UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
OF THE SECURITIES EXCHANGE ACT OF 1934
For
The Quarterly Period Ended
or
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission
File Number
(Exact name of registrant issuer as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
1705
- 1708, Level 17,
Taman Desa,
(Address of principal executive offices, including zip code)
Registrant’s
phone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding twelve months (or shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large
Accelerated Filer ☐ Accelerated Filer ☐
Emerging
growth company
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
☐
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes ☐ No ☐
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class | Outstanding at August 10, 2020 | |
TABLE OF CONTENTS
| 2 |
PART I FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
AGAPE ATP CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents (Included $ | $ | $ | ||||||
| Accounts receivable | ||||||||
| Accounts receivable – related party | ||||||||
| Amount due from related parties | ||||||||
| Inventories | ||||||||
| Prepaid taxes (Included $ | ||||||||
| Prepayments and deposits (Included $ | ||||||||
| Prepayments and deposits – related party | ||||||||
| Total Current Assets | ||||||||
| OTHER ASSETS | ||||||||
| Property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Operating right-of-use assets | ||||||||
| Investment in marketable securities | ||||||||
| Investment in non-marketable securities | ||||||||
| Deferred offering costs | ||||||||
| Deferred tax assets, net | ||||||||
| Total Other Assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | $ | ||||||
| Customer deposits | ||||||||
| Operating lease liabilities - current | ||||||||
| Other payables and accrued liabilities ($ | ||||||||
| Amount due to a related party | ||||||||
| Total Current Liabilities | ||||||||
| OTHER LIABILITIES | ||||||||
| Operating lease liabilities – non-current | $ | $ | ||||||
| TOTAL LIABILITIES | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Preferred stock, $ par value; shares authorized; ne issued and outstanding | - | |||||||
| Common stock, par value $; shares authorized, and issued and outstanding as of June 30, 2020 and December 31, 2019, respectively | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( |
) | ( | ) | ||||
| Accumulated other comprehensive income | ||||||||
| TOTAL STOCKHOLDERS’ EQUITY | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-1 |
AGAPE ATP CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
| For the three months ended | For the six months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| REVENUE | $ | $ | $ | $ | ||||||||||||
| REVENUE – RELATED PARTY | ||||||||||||||||
| TOTAL REVENUE | ||||||||||||||||
| COST OF REVENUE | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| GROSS PROFIT (LOSS) | ( | ) | ||||||||||||||
| SELLING | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| COMMISSION | ( | ) | - | ( | ) | - | ||||||||||
| GENERAL AND ADMINISTRATIVE | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| TOTAL OPERATING EXPENSES | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| INCOME (LOSS) FROM OPERATIONS | ( | ) | ( | ) | ( | ) | ||||||||||
| OTHER INCOME (EXPENSES) | ||||||||||||||||
| Other income (expenses), net | ( | ) | ( | ) | ||||||||||||
| Loss from equity investment | - | - | - | ( | ) | |||||||||||
| Unrealized holding gain on marketable securities | - | - | ||||||||||||||
| Gain on deemed disposal of shares in Investee Company | - | - | - | |||||||||||||
| Impairment loss in equity investment | - | ( | ) | - | ( | ) | ||||||||||
| TOTAL OTHER INCOME (EXPENSES), NET | ( | ) | ( | ) | ||||||||||||
| INCOME (LOSS) BEFORE INCOME TAXES | ( | ) | ( | ) | ( | ) | ||||||||||
| (PROVISION FOR) BENEFIT OF INCOME TAXES | ( | ) | - | ( | ) | |||||||||||
| NET INCOME (LOSS) | ( | ) | ( | ) | ( | ) | ||||||||||
| OTHER COMPREHENSIVE INCOME | ||||||||||||||||
| Foreign currency translation adjustment | ||||||||||||||||
| COMPREHENSIVE INCOME (LOSS) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| EARNINGS (LOSS) PER SHARE | ||||||||||||||||
| Basic and diluted | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING | ||||||||||||||||
| Basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-2 |
AGAPE ATP CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
| COMMON STOCK | ADDITIONAL | ACCUMULATED OTHER | TOTAL | |||||||||||||||||||||
| Number of shares | Par value | PAID IN CAPITAL | ACCUMULATED DEFICIT | COMPREHENSIVE INCOME (LOSS) | STOCKHOLDERS’ EQUITY | |||||||||||||||||||
| Balance as of December 31, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Net income | - | |||||||||||||||||||||||
| Foreign currency translation adjustment | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance as of March 31, 2019 | ( | ) | ( | ) | ||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Foreign currency translation adjustment | - | |||||||||||||||||||||||
| Balance as of June 30, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| COMMON STOCK | ADDITIONAL | ACCUMULATED OTHER | TOTAL | |||||||||||||||||||||
| Number of shares | Par value | PAID IN CAPITAL | ACCUMULATED DEFICIT | COMPREHENSIVE INCOME | STOCKHOLDERS’ EQUITY | |||||||||||||||||||
| Balance as of December 31, 2019 | $ | $ | $ | ( | ) | $ | $ | | ||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Foreign currency translation adjustment | - | |||||||||||||||||||||||
| Balance as of March 31, 2020 | ( | ) | ||||||||||||||||||||||
| Net income | - | |||||||||||||||||||||||
| Issuance of common stock in connection with acquisition of Agape Superior Living Sdn Bhd | ||||||||||||||||||||||||
| Foreign currency translation adjustment | - | |||||||||||||||||||||||
| Balance as of June 30, 2020 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-3 |
AGAPE ATP CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Currency expressed in United States Dollars (“US$”)
For the six months ended June 30, | ||||||||
| 2020 | 2019 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | ||||||||
| Amortization | ||||||||
| Amortization of operating right-of-use assets | ||||||||
| Loss from equity investment | ||||||||
Unrealized holding gain on marketable securities | ( | ) | ||||||
| Gain on deemed disposal of shares in investee company | ( | ) | ||||||
Impairment loss in equity investment | ||||||||
| Deferred tax expenses | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivables | ( | ) | ||||||
| Accounts receivables – related party | ( | ) | ( | ) | ||||
| Amount due from a related party | ( | ) | ||||||
| Inventories | ||||||||
| Prepaid taxes | ||||||||
| Prepayments and deposits | ||||||||
| Prepayments and deposits – related party | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Accounts payable – related party | ||||||||
| Customer deposits | ( | ) | ( | ) | ||||
| Income taxes payable | ( | ) | ||||||
| Other payables and accrued liabilities | ||||||||
| Operating lease liabilities | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Cash and cash equivalent acquired through acquisition of Agape Superior Living Sdn Bhd | ||||||||
| Proceeds from sale of non-marketable securities to a related party | ||||||||
| Investment in non-marketable securities | ( | ) | ||||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Deferred offering costs | ( | ) | ||||||
| Repayments from related parties | ||||||||
| Amount due to a related party | ( | ) | ||||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS | ||||||||
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | ( | ) | ||||||
| CASH AND CASH EQUIVALENTS, beginning of period | ||||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | $ | ||||||
| SUPPLEMENTAL CASH FLOWS INFORMATION | ||||||||
| Income taxes paid | $ | $ | ||||||
| Interest paid | $ | $ | ||||||
| SUPPLEMENTAL NON-CASH FLOWS INFORMATION | ||||||||
| Amount transferred from investment in investee company to investment in non-marketable securities | $ | $ | ||||||
| Initial recognition of right-of-use assets and lease liabilities | $ | $ | ||||||
| Sale of non-marketable securities to a related party in exchange for ASL | $ | $ | ||||||
| Issuance of common stock in exchange for acquisition payment of ASL | $ | $ | ||||||
| Unpaid balance due to a related party in connection with acquisition payment of ASL | $ | $ | ||||||
| Unpaid accrued liabilities on deferred offering costs | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-4 |
AGAPE ATP CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
1. ORGANIZATION AND BUSINESS BACKGROUND
Agape ATP Corporation, a Nevada corporation (“the Company”) was incorporated under the laws of the State of Nevada on June 1, 2016.
Agape ATP Corporation operates through its wholly owned subsidiary, Agape ATP Corporation, a Company organized in Labuan, Malaysia.
Agape
ATP Corporation, incorporated in Labuan, Malaysia, is an investment holding company with
On
May 8, 2020, the Company entered into a Share Exchange Agreement with Mr. How Kok Choong, CEO and director of the Company to acquire
ordinary shares, no par value, equivalent to approximately
Agape Superior Living Sdn. Bhd. (“ASL”) is a limited company incorporated on August 8, 2003, under the laws of Malaysia.
The Company and its subsidiaries engage in the network marketing sales business in the Health and Wellness Industry. The principal activity of the Company is to supply high-quality health and wellness products, including supplements to assist in cell metabolism, detoxification, blood circulation, anti-aging and products designed to improve the overall health system of the human body.
The accompanying unaudited condensed consolidated financial statements reflect the activities of the Company, Agape ATP Corporation (“AATP LB”), Agape ATP International Holding Limited (“AATP HK”), ASL and its variable interest entity (“VIE”), Agape S.E.A. Sdn. Bhd. (“SEA”) (See Note 3).
Details of the Company’s subsidiaries:
Subsidiary company name | Place and date of incorporation | Particulars of issued capital | Principal activities | Proportional of ownership interest and voting power held | |||||||||
| 1. | March 6, 2017 | % | |||||||||||
| 2. | June 1, 2017 | % | |||||||||||
| 3. | August 8, 2003 | % | |||||||||||
| 4. | March 4, 2004 | VIE | |||||||||||
| F-5 |
AGAPE ATP CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
Business Overview
Agape ATP Corporation is a company that provides health solution advisory services to our clients. We primarily focus our efforts on attracting customers in Malaysia. Our advisory services center on the “ATP Zeta Health Program”, which is a health program designed to effectively prevent diseases caused by polluted environments, unhealthy dietary intake and unhealthy lifestyles, and promotion of health. The program aims to promote improved health and longevity in our clients through a combination of modern medicine, proper nutrition and advice from skilled nutritionists and/or dieticians.
In order to strengthen the Company’s supply chain, on May 8, 2020, the Company has successfully acquired approximately % of ASL, with the goal of securing an established network marketing sales channel that has been established in Malaysia for the past 15 years. ASL has been offering the Company’s ATP Zeta Health Program as part of its product lineup. As such, the acquisition creates synergy in the Company’s operation by boosting the Company’s retail and marketing capabilities. The newly acquired subsidiary allows the Company to fulfill its mission of “helping people to create health and wealth” by providing a financially rewarding business opportunity to distributors and quality products to distributors and customers who seek a healthy lifestyle.
The Company offers three series of programs which consist of different services and products: ATP Zeta Health Program, ÉNERGÉTIQUE and BEAUNIQUE.
The ATP Zeta Health Program is a health program designed to promote health and general wellbeing designed to prevent health diseases caused by polluted environments, unhealthy dietary intake and unhealthy lifestyles. The program aims to promote improved health and longevity through a combination of modern health supplements, proper nutrition and advice from skilled dieticians as well as trained members and distributors.
The ÉNERGÉTIQUE series aims to provide a total dermal solution for a healthy skin beginning from the cellular level. The series is comprised of the Energy Mask series, Hyaluronic Acid Serum and Mousse Facial Cleanser.
The BEAUNIQUE product series focuses on the research of our diet’s impact on modifying gene expressions in order to address genetic variations and deliver a nutrigenomic solution for every individual.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), and include all normal and recurring adjustments that management of the Company considers necessary for a fair presentation of its financial position and operation results. Interim results are not necessarily indicative of results to be expected for any other interim period or for the full year. The information included in this Form 10-Q should be read in conjunction with information included in the Company’s transition report on Form 10-K for the period ended December 31, 2019, filed with the Securities and Exchange Commission on March 27, 2020.
| F-6 |
AGAPE ATP CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Principles of consolidation
The unaudited condensed consolidated financial statements include the financial statements of the Company, its subsidiaries and its VIE over which the Company exercises control and, where applicable, entities for which the Company has a controlling financial interest or is the primary beneficiary. All transactions and balances among the Company, its subsidiaries and its VIE have been eliminated upon consolidation.
Subsidiaries are those entities in which the Company, directly or indirectly, controls more than one half of the voting power; or has the power to govern the financial and operating policies, to appoint or remove the majority of the members of the board of directors, or to cast a majority of votes at the meeting of directors.
