Addentax(US:ATXG)2022-02-13 16:00markdown PART I – FINANCIAL INFORMATION [Financial Statements (Unaudited)](index=4&type=section&id=Item%201.%20Financial%20Statements%20%28Unaudited%29) Unaudited financial statements for the nine months ended December 31, 2021, show net income from cost reductions, despite asset declines and substantial going concern doubt [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Balance Sheet Summary (as of Dec 31, 2021 vs. Mar 31, 2021) | Metric | December 31, 2021 | March 31, 2021 | | :--- | :--- | :--- | | **Total Current Assets** | $4,827,884 | $7,997,482 | | **Total Assets** | $13,014,718 | $18,424,084 | | **Total Current Liabilities** | $9,430,568 | $12,428,415 | | **Total Liabilities** | $13,036,526 | $18,505,582 | | **Total Equity (Deficit)** | ($21,808) | ($81,498) | - The company's financial position shows a decrease in both **total assets** and **total liabilities** from March 31, 2021, to December 31, 2021 Notably, **cash and cash equivalents** decreased from **$1.85 million** to **$0.51 million**[10](index=10&type=chunk) [Condensed Consolidated Statements of Operations and Comprehensive Loss](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Loss) Statement of Operations Summary (Nine months ended Dec 31) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | **Revenues** | $9,835,733 | $21,014,064 | | **Cost of Revenues** | ($8,314,149) | ($22,776,087) | | **Gross Profit (Loss)** | $1,521,584 | ($1,762,023) | | **Income (Loss) from Operations** | $10,761 | ($3,593,015) | | **Net Income (Loss)** | $122,587 | ($3,560,206) | | **Basic and Diluted EPS** | $0.00 | ($0.14) | - For the nine months ended December 31, 2021, the company's revenue decreased by over **50%** year-over-year However, a **significant reduction** in the **cost of revenues** led to a swing from a **gross loss** in 2020 to a **gross profit** in 2021, resulting in a **net income** of **$122,587** compared to a **net loss** of **$3.56 million** in the prior year[11](index=11&type=chunk)[14](index=14&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Cash Flow Summary (Nine months ended Dec 31) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | **Net cash provided by (used in) operating activities** | $383,825 | ($3,782,116) | | **Net cash used in investing activities** | ($176,268) | ($1,094,344) | | **Net cash (used in) provided by financing activities** | ($1,543,573) | $4,718,213 | | **Net (Decrease) Increase in Cash** | ($1,336,016) | ($158,247) | - **Cash flow from operations** turned positive in the nine months ended Dec 31, 2021, a **significant improvement** from a large cash use in the prior year However, **financing activities** resulted in a **net cash outflow** of **$1.54 million**, a reversal from a **large inflow** in 2020, contributing to an overall decrease in **cash and cash equivalents**[18](index=18&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) - The company operates in four segments: garment manufacturing, logistics services, property leasing, and **epidemic prevention supplies**, primarily in the PRC[21](index=21&type=chunk)[51](index=51&type=chunk) - There is **substantial doubt** about the company's ability to continue as a **going concern** due to a **net current liability** of **$4.6 million** and a **total equity deficit** of **$21,808** as of December 31, 2021 The company is dependent on financial support from its CEO[26](index=26&type=chunk)[28](index=28&type=chunk) - As of December 31, 2021, the company had **significant related party borrowings** of **$3.54 million**, with **$3.21 million** due to the CEO, Zhida Hong These borrowings are **unsecured**, **non-interest bearing**, and **repayable on demand**[34](index=34&type=chunk)[35](index=35&type=chunk) Segment Revenue (Nine months ended Dec 31, 2021) | Segment | Revenue from External Customers | | :--- | :--- | | Garment manufacturing | $2,488,173 | | Logistics Services | $4,144,604 | | Property management and leasing | $3,202,956 | | Epidemic prevention supplies | $0 | | **Total** | **$9,835,733** | - For the nine months ended December 31, 2021, one customer in the garment segment accounted for **24.8%** of total revenue The company also has **high supplier concentration** in its segments[66](index=66&type=chunk)[68](index=68&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=20&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management attributes the **53.2% revenue decrease** to discontinued epidemic supplies, offset by other segment growth, resulting in **net income** despite lower revenue, but highlights ongoing **going concern uncertainties** [Business Overview](index=20&type=section&id=Business%20Overview) - The company operates through four business segments: Garment manufacturing, Logistics services, Property management and subleasing, and **Epidemic prevention supplies**[73](index=73&type=chunk) - Business objectives include expanding the customer base in garment manufacturing, establishing a nationwide delivery network for logistics, and increasing the occupancy rate to over **70%** for the property management business[78](index=78&type=chunk)[79](index=79&type=chunk) [Results of Operations for the three months ended December 31, 2021 and 2020](index=23&type=section&id=Results%20of%20Operations%20for%20the%20three%20months%20ended%20December%2031%2C%202021%20and%202020) Q3 Performance Summary (Three months ended Dec 31) | Metric | 2021 | 2020 | Change (%) | | :--- | :--- | :--- | :--- | | **Revenue** | $2,791,470 | $3,411,552 | (18.2)% | | **Gross Profit** | $467,754 | $461,428 | 1.4% | | **Loss from Operations** | ($27,676) | ($288,526) | 90.4% | | **Net Income (Loss)** | $11,619 | ($303,581) | 103.8% | - The **18.2% decrease** in Q3 2021 revenue was mainly due to a **$2.3 million** drop in the garment manufacturing business because of **factory re-decoration** This was partially offset by growth in logistics and property management services[98](index=98&type=chunk)[100](index=100&type=chunk) - The company shifted from a **net loss** of **$0.3 million** in Q3 2020 to a **net income** of **$11,619** in Q3 2021, driven by a **significant reduction** in **operating expenses**, particularly **selling expenses** which fell by **80.2%**[98](index=98&type=chunk)[112](index=112&type=chunk)[113](index=113&type=chunk) [Results of Operations for the nine months ended December 31, 2021 and 2020](index=30&type=section&id=Results%20of%20Operations%20for%20the%20nine%20months%20ended%20December%2031%2C%202021%20and%202020) Nine-Month Performance Summary (ended Dec 31) | Metric | 2021 | 2020 | Change (%) | | :--- | :--- | :--- | :--- | | **Revenue** | $9,835,733 | $21,014,064 | (53.2)% | | **Gross Profit (Loss)** | $1,521,584 | ($1,762,023) | (186.4)% | | **Income (Loss) from Operations** | $10,761 | ($3,593,015) | 100.3% | | **Net Income (Loss)** | $122,587 | ($3,560,206) | 103.4% | - The **significant 53.2% revenue decrease** for the nine-month period was primarily because there was **no revenue** from the **epidemic prevention supplies business**, which had contributed **$11.9 million** (**56.5%** of total) in the same period of 2020[124](index=124&type=chunk)[127](index=127&type=chunk) - Despite the **revenue drop**, the company turned a **$3.6 million net loss** in the first nine months of 2020 into a **$0.1 million net income** in 2021 This was driven by the elimination of the high-cost, loss-making epidemic supplies business and **improved profitability** in logistics and property management[123](index=123&type=chunk)[140](index=140&type=chunk)[143](index=143&type=chunk) [Financial Condition, Liquidity and Capital Resources](index=34&type=section&id=Financial%20Condition%2C%20Liquidity%20and%20Capital%20Resources) - As of December 31, 2021, the company had approximately **$0.5 million** in cash, **$4.8 million** in **total current assets**, and **$9.5 million** in **current liabilities**, indicating a **significant working capital deficit**[150](index=150&type=chunk) - The company's financial condition raises **substantial doubt** about its ability to continue as a **going concern** It relies on **cash flow from operations** and **capital contributions** from the CEO to finance operations and meet obligations[150](index=150&type=chunk) - **Net cash from financing activities** saw a **$6.2 million negative swing**, from a **$4.7 million inflow** in 2020 to a **$1.5 million outflow** in 2021, mainly because there were no proceeds from stock issuance and an increase in net repayment of **related party borrowings**[145](index=145&type=chunk)[149](index=149&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=37&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section is not applicable as the company qualifies as a smaller reporting company - The company is **not required** to provide **quantitative and qualitative disclosures about market risk** because it is a smaller reporting company[155](index=155&type=chunk) [Controls and Procedures](index=37&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded disclosure controls were ineffective as of December 31, 2021, due to **material weaknesses** in **internal financial reporting controls**, with no material changes reported - An evaluation by management concluded that the company's **disclosure controls and procedures** were **not effective** as of December 31, 2021[157](index=157&type=chunk) - There were no changes in the company's **internal control over financial reporting** during the quarter that materially affected, or are reasonably likely to materially affect, these controls[158](index=158&type=chunk) PART II – OTHER INFORMATION [Legal Proceedings](index=38&type=section&id=Item%201.%20Legal%20Proceedings) The company is not currently a party to any legal proceedings that would materially affect its business, financial condition, or operations - The company reports **no material legal proceedings**[160](index=160&type=chunk) [Risk Factors](index=38&type=section&id=Item%201A.%20Risk%20Factors) As a smaller reporting company, Addentax Group Corp. is not required to provide information for this item - Disclosure of **risk factors** is **not required** as the company is a smaller reporting company[161](index=161&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=38&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities during the period - **None reported**[161](index=161&type=chunk) [Defaults Upon Senior Securities](index=38&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reported no defaults upon senior securities - **None reported**[161](index=161&type=chunk) [Other Information](index=38&type=section&id=Item%205.%20Other%20Information) There is no other information required to be disclosed that was not previously reported - **No other information to disclose**[161](index=161&type=chunk) [Exhibits](index=38&type=section&id=Item%206.%20Exhibits) The report includes certifications by the Principal Executive and Financial Officers, along with Interactive Data Files (XBRL) - Exhibits filed with this report include Section 302 and 906 **certifications** and the **Interactive Data File (XBRL)**[162](index=162&type=chunk)