Nocera, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; unaudited consolidated financial statements. Nocera provides land-based recirculating aquaculture systems, related services and, beginning in 2020, fish brokerage and distribution. Its PRC operating entity is consolidated through contractual VIE arrangements.
Financial performance
| Metric | Three months ended June 30, 2020 | Six months ended June 30, 2020 | Comparable 2019 period |
|---|---|---|---|
| Revenue | $469,078 | $1,159,731 | $11,262 quarter; $22,736 six months |
| Gross profit | $257,258 | $655,396 | $11,262 quarter; $22,736 six months |
| Gross margin | 54.8% | 56.5% | 100% in both periods, with no reported cost of sales |
| General and administrative expenses | $255,735 | $428,047 | $177,029 quarter; $340,545 six months |
| Net income (loss) attributable to Nocera | $33,475 | $252,793 | $(137,295) quarter; $(295,674) six months |
| Basic / diluted EPS | $0.0025 / $0.0019 | $0.0192 / $0.0143 | Loss per share in both periods |
- Revenue chiefly reflected recognition of a previously received JC Development franchise fee, fish brokerage and distribution with a strategic partner, and after-sales service on 473 fish-farming container units delivered in 2018. Management attributed higher gross profit partly to no direct cost associated with the franchise-fee revenue.
- Cash and cash equivalents were $344,781 at June 30, 2020, versus $28,539 at year-end 2019. Current assets were $2.44 million and current liabilities $2.16 million; working capital was approximately $285,000.
- Six-month operating cash flow was an outflow of $348,112, versus an inflow of $305,408 in 2019. Investing cash outflow was $1,851; financing inflow was $652,278, mainly related-party funding. Cash increased by $316,242.
- Total liabilities were $2.16 million, all classified as current. Bank borrowing was zero at period-end; amounts due to related parties were $382,009. Shareholders’ equity totaled $1.07 million.
Changes, outlook and risks
- Results improved from losses in 2019 as revenue rose sharply, but G&A increased year over year, primarily from legal, accounting and consulting fees. The filing describes 2020 revenue as tied to specific revenue streams and recognizes franchise-fee revenue deferred from 2019.
- Management said COVID-19 disruption had begun to affect business and expected a negative impact on results; duration was uncertain. The filing provides no quantified forecast or formal earnings guidance.
- The company plans demonstration sites in the U.S., Taiwan, Japan and Thailand and expects to need additional construction, marketing and operating capital. It expects to seek shareholder support and/or equity or debt financing, but gives no assurance of raising funds. Management stated there was no substantial doubt about going concern, citing $1.07 million of net assets.
- Revenue depended on two parties, according to the filing; receivables were also highly concentrated, with three customers representing 93.29% at June 30. Net receivables were $1.56 million after a $1.16 million doubtful-account allowance; gross receivables increased to $2.73 million.
- Disclosure controls and internal control over financial reporting were deemed ineffective. Reported material weaknesses included no written control documentation, no independent audit committee, inadequate financial close monitoring and GAAP expertise, and inadequate segregation of duties. Management outlined planned remediation, including adding independent directors and experienced finance personnel.
- Other matters to monitor include reliance on the PRC VIE contractual structure, related-party funding and transactions, 5.56 million outstanding warrants, and the increase in common shares outstanding to 13,181,786 from 12,354,200 at year-end. The filing reported no material legal proceedings or subsequent events requiring disclosure.
Important facts for investors to verify
- How much reported revenue and gross profit came from the franchise fee, brokerage activity and after-sales services, and whether those sources recur.
- Receivable collectability, allowance adequacy, customer concentration and the timing of customer advances and deferred-revenue recognition.
- Cash needs and the availability and terms of future shareholder or third-party financing, given negative operating cash flow.
- Progress in remediating the disclosed material weaknesses and the reliability of future financial reporting.
- Potential dilution from warrants and other equity instruments, and the legal and operational dependence on the PRC VIE arrangements.