Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward
Looking Statements
The
following discussion should be read in conjunction with the attached consolidated unaudited financial statements and notes thereto,
and our consolidated audited financial statements and related notes for our fiscal year ended March 31, 2018 found in our Annual
Report on Form 10-K (as amended). In addition to historical information, the following discussion contains forward-looking statements
that involve risks, uncertainties and assumptions. Where possible, we have tried to identify these forward-looking statements
by using words such as “
anticipate,
” “
believe,
” “
intends,
” or similar
expressions. Our actual results could differ materially from those anticipated by the forward-looking statements due to important
factors and risks including, but not limited to, those set forth in our Annual Report on Form 10-K (as amended), and amendments
thereto.
This
Report contains statements that we believe are, or may be considered to be, “
forward-looking statements
”. All
statements other than statements of historical fact included in this Report regarding the prospects of our industry or our prospects,
plans, financial position or business strategy, may constitute forward-looking statements. In addition, forward-looking statements
generally can be identified by the use of forward-looking words such as “
may,
” “
will,
” “
expect,
”
“
intend,
” “
estimate,
” “
foresee,
” “
project,
” “
anticipate,
”
“
believe,
” “
plans,
” “
forecasts,
” “
continue
” or “
could
”
or the negatives of these terms or variations of them or similar terms. Furthermore, such forward-looking statements may be included
in various filings that we make with the Securities and Exchange Commission or press releases or oral statements made by or with
the approval of one of our authorized executive officers. Although we believe that the expectations reflected in these forward-looking
statements are reasonable, we cannot assure you that these expectations will prove to be correct. These forward-looking statements
are subject to certain known and unknown risks and uncertainties, as well as assumptions that could cause actual results to differ
materially from those reflected in these forward-looking statements. Readers are cautioned not to place undue reliance on any
forward-looking statements contained herein, which reflect management’s opinions only as of the date hereof. Except as required
by law, we undertake no obligation to revise or publicly release the results of any revision to any forward-looking statements.
You are advised, however, to consult any additional disclosures we make in our reports to the SEC. All subsequent written and
oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by
the cautionary statements contained in this Report.
You
should read the matters described in “
Risk Factors
” and the other cautionary statements made in this Report,
and incorporated by reference herein, as being applicable to all related forward-looking statements wherever they appear in this
Report. We cannot assure you that the forward-looking statements in this Report will prove to be accurate and therefore prospective
investors are encouraged not to place undue reliance on forward-looking statements.
Critical
Accounting Policies and Estimates
The
discussion and analysis of the Company’s financial condition and results of operations are based upon its consolidated unaudited
financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States
of America. The preparation of these unaudited financial statements requires management to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going
basis, management evaluates past judgments and estimates, including those related to bad debts, accrued liabilities, convertible
promissory notes and contingencies. Management bases its estimates on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions. The accounting policies and related risks described in the Company’s annual report
on Form 10-K/A as filed with the Securities and Exchange Commission on September 21, 2018 (as amended) are those that depend most
heavily on these judgments and estimates. As of September 30, 2018, there had been no material changes to any of the critical
accounting policies contained therein.
Definitions:
Unless
the context requires otherwise, references to the “
Company,
” “
we,
” “
us,
”
“
our,
” “
Addentax
” and “
Addentax Group Corp.
” refer specifically to Addentax
Group Corp. and its consolidated subsidiaries including Dongguan Heng Sheng Wei Garments Co., Ltd, which is wholly-owned; Shantou
Chenghai Dai Tou Garments Co., Ltd, which is wholly-owned; Shenzhen Xin Kuai Jie Transportation Co., Ltd, which is wholly-owned;
Shenzhen Hua Peng Fa Logistic Co., Ltd, which is wholly-owned; and ingxi Industrial Chain Group Co., Ltd., which is wholly-owned.
In
addition, unless the context otherwise requires and for the purposes of this report only:
|
●
|
“
Exchange
Act
” refers to the Securities Exchange Act of 1934, as amended;
|
|
|
|
|
●
|
“
SEC
”
or the “
Commission
” refers to the United States Securities and Exchange Commission; and
|
|
|
|
|
●
|
“
Securities
Act
” refers to the Securities Act of 1933, as amended.
|
This
information should be read in conjunction with the interim unaudited financial statements and the notes thereto included in this
Quarterly Report on Form 10-Q, and the unaudited financial statements and notes thereto and Part II, Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year
ended March 31, 2018 (as amended).
Certain
capitalized terms used below and otherwise defined below, have the meanings given to such terms in the footnotes to our consolidated
financial statements included above under “
Part I - Financial Information
” - “
Item 1. Financial Statements
”.
Corporate
History
Addentax
Group Corp., was incorporated in the State of Nevada on October 28, 2014. We were originally incorporated to produce images on
multiple surfaces, such as glass, leather, plastic, ceramic, textile, and others using a 3D sublimation vacuum heat transfer machine.
We no longer pursue opportunities related to 3D printing positioning.
We
have a fiscal year-end of March 31.
On
July 12, 2016, we filed an amendment to our articles of incorporation, which amendment was effectuated by our transfer agent on
July 20, 2016. The certificate of amendment was filed in order to undertake a two for one forward stock split and increase our
authorized shares of common stock, par value $0.001 per share, to 150,000,000 shares, which forward stock split has been retroactively
reflected throughout this Report.
