ADDENTAX GROUP CORP. The following discussion and analysis of our financial condition and results of operations for the three months endedJune 30, 2022 and 2021 should be read in conjunction with the Financial Statements and corresponding notes included in this Report on Form 10-Q. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors and Special Note Regarding Forward-Looking Statements in this report. We use words such as "anticipate," "estimate," "plan," "project," "continuing," "ongoing," "expect," "believe," "intend," "may," "will," "should," "could," "target", "forecast" and similar expressions to identify forward-looking statements. Overview Our Business We are a garment manufacturer and logistics services provider based inChina . We are listed on the OTCQB under the symbol of "ATXG". We classify our businesses into four segments: Garment manufacturing, Logistics services, Property management and subleasing, and Epidemic prevention supplies. Our garment manufacturing business consists of sales made principally to wholesaler located inthe People's Republic of China ("PRC"). We have our own manufacturing facilities, with sufficient production capacity and skilled workers on production lines to ensure that we meet our high quality control standards and timely delivery requirement for our customers. We conduct our garment manufacturing operations through three wholly owned subsidiaries, namelyDongguan Heng Sheng Wei Garments Co., Ltd ("HSW"),Dongguan Yushang Clothing Co., Ltd ("YS"), andShantou Yi Bai Yi Garments Co., Ltd ("YBY") which are located in theGuangdong province,China . Our logistic business consists of delivery and courier services covering approximately 79 cities in approximately seven provinces and two municipalities inChina . Although we have our own motor vehicles and drivers, we currently outsource some of the business to our contractors. We believe outsourcing allows us to maximize our capacity and maintain flexibility while reducing capital expenditures and the costs of keeping drivers during slow seasons. We conduct our logistic operations through three wholly owned subsidiaries, namelyShenzhen Xin Kuai Jie Transportation Co., Ltd ("XKJ"),Shenzhen Yingxi Peng Fa Logistic Co., Ltd ("PF") andShenzhen Yingxi Tongda Logistic Co., Ltd ("TD"), which are located in theGuangdong province,China . Our property management and subleasing provides shops subleasing and property management services for garment wholesalers and retailers in garment market. We conduct our property management and subleasing operation through a wholly owned subsidiary, namelyDongguan Yingxi Daying Commercial Co., Ltd ("DY"). Our epidemic prevention supplies business consists of manufacturing and distribution of epidemic prevention products and resale of epidemic prevention supplies purchased from third party in both domestic and overseas markets. We conduct our manufacturing of the epidemic prevention products inDongguan Yushang Clothing Co., Ltd ("YS"). We conduct the trading of epidemic prevention suppliers throughAddentax Group Corp. ("ATXG") andShenzhen Qianhai Yingxi Industrial Chain Services Co., Ltd ("YX"), a wholly owned subsidiary of the
Company. 3 Business Objectives
Garment Manufacturing Business
We believe the strength of our garment manufacturing business is mainly due to our consistent emphasis on exceptional quality and timely delivery of our products. The primary business objective for our garment manufacturing segment is to expand our customer base and improve our profit. Logistics Services Business The business objective and future plan for our logistics services segment is to establish an efficient logistic system and to build a nationwide delivery and courier network inChina . As ofJune 30, 2022 , we provide logistics services to over 79 cities in approximately seven provinces and two municipalities. We expect to develop an additional 20 logistics points in existing serving cities and improve the Company's profit in the year end of 2022.
Property Management and Subleasing Business
The business objective of our property management and subleasing segment is to integrate resources in shopping mall, develop e-commerce bases and the Internet celebrity economy together to drive to increase the value of the stores in the area. The short-term goal for the year is to increase the occupancy rate of stores in the mall to more than 70%.
Epidemic Prevention Supplies Business
The primary objective of our epidemic prevention supplies business is to take the advantage of our resource in supply chain from the garment manufacturing business segment to facilitate and maximize the production, distribution and resale of epidemic prevention supplies, in order to increase our revenue base and improve our net profit. Seasonality of Business
Our business is affected by seasonal trends, with higher levels of garment sales in our second and third quarters and higher logistics services revenue in our third and fourth quarters. These trends primarily result from the timing of seasonal garment manufacturing shipments and holiday periods in the logistics services segment. Collection Policy
Garment manufacturing business
For our new customers, we generally require orders placed to be backed by advances or deposits. For our long-term and established customers with good payment track records, we generally provide payment terms between 30 to 180 days following their acknowledgement of receipt of goods.
