Addentax Group Corp. — Form 10-Q Summary
Reporting period: First fiscal quarter ended June 30, 2017; unaudited. The company’s fiscal year ends March 31. The filing was signed August 29, 2017.
Business context
After a change in control in November 2016, Addentax discontinued its former heat-transfer printing business and reported no continuing operations generating revenue. Management said it was exploring other business opportunities. The company reported no subsidiaries.
Financial performance and liquidity
| Metric | Three months ended June 30, 2017 | Comparable 2016 period |
|---|---|---|
| Revenue from continuing operations | $0 | $0 |
| Operating expenses | $24,948 | $0 |
| Net loss | $24,948 | $21,281 |
| Cash used in operating activities | $24,665 | $7,430 |
| Cash provided by financing activities | $24,665 | $13,055 |
| Cash at period end | $0 | $15,677 |
2017 operating expenses included $22,414 of professional fees, a $2,500 OTC Market fee, and $34 in bank charges. The 2016 loss was from discontinued operations; those operations reported $3,000 revenue and $2,486 gross profit before expenses.
At June 30, 2017, total assets were $5,831, comprising prepaid expenses. Current liabilities were $44,382, including $43,987 due to a related party; there was no cash balance. Working capital deficit was $38,551, versus $13,603 at March 31, 2017. Stockholders’ deficit was $38,551. No interest or taxes were paid, and the filing reports no investing cash flows. Profit margins are not meaningful given the absence of continuing-operations revenue.
Changes, outlook, risks and unusual items
- Net loss increased by $3,667 from the prior-year quarter, reflecting $24,948 of current-period continuing-operations expenses; the prior-year loss related to discontinued operations.
- Operating cash needs were funded by $24,665 in advances from an officer/director. These advances are unsecured, non-interest-bearing, due on demand, and not supported by a formal written commitment for continued support.
- Management stated that it planned to seek additional funding through public or private equity offerings. The company warned that financing may be insufficient for its needs through the year ending March 31, 2018. The filing says these conditions raise substantial doubt about the company’s ability to continue as a going concern; the statements include no adjustments for that uncertainty.
- The company disclosed an agreement to acquire all shares and assets of Yingxi Industrial Chain Group Co., Ltd. for 500 million Addentax shares, with completion stated as expected in September 2017. The filing also reports 500 million shares issued and held as treasury stock at June 30, while reporting 6.92 million shares outstanding as of August 25. The transaction’s status and share treatment are important to verify.
- Management concluded disclosure controls and internal control over financial reporting were ineffective, citing no audit committee or independent financial expert, inadequate cash controls, and insufficient formal data-backup and off-site-storage procedures. No material control changes occurred during the quarter.
- The company reported no material legal proceedings and no unregistered equity sales during the quarter. It did not provide Item 1A risk-factor disclosure, citing its smaller-reporting-company status.
Important facts for investors to verify
- Whether the Yingxi acquisition closed, its final consideration, and the resulting fully diluted share count; clarify the reported 500 million treasury shares and 6.92 million shares outstanding.
- Whether the company obtained financing after quarter-end and can meet near-term obligations, particularly the related-party balance due on demand.
- Whether continuing operations, revenues, or a defined business plan were established after the quarter, and whether going-concern uncertainty remains.
- Whether management addressed the disclosed material weaknesses and strengthened financial reporting controls.