A VIE is an entity that has either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest, such as through voting rights, right to receive the expected residual returns of the entity or obligation to absorb the expected losses of the entity. The variable interest holder, if any, that has a controlling financial interest in a VIE is deemed to be the primary beneficiary and must consolidate the VIE.
Use of estimates
The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Significant accounting estimates reflected in the Company’s unaudited condensed consolidated financial statements include allowance for doubtful accounts, allowance for inventories obsolescence, useful lives of property and equipment, useful lives of intangible assets, impairment of long-lived assets, allowance for deferred tax assets, operating right-of-use assets, operating lease liabilities and uncertain tax position and impairment of investment in non-marketable securities. Actual results could differ from these estimates.
Cash and cash equivalents
Cash and cash equivalents are carried at cost and represent cash on hand, time deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less.
Accounts receivable and accounts receivable – related party
Accounts
receivable and accounts receivable – related party are recorded at the invoiced amount less an allowance for any uncollectible
accounts and do not bear interest, which are due on credit term. Accounts receivable also include money due from a third-party
e-commerce platform acting as a collection agent for the Company on the sales through their platform. Management reviews the
adequacy of the allowance for doubtful accounts on an ongoing basis, using historical collection trends and aging of receivables.
Management also periodically evaluates individual customer’s financial condition, credit history, and the current economic
conditions to make adjustments in the allowance when it is considered necessary. Account balances are charged off against the
allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company’s
management continues to evaluate the reasonableness of the valuation allowance policy and update it if necessary. As of June 30,
2020, and December 31, 2019,
| F-7 |
AGAPE ATP CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventories
Inventories consist of finished goods and are stated at the lower of cost or net realizable value using the first-in first-out method.
Prepaid taxes
Prepaid taxes include (i) prepaid income taxes that will either be refundable or utilized to offset future income tax; and (ii) goods and service tax (“GST”) to be refundable.
Prepayments and deposits
Prepayments
and deposits are mainly cash deposited or advanced to suppliers for future inventory purchases or service providers for
future services. This amount is refundable and bears no interest. For any prepayments and deposits determined by management that
such advances will not be in receipts of inventories, services, or refundable, the Company will recognize an allowance account
to reserve such balances. Management reviews its prepayments and deposits on a regular basis to determine if the allowance is
adequate, and adjusts the allowance when necessary. Delinquent account balances are written-off against allowance for doubtful
accounts after management has determined that the likelihood of collection is not probable. The Company’s management continues
to evaluate the reasonableness of the valuation allowance policy and update it if necessary. As of June 30, 2020, and December
31, 2019, there is
Property and equipment, net
Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets with no residual value. The estimated useful lives are as follows:
| Useful Life | ||||
| Computer and office equipment | ||||
| Furniture & fixtures | ||||
| Leasehold improvements | ||||
| Vehicle |
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the consolidated statements of income and comprehensive income. Expenditures for maintenance and repairs are charged to earnings as incurred, while additions, renewals and betterments, which are expected to extend the useful life of assets, are capitalized. The Company also re-evaluates the periods of depreciation to determine whether subsequent events and circumstances warrant revised estimates of useful lives.
| F-8 |
AGAPE ATP CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Intangible assets, net
Intangible assets, net, are stated at cost, less accumulated amortization. Amortization expense is recognized on the straight-line basis over the estimated useful lives of the assets as follows:
| Classification | Useful Life | |||
| Computer software |
Impairment for long-lived assets
Long-lived
assets, including property and equipment, and intangible assets with finite lives are reviewed for impairment whenever events
or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the
assets) indicate that the carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets
based on the undiscounted future cash flows the assets are expected to generate and recognize an impairment loss when estimated
undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the
asset, if any, are less than the carrying value of the asset. If an impairment is identified, the Company would reduce the carrying
amount of the asset to its estimated fair value based on a discounted cash flows approach or, when available and appropriate,
to comparable market values. As of June 30, 2020, and December 31, 2019,
Deferred offering costs
Deferred offering costs represents costs associated with the Company’s current offering which will be netted against the proceeds from the Company’s current offering.
Investment in marketable equity securities
Prior to July 1, 2019, marketable securities included in investment in marketable equity securities (non-current) are stated at the lower of cost or market in the aggregate. Other marketable securities (non-current) are stated at the lower of cost or market in the aggregate and investments other than marketable equity securities in other investments (non-current) are stated at cost less any significant decline in fair value assessed to be other than temporary. Realized gains and losses on the sale of securities are based on the average cost of all the units of a particular security held at the time of sale.
On July 1, 2019, the Company adopted ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Investments in marketable equity securities (non-current) are reported at fair value with changes in fair value recognized in the Company’s consolidated statements of operations and comprehensive loss in the caption of “unrealized holding losses on marketable securities” in each reporting period.
| F-9 |
AGAPE ATP CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment in non-marketable equity securities
Prior to July 1, 2019, investments in non-marketable equity securities (non-current) are stated at cost less any significant decline in fair value assessed to be other than temporary. Realized gains and losses on the sale of securities are based on the average cost of all the units of a particular security held at the time of sale.
On July 1, 2019, the Company adopted ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Due to the Company’s non-marketable equity securities (non-current) does not qualify for the practical expedient to estimate fair value in accordance with ASC 820-10-35-59, the Company has selected to record its investments in non-marketable equity securities (non-current) at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issue.
At each reporting period, the Company will make a qualitative assessment considering impairment indicators to evaluate whether the investment is impaired. The qualitative assessment indicators include, but are not limited to: (1) A significant deterioration in the earnings performance, credit rating, asset quality, or business prospects of the investee; (ii) A significant adverse change in the regulatory, economic, or technological environment of the investee; (iii) A significant adverse change in the general market condition of either the geographical area or the industry in which the investee operates; (iv) A bona fide offer to purchase, an offer by the investee to sell, or a completed auction process for the same or similar investment for an amount less than the carrying amount of that investment; and (v) Factors that raise significant concerns about the investee’s ability to continue as a going concern, such as negative cash flows from operations, working capital deficiencies, or noncompliance with statutory capital requirements or debt covenants. If the qualitative assessment indicators indicated that the non-marketable equity securities (non-current) is deemed to be impaired, the Company would recognize the impairment loss equal to the difference between the fair value of the investment and its carrying amount.
Customer deposits
Customer deposits represent amounts advanced by customers on product orders and discounted value of unapplied coupons. Customer deposits are reduced when the related sale is recognized in accordance with the Company’s revenue recognition policy.
Revenue recognition
On July 1, 2019, the Company adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (ASC Topic 606) using the modified retrospective method for contracts that were not completed as of June 30, 2019. This did not result in an adjustment to retained earnings upon adoption of this new guidance as the Company’s revenue was recognized based on the amount of consideration expected to receive in exchange for satisfying the performance obligations.
| F-10 |
AGAPE ATP CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The core principle underlying the revenue recognition of this ASU allows the Company to recognize - revenue that represents the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This will require the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer. The Company’s revenue streams are recognized at a point in time for the Company’s sale of health and wellness products.
The ASU requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation.
The Company accounts for a contract with a customer when the contract is committed in writing, the rights of the parties, including payment terms, are identified, the contract has commercial substance and consideration is probable of substantially collection.
Prior to July 1, 2019, the Company recognizes revenue from sales of goods when the following four revenue criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) selling price is fixed or determinable; and (4) collectability is reasonably assured. Revenue from supplies of health and wellness products is recognized when title and risk of loss are transferred and there are no continuing obligations to the customer. Title and the risks and rewards of ownership transfer to and accepted by the customer when the products are collected by the customer at the Company’s office. Revenue is recorded net of sales discounts, returns, allowances, and other adjustments that are based upon management’s best estimates and historical experience and are provided for in the same period as the related revenues are recorded.
The application of the five-step model to the revenue streams compared to the prior guidance did not result in significant changes in the way the Company records its revenue. Upon adoption on July 1, 2019, the Company evaluated its revenue recognition policy for all revenue streams within the scope of the ASU under previous standards and using the five-step model under the new guidance and confirmed that there were no differences in the pattern of revenue recognition.
Sales of Health and Wellness products
- Performance obligations satisfied at a point in time
On July 1, 2019, the Company derives its revenues from sales contracts with its customers with revenues being recognized when control of the health and wellness products are transferred to its customer at the Company’s office or shipment of the goods, which is generally similar to when its delivery has occurred prior to July 1, 2019 Such revenues are recognized at a point in time after all performance obligations are satisfied. The revenue is recorded net of estimated discounts and return allowances. Products are given 60 days for returns or exchanges from the date of purchase. Historically, there were insignificant sales returns.
| F-11 |
AGAPE ATP CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The
Company also sells coupons to its customers for cash at a discounted price of the value of the coupons. Customers can apply the
value of the coupons for a reduction in the transaction price paid by the customer are recorded as a reduction of sales. The cash
proceeds resulted from the sale of coupons are recognized as customer deposits until the coupons to be applied as a reduction
of the health and wellness products transaction price upon such sales transactions occurred. The Company’s coupons have
a validity period of six months. If the Company’s customers did not utilize the coupons after six months, the Company would
recognize the forfeiture of the originated sales value of the coupons as net revenues. For the three and six months ended June
30, 2020, the Company recognized $
As
of June 30, 2020, the Company had contracts for the sales of health and wellness products amounting to $
Disaggregated information of revenues by products are as follows:
| For the three months ended | For the six months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Ionized Cal-Mag | $ | $ | $ | $ | ||||||||||||
| Omega Blend | ||||||||||||||||
| Young Formula | ||||||||||||||||
| Organic Youth Care Cleansing Bar | ||||||||||||||||
| Trim+ | ||||||||||||||||
| Lipomask | ||||||||||||||||
| Beta Maxx | ||||||||||||||||
| Energized Mineral Concentrate | ||||||||||||||||
| Survivor Select | ||||||||||||||||
| Vege-Fruit Fiber | ||||||||||||||||
| Mitogize | ||||||||||||||||
| Hyaluronic Acid Serum | ||||||||||||||||
| Mousse Facial Cleanser | ||||||||||||||||
| Total revenues | $ | $ | $ | $ | ||||||||||||
Cost of revenue
Cost of revenue includes freight-in and the purchase cost of manufactured goods for sale to customers.
Shipping and handling
Shipping
and handling charges amounted to $
| F-12 |
AGAPE ATP CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advertising costs
Advertising
costs amounted to $
Commission expenses
Commission
expenses are the Company’s most significant expenses. As with all companies in the network marketing industry, the Company’s
sales channel is external to the Company. The Company’s “external sales force” is stratified into two levels
based on priority recruitment. First, there are sales distributors. Second, all members recruited by a sales distributor, directly
or indirectly, are referred to as “sales network members”. The Company pays commission to every sales distributor
based on purchases made by its sales network members which includes the independent direct sales members. Top performing distributors
with their own physical stores may also become stockists of the Company, whereby they enjoy benefits such as maintaining a certain
amount of the Company’s inventory on their store premises. The stockists shall account to the Company for all products sales
from their store premises as monitored through the Company’s centralized stock tracking system. The Company pays a separate
commission to stockists based on revenue generated from the stockists’ physical stores. Commission expenses amounted to
$
Defined contribution plan
The
full-time employees of the Company are entitled to the government mandated defined contribution plan. The Company is required
to accrue and pay for these benefits based on certain percentages of the employees’ respective salaries, subject to certain
ceilings, in accordance with the relevant government regulations, and make cash contributions to the government mandated defined
contribution plan. Total expenses for the plans were $
The related contribution plans include:
| - | Social
Security Organization (“SOSCO”) – | |
| - | Employees
Provident Fund (“EPF”) – | |
| - | Employment
Insurance System (“EIS”) – | |
| - | Human
Resource Development Fund (“HRDF”) – |
| F-13 |
AGAPE ATP CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income taxes
The Company accounts for income taxes in accordance with U.S. GAAP for income taxes. The charge for taxation is based on the results for the fiscal year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred taxes is accounted for using the asset and liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the consolidated financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized. Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.
An
uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would
be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount
of tax benefit that is
The Company conducts much of its business activities in Hong Kong and Malaysia and is subject to tax in each of their jurisdictions. As a result of its business activities, the Company will file separate tax returns that are subject to examination by the foreign tax authorities.
Comprehensive income (loss)
Comprehensive income (loss) consists of two components, net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) refers to revenue, expenses, gains and losses that under GAAP are recorded as an element of stockholders’ equity but are excluded from net income. Other comprehensive income (loss) consists of a foreign currency translation adjustment resulting from the Company not using the U.S. dollar as its functional currencies.
