ADDENTAX GROUP CORP. The following discussion and analysis of our financial condition and results of operations for the three and nine months endedDecember 31, 2019 and 2018 should be read in conjunction with the attached consolidated unaudited Financial Statements and corresponding notes and our consolidated audited financial statements and related notes for the fiscal year endedMarch 31, 2019 found in our Annual Report on Form 10-K. 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 inChina . 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 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"),Shantou Chenghai Dai Tou Garments Co., Ltd ("DT") andDongguan Yu Shang Garments Co., Ltd ("YS"), which are located in theGuangdong province,China . Our logistic business consists of delivery and courier services covering approximately 20 provinces 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 two wholly owned subsidiaries, namelyShenzhen Xin Kuai Jie Transportation Co., Ltd ("XKJ") andShenzhen Hua Peng Fa Logistic Co., Ltd ("HPF"), which are located in theGuangdong province,China . 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. The primary business objective for our garment manufacturing segment is to expand our customer base and improve our profit. 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 inChina . As ofDecember 31, 2019 , we provide logistic service to over 79 cities in approximately nine 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 of 2020. 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 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.
The outbreak of the virus known as the coronavirus inJanuary 2020 resulted in interruption of both manufacturing business and service business which adversely affected the businesses significantly. Management is evaluating the impact and developing actions plan to minimize the effect and to recover both businesses as soon as possible.
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. 4 Estimates and Assumptions We regularly evaluate the accounting estimates that we use to prepare our financial statements. In general, management's estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management. Revenue Recognition Revenue is generated through sale of goods and delivery services. Revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amount of revenue that is recorded reflects the consideration that the Company expects to receive in exchange for those goods and services. The Company applies the following five-step model in order to determine this amount: (i) identification of the promised goods and services in the contract;
(ii) determination of whether the promised goods and services are performance
obligations, including whether they are distinct in the context of the
contract;
(iii) measurement of the transaction price, including the constraint on variable
consideration;
(iv) allocation of the transaction price to the performance obligations; and
(v) recognition of revenue when (or as) the Company satisfies each performance
obligation.
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.
Concentrations of Credit Risk
Cash held in banks: We maintain cash balances at the financial institutions in
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.
Leases
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.
5
Recently issued and adopted accounting pronouncements
InNovember 2016 , the FASB issued ASU 2016-18: Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this Update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update do not provide a definition of restricted cash or restricted cash equivalents. The amendments in this ASU on update are effective for public business entities for fiscal years beginning afterDecember 15, 2017 , and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The amendments in this Update should be applied using a retrospective transition method each period presented. The Company adopted this ASU onApril 1, 2018 and determined it had no impact on its consolidated financial statements as ofDecember 31, 2019 . InAugust 2018 , the FASB issued ASU 2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement to ASC Topic 820, Fair Value Measurement ("ASC 820"). ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing, modifying, and/or adding certain disclosures. ASU 2018-13 is effective for interim and annual reporting periods in fiscal years beginning afterDecember 15, 2019 . An entity is permitted to early adopt by modifying existing disclosures and delay adoption of the additional disclosures until the effective date. The Company is evaluating the effect that adoption of this guidance will have on its consolidated financial statements and related disclosures. InFebruary 2018 , theFinancial 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 onSeptember 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. 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 onDecember 15, 2019 . The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements. 6 InJanuary 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 afterDecember 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. InFebruary 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 takes effect for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2018 . According to this new standard, the Company recorded both right-of-use asset and lease liability of$1.9 million on its consolidated financial statements for the period endedDecember 31, 2019 .
The Company reviews new accounting standards as issued. Management has not identified any other new standards that it believes will have a significant impact on the Company's consolidated financial statements.
