Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of Operations.
|
The
following discussion and analysis of our financial condition and results of operations for the three and six months ended December
31, 2017 should be read in conjunction with the Financial Statements and corresponding notes included in this Quarterly Report
on Form 10-Q. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties,
such as our plans, objectives, expectations, and intentions. Actual results and the timing of events could differ materially from
those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the
Risk Factors and Special Note Regarding Forward-Looking Statements in this report. We use words such as “anticipate,”
“estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,”
“believe,” “intend,” “may,” “will,” “should,” “could,”
“target”, “forecast” and similar expressions to identify forward-looking statements.
Overview
Our
Business
We
are a garment manufacturer and logistic service provider based in China. We are listed on the OTCQB under the symbol of “ATXG”.
We classify our businesses into two segments: Garment manufacturing and logistics services.
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 two wholly owned subsidiaries, namely Dongguan Heng Sheng Wei Garments Co., Ltd (“HSW”)
and Shantou Chenghai Dai Tou Garments Co., Ltd (“DT”), which are located in the Guangdong province, China.
Our
logistic business consists of delivery and courier services covering approximately 20 provinces in China. Although we have our
own motor vehicles and drivers, we currently outsource some of the business to our contractors. We believe outsourcing allows
us to maximize our capacity and maintain flexibility while reducing capital expenditures and the costs of keeping drivers during
slow seasons. We conduct our logistic operations through two wholly owned subsidiaries, namely Shenzhen Xin Kuai Jie Transportation
Co., Ltd (“XKJ”) and Shenzhen Hua Peng Fa Logistic Co., Ltd (“HPF”), which are located in the Guangdong
province, China.
Business
Objectives
Garment
Manufacturing Business
We
believe the enduring strength of our garment manufacturing business is mainly due to our consistent emphasis on exceptional quality
and timely delivery. The primary business objective for our garment manufacturing segment is to expand our customer base and improve
our profit. In the future, we plan to develop our growth opportunities and continued investment initiatives to provide value-added
consulting services to the apparel supply-chain companies and retailers in China.
Logistic
Business
The
business objective and future plan for our logistic service segment is to establish an efficient logistic system and to build
a nationwide delivery and courier network in China. As of December 31, 2017, we provide logistic service to over 23 cities in
approximately 20 provinces. We expect to open logistic points in additional 10 cities in the third and fourth quarter of 2017
and in the year of 2018.
Seasonality
of Business
Our
business is affected by seasonal trends, with higher levels of garment sales in our second and third quarters and higher logistic
service revenue in our third and fourth quarters. These trends primarily result from the timing of seasonal garment manufacturing
shipments and holiday periods in the logistic 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 the delivery of
finished goods.
Logistic
business
For
logistic service, we generally receive payments from the customers between 30 to 90 days following the date of the register receipt
of packages.
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
We
are generating our revenue from the sale of garments manufactured and the provision of logistic services to customers. We recognize
our revenue, net of value-added taxes, upon customer acceptance, at such time title passes to the customer provided that (i) there
are no uncertainties regarding customer acceptance, (ii) persuasive evidence of an arrangement exists, (iii) the sales price is
fixed and determinable, and (iv) collectability is deemed probable.
Concentrations
of Credit Risk
Cash
held in banks: We maintain cash balances at the financial institutions in China. We have not experienced any losses in such accounts.
Accounts
Receivable: Customer accounts typically are collected within a short period of time, and based on its assessment of current conditions
and its experience collecting such receivables, management believes it has no significant risk related to its concentration within
its accounts receivable.
Recently
issued and adopted accounting pronouncements
In
May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” (“ASU 2014-09”).
The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services. ASU 2014-09 supersedes most existing revenue recognition guidance in US GAAP. In August 2015, the FASB issued ASU
2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date (“ASU 2015-14”), which defers
the effective date of ASU 2014-09 to January 1, 2018 for the Company. Early adoption is permitted. We expect to adopt ASU 2014-09
utilizing the modified retrospective method in the first quarter of 2018.
We
are in the process of reviewing our revenue contracts across each revenue stream and continues to evaluate the impact the standard
would have on each revenue stream. As a result of our evaluation performed to date, we do not believe the adoption of this new
standard will have a material impact on our revenue recognition policy.
In
January 2016, the FASB issued ASU 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement
of Financial Assets and Financial Liabilities (“ASU 2016-01”)”. The standard addresses certain aspects of recognition,
measurement, presentation, and disclosure of financial instruments. ASU 2016-01 is effective for fiscal years, and interim periods
within those years, beginning after December 15, 2017. We evaluated the impact of adopting the new standard and conclude there
was no material impact to our consolidated financial statement.
In
February 2016, the FASB issued ASU 2016-02, “Lease (Topic 842)”, which amends recognition of lease assets and lease
liabilities by lessees for those leases classified as operating leases. Under the new guidance, lessees will be required to recognize
a lease liability and a right-of-use asset for all leases (with the exception of short-term leases) at the commencement date.
This standard will take effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.