Non-controlling interest
| F-14 |
AGAPE ATP CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company computes earnings (loss) per share (“EPS”) in accordance with ASC 260, “Earnings per Share”. ASC 260 requires companies to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average ordinary share outstanding for the period. Diluted EPS presents the dilutive effect on a per share basis of the potential ordinary shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential ordinary shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. For the three and six months ended June 30, 2020 and 2019, there were dilutive shares.
Foreign currencies translation and transaction
Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
The reporting currency of the Company is United States Dollars (“US$”) and the accompanying financial statements have been expressed in US$. The Company’s subsidiary in Labuan maintains its books and record in United States Dollars (“US$”) albeit its functional currency being the primary currency of the economic environment in which the entity operates, which is the Malaysian Ringgit (“MYR” or “RM”). The Company’s subsidiary in Hong Kong maintains its books and record in Hong Kong Dollars (“HK$”), similar to its functional currency. The Company’s subsidiary and VIE in Malaysia conducts its businesses and maintains its books and record in the local currency, Malaysian Ringgit (“MYR” or “RM”), as its functional currency.
In general, for consolidation purposes, assets and liabilities of its subsidiaries whose functional currency is not US$ are translated into US$, in accordance with ASC Topic 830-30, “Translation of Financial Statement”, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiary are recorded as a separate component of accumulated other comprehensive income within the statements of stockholders’ equity. Cash flows are also translated at average translation rates for the periods, therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.
Translation of foreign currencies into US$1 have been made at the following exchange rates for the respective periods:
| As of | ||||||||
| June 30, 2020 | December 31, 2019 | |||||||
| Period-end MYR : US$1 exchange rate | ||||||||
| Period-end HKD : US$1 exchange rate | ||||||||
| F-15 |
AGAPE ATP CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
| For the three months ended | For the six months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Period-average MYR : US$ | ||||||||||||||||
| Period-average HKD : US$ | ||||||||||||||||
Related parties
Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Companies are also considered to be related if they are subject to common control or common significant influence.
Fair value of financial instruments
The accounting standard regarding fair value of financial instruments and related fair value measurements defines financial instruments and requires disclosure of the fair value of financial instruments held by the Company.
The accounting standards define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosure requirements for fair value measures. The three levels are defined as follow:
| ● | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. | |
| ● | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments. | |
| ● | Level 3 inputs to the valuation methodology are unobservable and significant to the fair value. |
Financial instruments included in current assets and current liabilities are reported in the consolidated balance sheets at face value or cost, which approximate fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rates of interest.
Leases
Effective July 1, 2019, the Company adopted ASU 2016-02, “Leases” (Topic 842), and elected the practical expedients that does not require the Company to reassess: (1) whether any expired or existing contracts are, or contain, leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases. For lease terms of twelve months or fewer, a lessee is permitted to make an accounting policy election not to recognize lease assets and liabilities. The Company also adopted the practical expedient that allows lessees to treat the lease and non-lease components of a lease as a single lease component. There is no impact from the adoption of ASC 842 as of July 1, 2019, as the Company did not have any existing leases with a lease term in excess of twelve months on July 1, 2019.
| F-16 |
AGAPE ATP CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Operating lease right-of-use (“ROU”) assets and lease liabilities are recognized at the adoption date of July 1, 2019 or the commencement date, whichever is earlier, based on the present value of lease payments over the lease term. Since the implicit rate for the Company’s leases is not readily determinable, the Company use its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow, on a collateralized basis, an amount equal to the lease payments, in a similar economic environment and over a similar term.
Lease terms used to calculate the present value of lease payments generally do not include any options to extend, renew, or terminate the lease, as the Company does not have reasonable certainty at lease inception that these options will be exercised. The Company generally considers the economic life of its operating lease ROU assets to be comparable to the useful life of similar owned assets. The Company has elected the short-term lease exception, therefore operating lease ROU assets and liabilities do not include leases with a lease term of twelve months or less. Its leases generally do not provide a residual guarantee. The operating lease ROU asset also excludes lease incentives. Lease expense is recognized on a straight-line basis over the lease term.
The Company reviews the impairment of its ROU assets consistent with the approach applied for its other long-lived assets. The Company reviews the recoverability of its long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on its ability to recover the carrying value of the asset from the expected undiscounted future pre-tax cash flows of the related operations. The Company has elected to include the carrying amount of operating lease liabilities in any tested asset group and includes the associated operating lease payments in the undiscounted future pre-tax cash flows.
Recent accounting pronouncements
The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and do not believe the future adoption of such any pronouncements may be expected to cause a material impact on its financial condition or the results of its operations, as follow:
In May 2019, the FASB issued ASU 2019-05, which is an update to ASU Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced the expected credit losses methodology for the measurement of credit losses on financial assets measured at amortized cost basis, replacing the previous incurred loss methodology. The amendments in Update 2016-13 added Topic 326, Financial Instruments—Credit Losses, and made several consequential amendments to the Codification. Update 2016-13 also modified the accounting for available-for-sale debt securities, which must be individually assessed for credit losses when fair value is less than the amortized cost basis, in accordance with Subtopic 326-30, Financial Instruments— Credit Losses—Available-for-Sale Debt Securities. The amendments in this Update address those stakeholders’ concerns by providing an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For those entities, the targeted transition relief will increase comparability of financial statement information by providing an option to align measurement methodologies for similar financial assets. Furthermore, the targeted transition relief also may reduce the costs for some entities to comply with the amendments in Update 2016-13 while still providing financial statement users with decision-useful information. In November 2019, the FASB issued ASU No. 2019-10, which to update the effective date of ASU No. 2016-13 for private companies, not-for-profit organizations and certain smaller reporting companies applying for credit losses, leases, and hedging standard. The new effective date for these preparers is for fiscal years beginning after December 15, 2022. ASU 2019-05 is effective for the Company for annual and interim reporting periods beginning January 1, 2023 as the Company is qualified as a smaller reporting company. The Company is currently evaluating the impact ASU 2019-05 may have on its unaudited condensed consolidated financial statements.
| F-17 |
AGAPE ATP CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In January 2020, the FASB issued ASU 2020-01 to clarify the interaction of the accounting for equity securities under ASC 321 and investments accounted for under the equity method of accounting in ASC 323 and the accounting for certain forward contracts and purchased options accounted for under ASC 815. With respect to the interactions between ASC 321 and ASC 323, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting when applying the measurement alternative in ASC 321, immediately before applying or upon discontinuing the equity method of accounting. With respect to forward contracts or purchased options to purchase securities, the amendments clarify that when applying the guidance in ASC 815-10-15-141(a), an entity should not consider whether upon the settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method in ASC 323 or the fair value option in accordance with ASC 825. The ASU is effective for interim and annual reporting periods beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim period. The Company does not expect the adoption of this standard to have a material impact on its unaudited condensed consolidated financial statements.
Reclassification
Certain prior period amounts have been reclassified to conform to the current period presentation for the three and six months ended June 30, 2019. These reclassifications have no effect on the unaudited condensed consolidated statements of operations and comprehensive income (loss).
3. VARIABLE INTEREST ENTITY (“VIE”)
SEA
is a trading company incorporated on March 4, 2004, under the laws of Malaysia. SEA provided all of ASL’s purchases. Its
equity at risk was insufficient to finance its activities and
| a. | The power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; and | |
| b. | The obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. |
Accordingly, the accounts of SEA is consolidated in the accompanying unaudited condensed financial statements.
The carrying amount of the VIE’s assets and liabilities were as follows:
| June 30, 2020 | ||||
| Current assets | $ | |||
| Current liabilities | ( | ) | ||
| Net assets | $ | |||
| F-18 |
AGAPE ATP CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
3. VARIABLE INTEREST ENTITY (“VIE”) (Continued)
| June 30, 2020 | ||||
| Current asset: | ||||
| Cash and cash equivalents | $ | |||
| Accounts receivable – intercompany | ||||
| Prepaid taxes | ||||
| Prepayments and deposits | ||||
| Total current assets | ||||
| Current liabilities: | ||||
| Accounts payable – intercompany | $ | |||
| Other payables and accrued liabilities | ||||
| Other payables – intercompany | ||||
| Total current liabilities | $ | |||
The summarized operating results of the VIE’s are as follows:
For the Three Months Ended June 30, 2020 | For the Six Months Ended June 30, 2020 | |||||||
| Operating revenues | $ | $ | ||||||
| Gross profit | $ | $ | ||||||
| Loss from operations | $ | ( | ) | $ | ( | ) | ||
| Net loss | $ | ( | ) | $ | ( | ) | ||
4. BUSNINESS COMBINATION
On May 8, 2020, the Company entered into a Share Exchange Agreement (“SPA”) with Mr. How Kok Choong, CEO and director of the Company to acquire ordinary shares, par value, equivalent to approximately % of the equity interest in ASL, an entity incorporated in Malaysia. Pursuant to the SPA, as amended on July 1, 2020, Mr. How will receive an aggregate consideration of $, which was determined based on the net asset carrying value of ASL as at March 31, 2020. The aggregate consideration shall be satisfied by (i) the offset of the Consideration whereby the Company has a loan receivable of $ as of March 31, 2020 due from Mr. How; and (ii) allotment and issuance of common stock of the Company. The Company shall allot and issue shares of the Company’s common stock, par value $, representing approximately % of the total issued and outstanding shares in the Company after the issuance of the Shares, which is valued at $ based on the closing price of $ of the Company as quoted on the OTC Market on March 31, 2020. As of June 30, 2020, the Company issued shares of the Company’s common stock with the remaining shares of the Company’s common stock issued on July 1, 2020.
The Company’s acquisition of ASL was accounted for as a business combination in accordance with ASC 805. The Company has allocated the purchase price of ASL based upon the carrying value of the identifiable assets acquired and liabilities assumed on April 1, 2020 as ASL was under the common control of Mr. How.
| F-19 |
AGAPE ATP CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
The following table summarizes the carry value of the identifiable assets acquired and liabilities assumed on the acquisition date, which represents the net purchase price allocation on the date of the acquisition of ASL.
| Carry Value | ||||
| ASSETS | ||||
| Current assets | ||||
| Cash | $ | |||
| Other receivables | ||||
| Other receivables - related parties | ||||
| Inventories | ||||
| Prepaid taxes | ||||
| Prepayments and other assets | ||||
| Total current assets | ||||
| Other assets | ||||
| Property and equipment, net | ||||
| Intangible assets, net | ||||
| Deferred taxes asset, net | ||||
| Total other assets | ||||
| Total assets | $ | |||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||
| Current liabilities | ||||
| Accounts payable - related party | $ | |||
| Customer deposits | ||||
| Other payables and accrued liabilities | ||||
| Total current liabilities | ||||
| Total liabilities | ||||
| Total net assets acquired | ||||
The following unaudited pro forma combined results of operations presents the Company’s financial results as if the acquisition of ASL had been completed on January 1, 2019. The unaudited pro forma results do not reflect operating efficiencies or potential cost savings which may result from the consolidation of operations. Accordingly, the unaudited pro forma financial information is not necessarily indicative of the results of operations that the Company would have recognized had we completed the transaction on January 1, 2019. Future results may vary significantly from the results in this pro forma information because of future events and transactions, as well as other factors.