Results of Operations for the three months endedDecember 31, 2019 and 2018 The following tables summarize our results of operations for the three months endedDecember 31, 2019 and 2018. The table and the discussion below should be read in conjunction with our consolidated financial statements and the notes thereto appearing elsewhere in this report. Three Months Ended December 31, Increase (decrease) in 2019 2018 2019 compared to 2018 (In U.S. dollars, except for percentages) Revenue$ 4,027,902 100.0 %$ 2,541,803 100 %$ 1,486,099 58.5 %
Cost of revenues (3,746,040 ) (93.0 )% (2,495,740 ) (98.2 )% (1,250,300 ) (50.1 )% Gross profit
281,862 7.0 % 46,063 1.8 % 235,799 511.9 %
Operating expenses (527,154 ) (13.1 )% (591,080 ) (23.3 )% (63,926 ) (10.8 )%
Loss from operations (245,292 ) (6.1 )% (545,017 ) (21.4 )% (299,725 ) (55.0 )%
Other income, net 66 (0.0 )% 2,142 0.1 % (2,076 ) (96.9 )%
Net finance cost (3,964 ) (0.1 )% - - (3,964 )
Income tax expense (9,022 ) (0.2 )% (2,102 ) (0.1 )% (6,920 ) (329.2 )%
Net (loss) income
52.6 %
Revenue
Revenue generated from our garment manufacturing business contributed $2,643,560
or 65.6% of our total revenue for the three months ended December 31, 2019 .
Revenue generated from our garment manufacturing business contributed $731,310
or 28.8% of our total revenue for the three months ended December 31, 2018 .
Revenue generated from our logistic business contributed
Total revenue for the three months endedDecember 31, 2019 and 2018 were$4,027,902 and$2,541,803 , respectively, a 58.5% increase compared with the three months endedDecember 31, 2018 . The increase was mainly because the orders were increase mainly due to the increase in garment business as the garment business developed a new client. Holding companies, YX and QYTG did not have consulting service income in the three months endedDecember 31 . 2019. 7 Cost of revenue Three Months Ended December 31, Increase (decrease) in 2019 2018 2019 compared to 2018 (In U.S. dollars, except for percentages) Net revenue for garment manufacturing$ 2,643,560 100.0 %$ 731,310 100 %$ 1,912,250 261.5 % Raw materials 1,946,455 73.6 % 572,596 78.3 % 1,373,859 239.9 % Labor 469,268 17.8 % 62,263 8.5 % 407,005 653.7 % Other and Overhead 21,934 0.8 % 27,248 3.7 % (5,314 ) (19.5 )% Total cost of revenue for garment
manufacturing 2,437,657 92.2 % 662,107
90.5 % 1,775,550 268.2 % Gross profit for garment manufacturing 205,903 7.8 % 69,203 9.5 % 136,700 197.5 % Net revenue for
logistic service 1,384,342 100 % 1,810,493
100 % (426,151 ) (23.5 )% Fuel, toll and other cost of logistic service 464,583 33.5 % 862,457 47.6 % (397,874 ) (46.1 )% Subcontracting fees 843,800 61.0 % 971,176 53.7 % (127,376 ) (13.1 )% Total cost of revenue
for logistic service 1,308,383 94.5 % 1,833,633 101.3 % (525,250 ) (28.6 )% Gross Profit (loss) for logistic service 75,959 5.5 % (23,140 ) (1.3 )% 99,099 (428.3 )% Total cost of revenue$ 3,746,040 93.0 %$ 2,495,740
98.2 %$ 1,250,300 50.1 % Gross profit$ 281,862 7.0 %$ 46,063 1.8 %$ 235,799 511.9 % Cost of revenue for our manufacturing segment for the three months endedDecember 31, 2019 and 2018 was$2,437,657 and$662,107 , 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 endedDecember 31, 2019 and 2018 was$1,308,383 and$1,833,633 , respectively, which includes gasoline and diesel fuel, toll charges, other cost of logistic service 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 98.7% and 75.7% of raw materials purchases for the three months endedDecember 31, 2019 and 2018, respectively. One and two suppliers provided more than 10% of our raw materials purchases for the three months endedDecember 31, 2019 and 2018. 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 a few subcontractors, in which the subcontracting fees to our largest contractor represented approximately 21.0% and 30.2% of total cost of revenues for our service segment for the three months endedDecember 31, 2019 and 2018, respectively. The percentage dropped as we used more subcontractors than last year. 