Current
Business
Effective
December 28, 2016, the Company executed a Sale & Purchase Agreement (“
S&P
”) for the acquisition of
100% of the shares of Yingxi Industrial Chain Group Co., Ltd., a company incorporated under the laws of the Republic of Seychelles.
Yingxi Industrial Chain Group Co., Ltd. (“
YICG
”) is currently a garment manufacturer. Intending to diversify
its service portfolio, the Company plans to develop another branch of business: international supply chain management consulting
service, which will focus exclusively on the textile & garments industry. The Company plans to assist clients to open textile
and garment sales outlets throughout China. The Company will also provide assistance services in plan implementation. Pursuant
to the S&P, which closed on September 25, 2017, the Company issued five hundred million (500,000,000) restricted common shares
of the Company to the owners of Yingxi Industrial Chain Group Co., Ltd. in consideration for the acquisition of YICG.
After
the Share Exchange, YICG’s business became our business. We are a garment manufacturer and logistic service provider based
in China. Our common stock is 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 wholesalers 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 meet the delivery requirements 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 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 September 30, 2018, we provide logistic service to 30 cities in approximately
20 provinces. We expect to develop additional 20 logistic point in existing serving cities in the third quarter and fourth quarter
of 2018 and improve company’s profit in 2019 fiscal year.
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 fiscal quarters. These trends primarily result from the timing of seasonal garment manufacturing
shipments and holiday periods in the logistic segment.
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 of
our receipt of packages.
Future
Business
In
addition to our garment manufacturing business, we also want to kick start our supply chain management consulting service. Our
supply chain management consulting service is still under development with no active clients. However, due to the uniqueness of
our business model, we have attracted over 30 potential clients strongly interested in our proposed service. All of those potential
clients are located in China. We plan to put our proposed service into operation in the third quarter of calendar 2018.
To
help ensure the quality of our business, we conduct strict rules for our potential clients.
Client
Qualifications: To sign a servicing contract with the Company, a potential client must:
|
1.
|
Be
established and validly existing pursuant to relevant laws and regulations;
|
|
|
|
|
2.
|
Demonstrate
that they have a good business reputation and operating performance, and comply with professional ethics; and
|
|
|
|
|
3.
|
Have
not breached any law or regulation, or have received any administrative penalty from a regulatory body or other department
in the past twenty-four months.
|
Medium
and small-sized enterprises all over the world can search for our service, but our current focus is on helping clients in China.
Many
medium-small sized enterprises in China experience the problem of business maintenance or expansion in the textile and garments
industry where increasing operational costs cause decreasing profit. Most seek to employ new business models that can increase
a company’s competitive advantage and increase sales. We have found that due to the limitation of resources and information,
management of these enterprises find it hard to design a suitable plan for their company’s sustainable development.
To
assist these enterprises, we set up a research team to carry out extensive investigation and integrate necessary industry information
and resources which can help us to work out the best plan for our clients.
The
research will include:
|
1.
|
Client
diligence: To collect details on the client including its financial reports, management, planned business model, internal
systems, operation flows and other important information;
|
|
|
|
|
2.
|
Relevant
business partner research: Focus on the raw material supplier and product buyer, and conduct comprehensive analysis;
|
|
|
|
|
3.
|
Market
research: To discover the actual market demands and market share; and
|
|
|
|
|
4.
|
Environment
research: Research and analyze the environment of policy, economy, technology and legal.
|
We
developed a multi-task Industrial Chain Service System which we call “
Adden Chain
” not only for providing business
solutions to clients, but also assisting the clients to fully realize their business plan and potential.
Our
company’s service can be divided into three parts:
Consulting
& Plan Design
There
are four main services within this part:
Promotion
Service
We
will design a “
Promotion Plan
” for our clients depending on their requirements to improve their marketing plans.
Operation
Assistance Service
We
can help clients to sort out all the individual parts (i.e., Raw Materials Supply, Manufacturing, Product Design and Marketing)
within the whole operation chain, and assist them to fix weaknesses. We can also help clients to reallocate the resources they
own and improve their operational efficiency.
Logistics
and International Trading Service
We
develop and apply our “
YX logistics system
” to improve our client’s transportation efficiency. Our YX
logistics system mainly provides three services to our clients: transportation service; storage & distribution service; and
bulk purchasing service.
We
also work with qualified international trading companies to help expand our clients’ global market share. Currently we build
trading routes to various areas like America, Australia, and Africa which can help clients lower international trading costs.
Financial
Services
We
will offer financial services to selected clients. These services include long term & short term loans which we provide to
clients, financing services, and inventory pledge services. Also, we plan to build a third party payment center which can improve
clients’ capital turnover. Clients will be able to employ the third party payment center to process transactions and accept
the payment terms and payment period we set. As the third party guarantor, we could help our clients to pay or receive payments
on time.
Plan
implementation Assistance:
We
have already built strategic cooperative relationships with over 40 textile and garments industry related entities. We are available
to assist our clients to deal with various issues and problems.
Additional
Services
Team
Establishment:
We
will assist clients to establish an organizational structure and a management team best suited for their business plan.
