Addentax Group Corp.: Form 10-Q for the period ended Dec 31, 2023
Filed with the SEC on Feb 14, 2024 and accepted by EDGAR at Feb 14, 2024, 06:03 ET.
Management's discussion and analysis
As filed, 50,002 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
The following discussion and analysis of our financial condition and results of operations for the three and nine months ended December 31, 2023 and 2022 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, Addentax Group Corp., are a Nevada holding company with no material operations of our own. We conduct substantially all of our operations through our operating companies established in the PRC, primarily Shenzhen Qianhai Yingxi Industrial Chain Service Co., Ltd. (“YX”), our wholly owned subsidiary and its subsidiaries. We are not a Chinese operating company. We are a holding company and do not directly own any substantive business operations in China. Therefore, our investors will not directly hold any equity interests in our operating companies. Our holding company structure involves unique risks to investors. Chinese regulatory authorities could disallow our operating structure, which would likely result in a material change in our operations and/or the value of our common stock, including that it could cause the value of such securities to significantly decline or become worthless. Our holding company, Addentax Group Corp., is listed on the Nasdaq Capital Market under the symbol “ATXG”. We classify our businesses into three segments: garment manufacturing, logistics services, property management and subleasing.
Unless the context otherwise requires, all references in this annual report to “Addentax” refer to Addentax Group Corp., a holding company, and references to “we,” “us,” “our,” the “Registrant”, the “Company,” or “our company” refer to Addentax and/or its consolidated subsidiaries. Addentax Group Corp., our Nevada holding company, is the entity in which our investors are investing.
Our subsidiaries include (i) Yingxi Industrial Chain Group Co., Ltd., a Republic of Seychelles company; (ii) Yingxi Industrial Chain Investment Co., Ltd., a Hong Kong company (“Yingxi HK”); (iii) Qianhai Yingxi Textile & Garments Co., Ltd., a PRC company; (iv) Shenzhen Qianhai Yingxi Industrial Chain Services Co., Ltd, a PRC company (“YX”), (v) Dongguan Heng Sheng Wei Garments Co., Ltd, a PRC company (“HSW”), (vi) Dongguan Yushang Clothing Co., Ltd, a PRC company (“YS”), (vii) Shantou Yi Bai Yi Garment Co., Ltd, a PRC company (“YBY”), (viii) Shenzhen Yingxi Peng Fa Logistic Co., Ltd., a PRC company (“PF”); (ix) Shenzhen Xin Kuai Jie Transportation Co., Ltd, a PRC company (“XKJ”), (x) Shenzhen Yingxi Tongda Logistic Co., Ltd, a PRC company (“TD”), (xi) Zhuang Hao Jia (Dongguan) Decoration Engineering Co.,Ltd, a PRC company (“ZHJ”), and (xii) Dongguan Aotesi Garments Co., Ltd., a PRC company (“AOT”), (xiii) Dongguan Hongxiang Commercial Co., Ltd., a PRC company (“HX”).
“PRC Subsidiaries” refer to, collectively, (i) Qianhai Yingxi Textile & Garments Co., Ltd.; (ii) Shenzhen Qianhai Yingxi Industrial Chain Services Co., Ltd (“YX”), (iii) Dongguan Heng Sheng Wei Garments Co., Ltd (“HSW”), (iv) Dongguan Yushang Clothing Co., Ltd (“YS”); (v) Shantou Yi Bai Yi Garment Co., Ltd (“YBY”); (vi) Shenzhen Yingxi Peng Fa Logistic Co., Ltd., a PRC company (“PF”); (vii) Shenzhen Xin Kuai Jie Transportation Co., Ltd, a PRC company (“XKJ”), (viii) Shenzhen Yingxi Tongda Logistic Co., Ltd, a PRC company (“TD”),,(ix) Zhuang Hao Jia (Dongguan) Decoration Engineering Co.,Ltd, a PRC company (“ZHJ”), and (x) Dongguan Aotesi Garments Co., Ltd., a PRC company (“AOT”), (xi) Dongguan Hongxiang Commercial Co., Ltd., a PRC company (“HX”).
“WFOE” refers to Qianhai Yingxi Textile & Garments Co., Ltd, a wholly foreign owned enterprise in China, which is indirectly wholly owned by Addentax Group Corp.