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 73.6% of our total manufacturing business revenue in the three months endedDecember 31, 2019 , compared with 78.3% in the three months endedDecember 31, 2018 . The decrease in percentages 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 17.8% of our total manufacturing business revenue in the three months endedDecember 31, 2019 , compared with 8.5% in the three months endedDecember 31, 2018 . Overhead and other expenses for our manufacturing business accounted for 0.8% of our total manufacturing business revenue for the three months endedDecember 31, 2019 , compared with 3.7% of total manufacturing business revenue for the three months endedDecember 31, 2018 . 8 Fuel, toll and other costs for our service business for the three months endedDecember 31, 2019 were$464,583 compared with$862,457 for the three months endedDecember 31, 2018 . Fuel, toll and other costs for our service business accounted for 33.5% of our total service revenue for the three months endedDecember 31, 2019 , compared with 47.6% for the three months endedDecember 31, 2018 . The decrease in percentages was primarily attributable to increase of
use of subcontractors. Subcontracting fees for our service business for the three months endedDecember 31, 2019 decreased 13.1% to$843,800 from$971,176 for the three months endedDecember 31, 2018 . Subcontracting fees accounted for 61.0% and 53.7% of our total service business revenue in the three months endedDecember 31, 2019 and 2018, respectively. This increase in percentages was primarily because the Company subcontracted more shipping orders to subcontractors in 2019 due to the increase in shipping orders with the destination that were not covered by the Company's own delivery and transportation networks. Moreover, the delivery cost of third-party has raised due to the market condition. Total cost of revenue for the three months endedDecember 31, 2019 was$3,746,040 , a 50.1% increase from$2,495,740 for the three months endedDecember 31, 2018 . Total cost of sales as a percentage of total sales for the three months endedDecember 31, 2019 was 93.0%, compared with 98.2% for the three months endedDecember 31, 2018 . Gross margin for the three months endedDecember 31, 2019 was 7.0% compared with 1.8% for the three months endedDecember 31, 2018 . Gross profit Increase (decrease) in 2019 2018 2019 compared to 2018 (In U.S. dollars, except for percentages) Gross profit$ 281,862 100 %$ 46,063 100 % 235,799 511.9 % Operating expenses: Selling expenses (960 ) (0.3 )% (4,770 ) (10.4 )% 3,810 79.9 % General and administrative expenses (526,194 ) (186.7 )% (586,310 ) (1,272.8 )% 60,116 10.3 % Total$ (527,154 ) (187.0 )%$ (591,080 ) (1,283.2 )% 63,926 10.8 % Loss from operations$ (245,292 ) (87.0 )%$ (545,017 ) (1,183.2 )% 299,725 55.0 %
Manufacturing business gross profit for the three months endedDecember 31, 2019 was$205,903 compared with$69,203 for the three months endedDecember 31, 2018 . Gross profit accounted for 7.8% of our total manufacturing business revenue for the three months endedDecember 31, 2019 , compared with 9.5% for the three months endedDecember 31, 2018 . Gross profit in our service business for the three months endedDecember 31, 2019 was$75,959 and gross margin was 5.5%. Gross loss in our service business for the three months endedDecember 31, 2018 was$(23,140) and gross margin
was (1.3)%. The decrease in gross margin was mainly due to increase of unit fuel cost and subcontracting fee in the quarter while unit price of service revenue remained mostly the same. Moreover, the portion of fuel cost of empty return trucks and cost of containers were relatively high compared with the slowed down revenue, which made the gross margin decrease as well.
