Addentax Group Corp. — Form 10-Q Summary
Reporting period: Third quarter of fiscal 2022, with the quarter and nine-month periods ended December 31, 2021. The statements are unaudited and reported in U.S. dollars. The company operates in China across garment manufacturing, logistics, property management and subleasing, and epidemic-prevention supplies.
Financial performance and position
| Metric | Three months ended Dec. 31, 2021 | Nine months ended Dec. 31, 2021 |
|---|---|---|
| Revenue | $2.79 million, down 18.2% year over year | $9.84 million, down 53.2% |
| Gross profit (margin) | $468,000 (16.8%), versus $461,000 (13.5%) | $1.52 million (15.5%), versus a $1.76 million gross loss |
| Operating income (loss) | $(28,000), versus $(289,000) | $11,000, versus $(3.59) million |
| Net income (loss) | $12,000, versus $(304,000) | $123,000, versus $(3.56) million |
| Operating cash flow | Not separately presented in the supplied filing text | $384,000, versus $(3.78) million |
Quarterly revenue declined mainly because garment manufacturing revenue fell; growth in logistics and property subleasing partly offset the reduction. For the nine-month period, epidemic-supplies revenue fell to zero from $11.87 million, while garment revenue declined 52.0% to $2.49 million. Logistics revenue increased 13.1% to $4.14 million, and property-management/subleasing revenue rose to $3.20 million from $295,000.
At December 31, 2021, cash was $506,000, down from $1.85 million at March 31. Current assets were $4.83 million and current liabilities $9.43 million, a $4.60 million net current liability. Total liabilities were $13.04 million; total equity was a deficit of $22,000. Related-party amounts payable were $3.54 million and are unsecured, non-interest-bearing, and payable on demand. Operating lease liabilities totaled approximately $7.31 million, including $3.70 million current. A $157,000 bank loan was past due; the company reported that it could not renew the facility and was negotiating repayment terms.
Nine-month cash flow comprised $384,000 provided by operations, $176,000 used in investing, and $1.54 million used in financing. Financing included $5.34 million of repayments of related-party borrowings, partly offset by $3.80 million of proceeds from related parties. No stock issuance proceeds were reported for the 2021 period. Basic and diluted earnings per share were $0.00 for both the quarter and nine-month period.
Changes, outlook and key risks
- The prior-year comparison included substantial epidemic-prevention-supplies sales and a gross loss in that business; the company reported no such revenue in the current nine-month period because it did not obtain orders it considered profitable.
- Management attributed lower garment revenue to factory redecoration and reduced capacity, estimating recovery in early 2022. It also cited rising PRC wages and higher subcontracting costs as cost pressures.
- Management’s stated objectives include developing 20 additional logistics points during 2022 and raising shopping-mall store occupancy above 70%. These are objectives, not reported financial guidance.
- The filing states that substantial doubt exists about the company’s ability to continue as a going concern, citing recurring liquidity needs, net current liabilities, and a small equity deficit. Management expects to rely on operating cash flows and CEO support; the CEO indicated an intent and ability to provide additional equity financing if needed. The filing cautions that additional capital could dilute shareholders.
- COVID-19 and economic uncertainty in China affected operations; the company said it could not reasonably estimate the pandemic’s full financial impact. Other risks include customer concentration (one garment customer represented 24.8% of nine-month revenue), supplier and subcontractor reliance, foreign-exchange movements, and the scheduled increase in preferential PRC tax rates from 5%–15% to 25% beginning in 2023.
- Management concluded disclosure controls and procedures were ineffective, citing material weaknesses in internal control over financial reporting. No material control changes during the quarter were reported. Management reported no material pending legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the company can meet near-term obligations, including the overdue bank loan and demand-payable related-party balances, and whether promised CEO support is available and sufficient.
- Whether garment capacity recovered as expected and whether the company achieved its logistics expansion and store-occupancy objectives.
- Whether operating cash generation is sustainable, given reduced cash balances and substantial lease commitments.
- Whether the reported profit improvement can continue without epidemic-supplies sales, and how garment, logistics, and property margins develop.
- How management plans to remediate the material control weaknesses and improve disclosure controls.