10-Q/A: CXJ Group Reports Steep Revenue Decline, Internal Control Failures

CXJ Group Co., Limited filed an amended quarterly report revealing a significant revenue drop and ineffective disclosure controls, raising going concern doubts.

Summary

• Amended its Quarterly Report on Form 10-Q for the period ended November 30, 2024, at the request of the SEC, concluding that disclosure controls and procedures were not effective.
• Reported a net loss of $143,693 for the three months ended November 30, 2024, a significant decline from a net profit of $203,216 in the same period last year.
• Revenue for the three months ended November 30, 2024, plummeted by 88.3% to $100,875 from $866,366 in the prior year, primarily due to slow market activity in brand name administrative fees and sales of automotive products.
• For the six months ended November 30, 2024, revenue decreased by 84.3% to $215,257 from $1,370,883 in the previous year.
• The company has an accumulated deficit of $5,548,740 as of November 30, 2024, up from $5,363,480 as of May 31, 2024.
• Cash and cash equivalents stood at a mere $352 as of November 30, 2024, down from $2,521 as of May 31, 2024.
• Net cash used in operating activities for the six months ended November 30, 2024, was $397,664, an improvement from $542,850 used in the prior year, but still a significant outflow.
• Raised $369,728 through share issuances during the six months ended November 30, 2024, to Zhongxin Lei and Shiguo Wang.
• Recognized an impairment loss on intangible assets of $1,597 for the six months ended November 30, 2024, due to no projected undiscounted cash flow.

Sentiment

Score: 2

Explanation: The company faces severe financial distress with an 88% revenue drop, a shift from profit to loss, and critically low cash. The 'not effective' disclosure controls and material weaknesses in internal controls, explicitly requested by the SEC, highlight significant operational and governance failures. The going concern warning further underscores the precarious financial position.

Positives

• Net cash used in operating activities decreased to $397,664 for the six months ended November 30, 2024, from $542,850 in the prior year, indicating a reduced cash burn from operations.
• Net cash provided by financing activities significantly improved to $394,463 for the six months ended November 30, 2024, compared to cash used of $32,753 in the prior year, primarily due to share issuances.
• Total current assets increased slightly to $560,910 as of November 30, 2024, from $535,302 as of May 31, 2024.
• Total current liabilities decreased to $1,803,535 as of November 30, 2024, from $1,979,652 as of May 31, 2024.

Negatives

• Revenue for the three months ended November 30, 2024, decreased by $765,491 (88.3%) to $100,875 compared to $866,366 in the prior year.
• The company shifted from a net profit of $203,216 for the three months ended November 30, 2023, to a net loss of $143,693 for the same period in 2024.
• Gross profit for the three months ended November 30, 2024, decreased by $464,951 (87.7%) to $65,442 from $530,393 in the prior year.
• Cash and cash equivalents are critically low at $352 as of November 30, 2024.
• Accumulated deficit increased to $5,548,740 as of November 30, 2024.
• Disclosure controls and procedures were deemed 'not effective' as of November 30, 2024, following an SEC request.
• Identified material weaknesses in internal controls related to related party transactions, business combination accounting, and the lack of an audit committee financial expert.
• Recognized an impairment loss on intangible assets of $1,597 due to no projected undiscounted cash flow in the future.
• The company disposed of 51% equity of a subsidiary (Xishijie Automobile Industry Ecology Technology Co., Ltd) for RMB 1 yuan, incurring a loss on disposal of $25,229.

Risks

• Going Concern Uncertainty: The company's ability to continue as a going concern is dependent on improving profitability and increasing market share, with current cash of $352 being insufficient for daily operations.
• Ineffective Disclosure Controls and Procedures: Management concluded that disclosure controls and procedures were not effective as of November 30, 2024, increasing the risk of financial misstatements and regulatory scrutiny.
• Material Weaknesses in Internal Control Over Financial Reporting: Specific weaknesses include lack of procedures for related party transactions, inadequate controls for business combination accounting, and absence of an audit committee financial expert.
• Liquidity Risk: Critically low cash and cash equivalents ($352) and significant accumulated deficit ($5,548,740) pose substantial liquidity challenges.
• Market Activity Slowdown: Significant revenue decline attributed to 'slow market activity' in brand name administrative fees and sales of automotive products, indicating potential demand issues.
• Reliance on Related Party Financing: The company relies on advances from a major shareholder (Cuiyao Luo, CFO) and a director (Rudong Shi) for working capital, which are unsecured, interest-free, and payable on demand, posing a risk if these funds are withdrawn.
• Foreign Currency Exchange Risk: The majority of revenues and expenses are denominated in Renminbi (RMB), and there is no assurance that exchange rates between RMB and USD will remain stable.
• Uncertainty in PRC Laws and Regulations: Contractual arrangements with VIEs in China are subject to uncertainties in interpretation and enforcement of PRC laws, which could limit the company's ability to enforce these arrangements or consolidate the VIEs.
• Goodwill Impairment: The company has a significant goodwill balance of $1,742,577, which has been subject to substantial impairment charges in previous periods, indicating ongoing risk of further write-downs if operating results deteriorate.