Selling, General and administrative expenses
Our selling expenses in our manufacturing segment for the three months endedDecember 31, 2019 and 2018 was$960 and$4 , 770, respectively. Our selling expenses in our service segment for the three months endedDecember 31, 2019 and 2018 was $nil and $nil, respectively. Selling expenses consist primarily of local transportation, unloading charges and product inspection charges. Total selling expenses for the three months endedDecember 31, 2019 decreased 79.9% to$960 from$4 , 770 for the three months endedDecember 31, 2018 . 9 Our general and administrative expenses in our manufacturing segment for the three months endedDecember 31, 2019 and 2018 was$46,675 and$98,017 , respectively. Our general and administrative expenses in our service segment, for the three months endedDecember 31, 2019 and 2018 was$252,309 and$232,359 , respectively. Our general and administrative expenses in our corporate office for the three months endedDecember 31, 2019 and 2018 was$227,210 and$255,934 , 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. Total general and administrative expenses for the three months endedDecember 31, 2019 decreased 10.3% to$526,194 from$586,310 for the three months endedDecember 31, 2018 . The increase was mainly due to the increase in legal and professional fees to comply with theSEC accounting, disclosure and reporting requirements, new office rental expense, overseas traveling expense and expense of General Meetings. (Loss) income from operations
Loss from operations for the three months endedDecember 31, 2019 and 2018 was$245,292 and$545,017 , respectively. Income (Loss) from operations of$158,268 and$(33,584) was attributed from our manufacturing segment for the three months endedDecember 31, 2019 and 2018, respectively. Loss from operations of$(176,350) and$(255,499) was attributed from our service segment for the three months endedDecember 31, 2019 and 2018, respectively. We incurred a loss from operations in corporate office of$(227,210) and$(255,934) for the three months endedDecember 31, 2019 and 2018, 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. The outbreak of the virus known as the coronavirus inJanuary 2020 resulted in interruption of both manufacturing business and service business which adversely affected the businesses significantly. We expect to incur further loss in the following quarter endedMarch 31, 2020 . We are evaluating the impact and developing actions plan to minimize the effect and to recover both businesses as soon as possible. Income Tax Expenses Income tax expense for the three months endedDecember 31, 2019 and 2018 was$9,022 and$2,102 , respectively, a 329.2% increase compared to 2018. The Company operates in the PRC and files tax returns in the PRC jurisdictions.
Yingxi HK was incorporated inHong Kong and is subject toHong Kong income tax at a 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 endedDecember 31 ,
2019 and 2018. 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 YX has been made it had no taxable income for the three months endedDecember 31, 2019 and 2018. The Company is governed by the Income Tax Laws of the PRC. Yingxi's operating companies, HSW, HPF, YS and DT were subject to an EIT rate of 25% in 2019. XKJ enjoyed the preferential tax benefits and its EIT rate was 15% in 2019. The Company's parent entity,Addentax Group Corp. is anU.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 endedDecember 31, 2019 and 2018. 10 Net Loss
We incurred a net loss of$258,212 and a net loss of$544,977 for the three months endedDecember 31, 2019 and 2018, respectively. Our basic and diluted earnings per share were$0.00 and$0.00 for the three months endedDecember 31, 2019 and 2018, respectively. Results of Operations for the nine months endedDecember 31, 2019 and 2018 The following tables summarize our results of operations for the nine months endedDecember 31, 2019 and 2018. The table and the discussion below should be read in conjunction with our consolidated financial statements and the notes thereto appearing elsewhere in this report. Nine Months Ended December 31, Increase (decrease) in 2019 2018 2019 compared to 2018 (In U.S. dollars, except for percentages) Revenue$ 8,182,396 100.0 %$ 8,108,408 100 %$ 73,988 0.9 %
