Agape ATP Corp — Q2 2021 Form 10-Q
Business context and reporting period
Unaudited results for the three and six months ended June 30, 2021. Agape sells health and wellness products and provides related advisory and wellness services, primarily in Malaysia, through subsidiaries and a consolidated variable interest entity. The company attributes the period’s operating disruption mainly to COVID-19 restrictions and lockdowns in Malaysia.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $303,786 | $1,523,862 | $605,566 | $1,523,862 |
| Gross profit | $268,163 | $1,052,308 | $492,352 | $1,052,308 |
| Gross margin | 88.3% | 69.1% | 81.3% | 69.1% |
| Operating income (loss) | $(408,997) | $46,192 | $(751,507) | $(113,324) |
| Net income (loss) | $(642,225) | $87,240 | $(975,875) | $(144,510) |
| Operating cash flow | Not presented by quarter | $(134,748) | $(780,664) |
At June 30, 2021, cash and cash equivalents were $3.30 million, current assets $4.61 million, working capital $3.75 million, total liabilities $1.02 million, and stockholders’ equity $4.87 million. Cash includes $23,526 held in the consolidated VIE and restricted to its obligations. The company reported no credit facilities; disclosed liabilities are principally operating leases, with $306,608 present value of lease obligations. Management said available resources should fund working capital needs for the next 12 months.
Cash declined $216,800 in the first half. Investing cash use was $1,220 and financing cash use was $16,588. No interest was paid. The filing reports no significant off-balance-sheet arrangements.
Material changes versus prior comparable periods
- Revenue fell 80.1% year over year in Q2 and 60.3% for the first half. Management linked the decline to lockdown-related disruption and weaker consumer purchasing power.
- First-half net loss widened to $975,875 from $144,510. Q2 shifted from $87,240 net income to a $642,225 net loss.
- Gross margins increased, which management attributed to a greater share of products sourced locally and, for the six-month comparison, the shift from wholesale to retail sales. The first-half comparison is not fully like-for-like: ASL contributed only from April 2020 in the prior-year period but throughout 2021.
- Q2 operating expenses included a $121,686 provision for doubtful prepayments to a supplier, which management said had been outstanding for over a year and was considered unlikely to be recovered. First-half results also included a $165,731 unrealized loss on marketable securities; the comparable 2020 period recorded a $126,666 unrealized gain.
Outlook, risks, contingencies and unusual items
- No quantified revenue or earnings guidance was provided. Management cautioned that revenue may not grow or remain at a similar level in the remainder of 2021 or in 2022; the financial impact of COVID-19 could not be reasonably estimated.
- Malaysia accounted for substantially all revenue. Ongoing pandemic restrictions, supply-chain interruptions, delayed deliveries, weaker demand and potential sales incentives could adversely affect results.
- The company disclosed a $4.51 million minimum-purchase commitment under a non-cancellable contract. It stated that, as of the report date, the vendor could not meet the commitment because manufacturing was delayed.
- One vendor accounted for 100% of purchases in both the 2021 and 2020 three- and six-month periods. One distributor represented 21.9% of Q2 2021 commission expense and 16.2% for the first half.
- Management concluded internal controls over financial reporting were ineffective and identified material weaknesses involving accounting expertise and staffing, internal audit, segregation of duties and risk assessment, system change controls, access security, and U.S. tax provision expertise. Remediation plans included appointing a CFO, establishing internal audit, engaging consultants, and seeking U.S. tax assistance; management expected implementation at least partly by fiscal year-end 2021.
- Legal proceedings and reasonably possible losses were described as not material. The company reported no material active or pending litigation.
Important facts for investors to verify
- Whether sales recover as Malaysian restrictions ease, and whether management’s 12-month liquidity assessment remains supportable.
- The supplier’s capacity to fulfill the purchase contract, the company’s exposure if it cannot, and the status and recoverability of supplier prepayments.
- Reconciliation of inventory write-down disclosures: the financial statements and notes report $36,636 for the first half, while MD&A cites $36,809.
- Progress in remediating the disclosed material weaknesses and whether subsequent filings report improved control effectiveness.
- The valuation and volatility of marketable securities and the resulting effect on reported earnings.