Addentax Group Corp. — Form 10-Q Summary
Reporting period: The filing covers the three and six months ended September 30, 2020, with balance-sheet comparisons to March 31, 2020. Although the request labels this “2020 Q2,” the filing itself reports the September 2020 quarter and first half of the company’s fiscal year.
Business context
Addentax operates in China across garments, logistics services, and epidemic-prevention supplies manufacturing and trading. The new epidemic-prevention supplies business drove most of the period’s revenue growth, primarily through resale of purchased products.
Financial performance
| Metric | Three months ended September 30, 2020 | Six months ended September 30, 2020 |
|---|---|---|
| Revenue | $11.68 million, versus $1.95 million | $17.60 million, versus $4.15 million |
| Gross profit (loss) / margin | $(3.02) million / (25.9)%, versus $0.32 million / 16.5% | $(2.22) million / (12.6)%, versus $0.68 million / 16.3% |
| Operating loss | $(3.49) million, versus $(0.31) million | $(3.30) million, versus $(0.66) million |
| Net loss | $(3.46) million, versus $(0.32) million; loss per share $(0.14) | $(3.26) million, versus $(0.69) million; loss per share $(0.13) |
- For the six-month period, epidemic-prevention supplies generated $11.86 million, or 67.4% of revenue, but recorded a $2.92 million gross loss. Management attributed the loss to rapidly rising materials costs while customer selling prices were fixed by sales agreements.
- Garment revenue rose, but its six-month gross margin declined to 8.0% from 15.5%, reflecting higher materials and labor costs. Logistics revenue declined 13.4%; its gross margin was 16.4%, versus 16.6%.
- Six-month operating cash outflow was $3.06 million, compared with $0.88 million in the prior-year period. Investing cash outflow was $0.38 million; financing provided $4.07 million. Ending cash was $1.18 million.
- At September 30, cash was $1.18 million, current assets were $4.09 million, and current liabilities were $8.13 million, implying a $4.04 million working-capital deficit. Total liabilities were $9.33 million.
- Bank borrowings were $234,149. Amounts due to related parties were $5.96 million, unsecured, non-interest-bearing, and repayable on demand. Operating lease liabilities totaled approximately $1.63 million.
Changes, outlook, and risks
- Revenue increased sharply year over year, chiefly from the new epidemic-prevention supplies segment and increased garment capacity. The increase did not translate into profitability because total cost of revenue exceeded revenue.
- The company raised $3.735 million in August 2020 by issuing 747,000 shares at $5 per share. It also received and repaid substantial related-party borrowings during the period.
- Management states that substantial doubt exists about the company’s ability to continue as a going concern. Continued operations depend on future profits and/or additional financing. Management expects to rely on operating cash flows and CEO support, and says the CEO has indicated willingness and ability to provide further equity financing; no assurance of future financing is provided.
- Management reported no formal financial guidance. It described plans to expand logistics coverage and improve profitability, while noting economic uncertainty, pricing pressure, collection and liquidity risks, and exposure to RMB exchange-rate movements.
- Customer and supplier concentration is high: the five largest customers accounted for 93.6% of quarterly and 86.8% of six-month sales; the five largest suppliers represented 99.6% and 97.2% of purchases, respectively. The filing also cites COVID-19-related disruption to logistics.
- Disclosure controls and procedures were concluded to be ineffective in light of material weaknesses in internal control over financial reporting. Management reported no material change in internal controls during the quarter.
- The filing reports no material pending legal proceedings and no off-balance-sheet arrangements. In November, the company sold $194,164 of inventory at cost for cash.
Important facts for investors to verify
- Confirm the causes, contract terms, and potential recurrence of the epidemic-supplies segment’s cost overruns and gross losses.
- Assess near-term liquidity, the demand repayment terms on related-party balances, and the availability and terms of any promised CEO or external financing.
- Reconcile share-count disclosures: the balance sheet reports 26,093,004 shares outstanding at September 30 after the August issuance, while the cover page reports 25,346,004 shares outstanding as of November 16.
- Reconcile MD&A liquidity figures, which state current assets of $4.282 million and current liabilities of $8.326 million, with the financial statements’ $4.085 million and $8.129 million, respectively.
- Review the material weaknesses and the company’s remediation plans, and monitor customer/supplier concentration and receivables collectability.