Agape ATP Corp: Form 10-Q for the period ended Sep 30, 2023

The information contained in this quarterly report on Form 10-Q is intended to update the information contained in our Form 10-K, dated March 31, 2023, for the year ended December 31, 2022 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 unaudited condensed consolidated financial statements and the notes to the unaudited condensed 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 provides health solution advisory services to its clients. We primarily focus our efforts on attracting customers in Malaysia. We have an advisory services center called 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 the promotion of health. The program aims to promote improved health and longevity through a combination of modern health supplements, 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 successfully acquired approximately 99.99% of Agape Superior Living Sdn Bhd, a Malaysia company (“ASL”), with the goal of securing an established network marketing sales channel that has been established in Malaysia for the past 18 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 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 deems creating public awareness on wellness and wellbeing lifestyle as essential to enhance the provision of its health solution advisory services; and therefore, incorporated Wellness ATP International Holdings Sdn, Bhd. (“WATP”). Upon its establishment, WATP started collaborating with ASL to carry out various wellness programs.

On November 11, 2021, Agape ATP Corporation (Labuan) formed a joint-venture entity, DSY Wellness International Sdn. Bhd. (“DSY Wellness”) with Mr. Steve Yap following which Agape ATP Corporation (Labuan) owns 60% of the equity interest, to pursue the business of providing complementary health therapies. The establishment of DSY Wellness is a further expansion of our business into the health and wellness industry. Mr. Steve Yap readily owns 33 proprietary formulas for treating non-communicable disease which he has agreed to bring into the company for joint commercialization. Mr. Steve Yap also has existing clients receiving traditional complimentary medicine or “TCM” in Indonesia and China.

We offer 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.

The newly established subsidiary DSY Wellness is a further expansion of our business into the health and wellness industry and aims to pursue the business of providing traditional and complementary health therapies.

Results of Operation

For the three months ended September 30, 2023 and 2022

Revenue

We generated revenue of $355,314, which comprised revenue from the Company’s network marketing business of $89,208 (approximately 25.1% of our total revenue); and revenue from the Company’s operations in the provision of complementary health therapies of $266,106 (approximately 74.9% of our total revenue) for the three months ended September 30, 2023 as compared to $663,889, which comprised revenue from the Company’s network marketing business of $463,025 (approximately 69.7% of our total revenue); and revenue from the Company’s operations in the provision of complementary health therapies of $200,864 (approximately 30.3% of our total revenue) for the three months ended September 30, 2022. Revenue from the Company’s network marketing business decreased significantly by $373,817 or approximately 80.7%. Revenue from the Company’s operations in the provision of complementary health therapies increased by $65,242 or approximately 32.5%. Total revenue decreased by $308,575 or approximately 46.5%. The decrease was predominately due to the poor performance from the Company’s network marketing business. The Company’s new range of products for its networking marketing business, is receiving lukewarm response from its distributors and is taking a much longer gestation period to take off than anticipated.

Cost of Revenue

Cost of revenue for the three months ended September 30, 2023 amounted to $120,586 as compared to $157,745 for the three months ended September 30, 2022, represented a decrease of $37,159 or approximately 23.6%. Cost of revenue did not decrease in tandem with the decrease in revenue for the period due to the varying gross profit margins associated with the provision of complementary health therapies.

Cost of revenue typically comprise of freight-in, cost of goods purchased, packing materials and services acquired.

Gross Profit

Gross profit for the three months ended September 30, 2023 amounted to $234,728, represented a gross margin of approximately 66.1% as compared to $506,144 for the three months ended September 30, 2022, equivalent to a gross margin of approximately 76.2%. The decrease in gross margin was predominantly due to lower gross margin associated with the provision of complementary health therapies as compared to the Company’s network marketing business.

Operating Expenses

Our operating expenses consist of selling expenses, commission expenses and G&A expenses (as defined below). Total operating expenses were $551,806 for the three months ended September 30, 2023, decreased by $147,646 or approximately 21.1% from $699,452 for the three months ended September 30, 2022.

Selling expenses

Selling expenses for the three months ended September 30, 2023 amounted to $49,285 as compared to $76,030 for the three months ended September 30, 2022, represented a decrease of $26,745 or approximately 35.2%. The Company’s selling expenses typically comprise salaries and benefits expenses which represented approximately 70% to 85% of total selling expenses, credit card processing fees and promotional expenses. The significant decrease in selling expenses for the three months ended September 30, 2023 was predominantly due to decrease in salaries and benefit expenses by $21,481.

