Business context and reporting period
Addentax Group Corp. filed this unaudited Form 10-Q for the quarter ended September 30, 2017, covering the three- and six-month periods ended that date in its fiscal year ending March 31. The company, based in China, reported textile and garment manufacturing, logistics, and business consultancy operations. On September 25, 2017, it completed a share exchange that made Yingxi Industrial Chain Group Co., Ltd. its wholly owned subsidiary. The transaction was accounted for as a reverse acquisition, with Yingxi as the accounting acquirer; the company discontinued its prior heat-transfer business plan.
Financial performance and position
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Revenue | $3.73 million; up 53% | $8.05 million; up 36% |
| Gross profit and margin | $363,098; 9.7% versus 15.9% | $643,073; 8.0% versus 14.2% |
| Net income (loss) | $(15,279), versus $(13,506) | $(119,669), versus income of $51,371 |
| Operating cash flow | $14,755 for the six months, versus $307,378 |
At September 30, cash was $378,557. Current assets were $8.26 million and current liabilities were $9.91 million, yielding a working-capital deficit of $1.65 million, compared with a small surplus at March 31. Short-term, non-interest-bearing loans payable were $4.28 million, up from $1.63 million; amounts due to related parties were $2.61 million. Total liabilities exceeded assets by $1.02 million. The filing reports no cash paid for interest or income taxes during the six-month period.
Six-month investing cash outflow was $1.86 million, including $1.50 million for acquisition of a subsidiary and substantial lending and note-receivable activity. Financing provided $2.05 million, including $4.275 million of borrowings and repayments of loans and related-party loans. Cash increased by $201,644 to $378,557.
Material changes and management commentary
Revenue rose, but cost of revenue grew faster, increasing 46% for the six-month period. Management attributed higher costs partly to increased transportation tolls and third-party costs associated with new business; it said unprofitable new business reduced gross profit. Gross margin fell to 8% from 14%, and the company moved from prior-year six-month net income to a loss. General and administrative expenses declined modestly, which management attributed to reduced staffing.
The share exchange involved issuance of 500 million Addentax common shares to Yingxi shareholders. The company reported 506.92 million shares outstanding at September 30 and November 20, 2017. It disclosed no material subsequent events through approval of the financial statements.
Outlook, risks, and unusual items
Management stated that additional financing may be needed for operations, capital expenditures, and working capital through the fiscal year ending March 31, 2018, and planned to seek funds through public or private offerings. The filing says these conditions raise substantial doubt about the company’s ability to continue as a going concern; the interim statements include no adjustments for the outcome of that uncertainty. No quantified earnings or revenue guidance was provided.
Customer concentration is significant: five customers accounted for 53% of six-month revenue, and two customers represented 58% of accounts receivable at September 30. The company also reported material weaknesses in financial reporting controls, including no independent audit committee, inadequate cash controls and segregation of duties, and no formal data-backup/off-site storage procedures. Management concluded disclosure controls and internal control over financial reporting were ineffective. The company checked “No” to whether it had filed all required reports during the preceding 12 months.
The filing reports no material legal proceedings, no defaults upon senior securities, and no material off-balance-sheet arrangements. It states that no separate risk-factor disclosure was required because the company was a smaller reporting company.
Important facts for investors to verify
- Confirm the reverse-acquisition accounting, the share exchange terms, and the reported share count and ownership after issuance of 500 million shares.
- Assess collectability and recoverability of the $4.48 million accounts receivable and $1.61 million notes receivable, including the interest-free, unsecured loans with no fixed repayment terms.
- Evaluate the company’s ability to fund operations and address its working-capital deficit, short-term debt, and disclosed going-concern uncertainty.
- Seek updates on remediation of the disclosed material weaknesses and the company’s filing-compliance status.
- Monitor customer concentration and whether new business can improve gross margins rather than continue to dilute them.