Logistics services business
For logistics services, we generally receive payments from the customers between 30 to 90 days following the date of the registration of our receipt of packages.
Property management and subleasing business
For property management and subleasing business, we generally collect rental and management fees of the following month each month in advance.
Epidemic prevention supplies business
For Epidemic prevention supplies business, we generally receive payment from the customers within 30 days following the delivery of finished goods. We would also give our long-term customers with a 12 months long credit term policy to maintain a good business relationship. 4 Economic Uncertainty
Our business is dependent on consumer demand for our products and services. We believe that the significant uncertainty in the economy inChina 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 inChina . 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 inChina , we believe our core strengths will continue to allow us to execute our strategy for long-term sustainable growth in revenue, net income and operating cash flow.
Summary of Critical Accounting Policies
We have identified critical accounting policies that, as a result of judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operation involved could result in material changes to our financial position or results of operations under different conditions or using different assumptions. Estimates and Assumptions We regularly evaluate the accounting estimates that we use to prepare our financial statements. In general, management's estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management. Revenue Recognition Revenue is generated through sale of goods and delivery services. Revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amount of revenue that is recorded reflects the consideration that the Company expects to receive in exchange for those goods and services. The Company applies the following five-step model in order to determine this amount: (i) identification of the promised goods and services in the contract;
determination of whether the promised goods and services are performance
(ii) obligations, including whether they are distinct in the context of the
contract;
(iii) measurement of the transaction price, including the constraint on variable
consideration;
(iv) allocation of the transaction price to the performance obligations; and
(v) recognition of revenue when (or as) the Company satisfies each performance
obligation.
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The Company only applies the five-step model to contracts when it is probable
that the Company will collect the consideration it is entitled to in exchange
for the goods or services it transfers to the customer. Once a contract is
determined to be within the scope of ASC 606 at contract inception, the Company
reviews the contract to determine which performance obligations the Company must
deliver and which of these performance obligations are distinct. The Company
recognizes as revenues the amount of the transaction price that is allocated to
the respective performance obligation when the performance obligation is
satisfied or as it is satisfied. Generally, the Company's performance
obligations are transferred to customers at a point in time, typically upon
delivery.
For all reporting periods, the Company has not disclosed the value of unsatisfied performance obligations for all product and service revenue contracts with an original expected length of one year or less, which is an optional exemption that is permitted under the adopted rules.
Leases Lessee
The Company determines if an arrangement is a lease at inception. Operating
leases are included in operating lease right-of-use ("ROU") assets, other
current liabilities, and operating lease liabilities in our consolidated balance
sheets. Finance leases are included in property and equipment, other current
liabilities, and other long-term liabilities in the consolidated balance sheets.
ROU assets represent the right to use an underlying asset for the lease term and
lease liabilities represent the obligation to make lease payments arising from
the lease. Operating lease ROU assets and liabilities are recognized at
commencement date based on the present value of lease payments over the lease
term. As most of the leases do not provide an implicit rate, The Company
generally use the incremental borrowing rate based on the estimated rate of
interest for collateralized borrowing over a similar term of the lease payments
at commencement date. The operating lease ROU asset also includes any lease
payments made and excludes lease incentives. Lease expense for lease payments is
recognized on a straight-line basis over the lease term.
Lessor
As a lessor, the Company's leases are classified as operating leases under ASC 842. Leases, in which the Company is the lessor, are substantially all accounted for as operating leases and the lease components and non-lease components are accounted for separately. Rental income from operating leases is recognized on a straight line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized on a straight line basis
over the lease term.
Recently issued accounting pronouncements
InJune 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 onApril 1, 2023 . The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements.
The Company reviews new accounting standards as issued. Management has not identified any other new standards that it believes will have a significant impact on the Company's consolidated financial statements.
