Xchange TEC.INC annual report, Q4 FY2021

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Filing identity and reporting period

Important mismatch: The supplied filing is Q&K International Group Limited’s Form 20-F, not a filing for Xchange TEC.INC. It is an annual report for the fiscal year ended September 30, 2021—not a standalone 2021 Q4 report. The filing was signed February 15, 2022. Financial statements are prepared under U.S. GAAP and reported in RMB; U.S. dollar equivalents are provided for convenience.

Q&K operates a China-focused long-term apartment rental platform, leasing apartments from landlords, refurbishing and furnishing them, and renting rooms to tenants. In October 2021, after the fiscal year-end, the company transferred its WFOE to a related party for nominal consideration and stated it no longer operated through its VIE. The VIE remained consolidated in FY 2021 financial statements.

Financial and operating performance

  • Revenue: RMB1,036.2 million (US$160.8 million), down 14.2% from RMB1,208.0 million in FY 2020. Rental service revenue was RMB939.2 million, down 15.0%; value-added services and other revenue was RMB97.0 million, down 5.6%.
  • Loss and margins: Net loss was RMB569.2 million (US$88.3 million), compared with RMB1,533.6 million in FY 2020. Operating loss was RMB399.7 million, or 38.6% of revenue; net loss was 54.9% of revenue. The smaller net loss primarily reflects lower impairment and disposal losses than in FY 2020, not a return to profitability.
  • Costs and unusual charges: Total operating costs and expenses declined 47.0% to RMB1,435.9 million, but remained above revenue. FY 2021 included RMB199.6 million of long-lived asset impairment, RMB30.2 million of disposal losses, RMB42.0 million of debt-extinguishment loss, and higher general and administrative expense, including bad-debt charges and write-off of deductible VAT.
  • Rental economics: Period-average occupancy improved to 89.9% from 83.8%. Average monthly rent before prepayment discounts declined to RMB1,080 from RMB1,185; after discounts it declined to RMB1,075 from RMB1,169. Rental spread margin after discounts increased to 22.2% from 19.8%.
  • Scale: Rental units contracted fell 23.6% year over year to 62,757; all were reported as available, with 57,255 occupied at September 30, 2021. The company attributed portfolio reductions in part to optimization and termination of arrangements.
  • Cash flow and liquidity: Operating cash outflow was RMB109.7 million (US$17.0 million), versus RMB54.8 million of operating cash inflow in FY 2020. Investing cash outflow was RMB6.5 million and financing cash inflow was RMB101.6 million. Cash and cash equivalents were RMB16.3 million (US$2.5 million), with restricted cash of RMB2.9 million, at year-end.
  • Debt and obligations: Bank borrowings were RMB759.7 million; rental installment loans were RMB18.1 million; and convertible notes, net, were RMB313.9 million. Accrued expenses and other current liabilities totaled RMB1,024.9 million. Current liabilities exceeded current assets by RMB2,171.0 million (US$336.9 million); total shareholders’ deficit was RMB2,484.9 million.
  • Capital expenditure: RMB6.5 million in FY 2021, down from RMB138.7 million in FY 2020 and RMB172.1 million in FY 2019.

Changes versus the prior comparable period

  • Revenue declined, while net loss narrowed substantially. Management attributed much of the cost reduction to a smaller operating footprint and the termination of cooperation with a rental service company owned by a state-owned bank.
  • Occupancy and after-discount rental spread margin improved, but average monthly rent and unit count declined.
  • General and administrative expense more than doubled to RMB217.1 million, primarily due to bad-debt expenses and a VAT credit write-off. Personnel costs within operating cost also rose as the company operated the acquired rental portfolio for a full year.
  • FY 2020 included much larger impairment and asset-disposal losses—RMB846.8 million and RMB469.0 million, respectively—helping explain the year-over-year reduction in FY 2021 losses.

Outlook, risks, and unusual items

  • Going concern: The auditor’s report includes an explanatory paragraph stating that significant losses, a substantial working-capital deficiency, and the need for additional funding raise substantial doubt about the company’s ability to continue as a going concern. The financial statements contain no adjustments for a possible failure to continue as a going concern.
  • Management’s liquidity plans: Management cited potential additional convertible-note proceeds and a principal shareholder’s agreement to consider financial support. It believed resources would meet needs for at least 12 months from the report date, but noted financing availability was uncertain. No revenue or profit guidance was provided.
  • Acquisition and dilution: The company acquired lease contracts and related assets for approximately 72,000 rental units in 2020. In 2021 it settled remaining consideration in part by delivering 186.4 million Class A shares. Certain shares carry make-whole and repurchase provisions; the company recorded RMB164.3 million of contingent liabilities. It also agreed to issue up to 99.6 million additional Class A shares to a contractor, subject to conditions.
  • VIE transfer and bankruptcy: The October 2021 transfer of the WFOE to a related party ended the company’s VIE operating structure, according to the filing. In January 2022, Qingke Public Rental, a VIE subsidiary, filed a voluntary bankruptcy petition, which the court accepted.
  • Legal exposures: The company accrued RMB3.9 million for landlord claims related to early lease terminations. It disclosed a further potential maximum exposure of RMB58.0 million for other landlord claims but did not accrue it. Supplier proceedings involving the VIE included a construction claim of approximately RMB58.0 million; the filing says the proceedings were settled in December 2021.
  • Other key risks: COVID-19 and tenant turnover; dependence on third-party contractors and a limited number of financing partners; rental prepayment refunds; evolving PRC rental, cybersecurity, data-protection and overseas-listing rules; foreign-exchange and cash-transfer restrictions; and potential U.S. trading restrictions under the HFCA Act.
  • Controls and listing: Management concluded internal control over financial reporting and disclosure controls were ineffective at September 30, 2021, citing insufficient U.S. GAAP/SEC reporting expertise and inadequate accounting manuals. Nasdaq notified the company in September 2021 that its ADS bid price was below US$1 and granted a compliance period.

Most important facts for investors to verify

  • Confirm the issuer identity: this document is Q&K International Group Limited’s 20-F, not an Xchange TEC.INC filing.
  • Review the audited financial statements, going-concern discussion, and cash needs and financing available after the February 2022 filing date.
  • Check current debt balances, convertible-note terms and conversion dilution, share-settlement guarantees, and potential contractor share issuance.
  • Verify the status and financial consequences of the WFOE transfer, VIE deconsolidation, Qingke Public Rental bankruptcy, and disclosed legal claims.
  • Assess whether occupancy, rent, rental spreads, and cash flow improved sustainably despite the shrinking portfolio and continuing losses.
  • Check remediation of the material weakness and the company’s subsequent Nasdaq listing compliance and auditor inspection status.