We are currently assessing the impact of this new standard on our consolidated financial statements.
In
August 2016, the FASB issued ASU 2016-15, “Statement of Cash flows -—Classification of Certain Cash Receipts and Cash
Payment”, effective for the fiscal years beginning after December 15, 2017, and interim periods within that fiscal year.
This Update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. We evaluated
the impact of adopting the new standard on our consolidated financial statements and conclude there was no material impact to
the Company’s financial statement.
In
January, 2017, the FASB issued 2017-01 “Business Combinations”, effective for the annual reporting period beginning
after December 15, 2017, and interim period within that period. This Updated clarifies the definition of a business with the objective
of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions of assets or
business. We evaluated the impact of adopting the new standard on its consolidated financial statements and conclude there was
no material impact to our financial statement.
In
February 2017, the FASB issued ASU 2017-05 “Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets
(Subtopic 610-20)”, effective for the annual reporting period beginning after the December 15, 2017, including the interim
reporting period within that period. This update provides guidance on the recognition of gains and losses on transfers of nonfinancial
assets and in substance nonfinancial assets to counterparties that are not customers. We evaluated the impact of adopting the
new standard on our consolidated financial statements and conclude there was no material impact to our financial statement.
We
review new accounting standards as issued. We have not identified any other new standards that we believe will have a significant
impact on our consolidated financial statements.
Results
of Operations for the three months ended December 31, 2017 and 2016
The
following tables summarize our results of operations for the three months ended December 31, 2017 and 2016. The table and the
discussion below should be read in conjunction with our condensed consolidated financial statements and the notes thereto appearing
elsewhere in this report.
|
|
Three Months Ended December 31, 2017
|
|
|
Increase (decrease) in
|
|
|
|
2017
|
|
|
2016
|
|
|
2017 compared to 2016
|
|
|
|
(In U.S. dollars, except for percentages)
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,061,999
|
|
|
|
100.0
|
%
|
|
$
|
2,413,505
|
|
|
|
100
|
%
|
|
$
|
648,494
|
|
|
|
26.9
|
%
|
Cost of revenues
|
|
|
(2,705,581
|
)
|
|
|
(88.4
|
%)
|
|
|
(2,053,447
|
)
|
|
|
(85.1
|
%)
|
|
|
652,134
|
|
|
|
31.8
|
%
|
Gross profit
|
|
|
356,418
|
|
|
|
11.6
|
%
|
|
|
360,058
|
|
|
|
14.9
|
%
|
|
|
(3,640
|
)
|
|
|
(1.0
|
%)
|
Operating expenses
|
|
|
(423,163
|
)
|
|
|
(13.8
|
%)
|
|
|
(293,273
|
)
|
|
|
(12.1
|
%)
|
|
|
129,890
|
|
|
|
44.3
|
%
|
Loss (income) from operations
|
|
|
(66,745
|
)
|
|
|
(2.2
|
%)
|
|
|
66,785
|
|
|
|
2.8
|
%
|
|
|
(133,530
|
)
|
|
|
(120
|
%)
|
Other income, net
|
|
|
7,204
|
|
|
|
0.2
|
%
|
|
|
2,677
|
|
|
|
0.1
|
%
|
|
|
4,527
|
|
|
|
169.1
|
%
|
Income tax expense
|
|
|
(5,976
|
)
|
|
|
(0.2
|
%)
|
|
|
(13,191
|
)
|
|
|
(0.5
|
%)
|
|
|
(7,215
|
)
|
|
|
(54.7
|
%)
|
Net (loss) income
|
|
$
|
(65,517
|
)
|
|
|
(2.2
|
%)
|
|
$
|
56,271
|
|
|
|
2.4
|
%
|
|
$
|
(121,788
|
)
|
|
|
(216.4
|
%)
|
Revenue
Revenue
generated from our garment manufacturing business contributed $716,406 or 23.4% of our total revenue for the three months ended
December 31, 2017. Revenue generated from our garment manufacturing business contributed $1,670,662 or 69.2% of our total revenue
for the three months ended December 31, 2016. The decrease was due to we partially closed our operations in 2017 to undergo business
restructuring for reorganizing the operational and other structures of our garment manufacturing subsidiaries to increase profitability.
Revenue
generated from our logistic business contributed $2,345,593 or 76.6% of our total revenue for the three months ended December
31, 2017. Revenue generated from our logistic business contributed $742,843 or 30.8% of our total revenue for the three months
ended December 31, 2016. The increase was due to revenue generated for the three months ended December 31, 2016 represents only
one-month revenue since Yingxi Industrial Chain Group Co., Ltd (“Yingxi”) consolidated with the four business operating
companies in the PRC through the acquisition of Yingxi Industrial Chain Investment Co., Ltd (“Yingxi HK”) in December
2016 (the “Acquisition transaction in 2016”).
Total
revenue for the three months ended December 31, 2017 were $3,061,999, a 26.9% increase compared with the three months ended December
31, 2016. This increase was due to the operating companies in the PRC was being acquired and consolidated to the Company beginning
December 2016.