Our garment manufacturing business consists of sales made principally to wholesaler located in the 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 meet the delivery requirements for our customers. We conduct our garment manufacturing operations through five wholly owned subsidiaries, namely Dongguan Heng Sheng Wei Garments Co., Ltd (“HSW”), Dongguan Yushang Clothing Co., Ltd (“YS”), Shantou Yi Bai Yi Garment Co., Ltd (“YBY”), Zhuang Hao Jia (Dongguan) Decoration Engineering Co.,Ltd (“ZHJ”), and Dongguan Aotesi Garments Co., Ltd., (“AOT”), which are located in the Guangdong province, China.
Our logistics business consists of delivery and courier services covering 86 cities in 11 provinces and 3 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 three wholly owned subsidiaries, namely Shenzhen Xin Kuai Jie Transportation Co., Ltd (“XKJ”), Shenzhen Yingxi Peng Fa Logistic Co., Ltd (“PF”) and Shenzhen Yingxi Tongda Logistic Co., Ltd (“TD”), which are located in the Guangdong province, China.
Our property management and subleasing business provides shops subleasing and property management services for garment wholesalers and retailers in the garment market. We conduct our property management and subleasing operation through a wholly owned subsidiary, namely Dongguan Yingxi Daying Commercial Co., Ltd. (“DY”), which is located in the Guangdong province, China.
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, 2023, we provide logistics services to over 86 cities in approximately 11 provinces and 3 municipalities . We expect to develop an additional 20 logistics points in existing serving cities and improve the Company’s profit in the year 2024.
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%. In February 2023, the Company disposed of DY to an independent third party at fair value, which was also its carrying value as of February 28, 2023. In September 2023, we finished the acquisition of HX.
Seasonality of Business
Our business is affected by seasonal trends, with higher levels of garment sales during our second and third quarters and higher logistics services revenue during 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.
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.
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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 September 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.
Results of Operations for the three months ended December 31, 2023 and 2022
The following tables summarize our results of operations for the three months ended December 31, 2023 and 2022. 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, 2023 (In U.S. dollars, except for percentages) | 2022 | Changes in 2023 compared to 2022 | ||||
|---|---|---|---|---|---|---|
| Revenue | $1,468,496 | 100.0% | $2,122,242 | 100% | $(653,746) | (30.8)% |
| Cost of revenues | (1,306,169) | (88.9)% | (1,514,780) | (71.4)% | 208,611 | 13.8% |
| Gross profit | 162,327 | 11.1% | 607,462 | 28.6% | (445,135) | (73.3)% |
| Operating expenses | (611,919) | (41.7)% | (700,429) | (33.0)% | (88,510) | 12.6% |
| (Loss) Income from operations | (449,592) | (30.6)% | (92,967) | 4.4% | (356,625) | (383.6)% |
| Other income, net | 111,566 | 7.6% | 19,232 | 0.9% | 92,334 | 480.1% |
| Fair value gain | (1,738,593) | (118.4)% | - | - | (1,738,593) | |
| Net finance cost | (527,818) | (35.9)% | (299) | (0.0)% | (527,519) | (26563.1)% |
| Income tax expense | (3,225) | (0.2)% | (8,184) | (0.4)% | 4,959 | 60.6% |
| Net (loss) income | $(2,607,662) | (177.6)% | $(82,218) | (3.9)% | $(2,525,444) | (3071.6)% |
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Revenue
Total revenue for the three months ended December 31, 2023 decreased by approximately $0.7 million, or 30.8%, as compared with the three months ended December 31, 2022. The decrease was mainly due to the decrease of $0.6 million in property management and subleasing business and $0.1 million decrease in garment manufacturing business.
Revenue generated from our garment manufacturing business contributed approximately $0.03 million or 1.8% of our total revenue for the three months ended December 31, 2023. Revenue generated from garment manufacturing business contributed approximately $0.1 million or 4.7% of our total revenue for the three months ended December 31, 2022, respectively. The low level of sales was mainly due to factory facilities renewal and repair, remaining factories cannot provide the same capacity as previously. We estimate the capacity will recover at the last quarter of the fiscal year ending 2024.
Revenue generated from our logistics services business contributed approximately $1.2 million or 81.0% of our total revenue for the three months ended December 31, 2023. Revenue generated from our logistic business contributed approximately $1.2 million or 57.2% of our total revenue for the three months ended December 31, 2022.
Revenue generated from our property management and subleasing business was $0.3 million or 17.2% of our total revenue for the three months ended December 31, 2023. The revenue from this business segment was $0.8 million or 37.5% of our total revenue of this business for the three months ended December 31, 2022.