Results of Operations for the three months ended
The following tables summarize our results of operations for the three months endedJune 30, 2022 and 2021. The table and the discussion below should be read in conjunction with our consolidated financial statements and the notes thereto appearing elsewhere in this report. Three Months Ended June 30, Changes in 2022 2022 2021 compared to 2021 (In U.S. dollars, except for percentages) Revenue$ 2,386,384 100.0 %$ 4,286,431 100 %$ (1,900,047 ) (44.3 )% Cost of revenues (1,929,700 ) (80.9 )% (3,703,026 ) (86.4 )% 1,773,326 47.9 % Gross profit 456,684 19.1 % 583,405 13.6 % (126,721 ) (21.7 )% Operating expenses (410,582 ) (17.2 )% (506,705 ) (11.8 )% 96,123 19.0 % Income from operations 46,102 1.9 % 76,700 1.8 % (30,598 ) (39.9 )% Other income, net 51,083 2.2 % 13,237 0.3 % 37,846 285.9 % Net finance cost 780 0.1 % (265 ) (0.0 )% 1,045 394.3 % Income tax expense (1,294 ) (0.1 )% (10,725 ) (0.3 )% 9,431 87.9 % Net income (loss)$ 96,671 4.1 %$ 78,947 1.8 %$ 17,724 22.4 % Revenue Total revenue for the three months endedJune 30, 2022 decreased by approximately$1.9 million , or 44.3%, as compared with the three months endedJune 30, 2021 . The significant decrease was mainly because of the decrease of$2.0 million in garment manufacturing and$0.1 million in property management and subleasing business and offset by$0.2 million increases in logistics services business. Revenue generated from our garment manufacturing business contributed approximately$0.04 million (1.7%) and$2.1 million (48.3%) of total revenue for the three months endedJune 30, 2022 and 2021, respectively. The decrease of$2.1 million was mainly due to factory facilities renewal and repair, remaining factories cannot provide as much capacity as before. We estimate the capacity will appear to recover at second quarter of FY2023. . 6 Revenue generated from our logistics services business contributed approximately$1.4 million or 58.3% of our total revenue for the three months endedJune 30, 2022 . Revenue generated from our logistic business contributed approximately$1.1 million or 25.8% of our total revenue for the three months ended June
30, 2021. Revenue generated from our property management and subleasing business contributed approximately$1.0 million or 40.0% of our total revenue for the three months endedJune 30, 2022 . The revenue from this business segment was$1.1 million or 25.9% of our total revenue of this business for the three months endedJune 30, 2021 . There was only$0.0004 million generated from our epidemic prevention supplies business for the three months endedJune 30, 2022 because no other orders were obtained in the quarter. The Company accepted sales orders very cautiously to make sure the sales orders can be matched with stable suppliers to secure profitability of each order. There was no revenue generated from this business for the three months endedJune 30, 2021 . Cost of revenue Increase Three months ended June 30, (decrease) in 2022 compared 2022 2021 to 2021 (In U.S. dollars, except for percentages) Net revenue for garment manufacturing$ 40,426 100.0 %$ 2,069,141 100 %$ (2,028,715 ) (98.0 )% Raw materials 27,952 69.1 % 1,441,333 69.7 % (1,413,381 ) (98.1 )% Labor 8,544 21.1 % 443,290 21.4 % (434,746 ) (98.1 )% Other and Overhead 579 1.4 % 10,399 0.5 % 9,820 94.4 % Total cost of revenue for garment manufacturing 37,075 91.7 % 1,895,022 91.6 % (1,857,947 ) (98.0 )% Gross profit for garment manufacturing 3,351 8.3 % 174,119 8.4 % (170,768 ) (98.1 )% 0 Net revenue for logistics services 1,390,882 100.0 % 1,108,042 100.0 % 282,840 25.5 % Fuel, toll and other cost of logistics services 602,584 44.3 % 393,150 35.5 % 209,434 53.3 % Subcontracting fees 441,196 31.7 % 486,722 43.9 % (45,526 ) (9.4 )% Total cost of revenue for logistics services 1,043,780 75.0 % 879,872 79.4 % 163,908 18.6 % Gross Profit for logistics services 347,102 25.0 % 228,170 20.6 % 118,932 52.1 % 0 Net revenue for property management and subleasing 954,835 100.0 % 1,109,248 100.0 % 154,413 Total cost of revenue for property management and subleasing 848,451 88.9 % 926,642 83.5 % 78,191 Gross Profit for property management and subleasing 106,384 11.1 % 182,606 16.5 % 76,222 0 Net revenue for epidemic prevention supplies$ 241 $ - Merchandise/Finished goods/Raw materials - - Other and Overhead 394 1,490 1,096 73.6 Total cost of revenue for epidemic prevention supplies 394 1,490 1,096 73.6 % Gross (loss) income for epidemic prevention supplies (153 ) (1,490 ) 100.0 % Total cost of revenue$ 1,929,700 80.9 % $
3,703,026 86.4 %
$ 456,684 19.1 %$ 583,405 (13.6 )%$ 126,721 21.7 % 7
For our garment manufacturing business, we purchase the majority of our raw materials directly from numerous local fabric and accessories suppliers.
