Agape ATP Corp. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2023. The interim financial statements are unaudited and presented in U.S. dollars. Agape ATP sells health and wellness products and provides related advisory and complementary health therapy services, primarily in Malaysia.
Financial performance and position
| Metric | Three months ended June 30, 2023 | Six months ended June 30, 2023 | Comparable 2022 period |
|---|---|---|---|
| Revenue | $303,935 | $684,703 | $396,707 quarter; $805,667 six months |
| Gross profit / margin | $196,004 / 64.5% | $448,414 / 65.5% | $287,324 / 72.4% quarter; $622,853 / 77.3% six months |
| Operating expenses | $555,537 | $1,261,831 | $593,507 quarter; $1,201,268 six months |
| Loss from operations | $359,533 | $813,417 | $306,183 quarter; $578,415 six months |
| Net loss | $379,449 | $813,524 | $404,344 quarter; $702,790 six months |
| Net loss attributable to Agape | $374,686 | $800,526 | $414,900 quarter; $713,997 six months |
| Operating cash flow | Not presented by quarter | $(742,175) | $(495,727) six months |
- Quarterly revenue fell 23.4% year over year; six-month revenue fell 15.0%. Six-month net loss widened by $110,734, while quarterly net loss narrowed by $24,895.
- At June 30, cash and cash equivalents were $653,754, down from $1,438,430 at December 31, 2022. Six-month cash usage was $784,676, including $742,175 used in operations, $6,499 used in investing, and $22,861 used for deferred offering costs; exchange-rate effects reduced cash by $13,141.
- Current assets were $941,436 and current liabilities were $968,329, producing a working-capital deficit of approximately $26,900. Total assets were $1.91 million, total liabilities $1.15 million, and total equity $750,654.
- The filing reports no credit facilities or other access to bank credit. Operating lease liabilities totaled $284,988, including $98,688 current and $186,300 non-current. The company also disclosed $16,020 of minimum payments on short-term leases.
- Quarter-end cash included $397,809 of bank deposits not covered by deposit insurance. The filing also identifies $1,146 of VIE cash that may only settle that entity’s obligations.
Material changes and operating trends
- For the six months, network-marketing revenue declined 58.9% to $229,521, while complementary health therapy revenue increased 84.0% to $455,182. In the second quarter, network-marketing revenue was $90,662, down 50.9%; therapy revenue was $213,273, approximately flat year over year.
- Management attributed weaker network-marketing sales to distributors and members curtailing purchases while awaiting a new product range; the product launch was delayed. The therapy business, which began in February 2022, partly offset the decline.
- Gross margin fell for both the quarter and six-month period, which management attributed primarily to the lower margins of complementary health therapies relative to network-marketing products.
- Six-month general and administrative expense rose 28.3% to $1,065,723, attributed mainly to therapy operations and expenses for the proposed Nasdaq uplisting. Selling and commission expenses declined.
- Six-month other expense, net, was $6,762, versus $115,695 in 2022, reflecting lower foreign-exchange losses and a gain on marketable securities; the company still recorded a $34,576 six-month foreign-exchange loss.
Outlook, risks, and unusual items
- Going concern: Management concluded substantial doubt exists about the company’s ability to continue as a going concern and stated it probably will not have sufficient funds to meet working-capital needs and obligations as they come due over the year following the filing. It cited recurring losses, a $5.75 million accumulated deficit, a working-capital deficit, and a slower-than-expected distributor recovery. Failure to raise funds or generate sufficient revenue could require the company to curtail or cease operations.
- Potential funding sources include equity financing in connection with a proposed second Nasdaq listing, bank or other debt financing, and related-party support or credit guarantees. The filing provides no assurance these sources will be available or that the listing will proceed successfully. It states the company has no current credit facilities.
- Management expects revenue to return to pre-pandemic levels but gives no quantified revenue, earnings, or cash-flow guidance. It also discusses possible expansion into Thailand, Indonesia, and Taiwan, including through e-commerce.
- Substantially all revenue is concentrated in Malaysia. The company warns of risks from weak consumer purchasing power, epidemic-related disruption, supply-chain or delivery interruptions, and foreign-currency movements. It has not hedged foreign-exchange exposure.
- The company reported a $75,000 tax penalty within accrued liabilities. It reported no material pending legal proceedings and stated legal claims were not material to the financial statements.
- Related-party activity includes product purchases from entities associated with a DSY Wellness director and IT services and other transactions involving companies connected to executives or directors. Three vendors represented 87.3% of six-month purchases; two vendors represented 90.1% of accounts payable at June 30.
- Disclosure controls and internal control over financial reporting were deemed ineffective due to material weaknesses involving accounting staffing and expertise, lack of an internal audit function, and inadequate IT controls. Management described remediation plans and expected at least partial implementation by the end of 2023.
Key facts for investors to verify
- Whether the proposed Nasdaq listing and related equity financing advance, and what proceeds and dilution may result.
- Cash burn, access to financing, and the company’s ability to meet obligations given the going-concern warning and working-capital deficit.
- Timing and commercial performance of the delayed product launch, and whether network-marketing sales recover.
- Growth, margins, and cash generation in complementary health therapies, which made up about two-thirds of six-month revenue.
- Concentration in major suppliers, related-party purchasing and services, and the uninsured portion of cash deposits.
- Progress in remediating internal-control weaknesses and the status of the $75,000 tax penalty.
- Common shares outstanding were 75,452,012 as of August 11, 2023; verify subsequent share-count changes and any financing terms.