Cost of revenue
| Three months ended December 31, 2023 (In U.S. dollars, except for percentages) | 2022 | Increase (decrease) in 2023 compared to 2022 | ||||
|---|---|---|---|---|---|---|
| Net revenue for garment manufacturing | $27,015 | 100.0% | $100,723 | 100% | $(73,708) | (73.2)% |
| Raw materials | 4,238 | 15.7% | 771 | 0.8% | 3,467 | 449.7% |
| Labor | 6,957 | 25.8% | 64,108 | 63.7% | (57,151) | (89.1)% |
| Other and Overhead | (1,292) | (4.8)% | 2,761 | 2.7% | (4,053) | (146.8)% |
| Total cost of revenue for garment manufacturing | 9,903 | 36.7% | 67,640 | 67.2% | (57,737) | (85.4)% |
| Gross profit (loss) for garment manufacturing | 17,112 | 63.3% | 33,083 | 32.8% | (15,971) | (48.3)% |
| Net revenue for logistics services | 1,189,004 | 100.0% | 1,213,530 | 100.0% | (24,526) | (2.0)% |
| Fuel, toll and other cost of logistics services | 495,352 | 41.6% | 648,971 | 53.5% | (153,619) | (23.7)% |
| Subcontracting fees | 560,735 | 47.2% | 253,359 | 20.9% | 307,376 | 121.3% |
| Total cost of revenue for logistics services | 1,056,087 | 88.8% | 902,330 | 74.4% | 153,757 | 17.0% |
| Gross Profit for logistics services | 132,917 | 11.2% | 311,200 | 25.6% | (178,283) | (57.3)% |
| Net revenue for property management and subleasing | 252,477 | 100.0% | 796,343 | 100.0% | (543,866) | (68.3)% |
| Total cost of revenue for property management and subleasing | 236,291 | 93.6% | 536,732 | 67.4% | (300,442) | (56.0)% |
| Gross Profit for property management and subleasing | 16,186 | 6.4% | 259,611 | 32.6% | (243,425) | (93.8)% |
| Net revenue for corporate and others | $- | 0% | $11,646 | 100.0% | (11,646) | (100.0)% |
| Merchandise/Finished goods/Raw materials | 3,888 | 0% | 8,078 | 69.4% | (4,190) | (51.9)% |
| Total cost of revenue for corporate and others | 3,888 | 0% | 8,078 | 69.4% | (4,190) | (51.9)% |
| Gross (loss) income for corporate and others | (3,888) | 0% | 3,568 | 30.6% | (7,456) | (209.0)% |
| Total cost of revenue | $1,306,169 | 88.9% | $1,514,780 | 71.4% | $(208,611) | (13.8)% |
| Gross profit | $162,327 | 11.1% | $607,462 | 28.6% | $(445,135) | (73.3)% |
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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 was approximately 15.7% of our total garment manufacturing business revenue for the three months ended December 31, 2023, as compared with 0.8% for the three months ended December 31, 2022.
Labor costs for our garment manufacturing business was approximately 25.8% of our total garment manufacturing business revenue for the three months ended December 31, 2023, as compared with 63.7% for the three months ended December 31, 2022.
Overhead and other expenses for our garment manufacturing business accounted for approximately (4.8)% of our total garment business revenue for the three months ended December 31, 2023, as compared with 2.7% of total garment business revenue for the three months ended December 31, 2022.
For our logistic business, we outsource some of our business to our contractors. The Company relied on a few subcontractors, which the subcontracting fees to our largest contractor represented approximately 53.1% and 28.1 % of total cost of revenues for our service segment for the three months ended December 31, 2023 and 2022, respectively. The increase was attributed to a decrease usage of our own logistics as compared to the subcontractor. We have not experienced any dispute with our subcontractors 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, 2023 was approximately $0.5 million as compared with $0.6 million for the three months ended December 31, 2022. Fuel, toll and other costs for our service business accounted for approximately 41.6% of our total service revenue for the three months ended December 31, 2023, as compared with 53.5% for the three months ended December 31, 2022. The decrease was primarily attributable to an increase of subcontractors usage after the COVID-19 epidemic.
Subcontracting fees for our service business for the three months ended December 31, 2023 increased significantly by approximately 121.3% to $0.6 million from $0.3 million for the three months ended December 31, 2022. Subcontracting fees accounted for approximately 47.2% and 20.9% of our total service business revenue in the three months ended December 31, 2023 and 2022, respectively. The increase was primarily attributable to a decrease usage of our own logistics as compared to the subcontractors after the COVID-19 epidemic.