Future Outlook

The company plans to extend its market share by acquiring quality businesses in the automotive aftermarket industries to increase its customer base, supply channels, skilled employees, and business connections. It also intends to further develop its online and offline marketing platforms and an internal enterprise resource planning (ERP) system by engaging an external IT company during 2025. The company aims to strategically diversify its existing product portfolio to offer a wider range of choices and broaden its customer base. A major shareholder has agreed to provide financial support, though management cannot provide assurances of success for any of these plans.

Management Comments

• "While the Company believes in the viability of its business strategy plans such as Flash Lion e-commerce sales model, Cloud chain (including Wechat, REDnote and Tik Toks short videos e-commerce sales model), and its ability to raise additional funds, there can be no assurance to that effect."
• "Management cannot provide any assurances that the Company will be successful in accomplishing any of its plans."
• "The Companys expected revenue increase has been slower than anticipated due to the time required to ramp up activity for new customers."
• "During its long-term planning process performed, the Company made adjustments to reduce its forecasted spend on HZ CXJ in 2025 and beyond, which further impacted expected revenue growth rates and their timing."

Industry Context

The company operates in the automotive aftermarket products trading and services business in the People's Republic of China. The significant revenue decline and slow market activity suggest a challenging environment within this specific segment or region, potentially indicating increased competition or reduced consumer spending on automotive products and services. The company's strategy to acquire quality businesses and develop e-commerce platforms aligns with broader industry trends of consolidation and digital transformation in the automotive aftermarket.

Management Changes

Corporate Governance

Related Party Transactions

• Amounts due from related parties totaled $81,903 as of November 30, 2024, including $300 from New Charles Technology Group Limited (controlled by Lixin Cai) and $81,603 from Hangzhou Xieli Internet Technology Co., Ltd (controlled by Cuiyao Luo).
• Amounts due to a related party, Cuiyao Luo (CFO & major shareholder), totaled $330,892 as of November 30, 2024, provided as unsecured, interest-free working capital, payable on demand.
• Amounts due to a director, Rudong Shi, totaled $9,530 as of November 30, 2024, provided as unsecured, interest-free working capital, payable on demand.

Stakeholder Impact

• Shareholders: Significant dilution risk from future capital raises, substantial losses, going concern uncertainty, and ineffective internal controls could lead to further share price depreciation and loss of investment.
• Employees: The company's precarious financial position and 'slow market activity' could lead to job insecurity or limited growth opportunities.
• Customers: Slow market activity and potential operational instability could impact service quality or product availability.
• Suppliers: Decreased purchasing activity and potential liquidity issues could affect payment timeliness.
• Creditors: The going concern warning and reliance on related party advances increase credit risk.
• Regulatory Authorities (SEC): The filing is an amendment requested by the SEC due to disclosure control issues, indicating heightened regulatory scrutiny.

Next Steps

• Engage an external IT company during 2025 to further develop online and offline marketing platforms and an internal enterprise resource planning (ERP) system.
• Extend market share through acquiring quality businesses in the automotive aftermarket industries.
• Diversify the existing product portfolio strategically.
• Address the identified material weaknesses in internal controls, including establishing procedures for related party transactions, improving business combination accounting, and appointing an audit committee financial expert.

Key Dates

Recommendation

The company exhibits severe financial distress with an 88% revenue decline, a shift from profit to significant loss, and critically low cash reserves ($352). The explicit "going concern" warning, coupled with management's admission of "not effective" disclosure controls and material weaknesses in internal financial reporting, signals profound operational and governance failures. While there was a capital raise, it was insufficient to address the underlying issues, and the company remains heavily reliant on related party financing. The overall picture points to a highly unstable and risky investment, making a strong sell recommendation appropriate for any seasoned investor or institution.

Keywords

Automotive aftermarket, SEC filing, 10-Q/A, Financial results, Internal controls, Going concern, China operations, Vehicle parts, Motor oil, Exhaust gas cleaner, Brand name management, Related party transactions, Share issuance, Liquidity, Corporate governance