Agape ATP Corp. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited consolidated financial statements are presented in U.S. dollars; comparisons are with Q1 2019 unless otherwise noted.
Business context
The company supplies health and wellness products and related advisory services, primarily in Malaysia. It relies on a single major customer and a major supplier; its products are produced by third parties. The filing attributes the quarter’s lack of product deliveries and sales to COVID-19 disruptions and lockdowns affecting supply and operations.
Key financial results
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $0 | $464,297 |
| Cost of revenue / gross profit | $0 / $0 | $420,178 / $44,119; gross margin about 9.5% |
| SG&A | $159,516 | $28,226; increase of $131,290, or about 465% |
| Other income (expenses), net | $(72,234) | $48,357 |
| Net income (loss) | $(231,750) | $71,215 |
| Operating cash flow | $(230,431) | $(358,320) |
| Investing cash flow | $70,173 | $0 |
| Cash decrease / ending cash | $(156,250) / $2,588,207 | Cash decrease $(361,517) / ending cash $3,091,400 |
Q1 2020 other expenses included a $74,618 net foreign-currency translation loss, an $18,538 unrealized loss on marketable securities, $18,129 interest income, and a $2,793 rebate from sundry purchases. SG&A growth was mainly attributed to higher professional fees and CEO travel expenses.
At March 31, 2020, total assets were $4,124,765, current assets $4,075,063, current liabilities $97,459, and working capital $3,977,604. Cash included $2,452,771 in time deposits. Total liabilities were $97,459; the filing reports no credit facilities and no financing cash flows. Stockholders’ equity was $4,027,306. Shares outstanding were 376,275,500 at quarter-end and May 11, 2020.
Material changes and notable items
- Revenue fell from $464,297 to zero as the company could not obtain deliveries from suppliers during COVID-19 disruptions. No purchases were recorded in Q1 2020.
- The company held $523,141 in receivables from its related-party customer at March 31, 2020; that customer represented 100% of receivables. The customer also accounted for all Q1 2019 revenue.
- Marketable securities were carried at $48,202, down from $66,484 at year-end, with an $18,538 unrealized holding loss recognized in Q1. Management cautioned that further investment impairments could occur if markets did not recover.
- On March 2, 2020, the company agreed to sell its Unreserved Sdn Bhd interest to its CEO/director for $730,637. It received $70,173, leaving $656,495 due from the director at quarter-end. The filing says this balance was settled in May as part of the consideration for a subsequent acquisition.
- On May 8, 2020, the company agreed to acquire approximately 99.99% of Agape Superior Living Sdn Bhd from its CEO/director for $1,714,003. Consideration included the $656,495 director receivable and issuance of 162,694 shares, valued in the filing at $1,057,508 using a $6.50 closing share price. Completion and transaction terms merit review as a related-party matter.
Outlook, risks, and contingencies
- Management said the COVID-19 financial impact could not be reasonably estimated, and gave no assurance that revenue would grow or remain at a similar level in the next three quarters of 2020. It expected any supplier delivery delays to be temporary, but acknowledged uncertainty.
- Management stated it believed liquidity was sufficient for working capital needs for 12 months from issuance of the report. This assessment should be weighed against the zero-revenue quarter, customer and supplier concentration, and contractual purchase commitments.
- Non-cancellable minimum purchase commitments totaled $5,377,725, including $693,900 annually for 2021–2025 and $1,908,225 thereafter. The filing says the vendor was unable to meet the minimum commitment because of manufacturing delays.
- The company decided not to extend its Hong Kong office tenancy; minimum remaining lease payments at March 31 were $7,862. No material active or pending legal proceedings were reported, and accrued or reasonably possible losses from claims were described as not material.
- Disclosure controls and procedures were assessed as ineffective because of material weaknesses: insufficient experienced accounting personnel, no functional internal audit function, and inadequate segregation of duties and risk assessment. Management described planned remediation, targeted at least partly for completion by year-end 2020.
- Key risks include COVID-19 and supply-chain disruption, dependence on one customer and one supplier, product and regulatory risks, foreign-exchange exposure, investment-value fluctuations, and reliance on the CEO. The filing says the company had no significant off-balance-sheet arrangements.
Important facts for investors to verify
- Whether supplier deliveries resumed, the company generated revenue after quarter-end, and the major customer relationship remained intact.
- The status and enforceability of the $5.38 million purchase commitments given the vendor’s stated inability to meet them.
- Completion, valuation, payment mechanics, and any governance review of the May related-party acquisition and share issuance.
- Collection or settlement of the related-party customer receivable and confirmation of the director receivable’s reported May settlement.
- Progress in remediating internal-control material weaknesses and any subsequent developments in liquidity or investment values.