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Form 10-Q ADDENTAX GROUP CORP. For: Jun 30

August 15, 2022 6:42 AM EDT

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended: June 30, 2022

 

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

 

For the transition period from _____________ to _________________

 

Commission File No. 333-206097

 

ADDENTAX GROUP CORP.

(Exact name of registrant as specified in its charter)

 

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

 

Kingkey 100, Block A, Room 4805,

Luohu District, Shenzhen City, China 518000

(Address of principal executive offices)

 

+ (86) 755 86961 405

(Registrant’s telephone number)

 

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

 

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

 

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

Yes ☐ No

 

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

Yes ☐ No

 

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

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer Smaller reporting company
Emerging growth  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

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

 

As of August 15, 2022, there were 26,093,004 shares outstanding of the registrant’s common stock.

 

 

 

 
 

 

TABLE OF CONTENTS

 

  PART I – FINANCIAL INFORMATION  
     
Item 1. Financial Statements (Unaudited) F-1
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 3
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
     
Item 4. Controls and Procedures 12
     
  PART II – OTHER INFORMATION  
     
Item 1. Legal Proceedings 13
     
Item 1A. Risk Factors 13
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 13
     
Item 3. Defaults Upon Senior Securities 13
     
Item 4. Mine Safety Disclosures 13
     
Item 5. Other Information 13
     
Item 6. Exhibits 13

 

2
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements and Supplementary Data

 

ADDENTAX GROUP CORP.

 

FINANCIAL STATEMENTS

 

For the three months ended June 30, 2021 and 2020

 

TABLE OF CONTENTS

 

Condensed Consolidated Balance sheets as of June 30, 2022 and March 31, 2022 (unaudited) F-2
Condensed Consolidated Statements of Income and Comprehensive Income for the Three months ended June 30, 2022 and 2021 (unaudited) F-3
Condensed Consolidated Statements of Changes in Equity for the three months ended June 30, 2022 and 2021 (unaudited) F-4
Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2022 and 2021 (unaudited) F-5
Notes to Condensed Consolidated Financial Statements for the three months ended June 30, 2022 and 2021 (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, 2022   March 31, 2022 
         
ASSETS          
           
CURRENT ASSETS          
Cash and cash equivalents  $2,232,348   $1,390,644 
Accounts receivables, net   2,137,753    2,164,970 
Inventories   263,259    266,596 
Prepayments and other receivables   1,047,597    575,210 
Advances to suppliers   1,090,088    1,181,466 
Amount due from related party   80,306    110,242 
Total current assets   6,851,351    5,689,128 
           
NON-CURRENT ASSETS          
Plant and equipment, net   758,529    836,419 
Long-term prepayments   -    31,496 
Operating lease right of use asset   

5,411,585

    6,530,017 
Total non-current assets   6,170,114    7,397,932 
TOTAL ASSETS  $13,021,465   $13,087,060 
           
LIABILITIES AND EQUITY          
           
CURRENT LIABILITIES          
Short-term loan  $142,591   $151,090 
Accounts payable   1,250,954    1,334,483 
Amount due to related parties   3,978,713    3,694,989 
Advances from customers   2,696    2,375 
Accrued expenses and other payables   2,104,474    1,445,473 
Operating lease liability current portion   3,612,922    3,763,931 
Total current liabilities   11,092,350    10,392,341 
           
NON-CURRENT LIABILITIES          
Operating lease liability   1,798,662    2,766,086 
TOTAL LIABILITIES  $12,891,012   $13,158,427 
           
EQUITY (deficit)          
Common stock ($0.001 par value, 50,000,000 shares authorized, 26,693,004 shares issued and outstanding at both June 30 and March 31, 2022)  $26,693   $26,693 
Additional paid-in capital   6,815,333    6,815,333 
Accumulated Deficit   (6,659,559)   (6,756,230)
Statutory reserve   13,821    13,821 
Accumulated other comprehensive loss   (65,835)   (170,984)
Total equity (deficit)   130,453    (71,367)
TOTAL LIABILITIES AND EQUITY  $13,021,465   $13,087,060 

 

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)

 

                 
       
    Three months ended
June 30,
 
    2022     2021  
             
REVENUES   $ 2,386,384     $ 4,286,431  
                 
COST OF REVENUES     (1,929,700 )     (3,703,026 )
                 
GROSS PROFIT     456,684       583,405  
                 
OPERATING EXPENSES                
Selling and marketing     (5,642 )     (46,390 )
General and administrative     (404,940 )     (460,315 )
Total operating expenses     (410,582 )     (506,705 )
                 