| F-20 |
AGAPE ATP CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
| For the Three Months Ended | For the Six Months Ended | For the Six Months Ended | ||||||||||
| June 30, 2019 | June 30, 2020 | June 30, 2019 | ||||||||||
| Revenue | $ | $ | $ | |||||||||
| Cost of revenue | ( | ) | ( | ) | ( | ) | ||||||
| Gross profit | ||||||||||||
| Total operating expenses | ( | ) | ( | ) | ( | ) | ||||||
| Income (loss) from operations | ( | ) | ( | ) | ||||||||
| Other income (expense), net | ( | ) | ( | ) | ||||||||
| Income (loss) before income taxes | ( | ) | ( | ) | ||||||||
| Benefit of (Provision for) income taxes | ( | ) | ||||||||||
| Net income (loss) | $ | ( | ) | $ | $ | ( | ) | |||||
| Net income (loss) per common share - basic and diluted | ( | ) | ( | ) | ||||||||
| Weighted average number of common shares outstanding - basic and diluted | $ | $ | $ | |||||||||
5. CASH AND CASH EQUIVALENTS
As
of June 30, 2020 and December 31, 2019 the Company has $
6. ACCOUNTS RECEIVABLE AND ACCOUNTS RECEIVABLE – RELATED PARTY
As of June 30, 2020 | As of December 31, 2019 | |||||||
| Accounts receivable | $ | $ | ||||||
| Accounts receivable – related party | ||||||||
| Allowance for doubtful accounts | - | - | ||||||
| Total accounts receivable and accounts receivable – related party | $ | $ | ||||||
| F-21 |
AGAPE ATP CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
7. INVENTORIES
Inventories consist of the following:
As of June 30, 2020 | As of December 31, 2019 | |||||||
| Finished goods | $ | $ | - | |||||
8. PREPAYMENTS AND DEPOSITS
| As of June 30, 2020 | As of December 31, 2019 | |||||||
| Prepaid expenses | $ | $ | ||||||
| Receivables from sales distributors | - | |||||||
| Deposits to suppliers | ||||||||
| Total prepaid expenses and deposits | $ | $ | ||||||
9. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the following:
As of June 30, 2020 | As of December 31, 2019 | |||||||
| Computer and office equipment | $ | $ | ||||||
| Furniture & fixtures | ||||||||
| Leasehold improvements | ||||||||
| Vehicle | ||||||||
| Subtotal | - | |||||||
| Less: accumulated depreciation | ( | ) | - | |||||
| Total | $ | $ | ||||||
Depreciation
expense for the three months ended June 30, 2020 and 2019 amounted to $
10. INTANGIBLE ASSETS, NET
Intangible assets, net, consist of the following:
As of June 30, 2020 | As of December 31, 2019 | |||||||
| Computer software | $ | $ | ||||||
| Less: accumulated amortization | ( | ) | - | |||||
| Total | $ | $ | ||||||
Amortization
expense for the three months ended June 30, 2020 and 2019 amounted to $
| F-22 |
AGAPE ATP CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
11. INVESTMENT IN MARKETABLE SECURITIES
| (i) | On
May 17, 2018, the Company purchased shares of common stock in Greenpro Capital Corp. for $ | |
| (ii) | On
October 16, 2018, the Company purchased shares of common stock in Greenpro Capital Corp. for $ |
As of June 30, 2020 | As of December 31, 2019 | |||||||
| Cost of investment | $ | $ | ||||||
| Unrealized holding gain (loss) | ( | ) | ||||||
| Exchange rate effect | ||||||||
| Investment in marketable securities | $ | $ | ||||||
12. INVESTMENT IN NON-MARKETABLE SECURITIES
The
Company invested in Unreserved Sdn Bhd with the investment amount of $
Unreserved Sdn Bhd was incorporated in Malaysia with ordinary shares authorized, issued and outstanding. Mr. Lim Hun Soon @ David Lim and Ms. Aniza Helina Akmi Karim are the directors of Unreserved Sdn Bhd. Mr. How Kok Choong was a director of the company from April 30, 2018 to March 27, 2019.
On
March 2, 2020, the Company agreed to sell the
On
April 3, 2019, the Company purchased a
| Unreserved Sdn Bhd | As of June 30, 2020 | As of December 31, 2019 | ||||||
| Investment in non-marketable securities | $ | $ | ||||||
| Less: Sale of investment in non-marketable securities | ( | ) | ||||||
| Investment in non-marketable securities | $ | $ | ||||||
| Phoenix Plus Corporation | ||||||||
| Cost of investment | $ | $ | ||||||
| Total investment in non-marketable securities | $ | $ | ||||||
| F-23 |
AGAPE ATP CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
13. OTHER PAYABLES AND ACCRUED LIABILITIES
As of June 30, 2020 |
December 31, 2019 | |||||||
| Accrued professional fees | $ | $ | ||||||
| Accrued promotion expenses | - | |||||||
| Accrued payroll | - | |||||||
| Others | ||||||||
| Total other payables and accrued liabilities | $ | $ | ||||||
14. RELATED PARTY BALANCES AND TRANSACTIONS
Related party balances
Accounts receivable – related party
| Name of Related Party | Relationship | Nature | As of June 30, 2020 | As of December 31, 2019 | ||||||||||
| SEA | $ | $ | ||||||||||||
| Agape Superior Living Pty Ltd (“ASLPL”) | ||||||||||||||
| Total | $ | $ | ||||||||||||
| F-24 |
AGAPE ATP CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
Amount due from related parties
| Name of Related Party | Relationship | Nature | As of June 30, 2020 | As
of | ||||||||
| Agape ATP (Asia) Limited (“AATP Asia”) | $ | $ | ||||||||||
| Redboy Picture Sdn Bhd “Redboy” | ||||||||||||
| Total | $ | $ | ||||||||||
Prepayments and Deposits - related party
| Name of Related Party | Relationship | Nature | As of June 30, 2020 | As of December 31, 2019 | ||||||||
| Agape Superior Living Pty Ltd (“ASLPL”) | $ | $ | - | |||||||||
| Total | $ | $ | ||||||||||
Amount due to a Related Party
| Name of Related Party | Relationship | Nature | As of June 30, 2020 | As of December 31, 2019 | ||||||||
| Mr. How Kok Choong | $ | (1) | $ | |||||||||
| Total | $ | $ | ||||||||||
| (1) |
| F-25 |
AGAPE ATP CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
Related party transactions
Revenue
| Name of Related Party | Relationship | Nature | For the Three Months Ended June 30, 2020 | For the Three Months Ended June 30, 2019 | ||||||||||
| SEA | $ | $ | ||||||||||||
| Agape Superior Living Pty Ltd (“ASLPL”) | ||||||||||||||
| Total | $ | $ | ||||||||||||
| Name of Related Party | Relationship | Nature | For the Six Months Ended June 30, 2020 | For the Six Months Ended June 30, 2019 | ||||||||||
| SEA | $ | $ | ||||||||||||
| Agape Superior Living Pty Ltd (“ASLPL”) | ||||||||||||||
| Total | $ | $ | ||||||||||||
| F-26 |
AGAPE ATP CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
15. STOCKHOLDERS’ EQUITY
Preferred stock
As of June 30, 2020, and December 31, 2019, there were preferred stocks authorized but were issued and outstanding.
Common stock
As of June 30, 2020, and December 31, 2019, there were common stocks authorized, and shares issued and outstanding, respectively.
In May 2020, the Company issued shares of the Company’s common stock in connection with the acquisition of ASL as part of the acquisition payment.
In
June 2020, ASL made certain adjustments to its March 31, 2020 financial statements. As a result, the net assets carrying value
increased by $
There were stock options, warrants or other potentially dilutive securities outstanding as of June 30, 2020 and December 31, 2019.
Non-controlling interest
As
of June 30, 2020 and for the three and six months ended June 30, 2020, no material transactions of non-controlling interest occurred
from the operating results from ASL as the Company holds approximately
16. INCOME TAXES
The United States and foreign components of income (loss) before income taxes were comprised of the following:
| For the three months ended | For the six months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Tax jurisdictions from: | ||||||||||||||||
| Local | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| - Foreign – Malaysia | ( | ) | ||||||||||||||
| - Foreign – Hong Kong | ( | ) | ( | ) | ( | ) | ||||||||||
| Income (loss) before income tax | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| F-27 |
AGAPE ATP CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
The (provision for) benefit of income taxes consisted of the following:
For the Three Months Ended June 30, 2020 | For the Three Months Ended June 30, 2019 | For the Six Months Ended June 30, 2020 | For the Six Months Ended June 30, 2019 | |||||||||||||
| Current: | ||||||||||||||||
| - Local | $ | $ | $ | $ | ||||||||||||
| - Foreign | - | - | - | |||||||||||||
| Deferred: | ||||||||||||||||
| - Local | - | - | - | - | ||||||||||||
| - Foreign | ( | ) | - | ( | ) | - | ||||||||||
| (Provision for) benefit of income taxes | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
The effective tax rate in the periods presented is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. The Company and its subsidiary that operate in various countries: United States, Malaysia (including Labuan) and Hong Kong that are subject to taxes in the jurisdictions in which they operate, as follows:
United States of America
Agape
ATP Corporation was incorporated in the State of Nevada and is subject to the tax laws of the United States of America. As of
June 30, 2020, the operations in the United States of America incurred approximately $
Malaysia
Changes
to the Labuan Business Activity Tax Act (LBATA) 1990 which was gazetted and came into operation on January 1, 2019 mandate companies
incorporated in Labuan to satisfy the “substantial activity requirements” to qualify for the preferential tax rate
of
Agape
Superior Living Sdn Bhd and Agape S.E.A. are governed by the income tax laws of Malaysia and the income tax provision in respect
of operations in Malaysia is calculated at the applicable tax rates on the taxable income for the periods based on existing legislation,
interpretations and practices in respect thereof. Under the Income Tax Act of Malaysia, enterprises that incorporated in Malaysia
are usually subject to a unified
| F-28 |
AGAPE ATP CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
Hong Kong
Agape
ATP International Holding (HK) Limited is subject to Hong Kong Profits Tax, which is charged at the statutory income rate of
The following table sets forth the significant components of the aggregate deferred tax assets of the Company as of:
As of June 30, 2020 | As of December 31, 2019 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carry forwards in U.S. | $ | $ | ||||||
| Net operating loss carry forwards in Malaysia | ||||||||
| Less: valuation allowance | ( | ) | ( | ) | ||||
| Deferred tax liabilities: | ||||||||
| Depreciation | ( | ) | ||||||
| Deferred tax assets, net | $ | $ | ||||||
Uncertain tax positions
The Company evaluates each uncertain tax position (including the potential application of interest and penalties) based on the technical merits, and measure the unrecognized benefits associated with the tax positions. As of June 30, 2020, and December 31, 2019, the Company did not have any significant unrecognized uncertain tax positions. The Company did not incur interest and penalties tax for the three and six months ended June 30, 2020 and 2019.
17. CONCENTRATIONS OF RISKS
(a) Major customers
For
the three and six months ended June 30, 2020, no customer accounted for
As
of June 30, 2020, receivables from a third-party e-commerce company accounted for approximately
(b) Major vendors
For
the three and six months ended June 30, 2020, one vendor accounted for
There
are
| F-29 |
AGAPE ATP CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(c) Commission Expenses to Sales Distributors and Stockists
For
the three and six months ended June 30, 2020, no sales distributor accounted for
(d) Credit risk
Financial
instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash. As of
June 30, 2020, and December 31, 2019, $
Financial instruments that are potentially subject to credit risk consist principally of accounts receivable. The Company believes the concentration of credit risk in its account receivable is substantially mitigated by its ongoing credit evaluation process and relatively short collection terms. The Company does not generally require collateral from customers. The Company evaluates the need for an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. Historically, the Company did not have any bad debt on its account receivable.
(e) Exchange rate risk
The Company cannot guarantee that the current exchange rate will remain steady; therefore, there is a possibility that the Company could post the same amount of profit for two comparable periods and because of the fluctuating exchange rate actually post higher or lower profit depending on exchange rate of RM and HK$ converted to US$ on that date. The exchange rate could fluctuate depending on changes in political and economic environments without notice.
18. COMMITMENTS AND CONTINGENCIES
Lease commitments
On
April 1, 2020, the Company adopted ASC 842 for ASL’s office space lease and sales and training center as the lease commencement
date upon the acquisition of ASL. The Company recognized lease liabilities of approximately $
| F-30 |
AGAPE ATP CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
The five-year maturity of the Company’s operating lease liabilities is as follow:
| Twelve Months Ending June 30, | Operating lease liabilities | |||
| 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| Total lease payments | ||||
| Less: interest | ( | ) | ||
| Present value of lease liabilities | $ | |||
The
Company also leases two distribution centers and one employee apartment with an expiring term of twelve months or fewer,
which were classified as operating leases. For lease terms of twelve months or fewer, a lessee is permitted to make an
accounting policy election not to recognize lease assets and liabilities. The Company selected not to recognize lease assets and
liabilities on these leases. As of June 30, 2020, the Company’s commitment for minimum lease payments under these operating
leases within the next twelve months are $
Rent
expense for the three months ended June 30, 2020 and 2019 was $
Purchase commitments
The total future minimum purchase commitment under a non-cancellable purchase contract as of June 30, 2020 for the next five years and thereafter is as follows:
| Twelve months ending June 30, | Minimum purchase | |||
| 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| Total minimum purchase commitments required | $ | |||
As of the date of this report, the Company’s vendor is not able to meet the Company’s minimum purchase commitment of the health and wellness products due to the manufacturing process was being delayed by its vendor.
