Agape ATP Corp. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Financial statements are unaudited and in U.S. dollars. Agape sells health and wellness products and services, primarily in Malaysia, through a network-marketing channel. The company acquired approximately 99.99% of Agape Superior Living (ASL) in 2020; its operations contributed to the current-period results.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $301,780 | $0 |
| Gross profit / margin | $224,189 / 74.3% | $0 |
| Operating expenses | $566,699 | $159,516 |
| Operating loss | $342,510 | $159,516 |
| Net loss | $333,650 | $231,750 |
| Operating cash flow | $(129,297) | $(230,431) |
- Revenue and margins: Q1 2021 revenue included $296,687 from products and $5,093 from wellness services. Cost of revenue was $77,591, including a $36,809 inventory write-down.
- Other income and expenses: Net other income was $14,980, including a $75,296 unrealized gain on marketable securities partly offset by a $72,128 foreign-exchange loss. Income-tax provision was $6,120.
- Cash and liquidity: Cash and cash equivalents were $3,354,558 at March 31, down from $3,517,600 at year-end 2020; the balance includes $31,040 held by the consolidated VIE and restricted to its obligations. Management reported working capital of $4,206,012 and stated it expects sufficient resources for the next 12 months.
- Cash flows: Investing cash flow was zero; financing cash used was $6,423, for deferred offering costs. Cash decreased by $163,042, including a $27,322 unfavorable exchange-rate effect.
- Debt and obligations: The balance sheet reports no conventional borrowings. Total liabilities were $1,113,127, including $347,053 in operating lease liabilities. Current liabilities were $916,983.
- Other balance-sheet items: Total assets were $6,666,027 and stockholders’ equity was $5,552,900. Marketable securities were carried at $650,643.
Changes versus the prior comparable period
Reported revenue rose from zero to $301,780, but the comparison is not like-for-like: ASL’s operations were included following the 2020 acquisition, while the company said COVID-related delivery disruption prevented sales in Q1 2020. For context, the filing’s unaudited pro forma Q1 2020 results, assuming ASL had been acquired at the start of that period, show revenue of $1,241,252 and a net loss of $22,538; these figures are not the reported Q1 2020 results.
Operating expenses increased to $566,699, including $116,114 in selling expenses and $88,439 in distributor commissions, both nil in Q1 2020. General and administrative expense rose 127% to $362,146, mainly due to additional ASL personnel and operating costs. Net loss increased by $101,900 year over year. Operating cash outflow narrowed by $101,134.
Outlook, risks and unusual items
- The filing provides no numerical revenue or earnings guidance. Management said there is no assurance revenue will grow or remain at a similar level in 2021 or 2022.
- COVID-19 restrictions and the company’s concentration of substantially all revenue in Malaysia may affect customer demand, operations, supply and delivery. Management said the financial impact could not be reasonably estimated.
- A non-cancellable purchase contract requires minimum purchases totaling $4,683,825 through 2026 and thereafter. The filing says the vendor was unable to meet the minimum commitment because manufacturing was delayed.
- Foreign-currency movements affect reported results; the company reported a $72,128 quarterly exchange loss and said it does not hedge foreign-currency exposures.
- Management concluded internal control over financial reporting was ineffective as of March 31, 2021 and identified material weaknesses involving accounting expertise and staffing, internal audit, segregation of duties, risk assessment, system-change controls, access security and tax expertise. Remediation plans include a CFO appointment, an intended internal audit function, external consulting and seeking U.S. tax support; management anticipated at least partial implementation by year-end 2021.
- Legal proceedings and reasonably possible losses were described as not material. No significant off-balance-sheet arrangements were reported.
Important facts for investors to verify
- How much of reported growth reflects the ASL acquisition and its network-marketing channel, and how current sales compare with the pro forma prior-period results.
- Whether the vendor can resume production and how the $4.68 million minimum-purchase commitment will be managed if delays continue.
- Whether cash generation improves as customer deposits, payables and operating costs change, and whether management’s 12-month liquidity assessment remains supportable.
- Progress in remediating the disclosed material weaknesses, including whether controls are tested and independently assessed.
- The valuation and volatility of marketable securities and the effects of currency movements on earnings and reported equity.