Cost
of revenue
|
|
Three Months Ended December 31, 2017
|
|
|
Increase (decrease) in
|
|
|
|
2017
|
|
|
2016
|
|
|
2017 compared to 2016
|
|
|
|
(In U.S. dollars, except for percentages)
|
|
|
|
|
|
|
|
Net revenue for garment manufacturing
|
|
$
|
716,406
|
|
|
|
100.0
|
%
|
|
$
|
1,670,662
|
|
|
|
100
|
%
|
|
$
|
(954,256
|
)
|
|
|
(57.1
|
%)
|
Raw materials
|
|
|
540,596
|
|
|
|
75.4
|
%
|
|
|
1,378,051
|
|
|
|
82.4
|
%
|
|
|
|
|
|
|
|
|
Labor
|
|
|
55,881
|
|
|
|
7.8
|
%
|
|
|
82,115
|
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
Other and Overhead
|
|
|
34,932
|
|
|
|
4.9
|
%
|
|
|
23,196
|
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
Total cost of revenue for garment manufacturing
|
|
|
631,409
|
|
|
|
88.1
|
%
|
|
|
1,483,362
|
|
|
|
88.8
|
%
|
|
|
(851,953
|
)
|
|
|
(57.4
|
%)
|
Gross profit for garment manufacturing
|
|
|
84,997
|
|
|
|
11.9
|
%
|
|
|
187,300
|
|
|
|
11.2
|
%
|
|
|
(102,303
|
)
|
|
|
(54.6
|
%)
|
Net revenue for logistic service
|
|
|
2,345,593
|
|
|
|
100.0
|
%
|
|
|
742,843
|
|
|
|
100
|
%
|
|
|
1,602,750
|
|
|
|
215.8
|
%
|
Fuel and toll
|
|
|
1,748,002
|
|
|
|
74.5
|
%
|
|
|
387,034
|
|
|
|
52.1
|
%
|
|
|
|
|
|
|
|
|
Subcontracting fees
|
|
|
326,170
|
|
|
|
13.9
|
%
|
|
|
183,051
|
|
|
|
24.6
|
%
|
|
|
|
|
|
|
|
|
Total cost of revenue for logistic service
|
|
|
2,074,172
|
|
|
|
88.4
|
%
|
|
|
570,085
|
|
|
|
76.7
|
%
|
|
|
1,504,087
|
|
|
|
263.8
|
%
|
Gross Profit for logistic service
|
|
|
271,421
|
|
|
|
11.6
|
%
|
|
|
172,758
|
|
|
|
23.3
|
%
|
|
|
98,663
|
|
|
|
57.1
|
%
|
Total cost of revenue
|
|
$
|
2,705,581
|
|
|
|
88.4
|
%
|
|
$
|
2,053,447
|
|
|
|
85.1
|
%
|
|
$
|
652,134
|
|
|
|
31.8
|
%
|
Gross profit
|
|
$
|
356,418
|
|
|
|
11.6
|
%
|
|
$
|
360,058
|
|
|
|
14.9
|
%
|
|
$
|
(3,640
|
)
|
|
|
(1.0
|
%)
|
Cost
of revenue for our manufacturing segment for the three months ended December 31, 2017 and 2016 was $631,409 and $1,483,362, respectively,
which includes direct raw material cost, direct labor cost, manufacturing overheads including depreciation of production equipment
and rent. Cost of revenue for our service segment for the three months ended December 31, 2017 was $2,074,172 and $570,085, respectively,
which includes gasoline and diesel fuel, toll charges and subcontracting fees.
For
our garment manufacturing business, we purchase the majority of our raw materials directly from numerous local fabric and accessories
suppliers. Aggregate purchases from our five largest raw material suppliers represented approximately 62% and 88% of raw materials
purchases for the three months ended December 31, 2017 and 2016, respectively. Three and four suppliers provided more than 10%
of our raw materials purchases for the three months ended December 31, 2017 and 2016. We have not experienced difficulty in obtaining
raw materials essential to our business, and we believe we maintain good relationships with our suppliers.
For
our logistic business, we outsource some of the business to our contractors. The Company relied on three subcontractors, in which
the subcontracting fees to our largest contractor represented approximately 60% of total cost of revenues for our service segment
for the three months ended December 31, 2017. We have not experienced any disputes with our subcontractor and we believe we maintain
good relationships with our contract logistic service provider.
Raw
material costs for our manufacturing business were 75.4% of our total manufacturing business revenue in the three months ended
December 31, 2017, compared with 82.4% in the three months ended December 31, 2016. The decrease was mainly due to the purchase
cost of the raw materials remained consistent, while the labor costs continued rising.
Labor
costs for our manufacturing business were 7.8% of our total manufacturing business revenue in the three months ended December
31, 2017, compared with 5.0% in the three months ended December 31, 2016. The increase was mainly due to the rising wages in the
PRC.
