Addentax Group Corp. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2018; the company’s fiscal year ends March 31. Financial statements are unaudited and reported in U.S. dollars. Addentax manufactures garments and provides logistics services in China.
Financial performance
| Metric | Three months ended September 30, 2018 | Six months ended September 30, 2018 | Comparable 2017 period |
|---|---|---|---|
| Revenue | $2.835 million | $5.567 million | $3.975 million; $7.614 million |
| Gross profit / margin | $681,577 / 24.0% | $976,196 / 17.5% | $571,486 / 14.4%; $844,243 / 11.1% |
| Operating income (loss) | $136,891 | $(37,110) | $144,254; $29,277 |
| Net income (loss) | $136,297 | $(24,609) | $138,793; $19,957 |
| Operating cash flow | Not separately reported | $933,504 provided | $109,846 used |
Quarterly revenue fell 28.7% year over year; six-month revenue fell 26.9%. Management attributed the decline to ending business with low-margin customers. Gross margin improved in both comparison periods, which management attributed to cost controls. The six-month operating loss reflected higher operating expenses, particularly corporate general and administrative expense, including SEC reporting and professional fees. Six-month basic and diluted EPS was reported as $0.00.
Logistics generated 68.7% of quarterly revenue and 63.5% of six-month revenue. The six-month logistics gross margin rose to 22.8% from 15.0%; manufacturing’s rose to 8.4% from 5.3%. Logistics subcontracting costs increased as more shipments to destinations outside the company’s network were outsourced.
Financial position and liquidity
- At September 30, 2018, cash was $376,963; current assets were $3.244 million and current liabilities were $5.370 million, producing a $2.217 million working-capital deficit. Total equity was negative $1.005 million.
- Related-party amounts payable were $4.257 million, unsecured, non-interest-bearing and due on demand. The balance included $3.592 million due to CEO Zhida Hong.
- The company reported $160,168 of bank borrowings under a loan bearing 5.8% annual interest and due September 2019. It also disclosed an approximately $218,000 revolving credit line, unused at quarter-end.
- Operating cash flow was positive in the six-month cash flow statement, while cash generated by working-capital movements was substantial. The filing also says management needs additional capital and does not have adequate cash to meet short- or long-term objectives.
- Cash increased from $264,806 at March 31, 2018. Total assets declined to $4.365 million from $7.518 million.
Outlook, risks and other notable matters
- Management states that substantial doubt exists about the company’s ability to continue as a going concern. Continuing operations depend on generating profits and/or securing financing; there is no assurance that financing will be available on acceptable terms. Additional equity could dilute shareholders.
- The company planned to expand its logistics network, including adding approximately 20 logistics points in existing service cities in the third and fourth quarters of calendar 2018, with the aim of improving fiscal 2019 profit. Its supply-chain consulting service had no active clients; management cited more than 30 potential clients and planned a calendar 2018 launch. No quantified financial guidance was provided.
- Management identified PRC operating and regulatory conditions, RMB/U.S. dollar exchange-rate exposure, customer credit and collection risk, and reliance on suppliers and logistics subcontractors. Accounts receivable were $1.914 million, with no doubtful-account allowance; multiple customers represented at least 10% of receivables.
- Disclosure controls and procedures were concluded to be ineffective as of September 30, 2018. The company reported no material changes in internal control over financial reporting during the quarter.
- The filing reports a $454,659 goodwill impairment as of March 31, 2018 and no long-lived-asset impairment at September 30, 2018. It also reports a six-month foreign-currency translation gain of $124,067 in other comprehensive income.
- Future minimum lease payments under operating leases were $562,123 for fiscal 2019–2021. The company reported no pending legal proceedings known to it and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether operating cash flow is repeatable: the cash flow statement reports $933,504 provided, while working-capital movements materially affected the result.
- How the company will address the working-capital deficit, negative equity, on-demand related-party payables and stated going-concern uncertainty.
- Collection quality and concentration of receivables, particularly given the absence of an allowance for doubtful accounts.
- Whether margin improvements can persist as revenue declines and logistics subcontracting costs rise.
- Progress on the planned logistics expansion and consulting service, which had no active clients at the time of the filing.
- Remediation plans for ineffective disclosure controls and the basis for the disclosed goodwill impairment relative to reported goodwill balances.