Contingencies
Legal
From time to time, the Company is party to certain legal proceedings, as well as certain asserted and un-asserted claims. Amounts accrued, as well as the total amount of reasonably possible losses with respect to such matters, individually and in the aggregate, are not deemed to be material to the consolidated financial statements.
| F-31 |
AGAPE ATP CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
COVID-19
On March 11, 2020, the World Health Organization or WHO declared the corona virus or COVID-19 a pandemic. In accordance with the recommendations of the WHO, Malaysia had imposed a nationwide lockdown via the government’s Movement Control Order (“MCO”) effective March 18, 2020. The MCO has resulted in quarantines, travel restrictions, and the temporary closure of stores and facilities in Malaysia. On May 4, 2020, the MCO was lessen to a Conditional Movement Control Order (“CMCO”) where most business sectors were allowed to operate under strict rules and Standard Operating Procedures mandated by the government of Malaysia.
Substantially all of the Company’s revenues are concentrated in Malaysia. Consequently, its results of operations will likely be adversely, and may be materially, affected, to the extent that the COVID-19 or any other epidemic harms the Malaysia and global economy in general. Any potential impact to its results will depend on, to a large extent, future developments and new information that may emerge regarding the duration and severity of the COVID-19 and the actions taken by government authorities and other entities to contain the COVID-19 or treat its impact, almost all of which are beyond its control. Potential impacts include, but are not limited to, the following:
| ● | temporary closure of offices, travel restrictions, financial impact of the Company’s customers or suspension supplies may negatively affected, and could continue to negatively affect, the demand for the Company’s product; | |
| ● | the Company may have to provide significant sales incentives to its customers during the outbreak, which may in turn materially adversely affect its financial condition and operating results; and |
any disruption of the Company’s supply chain, logistics providers or customers could adversely impact its business and results of operations, including causing the Company or its suppliers to cease manufacturing for a period of time or materially delay delivery to its customers, which may also lead to loss of its customers.
Because of the uncertainty surrounding the COVID-19 outbreak, the financial impact related to the outbreak of and response to the COVID-19 cannot be reasonably estimated at this time. There is no guarantee that the Company’s total revenues will grow or remain at the similar level year over year in the remaining period of 2020.
| F-32 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information contained in this quarter report on Form 10-Q is intended to update the information contained in our Form 10-K, dated March 27, 2020, for the six months ended December 31, 2019 and presumes that readers have access to, and will have read, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other information contained in such Form 10-K. The following discussion and analysis also should be read together with our consolidated financial statements and the notes to the consolidated financial statements included elsewhere in this Form 10-Q.
The following discussion contains certain statements that may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements appear in a number of places in this Report, including, without limitation, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements are not guarantees of future performance and involve risks, uncertainties and requirements that are difficult to predict or are beyond our control. Forward-looking statements speak only as of the date of this quarterly report. You should not put undue reliance on any forward-looking statements. We assume no responsibility to update the forward-looking statements contained in this transition report on Form 10-Q. The following should also be read in conjunction with the unaudited condensed Consolidated Financial Statements and notes thereto that appear elsewhere in this report.
Company Overview
Agape ATP Corporation, a Nevada corporation (“the Company”) was incorporated under the laws of the State of Nevada on June 1, 2016.
Agape ATP Corporation operates through its wholly owned subsidiary, Agape ATP Corporation, a Company organized in Labuan, Malaysia.
Agape ATP Corporation, incorporated in Labuan, Malaysia, is an investment holding company with 100% equity interest in Agape ATP International Holding Limited, a company incorporated in Hong Kong.
On May 8, 2020, the Company entered into a Share Exchange Agreement with Mr. How Kok Choong, CEO and director of the Company to acquire 9,590,596 ordinary shares, no par value, equivalent to approximately 99.99% of the equity interest in Agape Superior Living Sdn. Bhd., an entity incorporated in Malaysia.
Agape Superior Living Sdn. Bhd. (“ASL”) is a limited company incorporated on August 8, 2003, under the laws of Malaysia.
The Company and its subsidiaries engage in the network marketing sales business in the Health and Wellness Industry. The principal activity of the Company is to supply high-quality health and wellness products, including supplements to assist in cell metabolism, detoxification, blood circulation, anti-aging and products designed to improve the overall health system of the human body.
Agape ATP Corporation is a company that provides health solution advisory services to our clients. We primarily focus our efforts on attracting customers in Malaysia. Our advisory services center on the “ATP Zeta Health Program”, which is a health program designed to effectively prevent diseases caused by polluted environments, unhealthy dietary intake and unhealthy lifestyles, and promotion of health. The program aims to promote improved health and longevity in our clients through a combination of modern medicine, proper nutrition and advice from skilled nutritionists and/or dieticians.
In order to strengthen the Company’s supply chain, on May 8, 2020, the Company has successfully acquired approximately 99.99% of ASL, with the goal of securing an established network marketing sales channel that has been established in Malaysia for the past 15 years. On the same date, other than its existing network marketing sales channel, ASL itself has also commenced trading via an e-commerce platform. ASL has been offering the Company’s ATP Zeta Health Program as part of its product lineup. As such, the acquisition creates synergy in the Company’s operation by boosting the Company’s retail and marketing capabilities. The newly acquired subsidiary allows the Company to fulfill its mission of “helping people to create health and wealth” by providing a financially rewarding business opportunity to distributors and quality products to distributors and customers who seek a healthy lifestyle.
| 3 |
The Company offers three series of programs which consist of different services and products: ATP Zeta Health Program, ÉNERGÉTIQUE and BEAUNIQUE.
The ATP Zeta Health Program is a health program designed to promote health and general wellbeing designed to prevent health diseases caused by polluted environments, unhealthy dietary intake and unhealthy lifestyles. The program aims to promote improved health and longevity through a combination of modern health supplements, proper nutrition and advice from skilled dieticians as well as trained members and distributors.
The ÉNERGÉTIQUE series aims to provide a total dermal solution for a healthy skin beginning from the cellular level. The series is comprised of the Energy Mask series, Hyaluronic Acid Serum and Mousse Facial Cleanser.
The BEAUNIQUE product series focuses on the research of our diet’s impact on modifying gene expressions in order to address genetic variations and deliver a nutrigenomic solution for every individual.
Results of Operation
For the three months ended June 30, 2020 and 2019
Revenue
The Company generated revenue of $1,523,862 for the three months ended June 30, 2020 as compared to $396,472 for the three months ended June 30, 2019. The revenues for the three months ended June 30, 2020, were mainly derived from the increased sale of health and wellness products as a result of the acquisition of ASL, which brought us to a large group of customers in an established network marketing sales channel that has been established in Malaysia for the past 15 years. During the three months ended June 30, 2019, we were only making sales to our related party on a wholesale basis when they placed the purchase orders.
Cost of Revenue
Cost of revenue for the three months ended June 30, 2020 amounted to $471,554 as compared to $397,172 for the three months ended June 30, 2019. The costs were predominantly cost of goods and packing materials. The cost of revenue for the current reporting period was incurred by ASL for its retail activities, while the cost of revenue for the corresponding period last year was related to wholesale business of the Company prior to the acquisition of ASL.
Gross Profit (Loss)
Gross profit for the three months ended June 30, 2020 amounted to $1,052,308 as compared to gross loss of $700 for the three months ended June 30, 2019. Gross margin for the three months ended June 30, 2020 was approximately 69.1% as compared to approximately (0.2%) for the three months ended June 30, 2019. The increase in gross profit was mainly due to the increase in revenue as a result from the acquisition of ASL, which brought us to a large group of customers in an established network marketing sales channel as compared to the three months ended June 30, 2019, which we generated lower or negative gross margins from our sales to our related party wholesales customers.
Operating Expenses
Our operating expenses consist of selling expenses, commission expenses and general and administrative expenses.
| 4 |
Selling expenses
Selling expenses for three months ended June 30, 2020 amounted to $108,894 as compared to $6,504 for the three months ended June 30, 2019, an increase of $102,390 or approximately 1,574.3%. The increase was mainly due to the acquisition of ASL which attributed additional selling expenses to our operations and resulted from the increase of approximately $84,000 salary and employee benefit expenses of our employees in ASL’s sales center in the three months ended June 30, 2020. As compared to the same period in 2019, we do not have any employees in our sales team. The increase was also attributable to the increase of approximately $10,000 credit card charges of processing sales transactions from our customers and the increase of other miscellaneous selling expenses of approximately $8,000.
Commission expenses
Commission expenses were $382,498 and $0 for the three months ended June 30, 2020 and 2019, respectively, an increase of $382,498 or 100.0%. The increase in commission expenses was due to the acquisition of ASL which brought us to a new marketing channel that pay commissions to distributors and members in network sales marketing.
General and administrative expenses
General and administrative (“G&A”) expenses for the three months ended June 30, 2020 amounted to $514,724, as compared to $52,734 for the three months ended June 30, 2019, an increase of $461,990 or approximately 876.1%. The increase was mainly due to the increase of professional fees of approximately $233,000 as we have recently hired new professional firms located in the U.S. and Hong Kong, including legal counsel, auditor, and financial reporting consultant, to strengthen our current Securities and Exchange Commission (“SEC”) listing reporting documents and continue to stay compliant as well as professional services incurred in relation to the acquisition of ASL during the three months ended June 30, 2020 as compared to the same period in 2019, we were using local professional firms in Malaysia. Professional fee incurred by the U.S. and Hong Kong firms are generally higher than the professional fees incurred by the Malaysia firms. The increase of G&A expenses was also attributable to the acquisition of ASL with approximately $230,000 additional general and administrative expenses to our operations, which mainly comprised of rental expenses, salary and employee benefit expenses and depreciation expenses.
Other Income (Expenses)
For the three months ended June 30, 2020, we recorded an amount of $175,115 as other income, net as compared to $388,473 other expenses, net for the three months ended June 30, 2019. The net other income of $175,115 incurred during the three months ended June 30, 2020 comprised other income of $29,911 and unrealized holding gain on marketable securities of $145,204. The net other expenses of $388,473 incurred during the three months ended June 30, 2019 comprised other expense of $21,639 and $366,834 of impairment loss in our equity investment.
Provision for Income Taxes
The Company recorded provision for income taxes of $134,067 and $0 for the three months ended June 30, 2020 and 2019, respectively. During the three months ended June 30, 2020, we generated taxable income in ASL that are subject to a unified 24% income tax rate.
Net Income (Loss)
Net income increased by $535,651 from net loss of $448,411 for the three months ended June 30, 2019 to net income of $87,240 for the three months ended June 30, 2020, mainly due to reasons as discussed above.
| 5 |
For the six months ended June 30, 2020 and 2019
Revenue
The Company generated revenue of $1,523,862 for the six months ended June 30, 2020 as compared to $860,769 for the six months ended June 30, 2019. The revenues for the six months ended June 30, 2020, were mainly derived from the increased sales of health and wellness products as a result from the acquisition of ASL, which brought us to a large group of customers in an established network marketing sales channel that has been in established in Malaysia for the past 15 years. During the six months ended June 30, 2019, we were only making sales to our related party on wholesale basis when they placed the purchase orders.
Cost of Revenue
Cost of revenue for the six months ended June 30, 2020 amounted to $471,554 as compared to $817,350 for the six months ended June 30, 2019. The costs were predominantly cost of goods purchased and packing materials. The cost of revenue for the current reporting period was incurred by ASL for its retail activities, while the cost of revenue for the corresponding period last year was related to wholesale business of the Company prior to the acquisition of ASL.
Gross Profit
Gross profit for the six months ended June 30, 2020 amounted to $1,052,308 as compared to $43,419 for the six months ended June 30, 2019. Gross margin for the six months ended June 30, 2020 was approximately 69.1% as compared to approximately 5.0% for the six months ended June 30, 2019. The increase of gross margin was mainly due to the increase of revenue and decrease in cost of revenue for the six months ended June 30, 2020 as compared to the same period in 2019 as a result from the acquisition of ASL, which brought us to a large group of customers in an established network marketing sales channel. During the six months ended June 30, 2020, we generated higher gross margins of selling our products directly to the customers in the network channel as compared to the six months ended June 30, 2019, which we generated a much lower gross margins from our sales to our related party wholesales customers.
Operating Expenses
Our operating expenses consist of selling expenses, commission expenses and general and administrative expenses.
