Agape ATP Corp. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited results are reported in U.S. dollars. The company sells health and wellness products and related advisory programs, primarily in Malaysia.
Business context
In 2020, Agape acquired approximately 99.99% of Agape Superior Living Sdn. Bhd. (ASL), a Malaysian health-products seller with an established network-marketing channel. The acquisition materially changed the revenue mix and makes comparisons with 2019 less representative: prior-period sales were largely wholesale sales to a related party, while 2020 includes ASL retail and network-channel sales. The filing describes the acquisition agreement as entered May 8, while its accounting discussion says ASL was consolidated from April 1 due to common control.
Key financial results
| Metric | Three months ended June 30, 2020 | Six months ended June 30, 2020 | Comparable 2019 period |
|---|---|---|---|
| Revenue | $1.524 million | $1.524 million | $396,472 for quarter; $860,769 for six months |
| Gross profit (margin) | $1.052 million (69.1%) | $1.052 million (69.1%) | Quarter: loss of $700 (about -0.2%); six months: $43,419 (5.0%) |
| Operating income (loss) | $46,192 | ($113,324) | Quarter: ($59,938); six months: ($48,205) |
| Net income (loss) | $87,240 | ($144,510) | Quarter: ($448,411); six months: ($377,196) |
| Operating cash flow | ($780,664) for six months | ($590,473) for six months |
- Quarterly revenue rose year over year, while six-month revenue also increased; management attributes the change principally to ASL’s sales channel. Six-month operating loss widened despite higher gross profit, reflecting increased selling, commission, and general and administrative expenses.
- Q2 other income, net, was $175,115, including a $145,204 unrealized gain on marketable securities. Six-month other income, net, was $102,881, including a $126,666 unrealized gain. These gains are non-cash and affected reported earnings.
- At June 30, cash and cash equivalents were $3.428 million, total current assets $5.909 million, current liabilities $1.594 million, and working capital $4.315 million. Cash includes $18,680 held in the consolidated VIE and available only for its obligations.
- Total assets were $7.092 million, total liabilities $1.892 million, and stockholders’ equity $5.200 million. The filing reports no credit facilities or bank-credit access. Lease liabilities totaled $433,100, including current and non-current portions; no conventional borrowings are reported.
- Operating cash outflow included a $712,749 reduction in customer deposits and an increase in receivables. Investing cash inflow of $1.281 million primarily reflected $1.211 million of cash acquired with ASL. Financing cash inflow was $140,837.
Material changes, outlook and risks
- ASL’s acquisition brought new retail and distributor commissions, employees, premises, and operating costs. Q2 commission expense was $382,498; six-month general and administrative expense increased to $673,778 from $83,778 in 2019, largely due to professional fees and ASL-related expenses.
- The company recognized $61,368 of forfeited coupon income in the quarter and six-month period. It reported $661,900 of product sales contracts expected to be fulfilled within 12 months.
- Management said it believes liquidity is sufficient for working-capital needs over the next 12 months. It provided no quantified revenue or earnings guidance and cautioned that 2020 revenue may not grow or remain at a similar year-over-year level.
- COVID-19 restrictions in Malaysia, where substantially all revenue is concentrated, could affect demand, operations, collections, and supply. Management said the financial impact could not be reasonably estimated and noted possible product-delivery delays.
- A single vendor represented 100% of purchases in the 2020 six-month period. A non-cancellable purchase commitment totals $5.204 million, but the vendor was unable to meet the minimum commitment as of the report date due to manufacturing delays.
- Other risks include dependence on a major supplier, product safety and regulatory compliance, foreign-exchange movements, customer and supplier concentration, and reliance on CEO How Kok Choong. The company disclosed related-party transactions, including the ASL acquisition from its CEO.
- Management concluded disclosure controls were not effective at June 30 because of material weaknesses involving accounting expertise and staffing, lack of an internal audit function, and inadequate segregation of duties and risk assessment. Remediation plans included written procedures, external consulting, and establishing an internal audit function; management anticipated at least partial implementation by year-end 2020.
- The company reported no material pending legal proceedings and no significant off-balance-sheet arrangements. It had 376,452,047 common shares outstanding at August 10, 2020; the ASL acquisition included stock issuance.
Important facts for investors to verify
- Acquisition accounting and related-party terms: reconcile the April 1 consolidation date, May 8 agreement date, purchase consideration, and the reported number and valuation of shares issued.
- Whether the major supplier can resume deliveries and meet the $5.204 million purchase commitment, and the potential impact on inventory, customer fulfillment, and cash needs.
- Collection and quality of receivables, including the filing’s concentration of 97.4% of accounts receivable with a third-party e-commerce company, and the absence of a doubtful-account allowance.
- Sustainability of reported margins and earnings after separating ASL’s operations, coupon forfeitures, and unrealized securities gains from recurring performance.
- Progress in remediating internal-control material weaknesses and any subsequent changes in the controls environment.
- Effects of COVID-19, Malaysia market concentration, and foreign-exchange movements on demand, supply, and operating results.