INCOME FROM OPERATIONS     46,102       76,700  
                 
Interest income     3,238       1,967  
Interest expenses     (2,458 )     (2,232 )
Other income (expense), net     51,083       13,237  
                 
INCOME BEFORE INCOME TAX EXPENSE     97,965       89,672  
INCOME TAX EXPENSE     (1,294 )     (10,725 )
                 
NET (LOSS) INCOME     96,671       78,947  
Foreign currency translation gain (loss)     105,149       (30,516 )
TOTAL COMPREHENSIVE INCOME   $ 201,820     $ 48,431  
                 
EARNINGS (LOSS) PER SHARE                
Basic and diluted     0.00       0.00  
Weighted average number of shares outstanding – Basic and diluted     26,693,004       26,153,818  

 

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, 2021   26,693,004   $26,093   $6,815,333   $(6,834,228)  $13,821   $(103,117)  $(81,498)
Foreign currency translation                            (30,516)   (30,516)
Net income for the period   -    -    -    78,947    -    -    78,947 
BALANCE AT JUNE 30, 2021   26,693,004   $26,693   $6,815,333   $(6,755,281)  $13,821   $(133,633)  $(33,067)
                                    
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 

 

See accompany 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)

 

           
   Three Months Ended June 30 
   2022   2021 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income (loss)  $96,671   $78,947 
Adjustments to reconcile net income (loss) to net cash used in operating activities:          
Depreciation   35,883   33,986 
Changes in operating assets and liabilities          
Accounts receivable   27,217    (2,031,892)
Inventories   3,337    (137,894)
Advances to suppliers   91,378    (383,233)
Other receivables   (443,140)   (317,382)
Accounts payables   (83,529)   1,380,495 
Accrued expenses and other payables   549,880    129,338 
Advances from customers   321    (3,029)
Net cash provided by (used in) operating activities  $278,018   $(1,250,664)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of plant and equipment and other assets   -    (104,235)
Net cash used in investing activities  $-   $(104,235)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from related party borrowings   980,724    1,292,956 
Repayment of related party borrowings   (364,452)   (806,994)
Repayment of bank borrowings   (424)   - 
Net cash provided by financing activities  $615,848   $485,962 
           
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS   893,866   (868,937)
Effect of exchange rate changes on cash and cash equivalents   (52,162)   (3,969)
Cash and cash equivalents, beginning of the period   1,390,644    1,845,077 
CASH AND CASH EQUIVALENTS, END OF THE PERIOD  $2,232,348   $972,171 
           
Supplemental disclosure of cash flow information:          
Cash paid during the year for interest  $-   $1,936 
Cash paid during the year for income tax  $1,294   $10,725 
Supplemental disclosure of non-cash investing and financing activities:          
Right-of-use assets obtained in exchange for operating lease obligations  $-   $178,189 

 

See accompany notes to the unaudited condensed consolidated financial statements.

 

F-5
 

 

ADDENTAX GROUP CORP. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. ORGANIZATION AND BUSINESS ACQUISITIONS

 

ATXG and its subsidiaries (the “Company”) are engaged in the business of garments manufacturing, providing logistic services, property leasing and management service in the People’s Republic of China (“PRC” or “China”) and epidemic prevention supplies manufacturing and distribution both in China and overseas markets.

 

2. BASIS OF PRESENTATION

 

In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. All significant intercompany transactions and balances are eliminated in consolidation. However, the results of operations included in such financial statements may not necessary be indicative of annual results.

 

The Company uses the same accounting policies in preparing quarterly and annual financial statements. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2022 filed with the Securities and Exchange Commission (“SEC”) on June 23, 2022 (“2022 Form 10-K”).

 

GOING CONCERN UNCERTAINTY

 

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

 

F-6
 

 

The Company incurred net income of $96,671 and $78,947 for the three months ended June 30, 2022 and 2021, respectively. As of June 30, 2022 and March 31, 2022, the Company had net current liability of $4,240,999 and $4,703,213 , respectively, and total equity of $130,453 and a deficit on total equity of $71,367, respectively.

 

The Company expects to finance operations primarily through cash flow from revenue, capital contributions from the CEO and proceeds from proposed IPO. 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.

 

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however actual results could differ materially from those estimates.

 

There is no change on the accounting policies for the three months ended June 30, 2022.

