. Providing shops subleasing and property management services for garment wholesalers and retailers in garment market. The Company also provides general corporate services to its segments and these costs are reported as “Corporate and others”. F- 10 Selected information in the segment structure is presented in the following tables: Revenues by segment for the three months ended June 30, 2023 and 2022 are as follows: SCHEDULE OF SEGMENT REPORTING FOR REVENUE Revenues from external customers 2023 2022 Three months ended June 30, Revenues from external customers 2023 2022 Garments manufacturing segment $ 53,873 $ 40,426 Logistics services segment 998,633 1,390,882 Property management and subleasing - 954,835 Total of reportable segments 1,052,506 2,386,143 Corporate and other - 241 Total of reportable segments and consolidated revenue $ 1,052,506 $ 2,386,384 Intersegment revenue Garments manufacturing segment - - Total of reportable segments and consolidated revenue - - (Loss) Income from operations by segment for the three ended June 30, 2023 and 2022 are as follows: SCHEDULE OF SEGMENT REPORTING FOR (LOSS) INCOME FROM OPERATION Revenues from external customers 2023 2022 Three months ended June 30, 2023 2022 Garment manufacturing segment $ ( 22,155 ) $ ( 28,656 ) Logistics services segment 1,934 120,041 Property management and subleasing - 34,097 Total of reportable segments ( 20,221 ) 125,482 Corporate and other ( 240,728 ) ( 79,380 ) Total consolidated income from operations $ ( 260,949 ) $ 46,102 Total assets by segment as of June 30, 2023 and March 31, 2023 are as follows: SCHEDULE OF SEGMENT REPORTING FOR ASSETS Total assets June 30, 2023 March 31, 2023 Garment manufacturing segment $ 2,699,607 $ 2,169,973 Logistics services segment 2,272,917 2,476,841 Total of reportable segments 4,972,524 4,646,814 Corporate and other 35,619,131 36,656,067 Consolidated total assets $ 40,591,655 $ 41,302,881 Geographical Information The Company operates predominantly in China. In presenting information on the basis of geographical location, revenue is based on the geographical location of customers and long-lived assets are based on the geographical location of the assets. Geographic Information SCHEDULE OF GEOGRAPHICAL INFORMATION Three months ended June 30, 2023 2022 Revenues China 1,052,506 2,386,384 June 30, 2023 March 31, 2023 Long-Lived Assets China 3,376,718 3,511,640 F- 11 14. FINANCIAL INSTRUMENTS On January 4, 2023, the Company entered into a series of agreements with certain accredited investors, pursuant to which the Company received a net proceed of $ 15,000,000 in consideration of the issuance of: ● senior secured convertible notes in the aggregate original principal amount of approximately $ 16.7 million with interest rate of 5 % per annum (the “Convertible Notes”); The Convertible Notes shall be matured on July 4, 2024 . The conversion price is $ 1.25 , subject to adjustment under several conditions. ● warrants to purchase up to approximately 16.1 million shares of common stock of the Company (the “Common Stock”) until on or prior to 11:59 p.m. (New York time) on the five-year anniversary of the closing date at an exercise price of $ 1.25 per share, also subject to adjustment under several conditions. The Warrant is considered a freestanding instrument issued together with the Convertible Note and measured at its issuance date fair value. Proceeds received were first allocated to the Warrant based on its initial fair value. The initial fair value of the Warrant was $ 3.9 million. The Warrant were marked to the market with the changes in the fair value of warrant recorded in the consolidated statements of operations and comprehensive loss. As of March 31, 2023, the balance of the Warrant was approximately $ 2.0 million. The Convertible Note is classified as a liability and is subsequently stated at amortized cost with any difference between the initial carrying value and the repayment amount as interest expenses using the effective interest method over the period from the issuance date to the maturity date. The embedded conversion feature should be bifurcated and separately accounted for using fair value, as this embedded feature is considered not clearly and closely related to the debt host. The bifurcated conversion feature was recorded at fair value with the changes recorded in the consolidated statements of operations and comprehensive loss. The initial fair value of