Addentax Group Corp. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2016, the second quarter of the company’s fiscal year ending March 31, 2017; comparative results are for the three and six months ended September 30, 2015. The interim financial statements are unaudited. Addentax is a development-stage Nevada company producing printed images on various surfaces using heat-transfer technology, with operations based in Morocco.
Financial results and condition
| Metric | Three months ended Sep. 30, 2016 | Three months ended Sep. 30, 2015 | Six months ended Sep. 30, 2016 | Six months ended Sep. 30, 2015 |
|---|---|---|---|---|
| Revenue | $6,950 | $3,000 | $9,950 | $3,000 |
| Gross profit | $5,933 | $2,675 | $8,419 | $2,675 |
| Gross margin | 85.4% | 89.2% | 84.6% | 89.2% |
| Operating expenses | $6,177 | $4,668 | $29,944 | $9,615 |
| Net loss | $244 | $1,993 | $21,525 | $6,912 |
| Basic and diluted loss per share | $(0.00) | $(0.00) | $(0.01) | $(0.00) |
Revenue more than tripled for the six-month period, but operating expenses rose substantially and the six-month net loss increased. The filing attributes the higher expenses principally to SEC filing and share-issuance costs, as well as the timing of accounting and legal services. Quarterly results were less loss-making than the prior-year quarter.
- Cash and liquidity: Cash was $2,201 at September 30, 2016, down from $10,052 at March 31, 2016. Working capital was negative $16,178, versus positive $4,259 at fiscal year-end.
- Cash flow: Operating activities used $20,905 over six months. Financing provided $13,054, comprising $554 from issuing 37,000 shares and $12,500 in director advances. There was no investing cash flow.
- Balance sheet: Total assets were $6,169; current liabilities and total liabilities were $20,600, all consisting of loans from the director. Stockholders’ equity was a deficit of $14,431. The director balance is unsecured, non-interest-bearing, due on demand, and not supported by a formal promissory note.
- Other costs and obligations: The office lease is $190 per month and expires February 28, 2017. The company reported no interest or income taxes paid during the six-month period.
Outlook, risks, and other disclosures
- Management stated that the company lacks a stabilized revenue source and funding to implement its business plan; the filing identifies substantial doubt about its ability to continue as a going concern. Management expects near-term dependence on additional capital, but gives no assurance that financing or profitable operations will be achieved.
- The company planned to raise up to $90,000 through a public offering. The filing provides proposed spending allocations at several funding levels but does not establish that any proceeds will be raised. Additional equity could dilute existing holders; borrowing would add liabilities and cash obligations.
- The business had one officer/director performing the work, faced competitors with greater resources, and stated that it maintained no insurance. These factors could impair operations or expose the company to losses it may be unable to fund.
- Management concluded disclosure controls and internal control over financial reporting were ineffective as of September 30, 2016. Identified material weaknesses included no independent audit committee, inadequate cash controls and segregation of duties, and no formal data-backup or off-site storage procedures. No material control changes were reported during the quarter.
- The filing reports no material litigation and no material subsequent events. It also marks the company as a shell company and indicates it had not filed all required Exchange Act reports during the preceding 12 months.
Important facts for investors to verify
- Whether the planned public offering or other financing was completed, and whether the company obtained enough cash to meet obligations and execute its business plan.
- The status, repayment terms, and source of the $20,600 director advance, including the filing’s statement that this balance was not advanced under the previously described $30,000 loan agreement.
- The cause and recurrence of the six-month increase in operating expenses, particularly the $19,520 reported for regulatory filing fees, and the timing of accounting and legal costs.
- Whether revenue growth is sustainable and sufficiently diversified; the filing describes a customer contract but does not provide customer concentration or order-backlog detail.
- Whether the company remedied its disclosed control weaknesses and addressed its delinquent-filing status and shell-company classification.