Agape ATP Corp. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The unaudited consolidated statements cover the company’s health and wellness products and services business, primarily in Malaysia. Unless stated otherwise, amounts are U.S. dollars. The balance-sheet heading in the supplied filing text says “September 31,” an apparent date error; the filing elsewhere identifies September 30, 2021.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $201,284 | $1,413,063 | $806,850 | $2,936,925 |
| Gross profit / margin | $164,621 / 81.8% | $1,226,172 / 86.8% | $656,973 / 81.4% | $2,278,480 / 77.6% |
| Operating income (loss) | $(364,996) | $410,649 | $(1,116,503) | $297,325 |
| Net income (loss) | $(571,265) | $415,037 | $(1,547,140) | $270,527 |
| Operating cash flow | Not separately presented for the quarter | $(541,440) | $(743,670) |
- Q3 revenue fell 85.8% year over year; nine-month revenue fell 72.5%. Management primarily attributed the decline to Malaysian COVID-19 restrictions and disruption to operations.
- For the nine-month period, gross margin increased year over year, but management cautioned that comparison is affected by the shift from wholesale to retail after ASL was acquired in 2020. Q3 margin declined, which management linked partly to lower product margins intended to support sales.
- At September 30, cash and cash equivalents were $2.88 million, current assets $4.17 million, current liabilities $866,243, working capital $3.31 million, total assets $5.27 million, and total liabilities $983,906. Management said it expected sufficient resources for working capital needs over the next 12 months.
- Cash declined $636,923 in the first nine months. Investing activities used $3,970 and financing activities used $23,280; foreign exchange reduced cash by $68,233. The company reported no credit facilities and no interest paid.
- Total operating lease liabilities were $266,582. No other borrowings are reported in the supplied financial statements. Marketable securities were valued at $200,644, following a nine-month unrealized holding loss of $374,900.
Changes, outlook, and risks
- Compared with 2020, the company moved from profit to loss in both the quarter and nine-month period. The comparison is also affected by ASL’s contribution beginning April 1, 2020; 2021 includes a full nine months of ASL operations.
- Other notable nine-month items included a $121,598 provision for doubtful accounts relating to supplier prepayments considered unlikely to be recovered, and a $36,636 inventory write-down.
- The company gave no quantified revenue or earnings guidance. It said there was no assurance revenue would grow or remain at similar levels in 2021 and 2022, and that the financial effects of COVID-19 could not be reasonably estimated. It described possible demand, operating, and supply-chain disruption.
- A non-cancellable purchase contract carries minimum commitments totaling $4,336,875 through 2026 and thereafter. The filing says the vendor was unable to meet the commitment because of manufacturing delays.
- Management concluded internal control over financial reporting was ineffective and disclosed material weaknesses, including insufficient accounting expertise and staffing, inadequate segregation of duties and risk assessment, lack of internal audit, and deficiencies in system-change and data-access controls. Remediation plans included hiring a CFO, developing written procedures, and seeking external and tax support.
- Subsequent event: on November 11, 2021, a Labuan subsidiary formed a wellness joint venture, in which it holds 60%, to provide complementary health therapies.
- Other exposures include revenue concentration in Malaysia, reliance on a small number of suppliers, foreign-currency translation risk, and a reported $509,027 of uninsured bank deposits.
Important facts for investors to verify
- Whether sales and operations recovered after Malaysian restrictions eased, and whether the revenue decline continued after quarter-end.
- The recoverability of supplier prepayments and the status, enforceability, and financial implications of the $4.34 million purchase commitment given the vendor’s stated inability to meet it.
- The valuation and subsequent performance of the marketable securities underlying the $374,900 unrealized loss.
- Progress in remediating the disclosed material weaknesses and whether controls became effective.
- The terms, funding requirements, and expected contribution of the 60%-owned joint venture.
- The apparent “September 31” balance-sheet date error and any other inconsistencies in the filing’s reported figures.