the embedded conversion feature was $ 1.2 million. As of March 31, 2023, the fair value of the conversion option was $ 0.3 million. The Company determined that the other embedded features do not require bifurcation as they either are clearly and closely related to the Convertible Note or do not meet the definition of a derivative. The total proceeds of the Convertible Note and the Warrants, net of issuance cost, of $ 15.0 million was received by the Company in January 2023, and allocated to each of the financial instruments as following: SCHEDULE OF FINANCIAL INSTRUMENTS As of January 4, 2023 Derivative liabilities – Fair value of the Warrants $ 3,858,521 Derivative liabilities – Embedded conversion feature 1,247,500 Convertible Note 9,893,979 Total $ 15,000,000 In January 2023, the Company also granted to the placement agent a warrant as partial of agent fee to purchase 0.7 million shares of common stock of the Company. The warrant is matured in five years with exercise price of $ 1.25 subject to adjustments under different conditions. The warrant was recognized as derivative liability and the initial fair value was $ 0.168 million. The Company’s convertible notes obligations were as the following for the three months ended March 31, 2023 and 2022: SCHEDULE OF CONVERTIBLE NOTES OBLIGATION 2023 2022 Three months ended June 30, 2023 2022 Carrying value – beginning balance $ 11,219,519 $ - Converted to ordinary shares ( 2,882,444 ) - Amortization of debt discount 914,196 - Deferred debt discount and cost of issuance ( 1,117,667 ) - Interest charge 376,622 - Carrying value – ending balance $ 8,510,226 $ - During the period, $ 1.5 million of the convertible notes was converted into approximately 2.3 million ordinary shares, with average effective conversion price of $ 0.6795 per share. The Company’s derivative liabilities were as the following for the three months ended March 31, 2023 and 2022: SCHEDULE OF DERIVATIVE LIABILITIES 2023 2022 Three months ended June 30, 2023 2022 Derivative liabilities –Warrants $ $ - Beginning balance 2,013,261 - Marked to the market 805,302 - Ending fair value 2,818,563 - Derivative liabilities – Embedded conversion feature Beginning balance 277,222 - Converted to ordinary shares ( 113,594 ) - Remeasurement on change of convertible price 1,117,667 - Marked to the market 482,702 - Ending fair value 1,763,997 - - Total Derivative fair value at end of period $ 4,582,560 $ - F- 12 15. LEASE RIGHT-OF-USE ASSET AND LEASE LIABILITIES The Company recognized right-of-use asset as well as lease liability according to the ASC 842, Leases (with the exception of short-term leases). Lease liabilities are measured at present value of the sum of remaining rental payments as of June 30, 2023, with discounted rate of 4.75 % . A single lease cost is recognized over the lease term on a generally straight-line basis. All cash payments of operating lease cost are classified within operating activities in the statement of cash flows. The Company leases its head office. The lease period is 5 years with an option to extend the lease. The Company leases its plant and dormitory for 4.5 years with an option to extend the lease. The Company leased several floors in a commercial building for its sublease business for 3 years with an option to extend the lease. The Following table summarizes the components of lease expense: SCHEDULE OF LEASE COST 2023 2022 Three months ended June 30, 2023 2022 Operating lease cost 43,438 944,549 Short-term lease cost 23,557 20,444 Lease Cost $ 66,995 $ 964,993 The following table summarizes supplemental information related to leases: SCHEDULE OF SUPPLEMENTAL INFORMATION RELATED TO LEASES 2023 2022 Three months ended June 30, 2023 2022 Cash paid for amounts included in the measurement of lease liabilities Operating cash flow from operating leases $ 66,995 $ 964,993 Right-of-use assets obtained in exchange for new operating leases liabilities 1,219 - Weighted average remaining lease term - Operating leases (years) 2.0 1.5 Weighted average discount rate - Operating leases 4.75 % 4.75 % The following table summarizes the maturity of operating lease liabilities: SCHEDULE OF MATURITY OF OPERATING LEASE LIABILITY Years ending June 30 Lease cost 2024 $ 126,076 2025 114,096 2026 9,205 Total lease payments 249,377 Less: Interest ( 17,027 ) Total $ 232,350 16. SHARE CAPITAL The Company effected the amendment and combination to the outstanding shares of our common stock into a lesser number of outstanding shares (the “Reverse Stock Split Amendment”) on a ratio of one-for-ten, with effected date on June 26, 2023. After the reverse stock split, 3,739,581 ordinary shares are issued and outstanding as of June 30, 2023. 