 

Recently issued accounting pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This standard requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. This standard will be effective for the Company on April 1, 2023. The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements.

 

The Company reviews new accounting standards as issued. Management has not identified any other new standards that it believes will have a significant impact on the Company’s consolidated financial statements.

 

F-7
 

 

4. RELATED PARTY TRANSACTIONS

 

Name of Related Parties   Relationship with the Company
Zhida Hong   President, CEO, and a director of the Company
Bihua Yang   A legal representative of Shenzhen Xin Kuai Jie Transportation Co., Ltd (“XKJ”), a wholly subsidiary of our Company
Zhiyong Zhou   General Manager of XKJ, ceased to be general manager of XKJ since May, 2022
Dewu Huang   A legal representative of Shantou Yi Bai Yi Garments Co., Ltd (“YBY”), a wholly-owned subsidiary of our Company
Jinlong Huang   A spouse of legal representative of Dongguan Heng Sheng Wei Garments Co., Ltd (“HSW”), a wholly owned subsidiary of our Company

 

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

 

The Company had the following related party balances as of June 30, 2022 and March 31, 2022:

 

Amount due from related party   June 30, 2022     March 31, 2022  
Hongye Financial Consulting (Shenzhen) Co., Ltd.   $ 80,306     $ 110,242  
    $ 80,306     $ 110,242  

 

Related party borrowings   June 30, 2022     March 31, 2022  
Zhida Hong (1)   $ 3,258,845     $ 3,297,951  
Zhiyong Zhou (2)     322,631       -  
Bihua Yang (3)     70,264       31,738  
Dewu Huang     221,359       212,290  
Jinlong Huang     105,614       153,010  
    $ 3,978,713     $ 3,694,989  

 

  (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 Zhiyong Zhou to pay for daily operating expenditures of XKJ.
     
  (3) Being financial support from Bihua Yang for XKJ’s daily operation.
     
  (4) Being interest free advanced loan as financial support from Dewu Huang for YBY’s daily operation.

 

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

 

5. INVENTORIES

 

Inventories consist of the following as of June 30, 2022 and March 31, 2022:

 

           
   June 30, 2022   March 31, 2022 
Raw materials  $26,332   $184,498 
Work in progress   142,947    1,327 
Finished goods   93,980    80,771 
Total inventories  $263,259   $266,596 

 

F-8
 

 

6. 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.

 

7. PREPAYMENTS AND OTHER RECEIVABLES

 

Prepayments and other receivables consist of the following as of June 30, 2022 and March 31, 2022:

 

           
   June 30, 2022   March 31, 2022 
Prepayment   65,902    14,046 
Deposit   134,744    64,653 
Receivable of consideration on disposal of subsidiaries   251,801    269,798 
Other receivables   595,150    226,713 
Total prepayments and other receivables  $1,047,597   $575,210 

 

8. PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consists of the following as of June 30, 2022 and March 31, 2022:

 

           
   June 30, 2022   March 31, 2022 
Production plant  $70,074   $74,034 
Motor vehicles   1,128,524    1,192,296 
Office equipment   26,683    28,191 
Plant and equipment, gross   1,225,281    1,294,521 
Less: accumulated depreciation   (466,752)   (458,102)
Plant and equipment, net  $758,529   $836,419 

 

Depreciation expense for the three months ended June 30, 2022 and 2021 was $35,883 and $33,986, respectively.

F-9
 

 

9. 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 (RMB1,000,000) for daily operations. The loans are guaranteed at no cost by the legal representative of HSW. As of June 30, 2022, the Company has borrowed $142,591 (RMB955,281) (March 31, 2022: $151,090) under this line of credit with various annual interest rates from 4.84% 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.

 

10. INCOME TAXES

 

(a) Enterprise Income Tax (“EIT”)

 

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

 

Yingxi Industrial Chain Group Co., Ltd was incorporated in the Republic of Seychelles and, under the current laws of the British Virgin Islands, is not subject to income taxes. 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, 2022 and 2021.

 

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, 2022 and 2021.

 

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 2022 and 2021. The preferential tax rate will be expired at end of year 2022 and the EIT rate will be 25% from year 2023.

 

The Company’s parent entity, Addentax Group Corp. is 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, 2022 and 2021.

