Addentax Group Corp. — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2017. Unaudited consolidated financial statements are presented in U.S. dollars. The company manufactures garments and provides logistics services in China. Its present business includes subsidiaries acquired in December 2016, making comparisons with 2016—when the acquired operations were consolidated for only part of the period—materially non-comparable.
Financial performance and position
| Metric | Three months ended Dec. 31, 2017 | Nine months ended Dec. 31, 2017 |
|---|---|---|
| Revenue | $3.062 million | $11.340 million |
| Gross profit / margin | $356,418 / 11.6% | $1.139 million / 10.0% |
| Operating loss | $66,745 | $99,260 |
| Net loss | $65,517 | $105,846 |
| Operating cash flow | Not separately provided | $730,027 provided |
| Investing cash flow | Not separately provided | $3.127 million used |
| Financing cash flow | Not separately provided | $2.361 million provided |
- Quarterly revenue increased 26.9% year over year; nine-month revenue increased 369.9%. The filing attributes much of the increase to consolidation of the acquired businesses, so the growth rates do not represent like-for-like comparisons.
- At December 31, 2017, cash was $146,365, current assets were $8.394 million and current liabilities were $9.497 million, a working-capital deficit of approximately $1.103 million and a current ratio of about 0.88. Total assets were $9.980 million and total equity was $482,466.
- Current liabilities included $3.769 million of unsecured, non-interest-bearing third-party advances due on demand, $1.376 million due to related parties, and $3.308 million of accounts payable. The acquisition payable of $3.050 million reported at March 31, 2017 was nil at December 31, 2017.
- Accounts receivable, net, was $4.626 million, with no doubtful-account allowance. Customer A represented 35% and Customer B 11% of receivables. Other receivables were $2.152 million and advances to suppliers were $939,604.
Changes versus comparable periods
- For the quarter, gross margin declined from 14.9% to 11.6%; the company moved from $66,785 of operating income and $56,271 of net income to operating and net losses.
- For the nine months, gross margin fell from 14.9% to 10.0%, while the company moved from $66,785 of operating income and $56,271 of net income to a $99,260 operating loss and $105,846 net loss.
- Quarterly garment revenue fell to $716,406 from $1.671 million; management cited a partial operational closure for restructuring. Logistics revenue rose to $2.346 million from $742,843, largely reflecting the expanded consolidation period. The service segment reported nine-month operating income of $160,984, but manufacturing and corporate operations reported losses of $142,802 and $117,442, respectively.
- Quarterly general and administrative expense rose 43.2% to $419,057; nine-month expense rose to approximately $1.216 million. Management cited acquired operations and reverse-merger-related professional fees, partly offset by cost-cutting and staff reductions. New logistics points were said to have lower margins while the company offered lower service fees to attract business.
- Cash declined from $176,905 at March 31, 2017 to $146,365 at December 31, 2017. Nine-month cash flow included $3.050 million paid for the subsidiary acquisition and $76,788 of equipment purchases. Financing included $7.217 million of third-party borrowing proceeds and $4.856 million of repayments.
Outlook, risks and notable disclosures
- Management’s stated objectives were to expand garment customers and improve profitability, and to develop a nationwide logistics network. It described plans to open logistics points in additional cities, but provided no quantified revenue, earnings or cash-flow guidance.
- Management said it expected operating cash flows and borrowings from related and third parties to remain primary sources for short-term funding, and planned to improve cash generation through closer receivables monitoring. The working-capital deficit, low cash balance and demand-repayable advances underscore liquidity risk.
- Management cited economic uncertainty and pricing pressure in China, possible effects on sales, margins and collections, and RMB/U.S. dollar exchange-rate exposure. The nine-month foreign-currency translation loss was $38,836.
- Supplier and service-provider concentration is notable: the five largest suppliers accounted for 57% of inventory purchases over nine months (62% in the quarter), and the largest logistics subcontractor represented approximately 60% of service-segment cost of revenue. New logistics locations and rising PRC labor costs also affected margins.
- The company reported material weaknesses in internal controls: no independent audit committee or financial expert, inadequate cash controls and segregation of duties, and no formal backup/off-site data-storage procedures. Management concluded disclosure controls and internal control over financial reporting were ineffective as of December 31, 2017.
- The company reported no material pending legal proceedings and no off-balance-sheet arrangements. It expected to adopt revenue standard ASC 606 in the first quarter of 2018 and did not then expect a material impact. It reported no material tax impact from the U.S. Tax Cuts and Jobs Act for the period.
Important facts for investors to verify
- Reconcile the cash-flow comparison: the cash-flow statement reports prior-period operating cash used of $290,521, while the MD&A summary states $391,242 used.
- Confirm the stated nine-month gross margin against the filing’s inconsistent MD&A table: the financial statements show gross profit of $1.139 million on revenue of $11.340 million, or approximately 10.0%; one MD&A passage instead displays 11.6%.
- Assess collectability and concentration of receivables, given the material customer exposures and the absence of a doubtful-account allowance, and review the unsecured advances to third parties and suppliers.
- Review the terms, repayment capacity and continued availability of demand-repayable third-party and related-party funding, and the company’s plans to address its working-capital deficit.
- Track remediation of the disclosed control weaknesses and evaluate whether logistics expansion can improve margins despite subcontractor concentration and startup costs.