For property management and subleasing business, the cost of revenue was mainly the amortization of operating lease assets for the subleasing business. The Company disposed of DY in February 2023 and acquired HX in September 2023. Therefore, the revenue in the quarter was only $0.3 million compared to $0.8 million for the three months ended December 31, 2022.
Gross profit
Garment manufacturing business gross profit for the three months ended December 31, 2023 was approximately $17,113, as compared with gross profit of approximately $33,082 for the three months ended December 31, 2022. Gross profit accounted for approximately 63.3% of our total garment manufacturing business revenue for the three months ended December 31, 2023.
Gross profit in our logistics services business for the three months ended December 31, 2023 was approximately $132,917 and gross margin was 11.2%. Gross profit in our logistics services business for the three months ended December 31, 2022 was approximately $311,300 and gross margin was 25.6%. The decrease of gross profit ratio was mainly because the subsidiary PF used more subcontractors to proceed the orders which increase the cost of revenue.
Gross profit in our property management and subleasing business for the three months ended December 31, 2023 was approximately $16,186, or 6.4% of revenue of the segment. It was approximately $259,611, or 32.6% margin for the three months ended December 31, 2022.
| Three months ended December 31, 2023 (In U.S. dollars, except for percentages) | 2022 | Increase (decrease) in 2023 compared to 2022 | ||||
|---|---|---|---|---|---|---|
| Gross profit | $162,327 | 100% | $607,462 | 100% | (445,135) | (73.3)% |
| Operating expenses: | ||||||
| Selling expenses | (95,321) | (58.7)% | (24,511) | (4.0)% | (70,810) | 288.9% |
| General and administrative expenses | (516,598) | (318.2)% | (675,918) | (111.3)% | 159,320 | (23.6)% |
| Total | $(611,919) | (377.0)% | $(700,429) | (115.3)% | 88,510 | (12.6)% |
| (Loss) Income from operations | $(449,592) | (277.0)% | $(92,967) | (15.3)% | (356,625) | 383.6% |
Selling, General and administrative expenses
Our selling expenses were mainly incurred for our property management and subleasing business. It was $81,817 for property management and subleasing business and $13,504 for garments manufacturing business for the three months ended December 31, 2023 It was approximately $24,511 for property management and subleasing business for the three months ended December 31, 2022. Selling expenses consisted primarily of advertisement, local transportation, unloading charges and product inspection charges.
Our general and administrative expenses in our garment manufacturing business segment for the three months ended December 31, 2023 and 2022 was approximately $34,008 and $25,228, respectively. Our general and administrative expenses in our logistics services segment for the three months ended December 31, 2023 and 2022 was approximately $174,618 and $220,052, respectively. The general and administrative expenses in our property management and subleasing business was approximately $132,336 and $103,999 for the three months ended December 31, 2023 and 2022, respectively. Our general and administrative expenses in our corporate office for the three months ended December 31, 2023 and 2022 was approximately $175,636 and $326,639, respectively. General and administrative expenses consisted primarily of administrative salaries, office expense, certain depreciation and amortization charges, repairs and maintenance, legal and professional fees, warehousing costs and other expenses that are not directly attributable to our revenues.
Total general and administrative expenses for the three months ended December 31, 2023 decreased by approximately 23.6% to $516,598 from $675,918 for the three months ended December 31, 2022.
(Loss) Income from operations
Loss from operations for the three months ended December 31, 2023 was approximately $449,592, while loss from operations for the three months ended December 31, 2022 was $92,967. Loss from operations of approximately $30,398 and income from operations of $7,745 was attributed from our garment manufacturing segment for the three months ended December 31, 2023 and 2022, respectively. Loss from operations of approximately $41,699 and income from operations of approximately $91,147 was attributed from our logistics services segment for the three months ended December 31, 2023 and 2022, respectively. Loss from operations of approximately $168,012 and income from operations of $131,213 for the three months ended December 31, 2023 and 2022 was attributed from our property management and subleasing business, respectively. We incurred expenses from operations in corporate office of approximately $209,483 and $324,046 for the three months ended December 31, 2023 and 2022, respectively. The decrease of expenses from our corporate office was mainly due to decrease 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, 2023 and 2022 was approximately $3,255 and $8,184, respectively. 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, 2023 and 2022.
