Tianci International, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and nine months ended April 30, 2023; the company’s fiscal year ends July 31. Tianci is a holding company whose operating subsidiary, Roshing International Co., Ltd., distributes electronic hardware components and provides software development, technical consulting, training, maintenance, and business-promotion services primarily in Hong Kong and China, with some software revenue from Singapore.
On March 3, 2023, Tianci completed a reverse acquisition of RQS United Group Limited. The transaction added Roshing’s operating business, ended Tianci’s status as a shell company, and resulted in the issuance of common and preferred shares. Tianci owns 90% of Roshing.
Financial Performance and Position
| Metric | Three months ended April 30, 2023 | Three months ended April 30, 2022 | Nine months ended April 30, 2023 | Nine months ended April 30, 2022 |
|---|---|---|---|---|
| Revenue | $144,013 | $0 | $367,113 | $8,792 |
| Gross profit (loss) | $(116,687) | $(9,026) | $(80,942) | $(14,453) |
| Gross margin | (81.0%) | Not meaningful | (22.0%) | Not meaningful |
| Operating expenses | $197,441 | $15,393 | $238,876 | $43,598 |
| Loss from operations | $(314,128) | $(24,419) | $(319,818) | $(58,051) |
| Net loss | $(315,408) | $(20,390) | $(322,037) | $(48,473) |
| Net loss attributable to Tianci | $(296,194) | $(18,351) | $(302,160) | $(43,626) |
| Basic and diluted loss per share | $(0.07) | $(0.01) | $(0.12) | $(0.03) |
- Nine-month revenue consisted of $294,880 of hardware sales and $72,233 of service revenue. Hardware revenue generated approximately 22.8% gross margin, while service revenue generated a substantial gross loss, largely due to software developer compensation and $144,000 of stock-based compensation included in service costs.
- At April 30, 2023, cash was $263,069, accounts receivable were $115,004, and total assets were $443,745. Current liabilities were $686,998, producing negative working capital of approximately $252,291.
- Total liabilities were $690,178, including $294,943 due to related parties. Related-party balances are unsecured, non-interest-bearing, and due on demand. The filing also states that $180,800 was owed to officers for compensation under employment agreements.
- Stockholders’ equity was negative $246,433 at April 30, 2023, compared with positive $104,759 at July 31, 2022.
- Net cash provided by operating activities for the nine months was $314,295, compared with $58,051 of cash used in the prior-year period. The 2023 inflow primarily reflected a $622,659 reduction in accounts receivable and $210,000 of noncash stock compensation.
- Financing activities used $72,463 of cash, primarily because the company repaid $341,885 of a related-party working-capital advance. Ending cash increased by $241,832 from $21,237 at July 31, 2022.
- The company reported no investing cash flows and no interest or income-tax cash payments during the nine-month period.
Material Changes Versus the Prior Comparable Period
- Revenue increased by $358,321, or approximately 4,076%, for the nine months, primarily because the company began reporting hardware sales and expanded software maintenance and business-promotion services.
- Despite the revenue increase, the nine-month net loss attributable to Tianci increased to $302,160 from $43,626, reflecting higher service costs, stock compensation, selling and marketing expenses, and general and administrative expenses.
- Operating expenses increased to $238,876 from $43,598 for the nine months. The increase primarily included stock compensation issued in connection with the reverse merger.
- Accounts receivable declined from $737,663 at July 31, 2022 to $115,004 at April 30, 2023, while cash increased from $21,237 to $263,069.
- Common shares outstanding increased to 5,903,481 from 1,500,000, and 80,000 Series A preferred shares were issued. Each Series A preferred share is convertible into 100 common shares, subject to adjustment.
- The company recorded $210,000 of stock-based compensation for 700,000 shares issued to employees or affiliates of Roshing for continued service.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management states that existing liquidity and working capital are expected to be sufficient for the next 12 months, but acknowledges that additional funding may be required for changing business conditions, investments, acquisitions, capital expenditures, or other opportunities.
- The company plans to enter the glass sales industry in 2023, which may require significant capital expenditures. Management may seek equity, debt, or credit facilities; equity financing could dilute shareholders and debt could increase fixed obligations and impose covenants.
- Customer and vendor concentration is significant. Two customers represented 47.7% and 14.1% of nine-month revenue, while one customer represented 100% of accounts receivable at April 30, 2023. Two vendors represented more than 75.8% and 15.8% of purchases, and 86.9% and 13.1% of accounts payable.
- Management concluded that disclosure controls and procedures were not effective at April 30, 2023 because of limited information-processing controls, inadequate segregation of duties, the absence of an audit committee financial expert, and insufficient formal review procedures for significant accounting transactions.
- The company reports no legal proceedings, no defaults upon senior securities, and no off-balance-sheet arrangements. Management reported no material subsequent events through the financial statement issuance date.
- Operating lease liabilities totaled $7,496, with undiscounted future lease payments of $7,828. No material restrictive covenants or residual-value guarantees were reported.
- The filing states that COVID-19 had limited impact to date but could adversely affect operations, supply chains, demand, and financial results if conditions worsen.
- Zhigang Pei resigned as chief financial officer on April 13, 2023, and Shufang Gao was appointed chief financial officer on the same date. Gao signed the filing as chief executive officer and chief financial officer.
Important Facts for Investors to Verify
- Whether the company can sustain operations given negative working capital, negative equity, recurring operating losses, and related-party obligations due on demand.
- The collectability and concentration of the $115,004 accounts receivable balance, including the customer representing 100% of receivables.
- Whether hardware and service revenue growth is repeatable and whether software services can achieve positive gross margins after developer compensation and stock-based compensation.
- The terms, voting rights, and potential dilution from the 80,000 Series A preferred shares, each convertible into 100 common shares.
- The funding requirements and execution risks associated with the planned glass-sales business.
- Progress in remediating the material weaknesses in disclosure controls and internal control over financial reporting.
- The economic substance and ongoing impact of the reverse acquisition, related-party advances, shareholder-paid expenses, and stock compensation.