Agape ATP Corp — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited consolidated results are reported in U.S. dollars. Agape sells health and wellness products and services, primarily in Malaysia, including complementary health therapies through its 60%-owned joint venture.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $396,707 | $303,786 | $805,667 | $605,566 |
| Gross profit | $287,324 | $268,163 | $622,853 | $492,352 |
| Gross margin | 72.4% | 88.3% | 77.3% | 81.3% |
| Operating loss | $306,183 | $408,997 | $578,415 | $751,507 |
| Net loss | $404,344 | $642,225 | $702,790 | $975,875 |
| Net loss attributable to Agape | $414,900 | $642,225 | $713,997 | $975,875 |
- Revenue grew 30.6% in Q2 and 33.0% in the first half, driven mainly by complementary health therapies. In Q2, that business contributed about 54% of revenue; product sales were $366,635 and health and wellness services were $30,072.
- Gross margin declined as complementary therapies carried lower margins than the network-marketing business. Operating expenses were $593,507 in Q2 and $1,201,268 for the first half; first-half G&A rose 14.7% year over year.
- Other expenses included first-half foreign-exchange losses of $83,883 and unrealized marketable-securities losses of $52,889. The comparable 2021 period had a larger unrealized securities loss of $165,731.
- Cash and cash equivalents were $1.807 million at June 30, down from $2.598 million at December 31, 2021. First-half operating cash use was $493,326; investing cash use was $750; financing cash use was $178,926, principally deferred offering costs. The total cash decrease was $790,411, including a $117,409 adverse exchange-rate effect.
- Working capital was $1.753 million; current assets were $2.678 million and current liabilities $924,469 (about 2.9 times current liabilities). Total liabilities were $953,256. The filing reports no credit facilities or bank-credit access; operating lease liabilities totaled $161,385.
Changes, outlook and risks
- Management attributed revenue growth and higher cost of revenue and G&A partly to the launch of complementary health therapies. Net losses narrowed year over year, but the company remained loss-making and used operating cash.
- On January 20, 2022, CEO How Kok Choong agreed to forfeit 215,008,035 common shares, reducing shares outstanding from 290,460,047 at year-end 2021 to 75,452,012 at June 30. The company stated the forfeiture did not affect liquidity.
- Management expects revenue to return to pre-pandemic levels and anticipates growth from newer health and wellness activities. It believes resources should cover foreseeable requirements, but acknowledges this depends on successful execution; possible funding sources if cash proves insufficient include Malaysian lenders and related parties or shareholders. No quantified revenue or earnings guidance is provided.
- Substantially all revenue is concentrated in Malaysia. The company cites potential COVID-19-related demand, supply-chain and logistics disruption, and notes that future pandemic effects cannot be reasonably estimated. It also identifies foreign-exchange exposure and vendor concentration; in Q2 three vendors represented about 70%, 11% and 17% of purchases, and one related vendor represented 40% of accounts payable.
- Disclosure controls and internal control over financial reporting were deemed ineffective due to material weaknesses, including insufficient accounting expertise and staffing, inadequate segregation of duties and internal audit, and deficiencies in system access, audit-log, change-management, vendor-oversight and U.S. tax controls. Management described remediation plans, targeting at least partial implementation by year-end 2022.
- Other items: no material pending legal proceedings were reported. A July 2022 Greenpro Capital Corp. 10-for-1 reverse split affected the share count, but not the reported June 30 value, of Agape’s Greenpro investment.
Important facts for investors to verify
- Whether growth and margins in complementary therapies can be sustained, and whether the segment’s lower gross margin persists.
- Cash-burn trajectory, the timing and availability of funding, and management’s assumptions supporting its liquidity outlook.
- Progress in remediating the disclosed material weaknesses and whether accounting, tax and IT controls become effective.
- Exposure to concentrated suppliers and related-party purchases, including the terms and ongoing scale of those transactions.
- The filing gives inconsistent 2021 first-half inventory write-down amounts: the financial-statement note reports $36,636, while MD&A cites $36,809.