QYTG and YX were incorporated in the PRC and are subject to the PRC Enterprise Income Tax (EIT) rate is 25%. No provision for income taxes in the PRC has been made as QYTG and YX had no taxable income for the three months ended December 31, 2023 and 2022.
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 2023. The preferential tax rates will be expired at end of 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, 2023 and 2022.
Net Income (Loss)
We incurred net loss of approximately $2.6 million for the three months ended December 31, 2023 and a net loss of approximately $0.08 million for the three months ended December 31, 2022. Our basic and diluted loss per share were $0.66 and $0.00 for the three months ended December 31, 2023 and 2022, respectively.
Results of Operations for the nine months ended December 31, 2023 and 2022
The following tables summarize our results of operations for the nine months ended December 31, 2023 and 2022. 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, 2023 (In U.S. dollars, except for percentages) | 2022 | Changes in 2023 compared to 2022 | ||||
|---|---|---|---|---|---|---|
| Revenue | $3,856,316 | 100% | $6,652,645 | 100.0% | $(2,796,329) | (42.0)% |
| Cost of revenues | (3,054,193) | (79.2)% | (5,023,338) | (75.5)% | 1,969,145 | 39.2% |
| Gross profit | 802,123 | 20.8% | 1,629,307 | 24.5% | (827,184) | (50.8)% |
| Operating expenses | (1,817,596) | (47.1)% | (1,606,020) | (24.1)% | (211,576) | (13.2)% |
| (Loss) Income from operations | (1,015,473) | (26.3)% | 23,287 | 0.4% | (1,038,760) | (4460.7)% |
| Other income, net | (357,848) | (9.3)% | 93,288 | 1.4% | (451,136) | (483.6)% |
| Fair value gain | (172,001) | (4.5)% | - | - | (172,001) | - |
| Net finance cost | (2,420,935) | (62.8)% | 34 | (0.0)% | (2,420,969) | 36365.7% |
| Income tax expense | (7,726) | (0.2)% | (18,939) | (0.3)% | 11,213 | 59.2% |
| Net (loss) income | $(3,973,983) | (103.1)% | $97,670 | 1.5% | $(4,071,653) | (4168.8)% |
Revenue
Total revenue for the nine months ended December 31, 2023 decreased by approximately $2.8 million, or 42.0%, as compared with the nine months ended December 31, 2022. The decrease was mainly due to the decrease of $0.4 million in logistics services and $2.3 million in property management and subleasing business.
Revenue generated from our garment manufacturing business contributed approximately $0.2 million or 4.5% of our total revenue for the nine months ended December 31, 2023. Revenue generated from garment manufacturing business contributed approximately $0.1 million or 2.1% of our total revenue for the nine months ended December 31, 2022, respectively. The low level of sales was mainly due to factory facilities renewal and repair, remaining factories cannot provide the same capacity as previously. We estimate the capacity will appear to recover at last quarter of for the fiscal year ending 2024.
Revenue generated from our logistics services business contributed approximately $3.4 million or 87.5% of our total revenue for the nine months ended December 31, 2023. Revenue generated from our logistic business contributed approximately $3.8 million or 57.5% of our total revenue for the nine months ended December 31, 2022.
Revenue generated from our property management and subleasing business was $0.3 million or 8.1% of our total revenue for the nine months ended December 31, 2023. The revenue from this business segment was $2.7 million or 40.2% of our total revenue of this business for the nine months ended December 31, 2022.