Overhead
and other expenses for our manufacturing business accounted for 4.9% of our total manufacturing business revenue for the three
months ended December 31, 2017, compared with 1.4% of total manufacturing business revenue for the three months ended December
31, 2016.
Fuel
and toll costs for our service business for the three months ended December 31, 2017 were $1,748,002 compared with $387,034 for
the three months ended December 31, 2016. Fuel and toll costs for our service business accounted for 74.5% of our total service
revenue for the three months ended December 31, 2017, compared with 52.1% for the three months ended December 31, 2016. The increase
was primarily attributable to the Acquisition transaction in 2016.
Subcontracting
fees for our service business for the three months ended December 31, 2017 increased 78.2% to $326,170 from $183,051 for the three
months ended December 31, 2016. Subcontracting fees accounted for 13.9% and 24.6% of our total service business revenue in the
three months ended December 31, 2017 and 2016, respectively. This increase was primarily attributable to the Acquisition transaction
in 2016.
Total
cost of revenue for the three months ended December 31, 2017 was $2,705,581, a 31.8% increase from $2,053,447 for the three months
ended December 31, 2016. Total cost of sales as a percentage of total sales for the three months ended December 31, 2017 was 88.4%,
compared with 85.1% for the three months ended December 31, 2016. Gross margin for the three months ended December 31, 2017 was
11.6% compared with 14.9% for the three months ended December 31, 2016.
Gross
profit
|
|
Three Months Ended December 31, 2017
|
|
|
Increase (decrease) in
|
|
|
|
2017
|
|
|
2016
|
|
|
2017 compared to 2016
|
|
|
|
(In U.S. dollars, except for percentages)
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
356,418
|
|
|
|
100
|
%
|
|
$
|
360,058
|
|
|
|
100
|
%
|
|
|
(3,640
|
)
|
|
|
(1.0
|
%)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
(4,106
|
)
|
|
|
(1.2
|
%)
|
|
|
(736
|
)
|
|
|
(2.0
|
%)
|
|
|
3,370
|
|
|
|
457.9
|
%
|
General and administrative expenses
|
|
|
(419,057
|
)
|
|
|
(117.6
|
%)
|
|
|
(292,537
|
)
|
|
|
(81.3
|
%)
|
|
|
126,520
|
|
|
|
43.2
|
%
|
Total
|
|
$
|
(423,163
|
)
|
|
|
(118.8
|
%)
|
|
$
|
(293,273
|
)
|
|
|
(81.5
|
%)
|
|
|
129.890
|
|
|
|
44.3
|
%
|
(Loss) income from operations
|
|
$
|
(66,745
|
)
|
|
|
(18.8
|
%)
|
|
$
|
66,785
|
|
|
|
18.5
|
%
|
|
|
(133,530
|
)
|
|
|
199.9
|
%
|
Manufacturing
business gross profit for the three months ended December 31, 2017 was $84,997 compared with $187,300 for the three months ended
December 31, 2016. Gross profit accounted for 11.9% of our total manufacturing business revenue for the three months ended December
31, 2017, compared with 11.2% for the three months ended December 31, 2016.
Gross
profit in our service business for the three months ended December 31, 2017 was $271,421 and gross margin was 11.6%. Gross profit
in our service business for the three months ended December 31, 2016 was $172,758 and gross margin was 23.3%. The decrease was
derived from the new opened logistic points in 2017, these logistic points have a lower gross margin as we provide lower service
fee to attract new business.
Selling,
General and administrative expenses
Our
selling expenses in our manufacturing segment for the three months ended December 31, 2017 and 2016 was $4,106 and $736, respectively.
Our selling expenses in our service segment for the three months ended December 31, 2017 was $nil and $nil, respectively. Selling
expenses consist primarily of local transportation, unloading charges and product inspection charges.
Our
general and administrative expenses in our manufacturing segment for the three months ended December 31, 2017 and 2016 was $99,172
and $176,890, respectively. Our general and administrative expenses in our service segment, for the three months ended December
31, 2017 and 2016 was $283,480 and $115,647, respectively. Our general and administrative expenses in our corporate and other
segment for the three months ended December 31, 2017 and 2016 was $36,405 and $nil, 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.
Selling
expenses for the three months ended December 31, 2017 increased 457.9% to $4,106 from $736 for the three months ended December
31, 2016.
General
and administrative expenses for the three months ended December 31, 2017 increased 43.2% to $419,057 from $292,537 for the three
months ended December 31, 2016. The increase was mainly due to the Acquisition transaction in 2016, offset with the decrease in
expenses as a result of cost cutting policy applied in 2017 including streamlining operating process and laying off redundant
employees.
Income
from operations
(Loss)
income from operations for the three months ended December 31, 2017 and 2016 was ($66,745) and $66,785, respectively. (Loss) income
from operations of ($18,281) and $10,125 was attributed from our manufacturing segment for the three months ended December 31,
2017 and 2016, respectively. (Loss) income from operations of ($12,059) and $57,112 was attributed from our service segment for
the three months ended December 31, 2017 and 2016, respectively. We incurred a loss from operations in corporate segment of $36,405
and $452 for the three months ended December 31, 2017 and 2016, respectively. The loss from our corporate segment was mainly due
to the legal and professional fee in connection to the reverse merger transactions incurred in 2017.