Raw material costs for our garment manufacturing business were 69.1% of our total garment manufacturing business revenue in the three months endedJune 30, 2022 , compared with 69.7% in the three months endedJune 30, 2021 . The decreased in percentages was mainly due to the purchase cost of the raw materials dropped. Labor costs for our garment manufacturing business were 21.1% of our total garment manufacturing business revenue in the three months endedJune 30, 2022 , compared with 21.4% in the three months endedJune 30, 2021 . The increase in percentages was mainly due to the rising wages in the PRC. Overhead and other expenses for our garment manufacturing business accounted for 1.4% of our total garment business revenue for the three months endedJune 30, 2022 , compared with 0.5% of total garment business revenue for the three months endedJune 30, 2021 . For our logistic business, we outsource some of the business to our contractors. The Company relied on a few subcontractors, in which the subcontracting fees to our largest contractor represented approximately 35.6% and 33.4% of total cost of revenues for our service segment for the three months endedJune 30, 2022 and 2021, respectively. The percentage decreased as we used our own logistics more than the subcontractors under COVID-19 epidemic. We have not experienced any disputes with our subcontractor and we believe we maintain good relationships with our contract logistics services provider. Fuel, toll and other costs for our service business for the three months endedJune 30, 2022 were approximately$0.6 million compared with$0.4 million for the three months endedJune 30, 2021 . Fuel, toll and other costs for our service business accounted for 44.3% of our total service revenue for the three months endedJune 30, 2022 , compared with 35.5% for the three months endedJune 30, 2021 . The increase in percentages was primarily attributable to decrease of use of subcontractors under the epidemic circumstance. Subcontracting fees for our service business for the three months endedJune 30, 2022 decreased 8.3% to approximately$0.4 million from$0.5 million for the three months endedJune 30, 2021 . Subcontracting fees accounted for 31.7% and 43.9% of our total service business revenue in the three months endedJune 30, 2022 and 2021, respectively. This decrease in percentages was primarily because the Company used less subcontractors under the epidemic circumstance. 8
For property management and subleasing business, the cost of revenue was mainly the amortization of operating lease assets for the subleasing business.
For epidemic prevention supplies business, we have trading and own production. The cost of revenue included cost of merchandise and cost of our own products. The other cost of the quarter represented depreciation of machinery. Gross profit
Garment manufacturing business gross profit for the three months endedJune 30, 2022 was approximately$0.003 million , as compared with approximately$0.2 million for the three months endedJune 30, 2021 . Gross profit accounted for 8.3% of our total Garment manufacturing business revenue for the three months endedJune 30, 2022 , compared with 8.4% for the three months endedJune 30, 2021 . Gross profit in our logistics services business for the three months endedJune 30, 2022 was approximately$0.3 million and gross margin was 25.0%. Gross profit in our logistics services business for the three months endedJune 30, 2021 was approximately$0.2 million and gross margin was 20.6%. The increase of gross profit ratio was mainly because of a decrease of operating expenses due to replacement of old vehicles and shifting our strategic focus on high margin customers. Gross profit in our property management and subleasing business for the three months endedJune 30, 2022 was approximately$0.1 million , or 11.1% of our total property management and subleasing business revenue. It was approximately$0.2 million , or 16.5% for the three months endedJune 30, 2021 . Increase Three months ended June 30, (decrease) in 2022 compared 2022 2021 to 2021 (In U.S. dollars, except for percentages) Gross profit$ 456,684 100 %$ 583,405 100 % (126,721 ) (21.7 )% Operating expenses: Selling expenses (5,642 ) (1.2 )% (46,390 ) (8.0 )% 40,748 87.8 % General and administrative expenses (404,940 ) (88.7 )% (460,315 ) (78.9 )% 55,375 12.0 % Total$ (410,582 ) (89.9 )%$ (506,705 ) (86.9 )% 96,123 19.0 % Income from operations$ 46,102 10.1 %$ 76,700 13.1 % (30,598 ) (39.9 )%
Selling, General and administrative expenses
Our selling expenses were mainly incurred for our property management and subleasing business. It was approximately$0.006 million and$0.05 million for the three months endedJune 30, 2022 and 2021, respectively. Selling expenses consist primarily of advertisement, local transportation, unloading charges