Cost of revenue
| Nine months ended December 31, 2023 (In U.S. dollars, except for percentages) | 2022 | Increase (decrease) in 2023 compared to 2022 | ||||
|---|---|---|---|---|---|---|
| Net revenue for garment manufacturing | $172,106 | 100.0% | $142,010 | 100.0% | $30,096 | 21.2% |
| Raw materials | 30,187 | 17.5% | 28,323 | 19.9% | 1,864 | 6.6% |
| Labor | 100,097 | 58.2% | 73,376 | 51.7% | 26,721 | 36.4% |
| Other and Overhead | 1,389 | 0.8% | 4,380 | 3.1% | (2,991) | (68.3)% |
| Total cost of revenue for garment manufacturing | 131,673 | 76.5% | 106,079 | 74.7% | 25,595 | 24.1% |
| Gross profit for garment manufacturing | 40,433 | 23.5% | 35,931 | 25.3% | 4,502 | 12.5% |
| Net revenue for logistics services | 3,373,670 | 100.0% | 3,826,070 | 100.0% | (452,400) | (11.8)% |
| Fuel, toll and other cost of logistics services | 1,496,570 | 44.4% | 1,916,957 | 50.1% | (420,387) | (21.9)% |
| Subcontracting fees | 1,181,160 | 35.0% | 890,660 | 23.3% | 290,500 | 32.6% |
| Total cost of revenue for logistics services | 2,677,730 | 79.4% | 2,807,617 | 73.4% | (129,887) | (4.6)% |
| Gross Profit for logistics services | 695,940 | 20.6% | 1,018,453 | 26.6% | (322,513) | (31.7)% |
| Net revenue for property management and subleasing | 310,540 | 100.0% | 2,671,379 | 100.0% | (2,360,839) | (88.4)% |
| Total cost of revenue for property management and subleasing | 240,902 | 77.6% | 2,099,050 | 78.6% | (1,858,148) | (88.5)% |
| Gross Profit for property management and subleasing | 69,638 | 22.4% | 572,329 | 21.4% | (502,691) | (87.8)% |
| Net revenue for supplies corporate and others | $- | - | $13,186 | 100.0% | ||
| Other and Overhead | 3,888 | - | 10,592 | 80.3% | (6,704) | (63.3)% |
| Total cost of revenue for corporate and others | 3,888 | - | 10,592 | 80.3% | (6,704) | (63.3)% |
| Gross (loss) income for corporate and others | (3,888) | - | 2,594 | 19.7% | (6,482) | (249.9) |
| Total cost of revenue | $3,054,193 | 79.2% | $5,023,338 | 75.5% | $(1,969,145) | (39.2)% |
| Gross profit | $802,123 | 20.8% | $1,629,307 | 24.5% | $(827,184) | (50.8)% |
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 was approximately 17.5% of our total garment manufacturing business revenue for the nine months ended December 31, 2023, as compared with 19.9% for the nine months ended December 31, 2022. The decrease in percentages was mainly due to the company develop new raw material suppliers..
Labor costs for our garment manufacturing business was approximately 58.2% of our total garment manufacturing business revenue for the nine months ended December 31, 2023, as compared with 51.7% for the nine months ended December 31, 2022. The increase was mainly due to rising of salary.
Overhead and other expenses for our garment manufacturing business accounted for approximately 0.8% of our total garment business revenue for the nine months ended December 31, 2023, as compared with 3.1% of total garment business revenue for the nine months ended December 31, 2022.
For our logistic business, we outsource some of our business to our contractors. The Company relied on a few subcontractors, which the subcontracting fees to our largest contractor represented approximately 39.9% and 25.8% of total cost of revenues for our service segment for the nine months ended December 31, 2023 and 2022, respectively. The increase was attributed to a decrease usage of our own logistics as compared to the subcontractors after the COVID-19 epidemic. We have not experienced any disputes with our subcontractors 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, 2023 was approximately $1.5 million as compared with $1.9 million for the nine months ended December 31, 2022. Fuel, toll and other costs for our service business accounted for approximately 44.4% of our total service revenue for the nine months ended December 31, 2023, as compared with 50.1% for the nine months ended December 31, 2022. The decrease was primarily attributable to an increase of usage of subcontractors after the COVID-19 epidemic.
Subcontracting fees for our service business for the nine months ended December 31, 2023 increased approximately 32.6% to $1.2 million from $0.9 million for the nine months ended December 31, 2022. Subcontracting fees accounted for 35.0% and 23.3% of our total service business revenue in the nine months ended December 31, 2023 and 2022, respectively. The increase was primarily attributable a decrease usage of our own logistics as compared to the subcontractors after the COVID-19 epidemic.
For property management and subleasing business, the cost of revenue was mainly the amortization of operating lease assets for the subleasing business.
Gross profit
Garment manufacturing business gross profit for the nine months ended December 31, 2023 was approximately $40,433, as compared with approximately $35,931 for the nine months ended December 31, 2022. Gross profit accounted for 23.5% of our total garment manufacturing business revenue for the nine months ended December 31, 2023, as compared to 25.3% for the nine months ended December 31, 2022.
Gross profit in our logistics services business for the nine months ended December 31, 2023 was approximately $695,940 and gross margin was 20.6%. Gross profit in our logistics services business for the nine months ended December 31, 2022 was approximately $1,018,453 and gross margin was 26.6%. The decrease of gross profit ratio was mainly because the subsidiary PF used more subcontractors to proceed the orders which increase the cost of revenue.