 

F-10
 

 

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

 

   Three months ended 
   June 30, 
   2022   2021 
PRC statutory tax rate   25%   25%
Computed expected benefits (expense)   24,491    22,418 
Temporary differences   (40,566)   (39,459)
Permanent difference   (2,561)   1,478 
Changes in valuation allowance   19,930    26,288 
Income tax expense  $1,294   $10,725 

 

(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 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 2022 and 2021. The Company is required to pay the full amount of VAT calculated at the applicable VAT rate of the invoiced value of sales as required. A credit is available whereby VAT paid on gasoline and toll charges can be used to offset the VAT due on service income.

 

11. CONSOLIDATED SEGMENT DATA

 

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

 

  (a) Garment manufacturing. Including manufacturing and distribution of garments;
     
  (b) Logistics services. Providing logistic services; and
     
  (c) Epidemic prevention supplies. Including manufacturing, distribution and trading of epidemic prevention supplies.
     
  (d) Property management and subleasing. Providing shops subleasing and property management services for garment wholesalers and retailers in garment market.

 

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

 

F-11
 

 

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

 

Revenues by segment for the three months ended June 30, 2022 and 2021 are as follows:

 

           
   Three months ended
June 30,
 
Revenues from external customers  2022   2021 
Garments manufacturing segment  $40,426   $2,069,141 
Logistics services segment   1,390,882    1,108,042 
Property management and subleasing   954,835    1,109,248 
Epidemic prevention supplies segment   241    - 
Total of reportable segments and consolidated revenue  $2,386,384   $4,286,431 
           
Intersegment revenue          
Garments manufacturing segment   -    2,417 

 

Income from operations by segment for the three ended June 30, 2022 and 2021 are as follows:

           
   Three months ended 
   June 30, 
   2022   2021 
Garment manufacturing segment  $(28,656)  $123,629 
Logistics services segment   120,041    4,863 
Property management and subleasing   34,097    57,211 
Epidemic prevention supplies   -    - 
Total of reportable segments   125,482    185,703 
Corporate and other   (79,380)   (109,003)
Total consolidated income from operations  $46,102   $76,700 

 

Total assets by segment as at June 30, 2022 and March 31, 2022 are as follows:

           
Total assets  June 30,
2022
   March 31, 2022 
Garment manufacturing segment  $1,723,582   $1,784,020 
Logistics services segment   2,993,573    2,610,469 
Property management and subleasing   7,312,321    7,608,997 
Epidemic prevention supplies   35,042    64,885 
Total of reportable segments   12,064,518    12,068,371 
Corporate and other   956,947    1,018,689 
Consolidated total assets  $13,021,465   $13,087,060 

 

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

 

   Three months ended
June 30,
 
   2022   2021 
Revenues        
China   2,386,384    4,286,431 
Total   2,386,384    4,286,431 

 

   June 30, 2022   March 31, 2022 
Long-Lived Assets          
China   6,170,113    7,397,931 

 

F-12
 

 

12. 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, 2022, 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:

 

           
   Three months ended
June 30,
 
   2022   2021 
Operating lease cost   944,549    934,666 
Short-term lease cost   20,444    20,902 
Total  $964,993   $955,568 

 

The following table summarizes supplemental information related to leases:

 

   Three months ended
June 30,
 
   2022   2021 
Cash paid for amounts included in the measurement of lease liabilities          
Operating cash flow from operating leases  $964,993   $955,568 
Right-of-use assets obtained in exchange for new operating leases liabilities   -    178,189 
Weighted average remaining lease term - Operating leases (years)   1.5    2.5 
Weighted average discount rate - Operating leases   4.75%   4.75%

 

The following table summarizes the maturity of operating lease liabilities:

 

      
Years ending June 30  Lease cost 
2023  $3,784,536 
2024   1,959,775 
2025   14,474 
      
Total lease payments   5,758,785 
Less: Interest   (347,200)
Total  $5,411,585 

 

13. 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 6.699 and 6.341 as of June 30, 2022 and March 31, 2022, respectively. Revenue and expenses are translated at the average yearly exchange rates, which was 6.603 and 6.461 for the three months ended June 30, 2022 and 2021, 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, 2022 and March 31, 2022.

 

F-13
 

 

Garment manufacturing segment

 

    June 30, 2022     March 31, 2022  
Customer A     89.4 %     85.3 %
Customer B     10.6 %     11.4 %

 

The high concentration as of June 30, 2022 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, 2022   March 31, 2022 
Customer A   17.0%   8.2%
Customer B   15.0%   19.1%
Customer C   13.8%   Nil%
Customer D   9.8%   6.7%
Customer E   8.3%   3.9%

 

Property management and subleasing segment

 

There is no account receivable for Property management and subleasing segment as for March 31, 2022.