Headhunting
Services:
We
work with headhunting companies, i.e., companies that provide employment or recruiting services to find the most qualified managers
and professionals to meet the specific needs of our clients.
Follow-up
Service:
We
provide clients with continuous consultancy and follow-up services throughout the entire startup and service period.
Markets
Currently,
our market focuses on small and medium-sized enterprises in China who have business expansion plans.
Sufficiency
of Cash Flows
Because
current cash balances and our projected cash generated from operations are not sufficient to meet our cash needs for working capital
and capital expenditures, management intends to seek additional equity or obtain additional credit facilities. However, we may
be unable to raise additional capital upon terms acceptable to us. The sale of additional equity will result in additional dilution
to our shareholders. A portion of our cash may be used to acquire or invest in complementary businesses or products or to obtain
the right to use complementary technologies. From time to time, in the ordinary course of business, we evaluate potential acquisitions
of such businesses, products or technologies.
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
February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated
Other Comprehensive Income. The amendments allow a reclassification from accumulated other comprehensive income to retained earnings
for stranded tax effects resulting from the Tax Cuts and Jobs Act. This standard was effective for the Company on September 1,
2018. The adoption of this standard did not have a material impact on the Company’s consolidated financial position, results
of operations or cash flows.
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 September 1, 2020. The Company is currently evaluating
the impact the adoption of this ASU will have on its consolidated financial statements.
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. The Company evaluated the impact of adopting the new standard
and concluded that there was no material impact to its consolidated financial statements.
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. The Company is currently assessing the impact of this new standard 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 September 30, 2018 and 2017
The
following tables summarize our results of operations for the three months ended September 30, 2018 and 2017. 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 September 30,
|
|
|
Increase
(decrease) in
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
compared to 2017
|
|
|
|
|
(In
U.S. dollars, except for percentages)
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,834,812
|
|
|
|
100
|
%
|
|
$
|
3,974,797
|
|
|
|
100
|
%
|
|
$
|
(1,139,985
|
)
|
|
|
(28.7
|
%)
|
Cost of revenues
|
|
|
(2,153,235
|
)
|
|
|
(76.0
|
%)
|
|
|
(3,403,311
|
)
|
|
|
(85.6
|
)%
|
|
|
(1,250,076
|
)
|
|
|
(36.7
|
%)
|
Gross profit
|
|
|
681,577
|
|
|
|
24.0
|
%
|
|
|
571,486
|
|
|
|
14.4
|
%
|
|
|
110,091
|
|
|
|
19.3
|
%
|
Operating expenses
|
|
|
(544,686
|
)
|
|
|
(19.2
|
%)
|
|
|
(427,232
|
)
|
|
|
(10.8
|
%)
|
|
|
117,454
|
|
|
|
27.5
|
%
|
Income from operation
|
|
|
136,891
|
|
|
|
4.8
|
%
|
|
|
144,254
|
|
|
|
(3.6
|
%)
|
|
|
(7,363
|
)
|
|
|
(5.1
|
%)
|
Other income (expense), net
|
|
|
3,286
|
|
|
|
0.1
|
%
|
|
|
33
|
|
|
|
0.0
|
%
|
|
|
3,253
|
|
|
|
(9857.6
|
%)
|
Income tax expense
|
|
|
(3,880
|
)
|
|
|
(0.1
|
%)
|
|
|
(5,494
|
)
|
|
|
(0.1
|
%)
|
|
|
1,614
|
|
|
|
29.4
|
%
|
Net income
|
|
$
|
136,297
|
|
|
|
4.8
|
%
|
|
$
|
138,793
|
|
|
|
3.5
|
%
|
|
$
|
(2,496
|
)
|
|
|
(1.8
|
%)
|
Revenue
Revenue
generated from our garment manufacturing business contributed $887,165 or 31.3% of our total revenue for the three months ended
September 30, 2018. Revenue generated from our garment manufacturing business contributed $1,755,090 or 44.2% of our total revenue
for the three months ended September 30, 2017. The decrease was due to the fact that we terminated business with certain customers
with low profit margin during the three months ended September 30, 2018. We have begun to implement control on reviewing and monitoring
profit margin with each customer to increase profitability.
Revenue
generated from our logistic business contributed $1,947,647 or 68.7% of our total revenue for the three months ended September
30, 2018. Revenue generated from our logistic business contributed $2,219,707 or 55.8% of our total revenue for the three months
ended September 30, 2017. The decrease was due to the fact that we terminated business with certain customers with low profit
margin during the three months ended September 30, 2018. We have begun to implement control on reviewing and monitoring profit
margin with each customer to increase profitability.
Total
revenue for the three months ended September 30, 2018 was $2,834,812, a 28.7% decrease compared with the three months ended September
30, 2017. The decrease was due to the fact that we terminated business with certain customers with low profit margin during the
three months ended September 30, 2018. We have begun to implement control on reviewing and monitoring profit margin with each
customer to increase profitability.