Gross profit in our property management and subleasing business for the nine months ended December 31, 2023 was $69,639, or 22.4% gross margin. It was approximately $572,329, or 21.4% for the nine months ended December 31, 2022. The decrease was due to disposal of DY.
| Nine months ended December 31, 2023 (In U.S. dollars, except for percentages) | 2022 | Increase (decrease) in 2023 compared to 2022 | ||||
|---|---|---|---|---|---|---|
| Gross profit | $802,123 | 100.0% | $1,629,307 | 100.0% | (827,184) | (50.8)% |
| Operating expenses: | ||||||
| Selling expenses | (132,533) | (16.5)% | (60,155) | (3.7)% | (72,378) | (120.3)% |
| General and administrative expenses | (1,685,063) | (210.1)% | (1,545,865) | (94.9)% | (139,198) | (9.0)% |
| Total | $(1,817,596) | (226.6)% | $(1,606,020) | (98.6)% | (211,576) | (13.2)% |
| (Loss) Income from operations | $(1,015,473) | (126.6)% | $23,287 | 1.4% | (1,038,760) | (4460.7)% |
Selling, General and administrative expenses
Our selling expenses were mainly incurred for our property management and subleasing business. It consisted of $13,857 for garments manufacturing segment and approximately $118,676 for our property management and subleasing business for the nine months ended December 31, 2023. It was $60,155 for property management and subleasing business for the nine months ended December 31, 2022. Selling expenses consisted primarily of advertisement, local transportation, unloading charges and product inspection charges.
Our general and administrative expenses in our garment manufacturing business segment for the nine months ended December 31, 2023 and 2022 was approximately $98,117 and $84,821, respectively. Our general and administrative expenses in our logistics services segment for the nine months ended December 31, 2023 and 2022 was approximately $562,696 and $654,883, respectively. The general and administrative expenses in our property management and subleasing business was approximately $132,336 and $257,351 for the nine months ended December 31, 2023 and 2022, respectively. Our general and administrative expenses in our corporate office for the nine months ended December 31, 2023 and 2022 was approximately $891,914 and $548,810, respectively. General and administrative expenses consisted primarily of administrative salaries, office expense, certain depreciation and amortization charges, repairs and maintenance, legal and professional fees, warehousing costs and other expenses that are not directly attributable to our revenues.
Total general and administrative expenses for the nine months ended December 31, 2023 increased by approximately 9.0% to $1.7 million from $1.5 million for the nine months ended December 31, 2022.
(Loss) Income from operations
Loss from operations for the nine months ended December 31, 2023 was approximately $1.0 million, while income from operations for the nine months ended December 31, 2022 was $23,287. Loss from operations of approximately $71,541 and $48,999 for the nine months ended December 31, 2023 and 2022 was attributed from our garment manufacturing segment, respectively. Income from operations of approximately $132,530 and $363,569 was attributed from our logistics services segment for the nine months ended December 31, 2023 and 2022, respectively. Loss from operations of approximately $181,372 and income of $254,934 for the nine months ended December 31, 2023 and 2022 was attributed from our property management and subleasing business, respectively. We incurred expenses from operations in corporate office of approximately $895,090 and $546,217 for the nine months ended December 31, 2023 and 2022, respectively. The increase of expenses from our corporate office was mainly due to increase in legal and professional fees to comply with the SEC accounting, disclosure and reporting requirements.
Income Tax Expenses
Income tax expense for the nine months ended December 31, 2023 and 2022 was approximately $7,726 and $18,939, respectively. 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, 2023 and 2022.
QYTG and YX were incorporated in the PRC and are subject to the PRC Enterprise Income Tax (EIT) rate is 25%. No provision for income taxes in the PRC has been made as QYTG and YX had no taxable income for the nine months ended December 31, 2023 and 2022.
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 2023. The preferential tax rates will be expired at end of 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, 2023 and 2022.
Net Income (Loss)
We incurred net loss of approximately $4.0 million for the nine months ended December 31, 2023 and a net income of approximately $0.1 million for the nine months ended December 31, 2022. Our basic and diluted earnings per share were ($1.0) and $0.00 for the nine months ended December 31, 2023 and 2022, respectively.
Summary of cash flows
Summary cash flows information for the nine months ended December 31, 2023 and 2022 is as follow:
| Nine months ended December 31, 2023 (In U.S. dollars) | 2022 | |
|---|---|---|
| Net cash used in operating activities | $(1,521,802) | $(1,528,118) |
| Net cash provided by (used in) investing activities | $90,863 | $(17,500,000) |
| Net cash provided by financing activities | $1,332,470 | $19,240,977 |
Net cash used in operating activities in the nine months ended December 31, 2023 was $1.5 million, nearly the same as that of the nine months ended December 31, 2022.