Commission expenses

Commission expenses were $14,002 and $167,395 for the three months ended September 30, 2023 and 2022, respectively, represented a significant decrease of $153,393 or approximately 91.6%. The significant decrease in commission expenses was in line with the decrease in revenue.

General and administrative expenses (“G&A Expenses”)

G&A expenses for the three months ended September 30, 2023 amounted to $488,519, as compared to $456,027 for the three months ended September 30, 2022, an increase of $32,492 or approximately 7.1%. The Company’s G&A expenses typically comprise of salaries and benefits expenses, rental expenses, professional expenses and depreciation expenses. The increase in G&A expenses for the three months ended September 30, 2023 was predominantly due to increase in salaries and benefit expenses by $28,426.

Other Expenses, Net

For the three months ended September 30, 2023, we recorded an amount of $3,714 as other expenses, net, as compared to $65,906 other expenses, net, for the three months ended September 30, 2022, represented a decrease of $62,192 or approximately 94.4%.

The net other expenses of $3,714 incurred during the three months ended September 30, 2023 comprised foreign currency exchange loss of $382, unrealized holding loss on marketable securities of $3,872, other expenses, net of $98, interest income of $658 and loss on disposal of property and equipment of $20. The net other expenses of $65,906 incurred during the three months ended September 30, 2022 comprised foreign currency exchange loss of $59,504, unrealized holding loss on marketable securities of $11,395, other income, net of $1,173 and interest income of $3,820.

(Provision for) Benefit of Income Taxes

The Company recorded provision for income taxes of $3,943 and benefit of income taxes of $18,997 for the three months ended September 30, 2023 and 2022, respectively. Both the provision for income taxes as well as the benefit of income taxes were in respect of the Company’s operations in Malaysia.

Net Loss

Net loss increased by $84,518 from $240,217 for the three months ended September 30, 2022 to $324,735 for the three months ended September 30, 2023, mainly due to reasons as discussed above.

For the nine months ended September 30, 2023 and 2022

Revenue

We generated revenue of $1,040,017, which comprised revenue from the Company’s network marketing business of $318,729 (approximately 30.6% of our total revenue); and revenue from the Company’s operations in the provision of complementary health therapies of $721,288 (approximately 69.4% of our total revenue) for the nine months ended September 30, 2023 as compared to $1,469,556, which comprised revenue from the Company’s network marketing business of $1,021,365 (approximately 69.5% of our total revenue); and revenue from the Company’s operations in the provision of complementary health therapies of $448,191 (approximately 30.5% of our total revenue) for the nine months ended September 30, 2022. Revenue from the Company’s network marketing business decreased significantly by $702,636 or approximately 68.8%. Revenue from the Company’s operations in the provision of complementary health therapies increased significantly by $273,097 or approximately 60.9%. Total revenue decreased by $429,539 or approximately 29.2%. The decrease was predominately due to the poor performance from the Company’s network marketing business. The Company’s new range of products for its networking marketing business, is receiving lukewarm response from its distributors and is taking a much longer gestation period to take off than anticipated.

Cost of Revenue

Cost of revenue for the nine months ended September 30, 2023 amounted to $356,875 as compared to $340,559 for the nine months ended September 30, 2022, represented a marginal increase of $16,316 or approximately 4.8%. The increase was due to the varying gross profit margins in the Company’s operations in the provision of complementary health therapies.

Cost of revenue typically comprise of freight-in, cost of goods purchased, packing materials and services acquired.

Gross Profit

Gross profit for the nine months ended September 30, 2023, amounted to $683,142, represented a gross margin of approximately 65.7% as compared to $1,128,997 for the nine months ended September 30, 2022, equivalent to a gross margin of approximately 76.8%. The decrease in gross margin was predominantly due to lower gross margin associated with the provision of complementary health therapies as compared to the Company’s network marketing business.

Operating Expenses

Our operating expenses consist of selling expenses, commission expenses, and general and administrative expenses. Total operating expenses were $1,813,637 for the nine months ended September 30, 2023, represented a decrease by $87,083 or approximately 4.6% from $1,900,720 for the nine months ended September 30, 2022.