 

 

Epidemic prevention supplies segment

 

The accounts receivable of Epidemic prevention supplies segment as at June 30, 2022 was from one customer only.

 

For the three months ended June 30, 2022, one customer from Logistics services segment provided more than 10% of total revenue of the Company, represented 13.1% of total revenue of the Company for the three months. For the three months ended June 30, 2021, one customer from garment segment provided more than 10% of total revenue of the Company, represented 98.8% 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.

 

The following tables summarized the purchases from five largest suppliers of each of the reportable segment for the three months ended June 30, 2022 and 2021.

 

   Three months ended 
   June 30, 
   2022   2021 
Garment manufacturing segment   Nil%   100.0%
Logistics services segment   100.0%   61.6%
Property management and subleasing   100.0%   100.0%
Epidemic prevention supplies   Nil %   Nil%

 

(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, 2022, the total outstanding borrowings amounted to $142,591 (RMB955,281) with various interest rate from 4.84% to 6.96% p.a. (Note 10)

 

(e) COVID-19

 

The Coronavirus Disease (COVID-19) outbreak and the measures taken to contain the spread of the pandemic have created a high level of uncertainty to global economic prospects and this has impacted the Company’s operations and its financial performance in the last three quarters of the financial year and subsequent to the financial year end.

 

As the situation continues to evolve with significant level of uncertainty, the Company is unable to reasonably estimate the full financial impact of the COVID-19 outbreak. The Company is monitoring the situation closely and to mitigate the financial impact, it is conscientiously managing its cost by adopting an operating cost reduction strategy and conserving liquidity by working with major creditors to align repayment obligations with receivable collections.

 

F-14
 

 

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

 

The following discussion and analysis of our financial condition and results of operations for the three months ended June 30, 2022 and 2021 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 three wholly owned subsidiaries, namely Dongguan Heng Sheng Wei Garments Co., Ltd (“HSW”), Dongguan Yushang Clothing Co., Ltd (“YS”), and Shantou Yi Bai Yi Garments Co., Ltd (“YBY”) which are located in the Guangdong province, China.

 

Our logistic business consists of delivery and courier services covering approximately 79 cities in approximately seven provinces and two municipalities in China. Although we have our own motor vehicles and drivers, we currently outsource some of the business to our contractors. We believe outsourcing allows us to maximize our capacity and maintain flexibility while reducing capital expenditures and the costs of keeping drivers during slow seasons. We conduct our logistic operations through 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 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 June 30, 2022, 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 June 30, 2022 and 2021

 

The following tables summarize our results of operations for the three months ended June 30, 2022 and 2021. 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 June 30,   Changes in 2022 
   2022   2021   compared to 2021 
   (In U.S. dollars, except for percentages)     
Revenue  $2,386,384    100.0%  $4,286,431    100%  $(1,900,047)   (44.3)%
Cost of revenues   (1,929,700)   (80.9)%   (3,703,026)   (86.4)%   1,773,326    47.9%
Gross profit   456,684    19.1%   583,405   13.6%   (126,721)   (21.7)%
Operating expenses   (410,582)   (17.2)%   (506,705)   (11.8)%   96,123   19.0%
Income from operations   46,102    1.9%   76,700    1.8%   (30,598)   (39.9)%
Other income, net   51,083    2.2%   13,237    0.3%   37,846    285.9%
Net finance cost   780    0.1%   (265)   (0.0)%   1,045    394.3%
Income tax expense   (1,294)   (0.1)%   (10,725)   (0.3)%   9,431   87.9%
Net income (loss)  $96,671    4.1%  $78,947    1.8%  $17,724    22.4%

 

Revenue

 

Total revenue for the three months ended June 30, 2022 decreased by approximately $1.9 million, or 44.3%, as compared with the three months ended June 30, 2021. The significant decrease was mainly because of the decrease of $2.0 million in garment manufacturing and $0.1 million in property management and subleasing business and offset by $0.2 million increases in logistics services business.

 

Revenue generated from our garment manufacturing business contributed approximately $0.04 million (1.7%) and $2.1 million (48.3%) of total revenue for the three months ended June 30, 2022 and 2021, respectively. The decrease of $2.1 million was mainly due to factory facilities renewal and repair, remaining factories cannot provide as much capacity as before. We estimate the capacity will appear to recover at second quarter of FY2023.

.