and product inspection charges. Our general and administrative expenses in our Garment manufacturing business segment for the three months endedJune 30, 2022 and 2021 was approximately$0.03 million and$0.05 million , respectively. Our general and administrative expenses in our logistics services segment, for the three months endedJune 30, 2022 and 2021 was both approximately$0.2 million . The general and administrative expenses in our property management and subleasing business was approximately$0.07 million and$0.08 million for the three months endedJune 30, 2022 and 2021. Our general and administrative expenses in our epidemic prevention supplies segment was both nil for the three months endedJune 30, 2022 and 2021, respectively. Our general and administrative expenses in our corporate office for the three months endedJune 30, 2022 and 2021 was approximately$0.08 million and$0.1 million , respectively. General and administrative expenses consist primarily of administrative salaries, office expense, certain depreciation and amortization charges, repairs and maintenance, legal and professional fees, warehousing costs and other expenses that are not directly attributable to our revenues. 9 Total general and administrative expenses for the three months endedJune 30, 2022 decreased by 12.0% to approximately$0.40 million from$0.46 million for the three months endedJune 30, 2021 . Loss from operations Income from operations for the three months endedJune 30, 2022 and 2021 was approximately$0.05 million and$0.08 million , respectively. (Loss) Income from operations of approximately($0.03) million and$0.12 million was attributed from our garment manufacturing segment for the three months endedJune 30, 2022 and 2021, respectively. Income from operations of approximately$0.12 million and$0.005 million was attributed from our logistics services segment for the three months endedJune 30, 2022 and 2021, respectively. Income from operations of approximately$0.03 million and$0.06 million was attributed from our property management and subleasing business for the three months endedJune 30, 2022 and 2021, respectively. There was no income or loss from operations attributed from our epidemic prevention supplies segment for the three months endedJune 30, 2022 and 2021, respectively. We incurred a loss from operations in corporate office of approximately$0.08 million and$0.1 million for the three months endedJune 30, 2022 and 2021, respectively. The loss from our corporate office was mainly due to increase in legal and professional fees to comply with theSEC accounting, disclosure and reporting requirements. Income Tax Expenses
Income tax expense for the three months ended
Yingxi HK was incorporated inHong Kong and is subject toHong Kong income tax at a progressive tax rate of 16.5%. No provision for income taxes inHong Kong has been made as Yingxi HK had no taxable income for the three months ended
June 30, 2022 and 2021. QYTG and YX were incorporated in the PRC and is subject to the PRC Enterprise Income Tax (EIT) rate is 25%. No provision for income taxes in the PRC has been made as QYTG and YX had no taxable income for the three months endedJune 30, 2022 and 2021. The Company is governed by the Income Tax Laws of the PRC. All Yingxi's operating companies are subject to progressive EIT rates from 5% to 15% in 2022. The preferential tax rates will be expired at end of year 2022 and the EIT
rate will be 25% from year 2023. The Company's parent entity,Addentax Group Corp. is aU.S entity and is subject tothe United States federal income tax. No provision for income taxes inthe United States has been made asAddentax Group Corp. had noUnited States taxable income for the three months endedJune 30, 2022 and 2021. Net Income (Loss)
We incurred net income of approximately$0.1 million for both three months endedJune 30, 2022 and 2021, respectively. Our basic and diluted earnings per share were$0.00 and$0.00 for the three months endedJune 30, 2022 and 2021, respectively. 10 Summary of cash flows Summary cash flows information for the three months endedJune 30, 2022 and 2021 is as follow: Three months endedJune 30, 2022 2021 (InU.S. dollars)
Net cash provided by (used in) operating activities
$ - $ (104,235 )
Net cash provided by financing activities $ 615,848 $ 485,962 Net cash provided by operating activities in the three months endedJune 30, 2022 was approximately$1.5 million more than that of the three months endedJune 30, 2021 . It was mainly because the movement of operating assets and liabilities of the three months endedJune 30, 2022 resulted in cash inflow of approximately$0.1 million , while the movement of operating assets and liabilities of the three months endedJune 30, 2021 resulted in cash outflow of approximately$1.4 million . We will continue to improve our operating cash flow by closely monitoring the timely collection of accounts and other receivables. We generally do not hold any significant inventory for more than ninety days, as we typically manufacture upon customers' order. Net cash used in investing activities for the three months endedJune 30, 2022 was Nil, approximately$0.1 million less than that of the three months endedJune 30, 2021 . It was mainly because there was no purchase of plant and equipment and other assets in the three months endedJune 30, 2022 . Net cash provided by financing activities for the three months endedJune 30, 2022 was approximately$0.1 million more than the three months endedJune 30, 2021 . It was mainly because the net cash from related party borrowings in current period was approximately$0.1 million more than that of the three months endedJune 30, 2021 .