Selling expenses

Selling expenses for the nine months ended September 30, 2023 amounted to $189,509 as compared to $270,228 for the nine months ended September 30, 2022, represented a decrease of $80,719 or approximately 29.9%. The Company’s selling expenses typically comprise of salaries and benefits expenses which represented approximately 70% to 85% of total selling expenses, credit card processing fees and promotional expenses. The decrease in selling expenses for the nine months ended September 30, 2023 was predominantly due to decrease in salaries and benefit expenses by $45,194, promotional expenses by $13,956 and general reduction in most other selling expenses associated with the Company’s network marketing business.

Commission expenses

Commission expenses were $69,886 and $344,061 for the nine months ended September 30, 2023 and 2022, respectively. The decrease in commission expenses was in line with the decrease in revenue.

General and administrative expenses (“G&A expenses”)

G&A expenses for the nine months ended September 30, 2023 amounted to $1,554,242, as compared to $1,286,431 for the nine months ended September 30, 2022, an increase of $267,811 or approximately 20.8%. The increase in G&A expenses was mainly due to G&A expenses associated with the provision of complementary health therapies and expenses incurred by the Company on its on-going uplisting exercise to Nasdaq. The Company’s G&A expenses typically comprise of salaries and benefits expenses, rental expenses, professional expenses and depreciation expenses.

Other Expenses, Net

For the nine months ended September 30, 2023, we recorded an amount of $10,476 as other expenses, net, as compared to $181,601 other expenses, net, for the nine months ended September 30, 2022, represented a decrease of $171,125 or approximately 94.2%.

The net other expenses of $10,476 incurred during the nine months ended September 30, 2023 comprised foreign currency exchange loss of $34,958, unrealized holding gain on marketable securities of $4,838, other income, net of $12,402, interest income of $5,475 and gain on disposal of property and equipment of $1,767. The net other expenses of $181,601 incurred during the nine months ended September 30, 2022 comprised foreign currency exchange loss of $143,387, unrealized holding loss on marketable securities of $64,284, other income, net of $13,999 and interest income of $12,071.

Benefit of Income Taxes

The Company recorded benefit of income taxes of $2,712 and $10,317 for the nine months ended September 30, 2023 and 2022, respectively. The benefit of income taxes was in respect of the Company’s operations in Malaysia.

Net Loss

Net loss increased by $195,522 from $943,007 for the nine months ended September 30, 2022 to $1,138,259 for the nine months ended September 30, 2023, mainly due to reasons as discussed above.

Liquidity and Capital Resources

Malaysia, where the operations of the Company predominantly reside, officially transitioned to the endemic phase of COVID-19 effective April 1, 2022. Restrictions on businesses and people are minimal. Meanwhile, the government continues to encourage inoculation for those between the ages of 5 to 11 years and its adolescent group which comprised those between the ages 12 and 17. Adults who have been fully vaccinated, i.e., received two doses of the COVID-19 vaccine are encouraged to take booster shots.

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, disruption or suspension of supplies, our customers may be negatively impacted financially resulting in which the demand for our products may be adversely affected;
• 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.

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Albeit a lengthy 3 years in the COVID-19 pandemic and living alongside COVID-19, there could still be supply chain disruptions. From our experiences operating under the much-restricted COVID-19 environment, we have modified our methods of operations, to build in sufficient buffer in the management of inventories. We may experience slight delay in products delivery lead time but barring unforeseen circumstances, the setback should be temporary.

We are 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. Now that COVID-19 has subsided, we will re-assess our plans to 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 coronavirus cannot be reasonably estimated at this time. There is no guarantee that the Company’s total revenues will grow or remain at similar levels year over year in 2023 and beyond. We may have to record downward adjustments or impairment in the fair value of investments in the fiscal year 2023, if conditions have not been significantly improved and global stock markets have not recovered from recent declines.

As of September 30, 2023, we had working capital deficit of $445,245 consisting of cash and cash in bank of $311,659 as compared to a positive working capital of $799,239 consisting of cash and cash in bank of $523,619 and time deposits of $914,811 as of December 31, 2022. The Company had a net loss of $1,138,259 for the nine months ended September 30, 2023 and accumulated deficits of $6,073,141 as of September 30, 2023 as compared to net loss of $943,007 for the nine months ended September 30, 2022 and accumulated deficits of $4,213,396 as of September 30, 2022.