Cost
of revenue
|
|
Three
Months Ended September 30,
|
|
|
Increase
(decrease) in
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
compared to 2017
|
|
|
|
(In
U.S. dollars, except for percentages)
|
|
|
|
|
Net revenue
for garment manufacturing
|
|
$
|
887,165
|
|
|
|
100
|
%
|
|
$
|
1,755,090
|
|
|
|
100.0
|
%
|
|
$
|
(867,925
|
)
|
|
|
(49.4
|
%)
|
Raw materials
|
|
|
725,756
|
|
|
|
81.9
|
%
|
|
|
1,493,390
|
|
|
|
85.1
|
%
|
|
|
|
|
|
|
|
|
Labor
|
|
|
64,261
|
|
|
|
7.2
|
%
|
|
|
116,208
|
|
|
|
6.6
|
%
|
|
|
|
|
|
|
|
|
Other and Overhead
|
|
|
16,883
|
|
|
|
1.9
|
%
|
|
|
24,656
|
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
Total
cost of revenue for garment manufacturing
|
|
|
806,900
|
|
|
|
91.0
|
%
|
|
|
1,634,254
|
|
|
|
93.1
|
%
|
|
|
(827,354
|
)
|
|
|
(50.6
|
%)
|
Gross profit for
garment manufacturing
|
|
|
80,265
|
|
|
|
9.0
|
%
|
|
|
120,836
|
|
|
|
6.9
|
%
|
|
|
(40,571
|
)
|
|
|
(33.6
|
%)
|
Net revenue for logistic
service
|
|
|
1,947,647
|
|
|
|
100
|
%
|
|
|
2,219,707
|
|
|
|
100.0
|
%
|
|
|
(272,060
|
)
|
|
|
(12.3
|
%)
|
Fuel and toll
|
|
|
607,088
|
|
|
|
31.1
|
%
|
|
|
1,260,788
|
|
|
|
56.8
|
%
|
|
|
|
|
|
|
|
|
Subcontracting
fees
|
|
|
739,247
|
|
|
|
38.0
|
%
|
|
|
508,269
|
|
|
|
22.9
|
%
|
|
|
|
|
|
|
|
|
Total cost of revenue
for logistic service
|
|
|
1,346,335
|
|
|
|
69.1
|
%
|
|
|
1,769,057
|
|
|
|
79.7
|
%
|
|
|
(422,722
|
)
|
|
|
(23.9
|
%)
|
Gross Profit for
logistic service
|
|
|
601,312
|
|
|
|
30.9
|
%
|
|
|
450,650
|
|
|
|
20.3
|
%
|
|
|
150,662
|
|
|
|
33.4
|
%
|
Total
cost of revenue
|
|
$
|
2,153,235
|
|
|
|
76.0
|
%
|
|
$
|
3,403,311
|
|
|
|
85.6
|
%
|
|
$
|
(1,250,076
|
)
|
|
|
(36.7
|
%)
|
Gross
profit
|
|
$
|
681,577
|
|
|
|
24.0
|
%
|
|
$
|
571,486
|
|
|
|
14.4
|
%
|
|
$
|
110,091
|
|
|
|
19.3
|
%
|
Cost
of revenue for our manufacturing segment for the three months ended September 30, 2018 and 2017 was $806,900 and $1,634,254, 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 September 30, 2018 and 2017 was $1,346,335 and $1,769,057,
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 70.2% and 84% of raw materials
purchases for the three months ended September 30, 2018 and 2017, respectively. Two and three suppliers provided more than 10%
of our raw materials purchases for the three months ended September 30, 2018 and 2017. 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 50.5% and 67% of total cost of revenues for our service
segment for the three months ended September 30, 2018 and 2017, respectively. 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 81.9% of our total manufacturing business revenue in the three months ended
September 30, 2018, compared with 85.1% in the three months ended September 30, 2017. The decrease was mainly due to our cost-cutting
measures on materials cost have been in place and the decrease in raw materials purchase.
Labor costs for our manufacturing
business were 7.2% of our total manufacturing business revenue in the three months ended September 30, 2018, compared with 6.6%
in the three months ended September 30, 2017. The increase in percentage was mainly due to the rising wages in the PRC, the
decreased amount of labor cost was due to the decrease in business.
Overhead
and other expenses for our manufacturing business accounted for 1.9% of our total manufacturing business revenue for the three
months ended September 30, 2018, compared with 1.4% of total manufacturing business revenue for the three months ended September
30, 2017.
Fuel
and toll costs for our service business for the three months ended September 30, 2018 were $607,088 compared with $1,260,788 for
the three months ended September 30, 2017. Fuel and toll costs for our service business accounted for 31.1% of our total service
revenue for the three months ended September 30, 2018, compared with 56.8% for the three months ended September 30, 2017. The
decrease was primarily attributable to we subcontracted more shipping orders to subcontractors in 2018 due to the increase in
shipping orders with the destination that were not covered by the Company’s own delivery and transportation networks.
Subcontracting
fees for our service business for the three months ended September 30, 2018 increased 45.4% to $739,247 from $508,269 for the
three months ended September 30, 2017. Subcontracting fees accounted for 38.0% and 22.9% of our total service business revenue
in the three months ended September 30, 2018 and 2017, respectively. This increase was primarily attributable to we subcontracted
more shipping orders to subcontractors in 2018 due to the increase in shipping orders with the destination that were not covered
by the Company’s own delivery and transportation networks.
Total
cost of revenue for the three months ended September 30, 2018 was $2,153,235, a 36.7% decrease from $3,403,311 for the three months
ended September 30, 2017. Total cost of sales as a percentage of total sales for the three months ended September 30, 2018 was
76.0%, compared with 85.6% for the three months ended September 30, 2017. Gross margin for the three months ended September 30,
2018 was 24.0% compared with 14.4% for the three months ended September 30, 2017.