Cost of revenues (7,221,683 ) (88.3 )% (7,086,149 ) (87.4 )% (135,534 ) (1.9 )% Gross profit
960,713 11.7 % 1,022,259 12.6 % (61,546 ) (6.0 )%
Operating expenses (1,869,113 ) (22.8 )% (1,604,386 ) (19.8 )% (264,727 ) (16.5 )%
Loss from operations (908,400 ) (11.1 )% (582,127 ) (7.2 )% (326,273 ) (56.0 )%
Other income, net (10,753 ) (0.1 )% 19,132 0.2 % (29,885 ) (156.2 )%
Net finance cost (16,246 ) (0.3 )% - (16,246 )
Income tax expense (12,086 ) (0.1 )% (6,591 ) (0.0 )% (5,495 ) (83.4 )%
Net (loss) income
Revenue Revenue generated from our garment manufacturing business contributed$3,517,009 or 43.0% of our total revenue for the nine months endedDecember 31, 2019 . Revenue generated from our garment manufacturing business contributed$2,760,966 or 34.1% of our total revenue for the nine months endedDecember 31, 2018 . Revenue generated from our logistic business contributed$4,665,387 or 57.0% of our total revenue for the nine months endedDecember 31, 2019 . Revenue generated from our logistic business contributed$5,347,442 or 65.9% of our total revenue for the nine months endedDecember 31, 2018 . Total revenue for the nine months endedDecember 31, 2019 and 2018 were$8,182,396 and$8,108,408 , respectively, a 0.1% increase compared with the nine months endedDecember 31, 2018 . Holding companies, YX and QYTG did not have consulting service income in the nine months endedDecember 31, 2019 . One of the subsidiaries, HSW, was moving its factories which resulted in a decrease of order accepted. 11 Cost of revenue Nine months Ended December 31, Increase (decrease) in 2019 2018 2019 compared to 2018 (In U.S. dollars, except for percentages) Net revenue for garment manufacturing$ 3,517,008 100 %$ 2,760,966 100 %$ 756,042 27.4 % Raw materials 2,551,508 72.5 % 2,220,433 80.4 % 331,075 14.9 % Labor 570,181 16.2 % 243,710 8.8 % 326,471 134.0 % Other and Overhead 53,992 1.5 % 57,286 2.1 % (3,294 ) (5.8 )% Total cost of revenue for garment manufacturing 3,175,681 90.3 % 2,521,429
91.3 % 654,252 25.9 % Gross profit for garment manufacturing 341,327 9.71 % 239,537 8.7 % 101,790 42.5 % Net revenue for
logistic service 4,665,388 100 % 5,347,442 100 % (682,054 ) (12.8 )% Fuel, toll and other cost of logistic service 1,385,870 29.7 % 2,089,404 39.1 % (703,534 ) (33.7 )% Subcontracting fees 2,660,132 57.0 % 2,475,316 46.3 % 184,816 7.5 % Total cost of revenue for logistic service 4,046,002 86.7 % 4,564,720 85.4 % (518,718 ) (11.4 )% Gross Profit for logistic service 619,386 13.3 % 782,722 14.6 % (163,336 ) (20.9 )% Total cost of revenue$ 7,221,683 88.3 %$ 7,086,149 87.4 %$ 135,534 1.9 % Gross profit$ 960,713 11.7 %$ 1,022,259 12.6 %$ (61,546 ) (6.0 )% Cost of revenue for our manufacturing segment for the nine months endedDecember 31, 2019 and 2018 was$3,175,681 and$2,521,429 , 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 endedDecember 31, 2019 and 2018 was$4,046,002 and$4,564,720 , respectively, which includes gasoline and diesel fuel, toll charges, other cost of logistic service 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 91.2% and 51.4% of raw materials purchases for the nine months endedDecember 31, 2019 and 2018, respectively. One supplier provided more than 10% of our raw materials purchases for the nine months endedDecember 31, 2019 and 2018. 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 a few subcontractors, in which the subcontracting fees to our largest contractor represented approximately 19.3% and 15.2% of total cost of revenues for our service segment for the nine months endedDecember 31, 2019 and 2018, respectively. The percentage increased as we used more subcontractors than last year . 