Income
Tax Expenses
Income
tax expense for the three months ended December 31, 2017 and 2016 was $5,976 and $13,191, respectively, a54.7% decrease compared
to the same period of 2016. The Company operates in the PRC and files tax returns in the PRC jurisdictions.
Yingxi
Industrial Chain Group Co., Ltd was incorporated in the Republic of Seychelles and, under the current laws of the British Virgin
Islands, is not subject to income taxes.
Yingxi
HK was incorporated in Hong Kong and is subject to Hong Kong income tax at a tax rate of 16.5%. No provision for income taxes
in Hong Kong has been made as Yingxi HK had no taxable income for the three months ended December 31, 2017 and 2016.
QYTG
and YX were incorporated in the PRC and is subject to the PRC statutory tax 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, 2017 and 2016.
The
Company is governed by the Income Tax Laws of the PRC. Yingxi’s operating companies, HSW, HPF and DT were subject to an
EIT rate of 25% in 2017. XKJ enjoyed the preferential tax benefits and its EIT rate was 15% in 2017.
The
Company’s parent entity, Addentax Group Corp. is an U.S entity and is subject to the United States federal income tax. No
provision for income taxes in the United States has been made as Addentax Group Corp. had no United States taxable income for
the three months ended December 31, 2017 and 2016.
Net
Income
We
incurred a net (loss) income of ($65,517) and $56,271 for the three months ended December 31, 2017 and 2016, respectively. Our
basic and diluted earnings per share were $0.00 and $0.00 for the three months ended December 31, 2017, respectively.
Results
of Operations for the nine months ended December 31, 2017 and 2016
The
following tables summarize our results of operations for the nine months ended December 31, 2017 and 2016. The table and the discussion
below should be read in conjunction with our condensed consolidated financial statements and the notes thereto appearing elsewhere
in this report.
|
|
Nine Months Ended December 31, 2017
|
|
|
Increase (decrease) in
|
|
|
|
2017
|
|
|
2016
|
|
|
2017 compared to 2016
|
|
|
|
(In U.S. dollars, except for percentages)
|
|
|
|
|
Revenue
|
|
$
|
11,339,887
|
|
|
|
100.0
|
%
|
|
$
|
2,413,505
|
|
|
|
100
|
%
|
|
$
|
8,926,382
|
|
|
|
369.9
|
%
|
Cost of revenues
|
|
|
(10,201,018
|
)
|
|
|
(90.0
|
%)
|
|
|
(2,053,447
|
)
|
|
|
(85.1
|
%)
|
|
|
8,147,571
|
|
|
|
396.8
|
%
|
Gross profit
|
|
|
1,138,869
|
|
|
|
10.0
|
%
|
|
|
360,058
|
|
|
|
14.9
|
%
|
|
|
778,811
|
|
|
|
216.3
|
%
|
Operating expenses
|
|
|
(1,238,129
|
)
|
|
|
(10.9
|
%)
|
|
|
(293,273
|
)
|
|
|
(12.1
|
%)
|
|
|
944,856
|
|
|
|
322.2
|
%
|
Loss (income) from operations
|
|
|
(99,260
|
)
|
|
|
(0.9
|
%)
|
|
|
66,785
|
|
|
|
2.8
|
%
|
|
|
(166,045
|
)
|
|
|
(248.6
|
%)
|
Other income, net
|
|
|
7,127
|
|
|
|
0.0
|
%
|
|
|
2,677
|
|
|
|
0.1
|
%
|
|
|
4,498
|
|
|
|
168.0
|
%
|
Income tax expense
|
|
|
(13,713
|
)
|
|
|
(0.0
|
%)
|
|
|
(13,191
|
)
|
|
|
(0.5
|
%)
|
|
|
522
|
|
|
|
4.0
|
%
|
Net (loss) income
|
|
$
|
(105,846
|
)
|
|
|
(0.9
|
%)
|
|
$
|
56,271
|
|
|
|
2.4
|
%
|
|
$
|
(162,117
|
)
|
|
|
(288.1
|
%)
|
Revenue
Revenue
generated from our garment manufacturing business contributed $4,444,764 or 39.2% of our total revenue for the nine months ended
December 31, 2017. Revenue generated from our garment manufacturing business contributed $1,670,662 or 69.2% of our total revenue
for the nine months ended December 31, 2016. A increase of 166.0% was due to the Acquisition transaction in 2016, offset by the
decrease resulting from our operations was partially closed in 2017 to undergo business restructuring for reorganizing the operational
and other structures of our garment manufacturing subsidiaries to increase profitability.
