Nocera, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2021; unaudited. Nocera provides land-based recirculating aquaculture systems and related services. Results include Xin Feng Construction Co., Ltd. (XFC), consolidated as a variable interest entity beginning December 31, 2020; management says XFC contributed construction revenue in the quarter.
Key financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $1,579,486 | $690,653 |
| Gross profit / margin | $348,644 / 22.1% | $398,138 / 57.6% |
| Operating income / margin | $113,409 / 7.2% | $225,826 / 32.7% |
| Net income | $49,490 | $216,086 |
| Net income attributable to Nocera | $49,490 | $219,318 |
| Basic / diluted EPS | $0.0054 / $0.0036 | $0.0178 / $0.0124 |
| Operating cash flow | $(258,573) | $(241,351) |
Revenue increased about 129%, but gross profit fell about 12% and net income declined substantially. Management attributed higher revenue to XFC construction activity, while higher XFC cost of sales reduced gross profit. General and administrative expense rose to $235,235 from $172,312, primarily due to legal, accounting, and consulting costs. Income tax expense increased to $62,160 from $9,707. Q1 2021 included $103,155 of share-based compensation.
Financial position and liquidity
- At March 31, 2021, cash was $607,452, down from $1,023,531 at year-end. Current assets were $4.38 million and current liabilities $2.54 million; the current ratio was approximately 1.72.
- Total liabilities were $2.54 million, all current. Notes payable were $136,467 and bank borrowings $390,566, compared with $187,447 and $532,824, respectively, at December 31, 2020.
- Operating activities used $258,573; investing activities used $24,000; financing activities used $144,233, primarily reflecting bank borrowing repayments. Cash-flow statements report a $416,079 net decrease, while MD&A reports $416,077.
- Receivables from a related party totaled $1,158,085, including $1,138,952 due from an entity controlled by an XFC director. Management said the balance was unimpaired and expected to be collected.
- Management stated there was no substantial doubt about going concern, citing $2,701,368 of net assets, but also said additional capital would be needed for planned demonstration farms and growth.
Business developments, outlook, and risks
- Nocera terminated its relationship and VIE arrangements with Guizhou Wan Feng Hu in 2020; a settlement cancelled 4.75 million Nocera shares held by Zhang Bi. Nocera entered into VIE agreements with XFC at the end of 2020 and consolidated XFC.
- Management plans demonstration sites in the United States, Taiwan, Japan, and Thailand. It expects to seek shareholder financing or raise equity or debt; no assurance of successful financing was provided. No quantified earnings or revenue guidance was given.
- Customer concentration is high: two customers represented 98% of Q1 2021 revenue. Two customers also accounted for all reported accounts receivable at March 31, 2021.
- The filing cites COVID-19 disruption and potential negative operating effects, while describing the disruption as uncertain in duration. It reports no material pending legal proceedings and no off-balance-sheet arrangements.
- Management found disclosure controls and internal control over financial reporting ineffective, citing insufficient staffing and GAAP expertise, lack of written control procedures, no independent audit committee, inadequate review controls, and insufficient segregation of duties. It described plans to add independent directors and accounting resources and use consultants.
- On April 1, 2021, the company reported raising $200,000 in a private placement. The description refers inconsistently to units containing preferred shares versus common shares; the stated unit price was $2.50, with C and D warrants exercisable at $2.50 and $5.00, respectively, for three years.
Important facts for investors to verify
- Reconcile the cash-flow and MD&A discrepancies, including the 2021 receivables description: the cash-flow statement shows a $303,302 use of cash from receivables, while MD&A describes a decrease in receivables; the balance-sheet receivable increased.
- Confirm the correct 2020 attributable net income comparison: the statements report $219,318 attributable to Nocera, while MD&A cites $216,086.
- Review customer concentration, collectability and terms of the $1.14 million related-party receivable, and the company’s dependence on advance customer receipts.
- Assess XFC’s contribution, project economics, VIE contractual enforceability, and the company’s ability to fund planned expansion while operating cash flow remains negative.
- Clarify the April placement’s security type and terms. Also note the filing contains apparent date inconsistencies in its internal-control discussion and legal-proceedings disclosure.