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 72.5% of our total manufacturing business revenue in the nine months endedDecember 31, 2019 , compared with 80.4% in the nine months endedDecember 31, 2018 . The decrease in percentages 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 16.2% of our total manufacturing business revenue in the nine months endedDecember 31, 2019 , compared with 8.8% in the nine months endedDecember 31, 2018 . Overhead and other expenses for our manufacturing business accounted for 1.5% of our total manufacturing business revenue for the nine months endedDecember 31, 2019 , compared with 2.1% of total manufacturing business revenue for the nine months endedDecember 31, 2018 . 12 Fuel, toll and other costs for our service business for the nine months endedDecember 31, 2019 were$1,385,870 compared with$2,089,404 for the nine months endedDecember 31, 2018 . Fuel, toll and other costs for our service business accounted for 29.7% of our total service revenue for the nine months endedDecember 31, 2019 , compared with 39.1% for the nine months endedDecember 31, 2018 . The decrease in percentages was primarily attributable to increase of
use of subcontractors. Subcontracting fees for our service business for the nine months endedDecember 31, 2019 increased 7.5% to$2,660,132 from$2,475,316 for the nine months endedDecember 31, 2018 . Subcontracting fees accounted for 57.0% and 46.3% of our total service business revenue in the nine months endedDecember 31, 2019 and 2018, respectively. This increase in percentages was primarily because the Company subcontracted more shipping orders to subcontractors in 2019 due to the increase in shipping orders with the destination that were not covered by the Company's own delivery and transportation networks. Moreover, the delivery cost of third-party has raised due to the market condition. Total cost of revenue for the nine months endedDecember 31, 2019 was$7,221,683 , a 1.9% increase from$7,086,149 for the nine months endedDecember 31, 2018 . Total cost of sales as a percentage of total sales for the nine months endedDecember 31, 2019 was 88.3%, compared with 87.4% for the nine months endedDecember 31, 2018 . Gross margin for the nine months endedDecember 31, 2019 was 11.7% compared with 12.6% for the nine months endedDecember 31, 2018 . Gross profit Increase (decrease) in 2019 2018 2019 compared to 2018 (In U.S. dollars, except for percentages) Gross profit$ 960,713 100 %$ 1,022,259 100 % (61,546 ) (6.0 )% Operating expenses: Selling expenses (11,825 ) (1.2 )% (14,480 ) (1.4 )% 2,655 18.3 % General and administrative expenses (1,857,288 ) (193.3 )% (1,589,906 ) (155.5 )% (267,382 ) (16.8 )% Total$ (1,869,113 ) (194.6 )%$ (1,604,386 )
(156.9 )% (264,727 ) (16.5 )%
Loss from operations
Manufacturing business gross profit for the nine months endedDecember 31, 2019 was$341,327 compared with$239,537 for the nine months endedDecember 31, 2018 . Gross profit accounted for 9.7% of our total manufacturing business revenue for the nine months endedDecember 31, 2019 , compared with 8.7% for the nine months endedDecember 31, 2018 .
Gross profit in our service business for the nine months endedDecember 31, 2019 was$619,386 and gross margin was 13.3%. Gross profit in our service business for the nine months endedDecember 31, 2018 was$782,722 and gross margin was 14.6%. The decrease in gross margin was mainly due to increase of unit fuel cost and subcontracting fee in the third quarter while unit price of service revenue remained mostly the same. Moreover, the portion of fuel cost of empty return trucks and cost of containers were relatively high compared with the slowed down revenue, which made the gross margin decrease as well. In XKJ, service revenue decreased faster than the decrease of cost mainly due to the decrease in logistics service business.