6
 

 

Revenue generated from our logistics services business contributed approximately $1.4 million or 58.3% of our total revenue for the three months ended June 30, 2022. Revenue generated from our logistic business contributed approximately $1.1 million or 25.8% of our total revenue for the three months ended June 30, 2021.

 

Revenue generated from our property management and subleasing business contributed approximately $1.0 million or 40.0% of our total revenue for the three months ended June 30, 2022. The revenue from this business segment was $1.1 million or 25.9% of our total revenue of this business for the three months ended June 30, 2021.

 

There was only $0.0004 million generated from our epidemic prevention supplies business for the three months ended June 30, 2022 because no other 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. There was no revenue generated from this business for the three months ended June 30, 2021.

 

Cost of revenue

 

   Three months ended June 30,  

Increase
(decrease) in

 
   2022   2021  

2022 compared
to 2021

 
    (In U.S. dollars, except for percentages)           
Net revenue for garment manufacturing  $40,426    100.0%  $2,069,141    100%  $(2,028,715)   (98.0)%
Raw materials   27,952    69.1%   1,441,333    69.7%   (1,413,381)   (98.1)%
Labor   8,544    21.1%   443,290    21.4%   (434,746)   (98.1)%
Other and Overhead   579    1.4%   10,399    0.5%   9,820    94.4%
Total cost of revenue for garment manufacturing   37,075    91.7%   1,895,022    91.6%   (1,857,947)   (98.0)%
Gross profit for garment manufacturing   3,351    8.3%   174,119    8.4%   (170,768)   (98.1)%
                        0      
Net revenue for logistics services   1,390,882    100.0%   1,108,042    100.0%   282,840    25.5%
Fuel, toll and other cost of logistics services   602,584    44.3%   393,150    35.5%   209,434   53.3%
Subcontracting fees   441,196    31.7%   486,722    43.9%   (45,526)   (9.4)%
Total cost of revenue for logistics services   1,043,780    75.0%   879,872    79.4%   163,908   18.6%
Gross Profit for logistics services   347,102    25.0%   228,170    20.6%   118,932    52.1%
                        0      
Net revenue for property management and subleasing   954,835    100.0%   1,109,248    100.0%   154,413      
Total cost of revenue for property management and subleasing   848,451    88.9%   926,642    83.5%   78,191      
Gross Profit for property management and subleasing   106,384    11.1%   182,606    16.5%   76,222      
                        0      
Net revenue for epidemic prevention supplies  $241        $-                
Merchandise/Finished goods/Raw materials   -         -                
Other and Overhead   394         1,490         1,096    73.6 
Total cost of revenue for epidemic prevention supplies   394         1,490         1,096    73.6%
Gross (loss) income for epidemic prevention supplies   (153)        (1,490)             100.0%
Total cost of revenue  $1,929,700    80.9%  $3,703,026    86.4%  $1,773,326    47.9%
Gross profit  $456,684    19.1%  $583,405    (13.6)%  $126,721    21.7%

 

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 69.1% of our total garment manufacturing business revenue in the three months ended June 30, 2022, compared with 69.7% in the three months ended June 30, 2021. The decreased in percentages was mainly due to the purchase cost of the raw materials dropped.

 

Labor costs for our garment manufacturing business were 21.1% of our total garment manufacturing business revenue in the three months ended June 30, 2022, compared with 21.4% in the three months ended June 30, 2021. 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 1.4% of our total garment business revenue for the three months ended June 30, 2022, compared with 0.5% of total garment business revenue for the three months ended June 30, 2021.

 

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 35.6% and 33.4% of total cost of revenues for our service segment for the three months ended June 30, 2022 and 2021, respectively. The percentage decreased as we used our own logistics more than the subcontractors under COVID-19 epidemic. We have not experienced any disputes with our subcontractor and we believe we maintain good relationships with our contract logistics services provider.

 

Fuel, toll and other costs for our service business for the three months ended June 30, 2022 were approximately $0.6 million compared with $0.4 million for the three months ended June 30, 2021. Fuel, toll and other costs for our service business accounted for 44.3% of our total service revenue for the three months ended June 30, 2022, compared with 35.5% for the three months ended June 30, 2021. The increase in percentages was primarily attributable to decrease of use of subcontractors under the epidemic circumstance.

 

Subcontracting fees for our service business for the three months ended June 30, 2022 decreased 8.3% to approximately $0.4 million from $0.5 million for the three months ended June 30, 2021. Subcontracting fees accounted for 31.7% and 43.9% of our total service business revenue in the three months ended June 30, 2022 and 2021, respectively. This decrease in percentages was primarily because the Company used less subcontractors under the epidemic circumstance.