Net cash provided by investing activities in the nine months ended December 31, 2023 was consist of $0.1 million purchase of property and equipment and long-term prepayment and $0.2 million cash from acquired investee. Net cash used in investing activities in the nine months ended December 31, 2022 was for investment in debt securities.
Net cash provided by financing activities for the nine months ended December 31, 2023 included $3.9 million released from restricted cash, proceeds from bank borrowings of $0.2 million and net repayment of $2.7 million to related parties. Net cash provided by financing activities for the nine months ended December 31, 2022 included $20.2 million proceeds from its public offering and $1.0 million net repayment to related parties.
Financial Condition, Liquidity and Capital Resources
As of December 31, 2023, we had cash on hand of approximately $0.5 million, total current assets of approximately $30.3 million and current liabilities of approximately $5.4 million. We presently finance our operations from revenue, fund raising from our initial public offering proceeds and capital contributions from our chief executive officer, Mr. Hong Zhida (the “CEO”).
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.
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 last year, RMB depreciated against the U.S. dollar. As of December 31, 2023, the market foreign exchange rate was RMB 7.10 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 gain (loss) for the nine months ended December 31, 2023 and 2022 was approximately $0.05 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, 2023 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.
Controls and procedures
As filed, 1,535 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of December 31, 2023. Based on the evaluation of these disclosure controls and procedures, and in light of the material weaknesses found in our internal controls over financial reporting, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective.
Changes in Internal Controls over Financial Reporting
There was no change in the Company’s internal control over financial reporting period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Risk factors
As filed, 153 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
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.
Figures reported in this filing
Standardized line items from the XBRL in this filing, for the period ended 2023-12-31. Comparative periods it repeats are left out.
| Line item | Period | Value | XBRL concept |
|---|---|---|---|
| Revenue | 3 months2023-10-01 to 2023-12-31 | $1.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months2023-04-01 to 2023-12-31 | $3.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months2023-10-01 to 2023-12-31 | $1.3m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months2023-04-01 to 2023-12-31 | $3.1m | us-gaap:CostOfRevenue |
| Gross profit | 3 months2023-10-01 to 2023-12-31 | $162.3k | us-gaap:GrossProfit |
| Gross profit | 9 months2023-04-01 to 2023-12-31 | $802.1k | us-gaap:GrossProfit |
| Operating income | 3 months2023-10-01 to 2023-12-31 | −$449.6k | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months2023-04-01 to 2023-12-31 | −$1.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months2023-10-01 to 2023-12-31 | $529.5k | us-gaap:InterestExpense |
| Interest expense | 9 months2023-04-01 to 2023-12-31 | $2.4m | us-gaap:InterestExpense |
| Income tax | 3 months2023-10-01 to 2023-12-31 | $3.2k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months2023-04-01 to 2023-12-31 | $7.7k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months2023-10-01 to 2023-12-31 | −$2.6m | us-gaap:NetIncomeLoss |
| Net income | 9 months2023-04-01 to 2023-12-31 | −$4.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months2023-10-01 to 2023-12-31 | −$0.66 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months2023-04-01 to 2023-12-31 | −$1.00 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months2023-10-01 to 2023-12-31 | −$0.66 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months2023-04-01 to 2023-12-31 | −$1.00 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months2023-10-01 to 2023-12-31 | 3,980,714 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months2023-04-01 to 2023-12-31 | 3,980,714 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months2023-04-01 to 2023-12-31 | −$1.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months2023-04-01 to 2023-12-31 | $135.3k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | At period end2023-12-31 | $498.3k | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | At period end2023-12-31 | $30.3m | us-gaap:AssetsCurrent |
| Total assets | At period end2023-12-31 | $53.8m | us-gaap:Assets |
| Current liabilities | At period end2023-12-31 | $5.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | At period end2023-12-31 | $29.5m | us-gaap:Liabilities |
| Short-term borrowings | At period end2023-12-31 | $309.2k | us-gaap:ShortTermBorrowings |
| Shareholders' equity | At period end2023-12-31 | $24.2m | us-gaap:StockholdersEquity |
Source: SEC EDGAR, the filing index for accession 0001493152-24-006280. Last ingested by Listed: Nov 4, 2026, 06:33 ET. Listed shows no prices and gives no investment advice.