Selling, General and administrative expenses
Our selling expenses in our manufacturing segment for the nine months endedDecember 31, 2019 and 2018 was$11,826 and$14,480 , respectively. Our selling expenses in our service segment for the nine months endedDecember 31, 2019 and 2018 was $nil and $nil, respectively. Selling expenses consist primarily of local transportation, unloading charges and product inspection charges. Total selling expenses for the nine months endedDecember 31, 2019 decreased 18.3% to$11,826 from$14,480 for the nine months endedDecember 31, 2018 . 13 Our general and administrative expenses in our manufacturing segment for the nine months endedDecember 31, 2019 and 2018 was$141,698 and$237,514 , respectively. Our general and administrative expenses in our service segment, for the nine months endedDecember 31, 2019 and 2018 was$788,021 and$745,431 , respectively. Our general and administrative expenses in our corporate office for the nine months endedDecember 31, 2019 and 2018 was$927,569 and$606,961 , 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. Total general and administrative expenses for the nine months endedDecember 31, 2019 increased 16.8% to$1,857,288 from$1,589,906 for the nine months endedDecember 31, 2018 . The increase was mainly due to the increase in legal and professional fees to comply with theSEC accounting, disclosure and reporting requirements, new office rental expense, overseas travelling expense and expense of General Meetings. Loss from operations Loss from operations for the nine months endedDecember 31, 2019 and 2018 was$908,400 and$582,127 , respectively. Income (loss) from operations of$187,803 and$(12,458) was attributed from our manufacturing segment for the nine months endedDecember 31, 2019 and 2018, respectively. (Loss) income from operations of$(168,634) and$37,292 was attributed from our service segment for the nine months endedDecember 31, 2019 and 2018, respectively. We incurred a loss from operations in corporate office of$927,569 and$606,961 for the nine months endedDecember 31, 2019 and 2018, 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 nine months ended
Yingxi HK was incorporated inHong Kong and is subject toHong Kong income tax at a tax rate of 16.5%. No provision for income taxes inHong Kong has been made as Yingxi HK had no taxable income for the nine months endedDecember 31, 2019 and 2018. 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 YX has been made it had no taxable income for the nine months endedDecember 31, 2019 and 2018. The Company is governed by the Income Tax Laws of the PRC. Yingxi's operating companies, HSW, HPF, YS and DT were subject to an EIT rate of 25% in 2019. XKJ enjoyed the preferential tax benefits and its EIT rate was 15% in 2019. The Company's parent entity,Addentax Group Corp. is anU.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 nine months endedDecember 31, 2019 and 2018. 14 Net Loss We incurred a net loss of$947,485 and$569,586 for the nine months endedDecember 31, 2019 and 2018, respectively. Our basic and diluted earnings per share were$0.00 and$0.00 for the nine months endedDecember 31, 2019 and
2018, respectively. Summary of cash flows Summary cash flows information for the nine months endedDecember 31, 2019 and 2018 is as follow: 2019 2018 (InU.S. dollars)
Net cash (used in) provided by operating activities
$ (94,864 ) $
(91,246 )
Net cash provided by (used in) financing activities
Net cash used in operating activities consist of net loss of$947,485 , increased by depreciation of$84,277 , loss on disposal of property and equipment of$3,323 and reduced by increase in change of operating assets and liabilities of$199,051 . 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 purchase of plant and equipment
of
Net cash provided by financing activities consist of proceeds from bank borrowing of$515,816 , repayment of bank borrowing of$372,135 , repayment of related party borrowings of$665,323 and we received related party proceeds
of$1 , 828,042.
Financial Condition, Liquidity and Capital Resources
As ofDecember 31, 2019 , we had cash on hand of$424,021 , total current assets of$5,164,076 and current liabilities of$9,353,719 . 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.
Foreign Currency Translation Risk
Our operations are located in theChina , 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 ofDecember 31, 2019 , the market foreign exchange rate had decreased toRMB 6.963 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 and nine months endedDecember 31, 2019 and 2018 was$(50,440) ,$58,715 ,$(445) and$123,622 , 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 ofDecember 31, 2019 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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