Gross
profit
|
|
Three
Months Ended September 30,
|
|
|
Increase
(decrease) in
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
compared to 2017
|
|
|
|
(In
U.S. dollars, except for percentages)
|
|
|
|
|
Gross profit
|
|
$
|
681,577
|
|
|
|
100
|
%
|
|
$
|
571,586
|
|
|
|
100
|
%
|
|
|
109,991
|
|
|
|
19.2
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
(4,990
|
)
|
|
|
(0.7
|
%)
|
|
|
(5,611
|
)
|
|
|
(1.0
|
%)
|
|
|
(621
|
)
|
|
|
(11.1
|
%)
|
General
and administrative expenses
|
|
|
(539,696
|
)
|
|
|
(79.2
|
%)
|
|
|
(421,621
|
)
|
|
|
(73.8
|
%)
|
|
|
118,075
|
|
|
|
28.0
|
%
|
Total
|
|
$
|
(544,686
|
)
|
|
|
(79.9
|
%)
|
|
$
|
(427,232
|
)
|
|
|
(74.8
|
%)
|
|
|
117,454
|
|
|
|
27.5
|
%
|
Income
from operations
|
|
$
|
136,891
|
|
|
|
20.1
|
%
|
|
$
|
144,254
|
|
|
|
25.2
|
%
|
|
|
(7,363
|
)
|
|
|
(5.1
|
%)
|
Manufacturing
business gross profit for the three months ended September 30, 2018 was $80,265 compared with $120,836 for the three months ended
September 30, 2017. Gross profit accounted for 9.0% of our total manufacturing business revenue for the three months ended September
30, 2018, compared with 6.9% for the three months ended September 30, 2017.
Gross
profit in our service business for the three months ended September 30, 2018 was $601,312 and gross margin was 30.9%. Gross profit
in our service business for the three months ended September 30, 2017 was $450,650 and gross margin was 20.3%.
The
increase in gross margin was due to the implementation of cost-cutting measures and the effective control on our costs to increase
profitability during the three months ended September 30, 2018.
Selling,
General and administrative expenses
Our
selling expenses in our manufacturing segment for the three months ended September 30, 2018 and 2017 were $4,990 and $5,611, respectively.
We had no selling expenses in our service segment for the three months ended September 30, 2018 and 2017. 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 September 30, 2018 and 2017 were $67,005
and $104,194, respectively. Our general and administrative expenses in our service segment, for the three months ended September
30, 2018 and 2017 were $249,977 and $259,292, respectively. Our general and administrative expenses in our corporate and other
segment for the three months ended September 30, 2018 and 2017 were $222,713 and $58,135, 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 September 30, 2018 decreased 11.1% to $4,990 from $5,611 for the three months ended September
30, 2017.
General
and administrative expenses for the three months ended September 30, 2018 increased 28.0% to $539,696 from $421,621 for the three
months ended September 30, 2017. The increase was mainly due to the increase in legal and professional fees to comply with the
SEC accounting, disclosure and reporting requirements.
Income
from operations
Income
from operations for the three months ended September 30, 2018 and 2017 was $136,891 and $144,254, respectively. Income from operations
of $8,270 and $41,172 was attributed from our manufacturing segment for the three months ended September 30, 2018 and 2017, respectively.
Income from operations of $351,334 and $161,213 was attributed from our service segment for the three months ended September 30,
2018 and 2017, respectively. We incurred a loss from operations in corporate segment of $222,713 and $58,131 for the three months
ended September 30, 2018 and 2017, respectively. The loss from our corporate segment was mainly due to the 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 September 30, 2018 and 2017 was $3,880 and $5,494, respectively, a 29.4% decrease for the
2018 period compared to the same period of 2017. 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 September 30, 2018 and 2017.
QYTG
and YX were incorporated in the PRC and are subject to the PRC statutory tax rate of 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 September 30, 2018 and 2017.
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 2018 and 2017. XKJ enjoyed the preferential tax benefits and its EIT rate was 15% in 2018 and 2017.
The
Company is a U.S. entity and is subject to United States federal income tax. No provision for income taxes in the United States
has been made as the Company had no United States taxable income for the three months ended September 30, 2018 and 2017.
Net
Income
We
generated net income of $136,297 and $138,793 for the three months ended September 30, 2018 and 2017, respectively. Our basic
and diluted earnings per share were $0.0 and $0.0 for the three months ended September 30, 2018 and 2017, respectively.