Selling expenses
Selling expenses for six months ended June 30, 2020 amounted to $109,356 as compared to $7,846 for the six months ended June 30, 2019, an increase of $101,510 or approximately 1,293.8%. The increase was mainly due to the acquisition of ASL which attributed additional selling expenses to our operations and resulted from the increase of approximately $84,000 salary and employee benefit expenses of our employees in ASL’s sales center during the six months ended June 30, 2020. As compared to the same period in 2019, we do not have any employees in our sales team. The increase was also attributable to the increase of approximately $9,000 credit card charges of processing sales transactions from our customers and the increase of other miscellaneous selling expenses of approximately $8,000.
Commission expenses
Commission expenses were $382,498 and $0 for the six months ended June 30, 2020 and 2019, respectively, an increase of $382,498 or 100.0%. The increase in commission expenses was due to the acquisition of ASL which brought us to a new marketing channel which pays commissions to distributors and members in network sales marketing.
| 6 |
General and administrative expenses
General and administrative expenses for the six months ended June 30, 2020 amounted to $673,778, as compared to $83,778 for the six months ended June 30, 2019, an increase of $590,000 or approximately 704.2%. The increase was mainly due to the increase of professional fees of approximately $333,000 as we have recently hired new professional firms located in the U.S. and Hong Kong, including legal counsel, auditor, and financial reporting consultant, to strengthen our current Securities and Exchange Commission (“SEC”) listing reporting documents and to continue to stay compliant and professional services incurred in relation to the acquisition of ASL during the six months ended June 30, 2020 as compared to the same period in 2019, we were using local professional firms in Malaysia. Professional fee incurred by the U.S. and Hong Kong firms are generally higher than the professional fees incurred by the Malaysia firms. The increase of G&A expenses was also attributable to the acquisition of ASL with approximately $230,000 additional general and administrative expenses to our operations, which mainly comprised of rental expenses, salary and employee benefit expenses and depreciation expenses. In addition, the increase of G&A expenses was also due to the increase of approximately $32,000 of travelling expenses for our CEO for potential business developments.
Other Income (Expenses)
For the six months ended June 30, 2020, we recorded an amount of $102,881 as other income, net as compared to $335,956 other expenses, net for the six months ended June 30, 2019. The net other income of $102,881 incurred during the six months ended June 30, 2020 comprised other expenses of $23,785 and unrealized holding gain on marketable securities of $126,666. The net other expenses of $335,956 incurred during the six months ended June 30, 2019 comprised other income of $40,454, $26,085 on share of loss in investee company from our equity investment, $16,509 on gain on deemed disposal of shares in investee company and $366,834 of impairment loss in our equity investment.
Provision for (Benefit of) Income Taxes
The Company recorded provision for (benefit of) income taxes $134,067 and $(6,965) for the six months ended June 30, 2020 and 2019, respectively. During the six months ended June 30, 2020, we generated taxable income in ASL that are subject to a unified 24% income tax rate. On the other hand, during the six months ended March 31, 2019, we incurred taxable losses that can be carried forward for 7 years, which resulted in recognition of deferred tax assets on net operating loss and income tax benefits.
Net Loss
Net loss decreased by $232,686 from net loss of $377,196 for the six months ended June 30, 2019 to $144,510 for the six months ended June 30, 2020, mainly due to reasons as discussed above.
Liquidity and Capital Resources
On March 11, 2020, the World Health Organization or WHO declared the corona virus or COVID-19 a pandemic. In accordance with the recommendations of the WHO, Malaysia had imposed a nationwide lockdown via the government’s Movement Control Order (“MCO”) effective March 18, 2020. The MCO has resulted in quarantines, travel restrictions, and the temporary closure of stores and facilities in Malaysia. On May 4, 2020, the MCO was eased to a Conditional Movement Control Order (“CMCO”) where most business sectors were allowed to operate under strict rules and Standard Operating Procedures mandated by the government of Malaysia.
Substantially all of our revenues are concentrated in Malaysia. Consequently, our results of operations will likely be adversely, and may be materially, affected, to the extent that the COVID-19 or any other epidemic harms the Malaysia and global economy in general. Any potential impact to our results will depend on, to a large extent, future developments and new information that may emerge regarding the duration and severity of the COVID-19 and the actions taken by government authorities and other entities to contain the COVID-19 or treat its impact, almost all of which are beyond our control. Potential impacts include, but are not limited to, the following:
| 7 |
| ● | temporary closure of offices, travel restrictions, financial impact of our customers or suspension supplies may negatively affected, and could continue to negatively affect, the demand for our products; | |
| ● | we may have to provide significant sales incentives to our customers during the outbreak, which may in turn materially adversely affect our financial condition and operating results; and | |
| ● | any disruption of our supply chain, logistics providers or customers could adversely impact our business and results of operations, including causing us or our suppliers to cease manufacturing for a period of time or materially delay delivery to our customers, which may also lead to loss of our customers. |
Although some of the countries from which our products are sourced are experiencing lockdowns, industries involve in the provision of food especially health products and pharmaceuticals are normally exempted. We may experience slight delay in products delivery lead time but barring unforeseen circumstances, the setback should be temporary.
We currently operating primarily in Malaysia and anticipate expanding into the Asian markets in the future, with a particular focus, at least initially, on expanding into Thailand, Indonesia and Taiwan. We will explore expansion via e-commerce. When the pandemic has subsided or is over and restrictions on travelling between nations are uplifted, we will set up offices in the countries in which we operate to better service our customers.
Because of the uncertainty surrounding the COVID-19 outbreak, the financial impact related to the outbreak of and response to the COVID-19 cannot be reasonably estimated at this time. There is no guarantee that our total revenues will grow or remain at the similar level year over year in the last two quarters of 2020.
As of June 30, 2020, we had working capital of $4,314,771 consisting of cash in bank of $917,458 and time deposits of $2,483,915 as compared to working capital of $3,452,665 consisting of cash in bank of $238,937 and time deposits of $2,505,520 as of December 31, 2019. In assessing our liquidity, we monitor and analyze our cash on-hand and our operating expenditure commitments. Our liquidity needs are to meet our working capital requirements and operating expenses obligations. We believe we will have sufficient liquidity to fund our working capital needs for the next 12 months from the date of issuance of this Form 10-Q.
The following summarizes the key components of our cash flows for the six months ended June 30, 2020 and 2019:
| For the Six Months Ended | ||||||||
| June 30, 2020 | June 30, 2019 | |||||||
| Net cash used in operating activities | $ | (780,664 | ) | $ | (590,473 | ) | ||
| Net cash provided by (used in) investing activities | 1,280,991 | (1,500 | ) | |||||
| Net cash provided by (used in) financing activities | 140,837 | (4,573 | ) | |||||
| Effect of exchange rate on cash and cash equivalents | 42,043 | 1,216 | ||||||
| Net change in cash and cash equivalents | $ | 683,207 | $ | (595,330 | ) | |||
Operating activities
Net cash used in operating activities for the six months ended June 30, 2020 was $780,664 and was mainly comprised of our net loss of $144,510, the non-cash income on unrealized holding gain on marketable securities of $126,667, the increase of accounts receivables, including related party, of $322,547, the decrease of customer deposits of $712,749 and the payment of operating lease liabilities of $32,253. The net cash used in operating activities was mainly offset by the non-cash depreciation expense of $17,716, amortization of operating right-of-use assets of $32,756 and deferred taxes provision of $134,067, the decrease in prepayments and deposits of $125,422, the decrease in inventories of $206,540 and the increase in other payables and accrued liabilities of $51,093.
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Net cash used in operating activities for the six months ended June 30, 2019 was $590,473 and mainly comprised of net loss of $377,196, the non-cash expense of gain on deemed disposal of shares in Investee Company of $16,509, the increase of related party accounts receivable of $433,338, and the decrease in customer deposits of $217,743. The net cash used in operating activities was mainly offset by the non-cash expense of loss from equity investment of $26,085 and the impairment loss in equity investment of $366,834, the decrease of prepayments and deposits of $11,734, the increase in related party accounts payable of $35,145 and the increase in other payables and accrued liabilities of $23,690.
Investing activities
Net cash provided by investing activities for the six months ended June 30, 2020, were in respect of cash and cash equivalents acquired through acquisition of ASL of $1,210,818 and partial proceeds collected from the sale of our non-marketable securities of $70,173.
Net cash used in investing activities for the six months ended June 30, 2019 was $1,500 which was due to the investment in non-marketable securities.
Financing activities
Net cash provided by financing activities for the six months ended June 30, 2020 was $140,837 which were mainly comprised of repayments from related parties of $216,575 offset by payment of deferred offering cost of $75,738.
Net cash used in financing activities for the six months ended June 30, 2019 was $4,573 which were due to the repayment to a director of $5,318 offset by repayment from related parties of $745.
Credit Facilities
We do not have any credit facilities or other access to bank credit.
Off-Balance Sheet Arrangements
As of June 30, 2020, we have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.
Critical Accounting Polices
Use of estimates
The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Significant accounting estimates reflected in the Company’s unaudited condensed consolidated financial statements include allowance for doubtful accounts, allowance for inventories obsolescence, useful lives of property and equipment, useful lives of intangible assets, impairment of long-lived assets, allowance for deferred tax assets, operating right-of-use assets, operating lease liabilities and uncertain tax position and impairment of investment in non-marketable securities. Actual results could differ from these estimates.
Revenue recognition
On July 1, 2019, the Company adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (ASC Topic 606) using the modified retrospective method for contracts that were not completed as of June 30, 2019. This did not result in an adjustment to retained earnings upon adoption of this new guidance as the Company’s revenue was recognized based on the amount of consideration expected to receive in exchange for satisfying the performance obligations.
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The core principle underlying the revenue recognition of this ASU allows the Company to recognize - revenue that represents the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This will require the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer. The Company’s revenue streams are recognized at a point in time for the Company’s sale of health and wellness products.
The ASU requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation.
The Company accounts for a contract with a customer when the contract is committed in writing, the rights of the parties, including payment terms, are identified, the contract has commercial substance and consideration is probable of substantially collection.
Prior to July 1, 2019, the Company recognizes revenue from sales of goods when the following four revenue criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) selling price is fixed or determinable; and (4) collectability is reasonably assured. Revenue from supplies of health and wellness products is recognized when title and risk of loss are transferred and there are no continuing obligations to the customer. Title and the risks and rewards of ownership transfer to and accepted by the customer when the products are collected by the customer at the Company’s office. Revenue is recorded net of sales discounts, returns, allowances, and other adjustments that are based upon management’s best estimates and historical experience and are provided for in the same period as the related revenues are recorded.
The application of the five-step model to the revenue streams compared to the prior guidance did not result in significant changes in the way the Company records its revenue. Upon adoption on July 1, 2019, the Company evaluated its revenue recognition policy for all revenue streams within the scope of the ASU under previous standards and using the five-step model under the new guidance and confirmed that there were no differences in the pattern of revenue recognition.
Sales of Health and Wellness products
- Performance obligations satisfied at a point in time
On July 1, 2019, the Company derives its revenues from sales contracts with its customers with revenues being recognized when control of the health and wellness products are transferred to its customer at the Company’s office or shipment of the goods, which is generally similar to when its delivery has occurred prior to July 1, 2019 Such revenues are recognized at a point in time after all performance obligations are satisfied. The revenue is recorded net of estimated discounts and return allowances. Products are given 60 days for returns or exchanges from the date of purchase. Historically, there were insignificant sales returns.
The Company also sells coupons to its customers for cash at a discounted price of the value of the coupons. Customers can apply the value of the coupons for a reduction in the transaction price paid by the customer are recorded as a reduction of sales. The cash proceeds resulted from the sale of coupons are recognized as customer deposits until the coupons to be applied as a reduction of the health and wellness products transaction price upon such sales transactions occurred. The Company’s coupons have a validity period of six months. If the Company’s customers did not utilized the coupons after six months, the Company would recognize the forfeiture of the originated sales value of the coupons as net revenues.
Fair value of financial instruments
The accounting standard regarding fair value of financial instruments and related fair value measurements defines financial instruments and requires disclosure of the fair value of financial instruments held by the Company.
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The accounting standards define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosure requirements for fair value measures. The three levels are defined as follow:
| ● | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. | |
| ● | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments. | |
| ● | Level 3 inputs to the valuation methodology are unobservable and significant to the fair value. |
Financial instruments included in current assets and current liabilities are reported in the consolidated balance sheets at face value or cost, which approximate fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rates of interest.