Financial Condition, Liquidity and Capital Resources
As ofJune 30, 2022 , we had cash on hand of approximately$2.2 million , total current assets of approximately$6.9 million and current liabilities of approximately$11.1 million . We presently finance our operations by using the cash flows borrowed from related parties and third parties. We aim to improve our operating cash flows and anticipate that cash flows from our operations and borrowings from related parties and third parties will continue to be our primary source of funds to finance our short-term cash needs. The Company's financial conditions raise substantial doubt about the Company's ability to continue as a going concern. The ability to continue as a going concern is dependent upon the Company's profit generating operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they become due. The Company expects to finance operations primarily through cash flow from revenue, fund raising from IPO proceedings and capital contributions from the CEO. During the year, the CEO has provided financial support for the operations of the Company. In the event that the Company requires additional funding to finance the growth of the Company's current and expected future operations as well as to achieve our strategic objectives, the CEO has indicated the intent and ability to provide additional equity financing. The growth and development of our business will require a significant amount of additional working capital. We currently have limited financial resources and based on our current operating plan, we will need to raise additional capital in order to continue as a going concern. We currently do not have adequate cash to meet our short or long-term objectives. In the event additional capital is raised, it may have a dilutive effect on our existing stockholders. We are subject to all the substantial risks inherent in the development of a new business enterprise within an extremely competitive industry. Due to the absence of a long standing operating history and the emerging nature of the markets in which we compete, we anticipate operating losses until we can successfully implement our business strategy, which includes all associated revenue streams. Our revenue model is new and evolving, and we cannot be certain that it will be successful. The potential profitability of this business model is unproven. We may never ever achieve profitable operations. Our future operating results depend on many factors, including demand for our services, the level of competition, and the ability of our officers to manage our business and growth. As a result of the emerging nature of the market in which we compete, we may incur operating losses until such time as we can develop a substantial and stable revenue base. Additional development expenses may delay or negatively impact the ability of the Company to generate profits. Accordingly, we cannot assure you that our business model will be successful or that we can sustain revenue growth, achieve or sustain profitability, or continue as a going concern.
Foreign Currency Translation Risk
Our operations are located inChina , which may give rise to significant foreign currency risks from fluctuations and the degree of volatility in foreign exchange rates between theU.S. dollar and the Chinese Renminbi ("RMB"). All of our sales are in RMB. In the past years, RMB continued to appreciate against theU.S. dollar. As ofJune 30, 2022 , the market foreign exchange rate wasRMB 6.70 toone U.S. dollar . Our financial statements are translated intoU.S. dollars using the closing rate method. The balance sheet items are translated intoU.S. dollars using the exchange rates at the respective balance sheet dates. The capital and various reserves are translated at historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for the period. All translation adjustments are included in accumulated other comprehensive income in the statement of equity. The foreign currency translation gain (loss) for the three months endedJune 30, 2022 and 2021 was approximately$0.1 million and$0.03 million respectively.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements (as that term is defined in Item 303(a)(4)(ii) of Regulation S-K) as ofJune 30, 2022 that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
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