Results
of Operations for the six months ended September 30, 2018 and 2017
The
following tables summarize our results of operations for the six months ended September 30, 2018 and 2017. 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.
|
|
Six
Months Ended September 30,
|
|
Increase
(decrease) in
|
|
|
|
2018
|
|
2017
|
|
2018
compared to 2017
|
|
|
|
(In
U.S. dollars, except for percentages)
|
|
|
|
Revenue
|
|
$
|
5,566,605
|
|
|
|
100
|
%
|
|
$
|
7,614,205
|
|
|
|
100.0
|
%
|
|
$
|
(2,047,600
|
)
|
|
|
(26.9
|
%)
|
Cost of revenues
|
|
|
(4,590,409
|
)
|
|
|
(82.5
|
%)
|
|
|
(6,769,962
|
)
|
|
|
(88.9
|
%)
|
|
|
(2,179,553
|
)
|
|
|
(32.2
|
%)
|
Gross profit
|
|
|
976,196
|
|
|
|
17.5
|
%
|
|
|
844,243
|
|
|
|
11.1
|
%
|
|
|
131,953
|
|
|
|
15.6
|
%
|
Operating
expenses
|
|
|
(1,013,306
|
)
|
|
|
(18.2
|
%)
|
|
|
(814,966
|
)
|
|
|
(10.7
|
%)
|
|
|
198,340
|
|
|
|
24.3
|
%
|
Income(loss) from operations
|
|
|
(37,110
|
)
|
|
|
(0.6
|
%)
|
|
|
29,277
|
|
|
|
0.4
|
%
|
|
|
(66,387
|
)
|
|
|
(226.8
|
%)
|
Other income (expense),
net
|
|
|
16,990
|
|
|
|
0.3
|
%
|
|
|
(1,583
|
)
|
|
|
(0.0
|
%)
|
|
|
18,573
|
|
|
|
1173.3
|
%
|
Income
tax expense
|
|
|
(4,489
|
)
|
|
|
(0.1
|
%)
|
|
|
(7,737
|
)
|
|
|
(0.1
|
%)
|
|
|
(3,248
|
)
|
|
|
(42.0
|
%)
|
Net
income (loss)
|
|
$
|
(24,609
|
)
|
|
|
(0.4
|
%)
|
|
$
|
19,957
|
|
|
|
0.3
|
%
|
|
$
|
(44,566
|
)
|
|
|
(223.3
|
%)
|
Revenue
Revenue
generated from our garment manufacturing business contributed $2,029,655 or 36.5% of our total revenue for the six months ended
September 30, 2018. Revenue generated from our garment manufacturing business contributed $3,061,977 or 40.2% of our total revenue
for the six months ended September 30, 2017. The decrease was due to the fact that we terminated business with certain customers
with low profit margin during the six months ended September 30, 2018. We have begun to implement control on reviewing and monitoring
profit margin with each customer to increase profitability.
Revenue
generated from our logistic business contributed $3,536,950 or 63.5% of our total revenue for the six months ended September 30,
2018. Revenue generated from our logistic business contributed $4,552,228 or 59.8% of our total revenue for the six months ended
September 30, 2017. The decrease was due to the fact that we terminated business with certain customers with low profit margin
during the six months ended September 30, 2018. We have begun to implement control on reviewing and monitoring profit margin with
each customer to increase profitability.
Total
revenue for the six months ended September 30, 2018 was $5,566,605, a 26.9% decrease compared with the six months ended September
30, 2017. The decrease was due to the fact that we terminated business with certain customers with low profit margin during the
six months ended September 30, 2018. We have begun to implement control on reviewing and monitoring profit margin with each customer
to increase profitability.
Cost
of revenue
|
|
Six
Months Ended September 30,
|
|
Increase
(decrease) in
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
compared to 2017
|
|
|
|
(In U.S. dollars, except for percentages)
|
|
|
|
|
Net revenue
for garment manufacturing
|
|
$
|
2,029,655
|
|
|
|
100
|
%
|
|
$
|
3,061,977
|
|
|
|
100.0
|
%
|
|
$
|
(1,032,322
|
)
|
|
|
(33.7
|
%)
|
Raw materials
|
|
|
1,647,836
|
|
|
|
81.2
|
%
|
|
|
2,550,364
|
|
|
|
83.3
|
%
|
|
|
|
|
|
|
|
|
Labor
|
|
|
181,447
|
|
|
|
8.9
|
%
|
|
|
284,792
|
|
|
|
9.3
|
%
|
|
|
|
|
|
|
|
|
Other and Overhead
|
|
|
30,038
|
|
|
|
1.5
|
%
|
|
|
64,365
|
|
|
|
2.1
|
%
|
|
|
|
|
|
|
|
|
Total
cost of revenue for garment manufacturing
|
|
|
1,859,321
|
|
|
|
91.6
|
%
|
|
|
2,899,521
|
|
|
|
94.7
|
%
|
|
|
(1,040,200
|
)
|
|
|
(35.9
|
%)
|
Gross profit for
garment manufacturing
|
|
|
170,333
|
|
|
|
8.4
|
%
|
|
|
162,456
|
|
|
|
5.3
|
%
|
|
|
7,877
|
|
|
|
4.8
|
%
|
Net revenue for logistic
service
|
|
|
3,536,950
|
|
|
|
100
|
%
|
|
|
4,552,228
|
|
|
|
100.0
|
%
|
|
|
(1,015,278
|
)
|
|
|
(22.3
|
%)
|
Fuel and toll
|
|
|
1,226,948
|
|
|
|
34.7
|
%
|
|
|
3,040,980
|
|
|
|
66.8
|
%
|
|
|
|
|
|
|
|
|
Subcontracting
fees
|
|
|
1,504,140
|
|
|
|
42.5
|
%
|
|
|
829,461
|
|
|
|
18.2
|
%
|
|
|
|
|
|
|
|
|
Total cost of revenue
for logistic service
|
|
|
2,731,088
|
|
|
|
77.2
|
%
|
|
|
3,870,441
|
|
|
|
85.0
|
%
|
|
|
(1,139,353
|
)
|
|
|
(29.4
|
%)
|
Gross Profit for
logistic service
|
|
|
805,863
|
|
|
|
22.8
|
%
|
|
|
681,787
|
|
|
|
15.0
|
%
|
|
|
124,076
|
|
|
|
18.2
|
%
|
Total
cost of revenue
|
|
$
|
4,590,409
|
|
|
|
82.5
|
%
|
|
$
|
6,769,962