17. RISKS AND UNCERTAINTIES (a) Economic and Political Risks The Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy. The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation. (b) Foreign Currency Translation The Company’s reporting currency is the U.S. dollar. The functional currency of the parent company is the U.S. dollar and the functional currency of the Company’s operating subsidiaries is the Chinese Renminbi (“RMB”). For the subsidiaries whose functional currencies are the RMB, all assets and liabilities are translated at exchange rates at the balance sheet date, which was 7.25 and 6.87 as of June 30, 2023 and March 31, 2023, respectively. Revenue and expenses are translated at the average yearly exchange rates, which was 7.004 and 6.603 for the three months ended June 30, 2023 and 2022, respectively. Equity is translated at historical exchange rates. Any translation adjustments resulting are not included in determining net income but are included in foreign exchange adjustments to other comprehensive loss, a component of equity. (c) Concentration Risks The followings are the percentages of accounts receivable balance of the top customers over accounts receivable for each segment as of June 30, 2023 and March 31, 2023. F- 13 Garment manufacturing segment SCHEDULE OF CONCENTRATION RISKS June 30, 2023 March 31, 2023 Customer A 88.4 % 85.3 % Customer B 10.6 % 11.4 % The high concentration as of June 30, 2023 was mainly due to business development of a large distributor of garments. Management believes that should the Company lose any one of its major customers, it was able to sell similar products to other customers. Logistics services segment June 30, 2023 March 31, 2023 Customer A 24.2 % 11.4 % Customer B 17.0 % 14.1 % Customer C 8.8 % 7.3 % Customer D 7.1 % 2.5 % Customer E 6.9 % 6.4 % Property management and subleasing segment There is no account receivable for Property management and subleasing segment as for June 30, and March 31, 2023. Epidemic prevention supplies segment The accounts receivable of Epidemic prevention supplies segment as of June 30, 2022 was from one customer only. There was no more sales in year ended June 30, 2023. Concentration on customers For the three months ended June 30, 2023, three customers from Logistics services segment provided more than 10 % of total revenue of the Company, represented 40.6 % of total revenue of the Company for the three months. For the three months ended June 30, 2022, one customer from Logistics services segment provided more than 10 % of total revenue of the Company, representing 13.1 % of total revenue of the Company for the three months. Management believes that should the Company lose any one of its major customers, it was able to sell similar products to other customers. Concentration on suppliers The following tables summarized the purchases from five largest suppliers of each of the reportable segment for the three months ended June 30, 2023 and 2022. SCHEDULE OF PURCHASES FROM SUPPLIERS Three months ended June 30, 2023 2022 Garment manufacturing segment Nil % Nil % Logistics services segment 100.0 % 100.0 % Property management and subleasing Nil % 100.0 % (d) Interest Rate Risk The Company’s exposure to interest rate risk primarily relates to the interest expenses on our outstanding bank borrowings and the interest income generated by cash invested in cash deposits and liquid investments. As of June 30, 2023, the total outstanding borrowings amounted to $ 130,176 (RMB 944,255 ) with various interest rate from 4.3 % to 4.9 % p.a. (Note 10) 18. SUBSEQUENT EVENTS On July 13, 2023, the Company entered into a Waiver and Ratification Agreement with one of the holders of the Convertible Note. According to the agreement, the holder redeemed the full amount of $7.5 million for the Convertible Note and irrevocably waives any past, present or future claims, rights and obligations under the Note and the Warrant. In July 2023, approximately $ 2.4 million of convertible note including principal and related accrued interest were converted into approximately 0.44 million common stock. The effective average conversion price was $ 5.74 per share. F- 14