 

8
 

 

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

 

For epidemic prevention supplies business, we have trading and own production. The cost of revenue included cost of merchandise and cost of our own products. The other cost of the quarter represented depreciation of machinery.

 

Gross profit

 

Garment manufacturing business gross profit for the three months ended June 30, 2022 was approximately $0.003 million, as compared with approximately $0.2 million for the three months ended June 30, 2021. Gross profit accounted for 8.3% of our total Garment manufacturing business revenue for the three months ended June 30, 2022, compared with 8.4% for the three months ended June 30, 2021.

 

Gross profit in our logistics services business for the three months ended June 30, 2022 was approximately $0.3 million and gross margin was 25.0%. Gross profit in our logistics services business for the three months ended June 30, 2021 was approximately $0.2 million and gross margin was 20.6%. 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 three months ended June 30, 2022 was approximately $0.1 million, or 11.1% of our total property management and subleasing business revenue. It was approximately $0.2 million, or 16.5% for the three months ended June 30, 2021.

 

   Three months ended June 30,   Increase
(decrease) in
 
   2022   2021   2022 compared
to 2021
 
    (In U.S. dollars, except for percentages)           
Gross profit  $456,684    100%  $583,405    100%   (126,721)   (21.7)%
Operating expenses:                              
Selling expenses   (5,642)   (1.2)%   (46,390)   (8.0)%   40,748    87.8%
General and administrative expenses   (404,940)   (88.7)%   (460,315)   (78.9)%   55,375    12.0%
Total  $(410,582)   (89.9)%  $(506,705)   (86.9)%   96,123    19.0%
Income from operations  $46,102    10.1%  $76,700    13.1%   (30,598)   (39.9)%

 

Selling, General and administrative expenses

 

Our selling expenses were mainly incurred for our property management and subleasing business. It was approximately $0.006 million and $0.05 million for the three months ended June 30, 2022 and 2021, respectively. Selling expenses consist 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 June 30, 2022 and 2021 was approximately $0.03 million and $0.05 million, respectively. Our general and administrative expenses in our logistics services segment, for the three months ended June 30, 2022 and 2021 was both approximately $0.2 million. The general and administrative expenses in our property management and subleasing business was approximately $0.07 million and $0.08 million for the three months ended June 30, 2022 and 2021. Our general and administrative expenses in our epidemic prevention supplies segment was both nil for the three months ended June 30, 2022 and 2021, respectively. Our general and administrative expenses in our corporate office for the three months ended June 30, 2022 and 2021 was approximately $0.08 million and $0.1 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 June 30, 2022 decreased by 12.0% to approximately $0.40 million from $0.46 million for the three months ended June 30, 2021.

 

Loss from operations

 

Income from operations for the three months ended June 30, 2022 and 2021 was approximately $0.05 million and $0.08 million, respectively. (Loss) Income from operations of approximately ($0.03) million and $0.12 million was attributed from our garment manufacturing segment for the three months ended June 30, 2022 and 2021, respectively. Income from operations of approximately $0.12 million and $0.005 million was attributed from our logistics services segment for the three months ended June 30, 2022 and 2021, respectively. Income from operations of approximately $0.03 million and $0.06 million was attributed from our property management and subleasing business for the three months ended June 30, 2022 and 2021, respectively. There was no income or loss from operations attributed from our epidemic prevention supplies segment for the three months ended June 30, 2022 and 2021, respectively. We incurred a loss from operations in corporate office of approximately $0.08 million and $0.1 million for the three months ended June 30, 2022 and 2021, respectively. The loss from our corporate office was mainly due to increase in legal and professional fees to comply with the SEC accounting, disclosure and reporting requirements.

 

Income Tax Expenses

 

Income tax expense for the three months ended June 30, 2022 and 2021 was approximately $0.001 million and $0.01 million, 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 June 30, 2022 and 2021.

 

QYTG and YX were incorporated in the PRC and is subject to the PRC Enterprise Income Tax (EIT) rate is 25%. No provision for income taxes in the PRC has been made as QYTG and YX had no taxable income for the three months ended June 30, 2022 and 2021.

 

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 2022. 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 June 30, 2022 and 2021.

 

Net Income (Loss)

 

We incurred net income of approximately $0.1 million for both three months ended June 30, 2022 and 2021, respectively. Our basic and diluted earnings per share were $0.00 and $0.00 for the three months ended June 30, 2022 and 2021, respectively.