|
|
|
|
88.9
|
%
|
|
$
|
(2,179,553
|
)
|
|
|
(32.2
|
%)
|
Gross
profit
|
|
$
|
976,196
|
|
|
|
17.5
|
%
|
|
$
|
844,243
|
|
|
|
11.1
|
%
|
|
$
|
131,953
|
|
|
|
15.6
|
%
|
Cost
of revenue for our manufacturing segment for the six months ended September 30, 2018 and 2017 was $1,859,322 and $2,899,521, 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 six months ended September 30, 2018 and 2017 was $2,731,087 and $3,870,441,
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 56.5% and 63% of raw materials
purchases for the six months ended September 30, 2018 and 2017, respectively. Three suppliers provided more than 10% of our raw
materials purchases for the six months ended September 30, 2018 and 2017. 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 31.5% and 75% of total cost of revenues for our service
segment for the six months ended September 30, 2018 and 2017, respectively. 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 81.2% of our total manufacturing business revenue in the six months ended September
30, 2018, compared with 83.3% in the six months ended September 30, 2017. The decrease was mainly due to our cost-cutting measures
on materials costs which have been put in place and the decrease in raw materials purchased.
Labor
costs for our manufacturing business were 8.9% of our total manufacturing business revenue in the six months ended September 30,
2018, compared with 9.3% in the six months ended September 30, 2017.
Overhead
and other expenses for our manufacturing business accounted for 1.5% of our total manufacturing business revenue for the six months
ended September 30, 2018, compared with 2.1% of total manufacturing business revenue for the six months ended September 30, 2017.
Fuel
and toll costs for our service business for the six months ended September 30, 2018 were $1,226,948 compared with $3,040,980 for
the six months ended September 30, 2017. Fuel and toll costs for our service business accounted for 34.7% of our total service
revenue for the six months ended September 30, 2018, compared with 66.8% for the six months ended September 30, 2017. The decrease
was primarily attributable to we subcontracted more shipping orders to subcontractors in 2018 due to the increase in shipping
orders with the destination that were not covered by the Company’s own delivery and transportation networks.
Subcontracting
fees for our service business for the six months ended September 30, 2018 increased 81.3% to $1,504,140 from $829,461 for the
six months ended September 30, 2017. Subcontracting fees accounted for 42.5% and 18.2% of our total service business revenue in
the six months ended September 30, 2018 and 2017, respectively. This increase was primarily attributable to we subcontracted more
shipping orders to subcontractors in 2018 due to the increase in shipping orders with the destination that were not covered by
the Company’s own delivery and transportation networks.
Total
cost of revenue for the six months ended September 30, 2018 was $4,590,409, a 32.2% decrease from $6,769,962 for the six months
ended September 30, 2017. Total cost of sales as a percentage of total sales for the six months ended September 30, 2018 was 82.5%,
compared with 88.9% for the six months ended September 30, 2017. Gross margin for the six months ended September 30, 2018 was
17.5% compared with 11.1% for the six months ended September 30, 2017.
Gross
profit
|
|
Six
Months Ended September 30,
|
|
Increase
(decrease) in
|
|
|
|
2018
|
|
2017
|
|
2018
compared to 2017
|
|
|
|
|
(In
U.S. dollars, except for percentages)
|
|
|
Gross profit
|
|
$
|
976,196
|
|
|
|
100
|
%
|
|
$
|
844,243
|
|
|
|
100
|
%
|
|
|
131,953
|
|
|
|
15.6
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
(9,710
|
)
|
|
|
(1.0
|
%)
|
|
|
(17,537
|
)
|
|
|
(2.1
|
%)
|
|
|
(7,827
|
)
|
|
|
(44.6
|
%)
|
General
and administrative expenses
|
|
|
(1,003,596
|
)
|
|
|
(102.8
|
%)
|
|
|
(797,429
|
)
|
|
|
(94.4
|
%)
|
|
|
206,167
|
|
|
|
25.9
|
%
|
Total
|
|
$
|
(1,013,306
|
)
|
|
|
(103.8
|
%)
|
|
$
|
(814,966
|
)
|
|
|
(96.5
|
%)
|
|
|
198,340
|
|
|
|
24.3
|
%
|
Income
(loss) from operations
|
|
$
|
(37,110
|
)
|
|
|
(3.8
|
%)
|
|
$
|
29,277
|
|
|
|
3.5
|
%
|
|
|
(66,387
|
)
|
|
|
(226.8
|
%)
|
Manufacturing
business gross profit for the six months ended September 30, 2018 was $170,333 compared with $162,456 for the six months ended
September 30, 2017. Gross profit accounted for 8.4% of our total manufacturing business revenue for the six months ended September
30, 2018, compared with 5.3% for the six months ended September 30, 2017.
