Agape ATP Corp. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results are in U.S. dollars. The company sells health and wellness products and services, primarily in Malaysia. The period includes Agape Superior Living Sdn. Bhd. (ASL), acquired effective April 1, 2020; therefore, comparisons with 2019 are not on the same business basis.
Financial results
| Metric | Three months 2020 | Three months 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1.413 million | $236,736 | $2.937 million | $1.098 million |
| Gross profit | $1.226 million | $26,353 | $2.278 million | $69,772 |
| Gross margin | 86.8% | 11.1% | 77.6% | 6.4% |
| Operating income (loss) | $410,649 | ($76,829) | $297,325 | ($125,034) |
| Net income (loss) | $415,037 | ($98,064) | $270,527 | ($475,260) |
| Net cash used in operating activities | Not presented quarterly | Not presented quarterly | ($743,670) | ($691,672) |
- Revenue and profitability: Management attributed higher sales and margins mainly to ASL’s established Malaysian network-marketing channel, compared with prior-period wholesale sales, largely to a related party. Nine-month revenue increased 167.6%; net income improved from a loss to a profit. The company recognized $156,499 of forfeited coupon income in the first nine months.
- Expenses and other items: Nine-month operating expenses rose to $1.981 million from $194,806, including $683,455 of distributor commissions and $1.029 million of general and administrative costs. Other income included a $102,247 unrealized gain on marketable securities; the prior-year period included a $366,834 investment impairment.
- Liquidity: September 30 cash and cash equivalents were $3.344 million, including $2.565 million in time deposits; $17,195 was held by the consolidated VIE and restricted to its obligations. Working capital was $4.927 million. Current assets were $5.914 million and current liabilities $986,849.
- Cash flow: Operating activities used $743,670 despite reported net income, with cash use including a $1.268 million decrease in customer deposits and increases in receivables and prepaid taxes. Investing activities provided $1.276 million, primarily from cash acquired with ASL; financing activities provided $21,104. Cash increased $599,133 during the nine months.
- Debt and obligations: The company reported no credit facilities or other access to bank credit and no material off-balance-sheet arrangements. Operating lease liabilities totaled $418,257 at present value. Non-cancellable purchase commitments totaled $5.031 million; management said its vendor was unable to meet the minimum purchase commitment because of manufacturing delays.
Material developments, outlook and risks
- The company acquired approximately 99.99% of ASL from CEO and director How Kok Choong for stated consideration of $1.804 million, based on ASL’s net asset carrying value. Consideration included offsetting a $656,495 receivable from the CEO and issuing 176,547 company shares. ASL expanded the company’s sales channel and contributed substantially to reported 2020 revenue.
- Management said it believed available liquidity would cover working-capital needs for the 12 months following issuance. It gave no specific revenue or earnings forecast and cautioned that revenue may not grow or remain at similar levels in the remainder of 2020 or in 2021.
- COVID-19 restrictions in Malaysia, where substantially all revenue is concentrated, could disrupt demand, operations, logistics and supply. The financial impact was not reasonably estimable. Management also described potential expansion into Asian markets, initially Thailand, Indonesia and Taiwan, including through e-commerce.
- Other risks include foreign-exchange movements, reliance on a small number of vendors, and receivable concentration: an e-commerce platform represented approximately 99.5% of accounts receivable at quarter-end. Two vendors accounted for all reported purchases in 2020, in proportions of approximately 64%/36% for Q3 and 67%/33% for the nine-month period.
- Disclosure controls were deemed ineffective as of September 30, 2020 because of material weaknesses in accounting expertise and review, internal audit, segregation of duties and risk assessment. Management outlined remediation plans, including written accounting procedures, external consulting, an internal audit function and staff training.
- Related-party matters warrant attention: the ASL acquisition involved the CEO, and the company previously agreed to sell its Unreserved Sdn. Bhd. investment to him. The filing reports no material pending legal proceedings.
Most important facts for investors to verify
- How much of the reported revenue and margin improvement is recurring and attributable to ASL, and how comparable results are after its acquisition.
- Whether operating cash flow improves, particularly the sustainability of customer deposits and the collection of receivables and prepaid taxes.
- Whether the vendor can meet the $5.031 million purchase commitment, and the implications of the reported manufacturing delays.
- Progress in remediating the disclosed material weaknesses and restoring effective disclosure controls.
- The terms, valuation and governance of transactions involving the CEO, including the ASL acquisition and the related receivable offset.
- Effects of COVID-19 restrictions, Malaysian market concentration, and vendor, e-commerce platform and currency risks on future results.