From the recent Initial Public Offering in relation to the Company’s uplisting in Nasdaq, which was completed on October 11, 2023, the Company received net proceeds of $5,615,431 ($6,600,000 offering, less underwriting fee of $528,000, non-accountable expenses of $66,000 and other offering expenses of $1,003,681, including $613,112 which has already been paid by the Company).

Based on the above, management is of the opinion that the Company will have sufficient funds to meet its working capital requirements and debt obligations as they become due 12 months from the filing date of these unaudited condensed consolidated financial statements.

The following summarizes the key components of our cash flows for the nine months ended September 30, 2023 and 2022:

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Operating activities

Net cash used in operating activities for the nine months ended September 30, 2023 was $995,706, comprised of net loss of $1,138,259, increase in accounts receivables of $20,800, increase in amount due from related parties of $782, increase in inventories of $13,484, decrease in customer deposits of $45,083, payment of operating lease liabilities of $114,943, decrease in other payables and accrued liabilities of $219,676, decrease in other payable – related parties of $1,959, decrease in income tax payable of $10,674, the non-cash items on unrealized holding gain on marketable securities of $4,838, deferred tax benefit of $6,537, offset by the non-cash depreciation and amortization expense of $59,424, amortization of operating right-of-use assets of $113,804, refund in prepaid taxes of $307,967, decrease in prepayments and deposits of $84,978, increase in accounts payables (including related parties) of $15,156.

Net cash used in operating activities for the nine months ended September 30, 2022 was $737,456 and were mainly comprised of the net loss of $943,007, deferred tax benefit of $14,903, increase in accounts receivables of $1,828, decrease in customer deposits of $197,518, payment of operating lease liabilities of $106,716, decrease in other payables and accrued liabilities of $192,108. The net cash used in operating activities was mainly offset by the non-cash depreciation and amortization expense of $55,460, amortization of operating right-of-use assets of $106,300, unrealized holding loss on marketable securities of $64,284, decrease in amount due from related parties of $6,788, decrease in inventories of $81,376, refund in prepaid taxes of $266,120, decrease in prepayments and deposits of $103,276, increase in accounts payables (including related parties) of $30,100, increase in other payables from related parties of $4,056 and decrease in income tax payables of $864.

Investing activities

Net cash used in investing activities for the nine months ended September 30, 2023 was $7,200, which was in respect of purchase of equipment.

Net cash used in investing activities for the nine months ended September 30, 2022 was $5,777, which was in respect of purchase of equipment.

Financing activities

Deferred offering cost made up the entire net cash used in financing activities for the nine months ended September 30, 2023 and 2022 of $113,911 and $184,466, respectively.

Credit Facilities

We do not have any credit facilities or other access to bank credit.

Off-Balance Sheet Arrangements

As of September 30, 2023, 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 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 inventories obsolescence, impairment of long-lived assets and allowance for deferred tax assets. Following are the methods and assumptions used in determining our estimates.

Estimated allowance for inventories obsolescence

Management reviews inventory on hand for estimated obsolescence or unmarketable items, as compared to future demand requirements and the shelf life of the various products. Based on the review, the Company records inventory write-downs, when necessary, when costs exceed expected net realizable value. The Company did not recognize any inventory write-downs nor inventory write-off for the three and nine months ended September 30, 2023 and 2022.

Impairment of long-lived assets

Operating right-of-use assets and property and equipment are stated at costs less accumulated depreciation and impairment, if any. In determining whether an asset is impaired, the Company has to exercise judgment and make estimation, particularly in assessing: (1) whether an event has occurred or any indicators that may affect the asset value; (2) whether the carrying value of an asset is not recoverable that is its carrying amount exceeds the amount of expected undiscounted future cash flows result from the use of the asset. Once it is established that impairment has occurred, the amount of impairment expense is determined as the difference between the carrying value of the asset and its estimated fair value based on a discounted cash flows approach.

As of September 30, 2023 and December 31, 2022, the carrying amounts of operating right-of-use assets and property and equipment amounted to $374,283 and $89,058 (December 31, 2022: $81,133 and $142,149), respectively. No impairment losses on operating right-of-use assets and property and equipment were recognized as of September 30, 2023 and 2022.

