Addentax Group Corp. — Form 10-Q Summary
Reporting period: Quarter ended December 31, 2019, with comparative results for the three and nine months ended December 31, 2018. The company manufactures garments and provides logistics services in China. Financial statements are unaudited.
Financial performance and position
| Metric | Three months ended Dec. 31, 2019 | Nine months ended Dec. 31, 2019 |
|---|---|---|
| Revenue | $4.03 million; up 58.5% year over year | $8.18 million; up 0.9% |
| Gross profit / margin | $281,862 / 7.0% (prior year: $46,063 / 1.8%) | $960,713 / 11.7% (prior year: $1.02 million / 12.6%) |
| Operating loss | $245,292 (prior year: $545,017) | $908,400 (prior year: $582,127) |
| Net loss | $258,212 (prior year: $544,977) | $947,485 (prior year: $569,586) |
| Loss per share, basic and diluted | $0.01 | $0.04 |
| Operating cash flow | Nine-month use of $1.06 million, versus $1.08 million provided in the prior-year period |
Quarterly revenue growth reflected garment manufacturing revenue rising to $2.64 million from $731,310, including business from a new client. Logistics revenue fell 23.5% to $1.38 million. For the nine-month period, garment revenue increased 27.4% to $3.52 million, while logistics revenue declined 12.8% to $4.67 million. The company said factory relocation reduced accepted orders at one subsidiary.
At December 31, 2019, cash was $424,021; current assets were $5.16 million and current liabilities were $9.35 million, resulting in net current liabilities of $4.19 million. Total liabilities were $10.84 million, including $5.23 million due to related parties (unsecured, non-interest-bearing and payable on demand), $359,038 of bank loans, and $1.94 million of operating lease liabilities. Total equity was in deficit by $2.59 million. Accounts receivable rose to $3.68 million from $1.80 million at March 31, 2019.
Nine-month cash flow included $94,864 used for equipment purchases and $1.31 million provided by financing activities. Related-party borrowings supported funding: the company received $1.83 million and repaid $665,323 during the period. Its two bank loans were fully drawn and due in July and September 2020.
Changes, outlook and risks
- Quarterly gross margin improved, but nine-month gross margin declined. Nine-month operating expenses rose 16.5%, mainly due to higher corporate legal and professional, office rental, travel and meeting costs.
- Manufacturing generated operating income of $187,803 for the nine months; logistics recorded an operating loss of $168,634, and corporate and other costs were $927,569.
- Management said it expected to develop 20 additional logistics points in existing service cities during 2020. The filing gives no quantified revenue or earnings guidance.
- The company reported that the coronavirus outbreak beginning in January 2020 significantly interrupted both businesses and said it expected a further loss in the quarter ending March 31, 2020. Management was assessing the impact and developing recovery actions; the extent of the impact was not quantified.
- The filing states that recurring losses, net current liabilities and the need for additional financing raise substantial doubt about the company’s ability to continue as a going concern. Management cited expected operating cash flow and potential CEO support, but noted there is no assurance of financing on acceptable terms or at all. Additional equity financing could dilute shareholders.
- Credit and concentration risks include one customer representing 64% of accounts receivable at December 31, 2019, no allowance for doubtful accounts, and the five largest suppliers representing approximately 99% of quarterly inventory purchases. Management also identifies China operating, foreign-exchange and economic risks; substantially all sales are in RMB.
- Management concluded disclosure controls and internal control over financial reporting were ineffective because of a material weakness: insufficient accounting personnel with appropriate knowledge, experience and training. The company reported no material change in internal controls during the quarter.
- The company reported no material pending legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Reconcile the reported per-share losses: the financial statements show quarterly loss per share of $0.01 and nine-month loss per share of $0.04, while the MD&A describes EPS as $0.00 for both periods.
- Assess collectability and concentration of the $3.68 million receivable balance, especially the 64% exposure to one customer and the absence of an allowance.
- Confirm the timing and source of funds to meet the $4.19 million working-capital deficit, on-demand related-party balances and 2020 bank-loan maturities; verify whether CEO financing support will continue.
- Monitor the coronavirus-related operating disruption and whether the projected further quarterly loss or recovery plans changed after the filing.
- Track remediation of the disclosed material weakness and the company’s progress toward effective disclosure and financial-reporting controls.