Agape ATP Corp. — Form 10-Q Summary
Business and period: The company sells health and wellness products and provides related advisory services, primarily in Malaysia, through subsidiaries. This unaudited report covers the quarter ended September 30, 2019; results are compared with the quarter ended September 30, 2018. Amounts are in U.S. dollars.
Key financial metrics
| Metric | Quarter ended Sep. 30, 2019 | Quarter ended Sep. 30, 2018 |
|---|---|---|
| Revenue | $236,736 | $415,367 |
| Cost of revenue | $210,383 | $378,423 |
| Gross profit / margin | $26,353 / 11.1% | $36,944 / 8.9% |
| Other income | $19,865 | $1,621 |
| SG&A and operating expenses | $144,282 | $118,618 |
| Net loss | $(98,064) | $(135,866) |
| Comprehensive loss | $(101,372) | $(135,866) |
| Net loss per share, basic and diluted | $(0.00) | $(0.00) |
Revenue fell about 43% year over year. Gross margin improved, but gross profit declined as sales contracted and operating expenses increased. Net loss narrowed, partly because the prior-year quarter included a $52,109 share of investee loss and $3,704 of tax expense; the company reported neither in 2019. Management attributed 2019 other income mainly to interest on time deposits, and operating expenses mainly to unrealized foreign-exchange losses, rent, and professional accounting fees.
At September 30, 2019, cash and cash equivalents were $2,753,080, current assets $3,745,914, current liabilities $127,218, and working capital $3,618,696. Total assets were $4,606,199 and total liabilities $127,218; the balance sheet reports no borrowings. Cash declined $104,507 during the quarter. The cash-flow statement reports $101,199 of operating cash used; MD&A reports $107,765. No investing or financing cash flows were reported. No credit facilities are available. Management said additional capital may be needed and financing may not be obtainable when required.
Investments included $134,166 in marketable securities, net of a $366,834 impairment, and $726,119 in non-marketable securities. Trade receivables were $628,583, up from $511,610 at June 30, 2019.
Material changes and notable items
- Revenue decreased from $415,367 to $236,736. The 2019 quarter’s entire revenue and receivables balance came from one customer, identified as a related party controlled by the CEO.
- All reported 2019 purchases, $210,383, were from one vendor. The filing identifies reliance on this customer and supplier as material business risks.
- Cash from operations shifted from $307,005 provided in the prior-year quarter to cash used in 2019. The filing attributes the current-period use mainly to funding receivables.
- Unreserved Sdn Bhd’s ownership dilution in March 2019 reduced the company’s interest from 20% to 17.86%; the company discontinued equity-method accounting and reclassified the investment.
- There were 376,275,500 common shares outstanding as of November 8, 2019. The equity statement instead shows 376,275,600 shares, an inconsistency to verify.
Outlook, risks, and controls
The filing provides no quantified revenue or earnings guidance. Management said it may evaluate additional health products and skin- and hair-care offerings, but cautioned that current operations may not generate enough revenue to fund operations or planned growth. It may seek equity or debt financing, bank loans, or revolving credit, but has no credit facilities and cannot assure financing will be available.
Key disclosed risks include customer and supplier concentration, possible disruption or termination of supply, changing consumer preferences, product quality and liability claims, regulation of health products, foreign-exchange exposure, competition, and dependence on the CEO. The company reported no material pending legal proceedings and no subsequent event requiring disclosure.
Management concluded that disclosure controls and internal control over financial reporting were not effective as of September 30, 2019. The identified material weakness was inadequate segregation of duties and risk assessment, creating a risk that errors or material misstatements may not be prevented or detected timely. Planned remediation includes adding accounting and management personnel and segregating responsibilities; management anticipated at least partial implementation by fiscal year-end 2020.
Investor verification priorities
- Reconcile operating cash used: $101,199 in the cash-flow statement versus $107,765 in MD&A.
- Confirm the correct share count: 376,275,500 in the balance sheet and cover page versus 376,275,600 in the equity statement.
- Assess collection of the $628,583 receivable and the company’s exposure to its single related-party customer.
- Review the continuity and terms of the sole-source supplier relationship and the availability of replacement products.
- Evaluate the adequacy and timing of internal-control remediation and whether additional financing will be required.