Allowance for deferred tax assets

The Company conducts much of its business activities in Malaysia and Hong Kong and is subject to tax in each of these jurisdictions. Significant estimates are required in determining the provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

Deferred tax assets relating to certain temporary differences and tax losses are recognized as management considers it is probable that future taxable profit will be available against which the temporary differences or tax losses can be utilized. Where the expectation is different from the original estimate, such differences will impact the recognition of deferred taxation assets and taxation in the periods in which such estimate is changed.

Critical Accounting Policies

Revenue recognition

The Company adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (ASC Topic 606). 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 as well as services.

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.

Sales of Health and Wellness products

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. 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.

Sales of products through Network Marketing Business

Under the Company’s network marketing business, the Company issues product coupons to members and distributors when these customers made purchases above certain thresholds set by the Company. Depending on the type of product coupons issued, the coupons carry varying values and can be used by the customers for reduction in the transaction price of product purchases within the coupon validity period. The value of the product coupons issued is recorded as a reduction of the Company’s revenue account upon issuance; the corresponding amount credited to the customer deposits account. Amounts in customer deposits will be reversed when the coupons are used. The Company’s coupons have a validity period of between six and twelve months. If the Company’s customers did not utilize the coupons after the validity period, the Company would recognize the forfeiture of the originated sales value of the coupons as net revenues.

Sales of products for the provision of complementary health therapies

Products for the provision of complementary health therapies are predominantly Chinese herbs in different forms, processed or otherwise, for prescriptions for treating non-communicable diseases.

Provision of Health and Wellness services

The Company carries out its Wellness program, where the Company’s products are bundled with health screening test and a health camp program. The health screening test and the health camp programs are considered as separate performance obligations. The promises to deliver the health screening test report and the attendance at the health camp are separately identifiable, which are evidenced by the fact that the Company provides separate services of delivering the health screening test report and allowing admission of the customers to attend the health camp. The Company derives its revenues from sales contracts with its customers with revenues being recognized when the test reports are completed and delivered to its customers during the consultation section in person. The Company also separately derives its revenues from sales contracts with its customers with revenues being recognized when the health camp program was completed in the final day of the health camp.

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.

Accounting Standards Adopted in 2023

On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC 326”). This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology.

In addition, CECL made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities if management does not intend to sell and does not believe that it is more likely than not, they will be required to sell.

As ASU 2016-13 has been adopted from January 1, 2023, the Company adopted ASU 2019-05, Financial instruments – Credit Losses (Topic 326) Targeted Transition Relief at the same time.

The AUS 2019-05 provides entities that have certain instruments with an option to irrevocably elect the fair value option applied on an instrument-by-instrument basis for eligible instruments. The fair value option election does not apply to held-to-maturity debt securities.

The adoption of these ASUs did not have a material impact on the unaudited condensed consolidated financial statements for the three and nine months ended and as at September 30, 2023.

In July 2023, the FASB issued ASU No. 2023-03 “Presentation of Financial Statements (Topic 205), Income Statement – Reporting Comprehensive Income (Topic 22), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation – Stock Compensation (Topic 718): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280 – General Revision of Regulation S-X: Income or Loss Applicable to Common Stock”. The ASU 2023-03 amends or supersedes various SEC paragraphs within the Codification to confirm to past SEC announcements and guidance issued by the SEC. The ASU 2023-03 was immediately effective and did not have a significant impact on our unaudited condensed consolidated financial statements as it does not provide any new guidance.

In October 2023, the FASB issued ASU No. 2023-06 “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative” The ASU No. 2023-06 clarifies or improve disclosure and presentation requirements of a variety of topics, which will allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the FASB accounting standard codification with the SEC’s regulations. The effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. As the ASU No. 2023-06 does not provide any new guidance and is not expected to have a significant impact on our unaudited condensed consolidated financial statements.

Recent accounting pronouncements

The Company has reviewed all recently issued, but not yet effective, considers the applicability and impact of all accounting standards updates (“ASUs”). Management periodically reviews new accounting standards that are issued.