Revenue
generated from our logistic business contributed $6,895,123 or 60.8% of our total revenue for the nine months ended December 31,
2017. Revenue generated from our logistic business contributed $742,843 or 30.8% of our total revenue for the nine months ended
December 31, 2016. The increase was due to revenue generated for the three months ended December 31, 2016 represents only one-month
revenue since Yingxi Industrial Chain Group Co., Ltd (“Yingxi”) consolidated with the four business operating companies
in the PRC through the acquisition of Yingxi Industrial Chain Investment Co., Ltd (“Yingxi HK”) in December 2016 (the
“Acquisition transaction in 2016”).
Total
revenue for the nine months ended December 31, 2017 were $11,339,887, a 369.9% increase compared with the nine months ended December
31, 2016. This increase was due to the operating companies in the PRC was being acquired and consolidated to the Company beginning
December 2016.
Cost
of revenue
|
|
Nine Months Ended December 31, 2017
|
|
|
Increase (decrease) in
|
|
|
|
2017
|
|
|
2016
|
|
|
2017 compared to 2016
|
|
|
|
(In U.S. dollars, except for percentages)
|
|
|
|
|
Net revenue for garment manufacturing
|
|
$
|
4,444,764
|
|
|
|
100.0
|
%
|
|
$
|
1,670,662
|
|
|
|
100
|
%
|
|
$
|
2,774,102
|
|
|
|
166.0
|
%
|
Raw materials
|
|
|
3,700,204
|
|
|
|
83.3
|
%
|
|
|
1,378,051
|
|
|
|
82.4
|
%
|
|
|
|
|
|
|
|
|
Labor
|
|
|
410,562
|
|
|
|
9.2
|
%
|
|
|
82,115
|
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
Other and Overhead
|
|
|
159,834
|
|
|
|
3.6
|
%
|
|
|
23,196
|
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
Total cost of revenue for garment manufacturing
|
|
|
4,270,600
|
|
|
|
88.1
|
%
|
|
|
1,483,362
|
|
|
|
88.8
|
%
|
|
|
2,787,238
|
|
|
|
187.9
|
%
|
Gross profit for garment manufacturing
|
|
|
174,164
|
|
|
|
11.9
|
%
|
|
|
187,300
|
|
|
|
11.2
|
%
|
|
|
(13,136
|
)
|
|
|
(7.0
|
%)
|
Net revenue for logistic service
|
|
|
6,895,123
|
|
|
|
100.0
|
%
|
|
|
742,843
|
|
|
|
100
|
%
|
|
|
6,152,280
|
|
|
|
828.2
|
%
|
Fuel and toll
|
|
|
4,821,098
|
|
|
|
69.9
|
%
|
|
|
387,034
|
|
|
|
52.1
|
%
|
|
|
|
|
|
|
|
|
Subcontracting fees
|
|
|
1,109,320
|
|
|
|
16.1
|
%
|
|
|
183,051
|
|
|
|
24.6
|
%
|
|
|
|
|
|
|
|
|
Total cost of revenue for logistic service
|
|
|
5,930,418
|
|
|
|
86.0
|
%
|
|
|
570,085
|
|
|
|
76.7
|
%
|
|
|
5,360,333
|
|
|
|
940.3
|
%
|
Gross Profit for logistic service
|
|
|
964,705
|
|
|
|
14.0
|
%
|
|
|
172,758
|
|
|
|
23.3
|
%
|
|
|
791,947
|
|
|
|
458.4
|
%
|
Total cost of revenue
|
|
$
|
10,201,018
|
|
|
|
88.4
|
%
|
|
$
|
2,053,447
|
|
|
|
85.1
|
%
|
|
$
|
8,147,571
|
|
|
|
396.8
|
%
|
Gross profit
|
|
$
|
1,138,869
|
|
|
|
11.6
|
%
|
|
$
|
360,058
|
|
|
|
14.9
|
%
|
|
$
|
778,811
|
|
|
|
216.3
|
%
|
Cost
of revenue for our manufacturing segment for the nine months ended December 31, 2017 and 2016 was $4,270,600 and $1,483,362, respectively,
which includes direct raw material cost, direct labor cost, manufacturing overheads including depreciation of production equipment
and rent. Cost of revenue for our service segment for the nine months ended December 31, 2017 was $5,930,418 and $570,085, respectively,
which includes gasoline and diesel fuel, toll charges and subcontracting fees.
For
our garment manufacturing business, we purchase the majority of our raw materials directly from numerous local fabric and accessories
suppliers. Aggregate purchases from our five largest raw material suppliers represented approximately 57% and 88% of raw materials
purchases for the nine months ended December 31, 2017 and 2016, respectively. Three and four suppliers provided more than 10%
of our raw materials purchases for the nine months ended December 31, 2017 and 2016. We have not experienced difficulty in obtaining
raw materials essential to our business, and we believe we maintain good relationships with our suppliers.
For
our logistic business, we outsource some of the business to our contractors. The Company relied on three subcontractors, in which
the subcontracting fees to our largest contractor represented approximately 60% of total cost of revenues for our service segment
for the nine months ended December 31, 2017. We have not experienced any disputes with our subcontractor and we believe we maintain
good relationships with our contract logistic service provider.