 

10
 

 

Summary of cash flows

 

Summary cash flows information for the three months ended June 30, 2022 and 2021 is as follow:

 

  

Three months ended June 30,

 
   2022  

2021

 
  

(In U.S. dollars)

 
Net cash provided by (used in) operating activities  $278,018   $(1,250,664)
Net cash used in investing activities  $-   $(104,235)
Net cash provided by financing activities  $615,848   $485,962 

 

Net cash provided by operating activities in the three months ended June 30, 2022 was approximately $1.5 million more than that of the three months ended June 30, 2021. It was mainly because the movement of operating assets and liabilities of the three months ended June 30, 2022 resulted in cash inflow of approximately $0.1 million, while the movement of operating assets and liabilities of the three months ended June 30, 2021 resulted in cash outflow of approximately $1.4 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.

 

Net cash used in investing activities for the three months ended June 30, 2022 was Nil, approximately $0.1 million less than that of the three months ended June 30, 2021. It was mainly because there was no purchase of plant and equipment and other assets in the three months ended June 30, 2022.

 

Net cash provided by financing activities for the three months ended June 30, 2022 was approximately $0.1 million more than the three months ended June 30, 2021. It was mainly because the net cash from related party borrowings in current period was approximately $0.1 million more than that of the three months ended June 30, 2021.

 

Financial Condition, Liquidity and Capital Resources

 

As of June 30, 2022, we had cash on hand of approximately $2.2 million, total current assets of approximately $6.9 million and current liabilities of approximately $11.1 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, fund raising from IPO proceedings 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 June 30, 2022, the market foreign exchange rate was RMB 6.70 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 three months ended June 30, 2022 and 2021 was approximately $0.1 million and $0.03 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 June 30, 2022 that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

11
 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable to smaller reporting companies.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

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

 

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of June 30, 2022. 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.

 

12
 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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

 

Item 1A. Risk Factors

 

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

 

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

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

 

Item 5. Other Information

 

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

 

Item 6. Exhibits

 

Exhibit

Number

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

 

*Filed herewith.

 

13
 

 

SIGNATURES

 

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

 

Addentax Group Corp.
     
Date: August 15, 2022 By: /s/ Hong Zhida
    Hong Zhida
    President, Chief Executive Officer and Director,
    (Principal Executive Officer)
     
Date: August 15, 2022 By: /s/ Huang Chao
    Huang Chao
    Chief Financial Officer and Treasurer
    (Principal Financial and Accounting Officer)

 

14

 

 

Exhibit 31.1

 

CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Hong Zhida, certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of Addentax Group Corp.;
     
  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
     
  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
     
  4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     
  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

 

  5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
     
    (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     
    (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 15, 2022

 

  /s/ Hong Zhida
  Hong Zhida
  President, Chief Executive Officer, Secretary and Director
  (Principal Executive Officer)

 

 

 

 

Exhibit 31.2

 

CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Huang Chao, certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of Addentax Group Corp.;
     
  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
     
  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
     
  4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     
  (c)  Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

 

  5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
     
    (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     
    (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 15, 2022

 

  /s/ Huang Chao
  Huang
  Chao Chief Financial Officer and Treasurer
  (Principal Financial Officer)

 

 

 

 

Exhibit 32.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

The undersigned, Hong Zhida, Chief Executive Officer, of Addentax Group Corp., hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

  (1) the quarterly report on Form 10-Q of Addentax Group Corp. for the period ended June 30, 2022 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
     
  (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Addentax Group Corp.

 

  Dated: August 15, 2022
  /s/ Hong Zhida
  Hong Zhida
  President, Chief Executive Officer, Secretary and Director
  (Principal Executive Officer)

 

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Addentax Group Corp. and will be retained by Addentax Group Corp. and furnished to the Securities and Exchange Commission or its staff upon request.

 

 

 

 

Exhibit 32.2

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

The undersigned, Huang Chao, Chief Financial Officer, of Addentax Group Corp., hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

  (1) the quarterly report on Form 10-Q of Addentax Group Corp. for the period ended June 30, 2022 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
     
  (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Addentax Group Corp.

 

  Dated: August 15, 2022
  /s/ Huang Chao
 

Huang Chao

Chief Financial Officer, Treasurer

(Principal Financial Officer)

 

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Addentax Group Corp. and will be retained by Addentax Group Corp. and furnished to the Securities and Exchange Commission or its staff upon request.

 

 

 



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