Gross
profit in our service business for the six months ended September 30, 2018 was $805,863 and gross margin was 22.8%. Gross profit
in our service business for the six months ended September 30, 2017 was $681,787 and gross margin was 15.0%.
The
increase in gross margin was due to the implementation of cost-cutting measures and the effective control on our costs to increase
profitability during the six months ended September 30, 2018.
Selling,
General and administrative expenses
Our
selling expenses in our manufacturing segment for the six months ended September 30, 2018 and 2017 were $9,710 and $17,537, respectively.
We had no selling expenses in our service segment for the six months ended September 30, 2018 and 2017. Selling expenses consist
primarily of local transportation, unloading charges and product inspection charges.
Our
general and administrative expenses in our manufacturing segment for the six months ended September 30, 2018 and 2017 were $139,497
and $169,881, respectively. Our general and administrative expenses in our service segment, for the six months ended September
30, 2018 and 2017 were $513,072 and $520,241, respectively. Our general and administrative expenses in our corporate and other
segment for the six months ended September 30, 2018 and 2017 were $351,027 and $107,307, 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 six months ended September 30, 2018 decreased 44.6% to $9,710 from $17,537 for the six months ended September
30, 2017.
General
and administrative expenses for the six months ended September 30, 2018 increased 25.9% to $1,003,596 from $797,429 for the six
months ended September 30, 2017. The increase was mainly due to the increase in legal and professional fees to comply with the
SEC accounting, disclosure and reporting requirements.
Income
from operations
Income
(loss) from operations for the six months ended September 30, 2018 and 2017 was ($37,110) and $29,277, respectively. Income from
operations of $21,126 and $7,875 was attributed from our manufacturing segment for the six months ended September 30, 2018 and
2017, respectively. Income from operations of $292,791 and $128,704 was attributed from our service segment for the six months
ended September 30, 2018 and 2017, respectively. We incurred a loss from operations in corporate segment of $351,027 and $107,302
for the six months ended September 30, 2018 and 2017, respectively. The loss from our corporate segment was mainly due to the
increase in legal and professional fees to comply with the SEC accounting, disclosure and reporting requirements.
Income
Tax Expenses
Income
tax expense for the six months ended September 30, 2018 and 2017 was $4,489 and $7,737, respectively, a 42.0% decrease for the
2018 period compared to the same period of 2017. 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 six months ended September 30, 2018 and 2017.
QYTG
and YX were incorporated in the PRC and are subject to the PRC statutory tax rate of 25%. No provision for income taxes in the
PRC has been made as QYTG and YX had no taxable income for the six months ended September 30, 2018 and 2017.
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 2018 and 2017. XKJ enjoyed the preferential tax benefits and its EIT rate was 15% in 2018 and 2017.
The
Company is a U.S. entity and is subject to United States federal income tax. No provision for income taxes in the United States
has been made as the Company had no United States taxable income for the six months ended September 30, 2018 and 2017.
Net
Income
We
incurred net income (loss) of ($24,609) and $19,957 for the six months ended September 30, 2018 and 2017, respectively. Our basic
and diluted earnings per share were $0.0 and $0.0 for the six months ended September 30, 2018 and 2017, respectively.
Summary
of cash flows
Summary
cash flows information for the six months ended June 30, 2018 and 2017 is as follow:
|
|
2018
|
|
|
2017
|
|
|
|
(In U.S. dollars)
|
|
Net cash provided by (used in) operating activities
|
|
$
|
933,504
|
|
|
$
|
(109,846
|
)
|
Net cash used in investing activities
|
|
$
|
(57,668
|
)
|
|
$
|
(3,051,186
|
)
|
Net cash (used in) provided by financing activities
|
|
$
|
(751,801
|
)
|
|
$
|
3,296,747
|
|
Net cash used in operating
activities for the six months ended September 20, 2018, consisted of net loss of ($24,609), increased by depreciation of $60,043,
and increased by net increase in change of operating assets and liabilities of $898,070. We plan 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 receipt of customers’ orders.
Net
cash used in investing activities for the six months ended September 20, 2018, consisted of purchase of plant and equipment of
$57,668.
Net
cash provided by financing activities for the six months ended September 20, 2018, consisted of third party proceeds of $75,948;
related party proceeds of $4,922,447; and proceeds from bank borrowings of $160,168, offset by repayment of third party borrowings
of $127,395 and repayment of related party borrowings of $5,782,249.
Financial
Condition, Liquidity and Capital Resources
As
of September 30, 2018, we had cash on hand of $376,963, total current assets of $3,243,610 and current liabilities of $5,370,254.
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.
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.
We
have very limited financial resources. We will need to raise substantial additional capital to support the on-going operation
and increased market penetration of our services, until such time as we generate revenues sufficient to support our operations,
if ever. Our failure to obtain additional capital to finance our working capital needs on acceptable terms, or at all, will negatively
impact our business, financial condition and liquidity. As of September 30, 2018, we had approximately $5,370,254 of current liabilities.
We currently do not have the resources to satisfy these obligations, and our inability to do so could have a material adverse
effect on our business, our ability to continue as a going concern, and the value of our securities.
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 September 30, 2018
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.