Raw
material costs for our manufacturing business were 83.3% of our total manufacturing business revenue in the nine months ended
December 31, 2017, compared with 82.4% in the nine months ended December 31, 2016.
Labor
costs for our manufacturing business were 9.2% of our total manufacturing business revenue in the nine months ended December 31,
2017, compared with 5.0% in the nine months ended December 31, 2016. The increase was mainly due to the rising wages in the PRC.
Overhead
and other expenses for our manufacturing business accounted for 3.6% of our total manufacturing business revenue for the nine
months ended December 31, 2017, compared with 1.4% of total manufacturing business revenue for the nine months ended December
31, 2016.
Fuel
and toll costs for our service business for the nine months ended December 31, 2017 were $4,821,098 compared with $387,034 for
the nine months ended December 31, 2016. Fuel and toll costs for our service business accounted for 69.9% of our total service
revenue for the nine months ended December 31, 2017, compared with 52.1% for the nine months ended December 31, 2016. The increase
was primarily attributable to the Acquisition transaction in 2016.
Subcontracting
fees for our service business for the nine months ended December 31, 2017 increased 606.0% to $1,109,320 from $183,051 for the
nine months ended December 31, 2016. Subcontracting fees accounted for 16.1% and 24.6% of our total service business revenue in
the nine months ended December 31, 2017 and 2016, respectively. This increase was primarily attributable to the Acquisition transaction
in 2016.
Total
cost of revenue for the nine months ended December 31, 2017 was $10,201,018, a 396.8% increase from $2,053,447 for the nine months
ended December 31, 2016. Total cost of sales as a percentage of total sales for the nine months ended December 31, 2017 was 90.0%,
compared with 85.1% for the nine months ended December 31, 2016. Gross margin for the nine months ended December 31, 2017 was
10.0% compared with 14.9% for the nine months ended December 31, 2016.
Gross
profit
|
|
Nine Months Ended December 31, 2017
|
|
|
Increase (decrease) in
|
|
|
|
2017
|
|
|
2016
|
|
|
2017 compared to 2016
|
|
|
|
(In U.S. dollars, except for percentages)
|
|
|
|
|
Gross profit
|
|
$
|
1,138,869
|
|
|
|
100
|
%
|
|
$
|
360,058
|
|
|
|
100
|
%
|
|
|
778,811
|
|
|
|
216.3
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
(21,643
|
)
|
|
|
(1.9
|
%)
|
|
|
(736
|
)
|
|
|
(2.0
|
%)
|
|
|
20,907
|
|
|
|
2,840.6
|
%
|
General and administrative expenses
|
|
|
(1,216,487
|
)
|
|
|
(106.8
|
%)
|
|
|
(292,537
|
)
|
|
|
(81.3
|
%)
|
|
|
923,950
|
|
|
|
315.8
|
%
|
Total
|
|
$
|
(1,238,129
|
)
|
|
|
(108.7
|
%)
|
|
$
|
(293,273
|
)
|
|
|
(81.5
|
%)
|
|
|
944,856
|
|
|
|
322.2
|
%
|
(Loss) income from operations
|
|
$
|
(99,260
|
)
|
|
|
(8.7
|
%)
|
|
$
|
66,785
|
|
|
|
18.5
|
%
|
|
|
(166,045
|
)
|
|
|
(248.6
|
%)
|
Manufacturing
business gross profit for the nine months ended December 31, 2017 was $174,164 compared with $187,300 for the nine months ended
December 31, 2016. Gross profit accounted for 11.9% of our total manufacturing business revenue for the nine months ended December
31, 2017, compared with 11.2% for the three months ended December 31, 2016.
Gross
profit in our service business for the nine months ended December 31, 2017 was $964,705 and gross margin was 11.6%. Gross profit
in our service business for the nine months ended December 31, 2016 was $172,758 and gross margin was 23.3%. The decrease was
a result of the new opened logistic points in 2017, these logistic points have a lower gross margin as we provide lower service
fee to attract new business.
Selling,
General and administrative expenses
Our
selling expenses in our manufacturing segment for the nine months ended December 31, 2017 and 2016 was $21,643 and $736, respectively.
Our selling expenses in our service segment for the nine months ended December 31, 2017 was $nil and $nil, respectively. Selling
expenses consist primarily of local transportation, unloading charges and product inspection charges.
Our
general and administrative expenses in our manufacturing segment for the nine months ended December 31, 2017 and 2016 was $295,324
and $176,891, respectively. Our general and administrative expenses in our service segment, for the nine months ended December
31, 2017 and 2016 was $803,721 and 115,647, respectively. Our general and administrative expenses in our corporate and other segment
for the nine months ended December 31, 2017 and 2016 was $117,441 and $nil, 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.
Selling
expenses for the nine months ended December 31, 2017 increased 2,840.6% to $21,643 from $736 for the nine months ended December
31, 2016.