Recent accounting pronouncements
The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and do not believe the future adoption of such any pronouncements may be expected to cause a material impact on its financial condition or the results of its operations, as follow:
In May 2019, the FASB issued ASU 2019-05, which is an update to ASU Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced the expected credit losses methodology for the measurement of credit losses on financial assets measured at amortized cost basis, replacing the previous incurred loss methodology. The amendments in Update 2016-13 added Topic 326, Financial Instruments—Credit Losses, and made several consequential amendments to the Codification. Update 2016-13 also modified the accounting for available-for-sale debt securities, which must be individually assessed for credit losses when fair value is less than the amortized cost basis, in accordance with Subtopic 326-30, Financial Instruments— Credit Losses—Available-for-Sale Debt Securities. The amendments in this Update address those stakeholders’ concerns by providing an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For those entities, the targeted transition relief will increase comparability of financial statement information by providing an option to align measurement methodologies for similar financial assets. Furthermore, the targeted transition relief also may reduce the costs for some entities to comply with the amendments in Update 2016-13 while still providing financial statement users with decision-useful information. In November 2019, the FASB issued ASU No. 2019-10, which to update the effective date of ASU No. 2016-13 for private companies, not-for-profit organizations and certain smaller reporting companies applying for credit losses, leases, and hedging standard. The new effective date for these preparers is for fiscal years beginning after December 15, 2022. ASU 2019-05 is effective for the Company for annual and interim reporting periods beginning January 1, 2023 as the Company is qualified as a smaller reporting company. The Company is currently evaluating the impact ASU 2019-05 may have on its unaudited condensed consolidated financial statements.
In January 2020, the FASB issued ASU 2020-01 to clarify the interaction of the accounting for equity securities under ASC 321 and investments accounted for under the equity method of accounting in ASC 323 and the accounting for certain forward contracts and purchased options accounted for under ASC 815. With respect to the interactions between ASC 321 and ASC 323, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting when applying the measurement alternative in ASC 321, immediately before applying or upon discontinuing the equity method of accounting. With respect to forward contracts or purchased options to purchase securities, the amendments clarify that when applying the guidance in ASC 815-10-15-141(a), an entity should not consider whether upon the settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method in ASC 323 or the fair value option in accordance with ASC 825. The ASU is effective for interim and annual reporting periods beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim period. The Company does not expect the adoption of this standard to have a material impact on its unaudited condensed consolidated financial statements.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign exchange risk. Substantially most of our revenues are denominated in the U.S. dollar while most of our expenses are denominated in Malaysian Ringgit and Hong Kong Dollar. We do not believe that we currently have any significant direct foreign exchange risk and have not hedged exposures denominated in foreign currencies or any other derivative financial instruments. Although in general, our exposure to foreign exchange risks should be limited, the value of an investment in our Common Stock may be affected by the foreign exchange rate between U.S. dollar and Malaysian Ringgit; and U.S. dollar and Hong Kong Dollar because the value of our business is effectively denominated in Malaysian Ringgit and Hong Kong Dollar, while the Common Stock is traded in U.S. dollars.
Credit risk. Financial instruments that are potentially subject to credit risk consist principally of accounts receivable. The Company believes the concentration of credit risk in its trade receivables is substantially mitigated by its ongoing credit evaluation process and relatively short collection terms. The Company does not generally require collateral from customers. The Company evaluates the need for an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.
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ITEM 4 CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures:
We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2020. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer. Based upon that evaluation, our Chief Executive Officer concluded that, as of June 30, 2020, our disclosure controls and procedures were not effective due to the presence of material weaknesses in internal control over financial reporting.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management has identified the following material weaknesses which have caused management to conclude that, as of June 30, 2020, our disclosure controls and procedures were not effective:
| (1) | The Company did not have sufficient full-time personnel with appropriate levels of accounting knowledge and experience to monitor the daily recording of transactions, address complex U.S. GAAP accounting issues and to prepare and review financial statements and related disclosures under U.S. GAAP. |
| (2) | Lack of a functional internal audit department or personnel that monitors the consistencies of the preventive internal control procedures; lack of adequate policies and procedures in internal audit function to ensure that the Company’s policies and procedures have been carried out as planned. |
| (3) | We do not have adequate segregation of duties and effective risk assessment. Lack of segregation of duties and effective risk assessment may cause the Company to face the likelihood of fraud or theft, due to poor oversight, governance and review to detect errors. |
Management’s Remediation Initiatives
In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we will prepare written policies and procedures for accounting and financial reporting with respect to the requirements and application of both U.S. GAAP and SEC guidelines, to establish a formal process to close our books monthly on an accrual basis and account for all transactions, including equity and debt transactions.
We plan to initiate the following series of measures to further strengthen the Company’s internal controls going forward:
| 1. | We intend to engage an external consulting firm to supplement our efforts to the implementation of the 2013 Committee of Sponsoring Organizations of the Treadway Commission, or COSO, framework for internal controls. |
| 2. | We intend to establish an internal audit function with assessment of Sarbanes-Oxley compliance requirements and improvement of overall internal control. |
| 3. | Once we hire additional employees, we intend to initiate a comprehensive program and development plan to provide ongoing company-wide trainings regarding internal control, with particular emphasis on our accounting staff. |
We anticipate that these initiatives will be at least partially, if not fully, implemented by the end of fiscal year 2020.
Changes in Internal Control over Financial Reporting:
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
We know of no materials, active or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceedings or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any beneficial shareholder are an adverse party or has a material interest averse to us.
Item 1A. Risk Factors.
Risks Related to our Business
We are exposed to concentration risk of heavy reliance on our major supplier for the supply of our products, and any shortage of, or delay in, the supply may significantly impact on our business and results of operation.
For the six months ended June 30, 2020, we purchased $167,054 from one of our major suppliers, represented 100% of our total purchases. Our business, financial condition and operating results depend on the continuous supply of products from our major supplier and our continuous supplier-customer relationship with it. Our heavy reliance on our major supplier for the supply of our products will have significant impact on our business and results of operation in the event of any shortage of, or delay in the supply.
As is customary in distribution arrangements of this type, the distribution agreement with our major supplier is terminable by either party by giving notice. There is no assurance that our major supplier will not terminate the distribution agreement. In the event that it terminates the distribution agreement, we will have to source products from other suppliers and we may not be able to secure supply of products with quantity and quality required to support our business or at all. Such termination may therefore have a material adverse impact on our business, financial condition and operating results if we fail to engage any other suppliers before the termination.
There is no assurance that our major supplier will continue to supply its products in the quantities and timeframes required by us to meet the needs of our customers or comply with its supply agreement with us. Our product supply may also be disrupted by potential labor disputes, strike action, natural disasters or other accidents, epidemic and pandemic affecting the supplier. If our major supplier does not supply products to us in a timely manner or in sufficient quantities, our business, financial condition and operating results may be materially and adversely affected. Furthermore, in the event of any delay in delivery of the products to us, our cash flow or working capital may be materially and adversely affected as a result of the corresponding delay in delivery of our products to our customers, and hence the delay in our receipt of payment from our customers.
Our major supplier may change its existing sales or marketing strategy in respect of the products supplied to us by changing its export strategy, reducing its sales or production volume or changing its selling prices. Consequently, there is no assurance that our major supplier will not appoint other dealers or distributors which may compete with us in the market where we operate. Furthermore, any significant increase in the selling prices of the products which we source from our supplier will increase our costs and may adversely affect our profit margin if we are not able to pass the increased costs on to our customers.
There is no assurance that there will be no deterioration in our relationship with our major supplier which could affect our ability to secure sufficient supply of products for our business. In the event that our major supplier changes its sales or marketing strategy or otherwise appoint other dealers or distributors who may compete with us, our business, financial condition and operating results may be materially and adversely affected.
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We could be adversely affected by a change in consumer preferences, perception and spending habits and failure to develop or enrich our product offering or gain market acceptance of our new products could have a negative effect on our business.
The market we operate is subject to changes in consumer preference, perception and spending habits. Our performance depends significantly on factors which may affect the level and pattern of consumer spending in the market we operate. Such factors include consumer preference, consumer confidence, consumer income and consumer perception of the safety and quality of our products. Media coverage regarding the safety or quality of, or diet or health issues relating to, our products or the raw materials, ingredients or processes involved in their manufacturing, may damage consumer confidence in our products. A general decline in the consumption of our products could occur as a result of change in consumer preference, perception and spending habits at any time.
Any failure to adapt our product offering to respond to such changes may result in a decrease in our sales if such changes are related to certain of our products. Any changes in consumer preference could result in lower sales of our products, put pressure on pricing or lead to increased levels of selling and promotional expenses. In any event a decrease in customer demand on our products may also result in lower sales and slow down the consumption of our inventory to a low inventory turnover level. Any of these changes could result in a material adverse effect on our business, financial conditions or results of operations.
The success of our products depends on a number of factors including our ability to accurately anticipate changes in market demand and consumer preferences, our ability to differentiate the quality of our products from those of our competitors, and the effectiveness of our marketing and advertising campaigns for our products. We may not be successful in identifying trends in consumer preferences and developing products that respond to such trends in a timely manner. We also may not be able to effectively promote our products by our marketing and advertising campaigns and gain market acceptance. If our products fail to gain market acceptance, are restricted by regulatory requirements, or have quality problems, we may not be able to fully recover our costs and expenses incurred in our operation, and our business prospects, financial condition or results of operations may be materially and adversely affected.
If we fail to maintain quality products and value, our sales are likely to be negatively affected.
Our success depends on the safety and quality of products that we obtain from our suppliers for our customers. Our future customers will identify our brand name with a certain level of quality and value. If we cannot meet this perceived value or level of quality, we may be negatively affected and our operating results may suffer. In addition, any failure on the part of our suppliers to maintain the quality of their products, will in turn substantially harm the results of our business operations, potentially forcing us to identify other suppliers or alter our business strategy significantly.
If we are unable to create brand influence, we may not be able to maintain current or attract new users and customers for our products.
Our operational and financial performance is highly dependent on the strength of our brand. We believe brand familiarity and preference will continue to have a significant role in winning customers as the decision to buy our products and services. In order to further expand our customer base, we may need to substantially increase our marketing expenditures to enhance brand awareness through various online and offline means. Moreover, negative coverage in the media of our company could threaten the perception of our brand, and we cannot assure you that we will be able to defuse negative press coverage about our company to the satisfaction of our investors, customers and suppliers. If we are unable to defuse negative press coverage about our company, our brand may suffer in the marketplace, our operational and financial performance may be negatively impacted and the price of our shares may decline.
Currently, we sell our products, with or without customization, under our brand name “ATP”, to domestic customers in Malaysia and to overseas customers. However, if our competitors initiate a lawsuit against us for infringing their trademark, we may be forced to adopt a new brand name for our products. As a result, we may incur additional marketing cost to raise awareness of such new brand name. We may also be ordered to pay a significant amount of damages, and our business, results of operations and financial condition could be materially and adversely affected.
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We may incur losses resulting from product liability claims or product recalls.
We may incur losses resulting from product liability claims with respect to our products supplied by our supplier. We may face claims or liabilities which may arise if there exist any defects in quality of these products or any of these products are deemed or proven to be unsafe, defective or contaminated. In the event that the use or misuse of any product distributed by us results in personal injury or death, product liability and/or indemnity claims may be brought against us, in addition to our product recalls, and the relevant regulatory authorities in the market we operate may close down some of our related operations and take administrative actions against us. If we experience any business disruption and litigation, we may incur additional costs and have to divert our management’s attention and resources on such matters, which may adversely affect our business, financial condition and results of operations.
We operate in a heavily regulated industry.
Our business is principally regulated by various laws and regulations in the market we operate, such as in Malaysia the Food Act of 1983 (Act 281) and Regulations, Control of Drugs and Cosmetics Regulations 1984 mandate authorization from the Food Safety and and Quality Division and National Pharmaceutical Regulatory Agency of the Ministry of Health for our Company’s products to be sold in the country. Various registrations, certificates and/or licenses for the conduct of our business are required under the above laws, which also contain provisions for requirements on the storage, labelling, advertising and importation of some of our products.
Based on our experience, some of the laws and regulations of the place where we operate our business are subject to amendments, uncertainty in interpretation and administrative actions from time to time. Therefore, we cannot assure you that, for the implementation of our business plans and the introduction of any new product, we will be able to obtain all the necessary registrations, certificates and/or licenses. Any failure to comply with the above laws and regulations may give rise to fines, administrative penalties and/or prosecution against us, which may adversely affect our reputation, financial condition or results of operation.