In March 2023, the FASB issued ASU No. 2023-01 “Leases (Topic 842) Common Control Arrangements”. This ASU provides guidance in ASC Topic 842 that Leasehold improvements associated with common control leases should be (i) amortized by the lessee over the useful life of the leasehold improvements to the common control group, regardless of the lease term, as long as the lessee controls the use of the underlying asset through a lease, and (ii) accounted for as a transfer between entities under common control through an adjustment to equity if and when the lessee no longer controls the use of the underlying asset. The ASU 2023-01 is effective for reporting periods beginning after December 15, 2023. Early adoption is permitted for both interim and annual financial statements that have not yet been issued. When adopted in an interim period, it must be adopted from the beginning of the year that includes that interim period. The Company is currently evaluating the impact of this ASU may have on its unaudited condensed consolidated financial statements.

In July 2023, the FASB issued ASU No. 2023-03 “Presentation of Financial Statements (Topic 205), Income Statement – Reporting Comprehensive Income (Topic 22), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation – Stock Compensation (Topic 718): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280 – General Revision of Regulation S-X: Income or Loss Applicable to Common Stock”. The ASU 2023-03 amends or supersedes various SEC paragraphs within the Codification to confirm to past SEC announcements and guidance issued by the SEC. The ASU 2023-03 was immediately effective and did not have a significant impact on our unaudited condensed consolidated financial statements as it does not provide any new guidance.

In October 2023, the FASB issued ASU No. 2023-06 “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative” The ASU No. 2023-06 clarifies or improve disclosure and presentation requirements of a variety of topics, which will allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the FASB accounting standard codification with the SEC’s regulations. The effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. As the ASU No. 2023-06 does not provide any new guidance and is not expected to have a significant impact on our unaudited condensed consolidated financial statements.

Except for the above-mentioned pronouncements, there are no new recent issued accounting standards that will have a material impact on the consolidated financial position, statements of operations and cash flows.

Recently adopted Accounting Pronouncements

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 has accordingly adopted ASUs 2016-13 and 2019-05 in the preparation of its unaudited condensed consolidated financial statements. The adoption of the accounting standards has no material impact on the unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2023.

Except for the above-mentioned pronouncements, there are no new recent issued accounting standards that will have a material impact on the consolidated financial position, statements of operations and cash flows.

Foreign exchange risk. Substantially most of our revenues are denominated in the Malaysian Ringgit while most of our expenses are denominated in Malaysian Ringgit, U.S. dollar 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 credit losses based upon factors surrounding the credit risk of specific customers, historical trends and other information.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Report, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on the foregoing evaluation, our chief executive officer and chief financial officer concluded that, as of September 30, 2023, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses described below.

Internal Control Over Financial Reporting

Our management, including our chief executive officer and chief financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the company’s chief executive officer and chief financial officer and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:

• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

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Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

As of September 30, 2023, our management, including our chief executive officer and chief financial officer, assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and SEC guidance on conducting such assessments. Based on such evaluation, the Company’s management, including our chief executive and chief financial officer, concluded that, during the period covered by this Report, internal controls and procedures over financial reporting were not effective. This was due to deficiencies that existed in the design or operation of our internal controls over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses.

Identified Material Weakness

A material weakness in internal control over financial reporting is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected.

Management, including our chief executive officer and chief financial officer identified the following material weakness during its assessment of internal controls over financial reporting as of September 30, 2023:

(i) insufficient 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; (ii) lack of a functional internal audit department or personnel that monitors the consistencies of the preventive internal control procedures and 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; (iii) lack of proper IT policies and procedures developed for system change management, user access management, backup management and service organization management.

Accordingly, the Company concluded that these control deficiencies resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls.

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 US 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.

To further strengthen the Company’s internal controls, we plan to initiate the following measures going forward:

1. We intend to establish an internal audit function with assessment of Sarbanes-Oxley compliance requirements and improvement of overall internal control.

2. Once we hire additional employees, we intend to initiate a comprehensive training program and development plan to provide ongoing company-wide trainings regarding internal control and requirements of U.S. GAAP financial statements and related disclosures, with particular emphasis on our accounting staff.

3. Hire suitable IT personnel to develop and implement proper IT policies and procedures for system change management, user access management, backup management and service organization management.

We anticipate that these initiatives will be at least partially, if not fully, implemented by the end of fiscal year 2023.

Changes in Internal Control over Financial Reporting:

Except as disclosed above, there were no changes in our internal control over financial reporting during the quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.