General
and administrative expenses for the nine months ended December 31, 2017 increased 315.8% to $1,216,487 from $292,537 for the nine
months ended December 31, 2016. The increase was mainly due to the Acquisition transaction in 2016, offset with the decrease in
expenses as a result of cost cutting policy applied in 2017 including streamlining operating process and laying off redundant
employees.
Income
from operations
(Loss)
income from operations for the nine months ended December 31, 2017 and 2016 was ($99,260) and $66,785, respectively. (Loss) income
from operations of ($142,802) and $10,125 was attributed from our manufacturing segment for the nine months ended December 31,
2017 and 2016, respectively. Income from operations of $160,984 and $57,112 was attributed from our service segment for the nine
months ended December 31, 2017 and 2016, respectively. We incurred a loss from operations in corporate segment of $117,442 and
$452 for the nine months ended December 31, 2017 and 2016, respectively. The loss from our corporate segment was mainly due to
the legal and professional fee in connection to the reverse merger transactions incurred in 2017.
Income
Tax Expenses
Income
tax expense for the nine months ended December 31, 2017 and 2016 was $13,713 and $13,191, respectively. A 4.0% increase compared
to the same period of 2016. The Company operates in the PRC and files tax returns in the PRC jurisdictions.
Yingxi
Industrial Chain Group Co., Ltd was incorporated in the republic of Seychelles and, under the current laws of the British Virgin
Islands, is not subject to income taxes.
Yingxi
HK was incorporated in Hong Kong and is subject to Hong Kong income tax at a tax rate of 16.5%. No provision for income taxes
in Hong Kong has been made as Yingxi HK had no taxable income for the nine months ended December 31, 2017 and 2016.
QYTG
and YX were incorporated in the PRC and is subject to the PRC federal statutory tax 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, 2017 and 2016.
The
Company is governed by the Income Tax Laws of the PRC. Yingxi’s operating companies, HSW, HPF and DT were subject to an
EIT rate of 25% in 2017. XKJ enjoyed the preferential tax benefits and its EIT rate was 15% in 2017.
The
Company’s parent entity, Addentax Group Corp. is an U.S entity and is subject to the United States federal income tax. No
provision for income taxes in the United States has been made as Addentax Group Corp. had no United States taxable income for
the nine months ended December 31, 2017 and 2016.
Net
Income
We
incurred a net (loss) income of ($105,846) and $56,271 for the nine months ended December 31, 2017 and 2016, respectively. Our
basic and diluted earnings per share were $0.00 and $0.00 for the nine months ended December 31, 2017, respectively.
Summary
of cash flows
Summary
cash flows information for the nine months ended December 31, 2017 and 2016 is as follow:
|
|
2017
|
|
|
2016
|
|
|
|
(In U.S. dollars)
|
|
Net cash provided by operating activities
|
|
$
|
730,027
|
|
|
$
|
(391,242
|
)
|
Net cash used in investing activities
|
|
$
|
(3,126,553
|
)
|
|
$
|
227,711
|
|
Net cash provided by financing activities
|
|
$
|
2,361,462
|
|
|
$
|
292,650
|
|
Net
cash used in operating activities consist of net loss of $105,846, increased by depreciation of $84,535, and reduced by decrease
in change of operating assets and liabilities of $63,035. We will improve our operating cash flow by closely monitoring the timely
collection of accounts and other receivables. We generally do not hold any significant inventory for more than ninety days, as
we typically manufacture upon customers’ order.
Net
cash used in investing activities consist of payment for acquisition of subsidiaries of $3,049,765 and purchase of plant and equipment
of $76,788.
Net
cash provided by financing activities consist of repayment of third party borrowings of $4,855,927 and we received third party
proceeds of $7,217,389.
Financial
Condition, Liquidity and Capital Resources
As
of December 31, 2017, we had cash on hand of $146,365, total current assets of $8,394,391 and current liabilities of $9,497,044.
We presently finance our operations primarily from cash flows from borrowings from related parties and third parties. We aim to
improve our operating cash flows and anticipate that cash flows from our operations and borrowings from related parties and third
parties will continue to be our primary source of funds to finance our short-term cash needs.
Foreign
Currency Translation Risk
Our
operations are located in the China, which may give rise to significant foreign currency risks from fluctuations and the degree
of volatility in foreign exchange rates between the U.S. dollar and the Chinese Renminbi (“RMB”). All of our sales
are in RMB. In the past years, RMB continued to appreciate against the U.S. dollar. As of September 30, 2017, the market foreign
exchange rate had increased to RMB 6.65 to one U.S. dollar. Our financial statements are translated into U.S. dollars using the
closing rate method. The balance sheet items are translated into U.S. dollars using the exchange rates at the respective balance
sheet dates. The capital and various reserves are translated at historical exchange rates prevailing at the time of the transactions
while income and expenses items are translated at the average exchange rate for the period. All translation adjustments are included
in accumulated other comprehensive income in the statement of equity. The foreign currency translation loss for the three and
nine months ended December 31, 2017 was $8,932 and $38,836, 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, 2017
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.