Legal disputes or proceedings could expose us to liability, divert our management’s attention and negatively impact our reputation.
We may at times be involved in potential legal disputes or proceedings during the ordinary course of business operations relating to product or other types of liability, employees’ claims, labor disputes or contract disputes that could have a material and adverse effect on our reputation, operation and financial condition. If we become involved in material or protracted legal proceedings or other legal disputes in the future, the outcome of such proceedings could be uncertain and could result in settlements or outcomes which adversely affect our financial condition. In addition, any litigation or legal proceedings could incur substantial legal expenses as well as significant time and attention of our management, diverting their attention from our business and operations.
If we are unable to successfully develop and timely introduce new products or services or enhance existing products or services, our business, financial condition and results of operations may be materially and adversely affected.
We must continually source, develop and introduce new products and services as well as improve and enhance our existing products and services to maintain or increase our sales. The success of new or enhanced products or services may depend on a number of factors including, anticipating and effectively addressing user preferences and demand, the success of our sales and marketing efforts, effective forecasting and management of products and services demands, purchase commitments, and the quality of or defects in our products. The risk of not meeting our customers’ preferences and demands through our products and services may result in a shift in market shares, as customers instead choose products and services offered by our competitors. This may result in lower sales revenue, materially and adversely affecting our business, financial condition and results of operations.
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Fluctuations in foreign currency exchange rates could have a material adverse effect on our financial results.
We earn revenues, pay expenses, own assets and incur liabilities in countries using currencies other than the U.S. dollar, including Australian Dollar, Malaysian Ringgit and the Hong Kong Dollar. Because our consolidated financial statements are presented in U.S. dollars, we must translate revenues, income and expenses, as well as assets and liabilities, into U.S. dollars at exchange rates in effect during or at the end of each reporting period. Therefore, increases or decreases in the value of the U.S. dollar against other currencies affect our net operating revenues, operating income and the value of balance sheet items denominated in foreign currencies. We cannot assure you that fluctuations in foreign currency exchange rates, particularly the strengthening of the U.S. dollar against major currencies would not materially affect our financial results.
Our business depends on the continued contributions made by Mr. How Kok Choong, as our key executive officer, the loss of who may result in a severe impediment to our business.
Our success is dependent upon the continued contributions made by our CEO and President, Mr. How Kok Choong. We rely on his expertise in business operations when we are developing our business. We have no “Key Man” insurance to cover the resulting losses in the event that any of our officer or directors should die or resign.
If Mr. How Kok Choong cannot serve the Company or is no longer willing to do so, the Company may not be able to find alternatives in a timely manner or at all. This would likely result in a severe damage to our business operations and would have an adverse material impact on our financial position and operating results. To continue as a viable operation, the Company may have to recruit and train replacement personnel at a higher cost. Additionally, if Mr. How Kok Choong joins our competitors or develops similar businesses that are in competition with our Company, our business may also be negatively impacted.
Our future success depends on our ability to attract and retain qualified long-term staff to fill management, technology, sales, marketing, and customer services positions. We have a great need for qualified talent, but we may not be successful in attracting, hiring, developing, and retaining the talent required for our success.
If we are not able to achieve our overall long-term growth objectives, the value of an investment in our Company could be negatively affected.
We have established and publicly announced certain long-term growth objectives. These objectives were based on, among other things, our evaluation of our growth prospects, which are generally driven by the sales potential of many product types, some of which are more profitable than others, and on an assessment of the potential price and product mix. There can be no assurance that we will realize the sales potential and the price and product mix necessary to achieve our long-term growth objectives.
We face risks related to health epidemics, severe weather conditions and other outbreaks.
In recent years, there have been outbreaks of epidemics in various countries, including Malaysia. Recently, there was an outbreak of a novel strain of coronavirus (COVID-19), which has spread rapidly to many parts of the world, including Malaysia. In March 2020, the World Health Organization declared the COVID-19 a pandemic. The epidemic has resulted in quarantines, travel restrictions, and the temporary closure of stores and facilities in Malaysia for the past few weeks.
Substantially all of our revenues are concentrated in Malaysia. Consequently, our results of operations will likely be adversely, and may be materially, affected, to the extent that the COVID-19 or any other epidemic harms the Malaysia and global economy in general. Any potential impact to our results will depend on, to a large extent, future developments and new information that may emerge regarding the duration and severity of the COVID-19 and the actions taken by government authorities and other entities to contain the COVID-19 or treat its impact, almost all of which are beyond our control. Potential impacts include, but are not limited to, the following:
| ● | temporary closure of offices, travel restrictions, financial impact of our customers or suspension supplies may negatively affected, and could continue to negatively affect, the demand for our products; |
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| ● | our customers may require additional time to pay us or fail to pay us at all, which could significantly increase the amount of accounts receivable and require us to record additional allowances for doubtful accounts. We may have to provide significant sales incentives to our customers during the outbreak, which may in turn materially adversely affect our financial condition and operating results; | |
| ● | any disruption of our supply chain, logistics providers or customers could adversely impact our business and results of operations, including causing us or our suppliers to cease manufacturing for a period of time or materially delay delivery to our customers, which may also lead to loss of our customers; and | |
| ● | the global stock markets have experienced, and may continue to experience, significant decline from the COVID-19 outbreak and the marketable securities that we have invested in could be materially adversely affected, which may lead to significant impairment in the fair values of our investments and in turn materially adversely affect our financial condition and operating results. |
Because of the uncertainty surrounding the COVID-19 outbreak, the financial impact related to the outbreak of and response to the coronavirus cannot be reasonably estimated at this time. There is no guarantee that our total revenues will grow or remain at the similar level year over year in the next two quarters of 2020. We may have to record downward adjustments or impairment in the fair value of investments in the third quarter of 2020, if conditions have not been significantly improved and global stock markets have not recovered from recent declines.
In general, our business could be adversely affected by the effects of epidemics, including, but not limited to, the COVID-19, avian influenza, severe acute respiratory syndrome (SARS), the influenza A virus, Ebola virus, severe weather conditions such as flood or hazardous air pollution, or other outbreaks. In response to an epidemic, severe weather conditions, or other outbreaks, government and other organizations may adopt regulations and policies that could lead to severe disruption to our daily operations, including temporary closure of our offices and other facilities. These severe conditions may cause us and/or our partners to make internal adjustments, including but
not limited to, temporarily closing down business, limiting business hours, and setting restrictions on travel and/or visits with clients and partners for a prolonged period of time. Various impact arising from a severe condition may cause business disruption, resulting in material, adverse impact to our financial condition and results of operations.
Risks Related to our Industry
Our business and reputation may be affected by product liability claims, litigation, customer complaints, product tampering, food safety issues, food-borne illnesses, health threats, quality control concerns or adverse publicity relating to our products. Product liability insurance of our supplier may not cover our liability sufficiently or at all.
Like other consumer product manufacturers, sale of our products involves an inherent risk of our products being found to be unfit for consumption or cause illness. Products may be rendered unfit for consumption due to raw materials or product contamination or degeneration, presence of microbials, illegal tampering of products by unauthorized third parties or other problems arising during the various stages of the procurement, production, transportation and storage processes. The occurrence of such problems may result in customer complaints, fines, penalties or adverse publicity causing serious damage to our reputation and brand, as well as product liability claims, other legal disputes and loss of revenues. Under certain circumstances, we may be required to recall our products. Even if a situation does not necessitate a product recall, we cannot assure you that product liability claims or other legal disputes will not be asserted against us as a result. Product liability insurance of our supplier may not cover our liability sufficiently or at all and will not cover liability that arises out of our default such as mishandling, poor storage condition and/or contamination of the products by us. As a result, a product liability or other judgment against us, or a product recall, could have a material adverse effect on our business, financial condition or results of operations.
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Our business is susceptible to food-borne illnesses. We cannot assure you that we are able to effectively prevent all diseases or illnesses caused by our products or contamination of our products. Furthermore, our reliance on third-party product suppliers means that food-borne illness incidents could be caused by our suppliers outside of our control. New illnesses may develop in the future, or diseases with long incubation periods could arise that could give rise to claims or allegations on a retroactive basis. Reports in the media of instances of food-borne illnesses or health threats of our products or any of their major ingredients could adversely and significantly affect our sales, and have significant negative impact on our results of operations. This risk exists even if it were later determined that the illness or health threat in fact was not caused by our products.
In addition, adverse publicity about health and safety concerns, whether unfounded or not, may discourage consumers from buying our products. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused personal injury or illness could adversely affect our reputation and our corporate and brand image. If consumers were to lose confidence in our brand and reputation, we could suffer long-term or even permanent declines in our sales and results of operation. The amount of negative news, customers complaints and claims against us may also be very costly and may divert our management’s attention from our business operation.
Increased competition and capabilities in the marketplace could hurt our business.
The market where we operate is highly competitive. We compete with other companies that operate in multiple geographic areas, as well as numerous companies that are primarily regional or local in operation. Our ability to gain or maintain share of sales in the market where we operate or in various local markets may be limited as a result of actions by competitors. If we do not continue to strengthen our capabilities in marketing and innovation to maintain our brand loyalty and market share while we selectively expand into other product categories, our business could be negatively affected.
Risks Related to our Common Stock
The market price of our shares is likely to be highly volatile and subject to wide fluctuations in response to factors such as:
| ● | variations in our actual and perceived operating results, especially during this time when the COVID-19 pandemic poses a threat; | |
| ● | news regarding gains or losses of customers or suppliers by us or our competitors; | |
| ● | news regarding gains or losses of key personnel by us or our competitors; | |
| ● | announcements of competitive developments, acquisitions or strategic alliances in our industry by us or our competitors; | |
| ● | changes in earnings estimates or buy/sell recommendations by financial analysts; | |
| ● | potential litigation; | |
| ● | the imposition of fines or penalties related to our activities in the market where we operate and failure to comply with applicable rules and regulations; | |
| ● | general market conditions or other developments affecting us or our industry; and | |
| ● | the operating and stock price performance of other companies, other industries and other events or factors beyond our control. |
In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of the shares.
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We may never be able to pay dividends and are unlikely to do so.
To date, we have not paid, nor do we intend to pay in the foreseeable future, dividends on our common stock, even if we become profitable. Earnings, if any, are expected to be used to advance our activities and for working capital and general corporate purposes, rather than to make distributions to stockholders. Since we are not in a financial position to pay dividends on our common stock and future dividends are not presently being contemplated, investors are advised that return on investment in our common stock is restricted to an appreciation in the share price. The potential or likelihood of an increase in share price is uncertain.
In addition, under Nevada law, we may only pay dividends subject to our ability to service our debts as they become due and provided that our assets will exceed our liabilities after the dividend. Our ability to pay dividends will therefore depend on our ability to generate sufficient profits.
Shareholders may be diluted significantly through our efforts to obtain financing and satisfy obligations through the issuance of securities.
Wherever possible, our board of directors will attempt to use non-cash consideration to satisfy obligations. In many instances, we believe that the non-cash consideration will consist of shares of our common stock, warrants to purchase shares of our common stock or other securities. Our board of directors has authority, without action or vote of the shareholders, to issue all or part of the authorized but unissued shares of common stock or warrants to purchase such shares of common stock. In addition, we may attempt to raise capital by selling shares of our common stock, possibly at a discount to market in the future. These actions will result in dilution of the ownership interests of existing shareholders and may further dilute common stock book value, and that dilution may be material. Such issuances may also serve to enhance existing management’s ability to maintain control of us, because the shares may be issued to parties or entities committed to supporting existing management.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information.
None.
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ITEM 6. Exhibits
| Exhibit No. | Description | |
| 31.1 | Rule 13(a)-14(a)/15(d)-14(a) Certification of principal executive officer* | |
| 32.1 | Section 1350 Certification of principal executive officer * | |
| 101.INS | XBRL Instance Document* | |
| 101.SCH | XBRL Schema Document* | |
| 101.CAL | XBRL Calculation Linkbase Document* | |
| 101.DEF | XBRL Definition Linkbase Document* | |
| 101.LAB | XBRL Label Linkbase Document* | |
| 101.PRE | XBRL Presentation Linkbase Document* |
* Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| AGAPE ATP CORPORATION | ||
| (Name of Registrant) | ||
| Date: August 13, 2020 | ||
| By: | /s/ How Kok Choong | |
| Title: | Chief Executive Officer, President, Director, Secretary and Treasurer | |
| (Principal Executive Officer) | ||
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