Nocera, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Nocera completed a reverse merger on December 31, 2018, with Grand Smooth Inc. (GSI) as accounting acquirer. The consolidated business provides aquaculture consulting and management, including fish-farming container services through a PRC variable interest entity (VIE).
Financial results and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Net sales | $11,474 | Nil |
| Gross profit / gross margin | $11,474 / 100% | Nil / not applicable |
| General and administrative expenses | $163,515 | $14,566 |
| Operating loss | $152,041 | $14,566 |
| Net loss | $159,067 | $11,056 |
| Net loss attributable to Nocera | $158,379 | $8,878 |
| Operating cash flow | $(266,994) | $257,112 provided |
Revenue was after-sales service for 473 fish-farming container sets delivered in 2018; the company reported no direct cost for that service. G&A rose primarily due to legal, accounting, and consulting fees at GSI. Interest expense was $7,205, attributed to recognition of unamortized discount when the convertible note was repaid. Basic loss per share was $0.0128, versus $0.0009 in Q1 2018.
At March 31, 2019, cash was $23,426; current assets were $4.17 million and current liabilities $2.46 million. Accounts receivable was $3.42 million, while total assets were $4.39 million and total liabilities $2.54 million. Related-party amounts payable were $1.12 million. The $10,000 convertible note was repaid with interest on January 3, 2019. Operating lease liabilities were $8,378. No conventional long-term borrowings are reported in the supplied filing text.
Financing cash inflow was $292,205, principally reflecting shareholder-related funding; investing cash flow was nil. Cash increased $16,219 to $23,426, partly offset by $8,992 of unfavorable exchange-rate effects. Management stated that it did not believe substantial doubt existed about going concern, citing net assets of $1.85 million and viewing the loss as temporary.
Changes, outlook, and risks
- Compared with Q1 2018, the company moved from no sales to modest service revenue, while operating expenses and losses increased substantially. Operating cash flow shifted from an inflow to an outflow.
- Management expects to need an additional $5–10 million for planned demonstration sites and related construction, marketing, and operating costs in the U.S., Taiwan, Japan, and Thailand. It expects to seek shareholder financing and/or equity or debt capital; success is not assured. Shareholders are described as committed to provide financing when the company seeks outside capital.
- Customer and receivable concentration is high: two customers accounted for all Q1 2019 sales and 99.47% of receivables at quarter-end. One supplier represented 91% of Q1 2019 purchases.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at March 31, 2019. Disclosed material weaknesses include no written control documentation, no independent audit committee, inadequate review of the close and GAAP expertise, and insufficient segregation of duties. Planned remediation includes independent audit committee members, experienced finance staff, and outside consultants; effectiveness is not assured.
- The company adopted ASC 842 on January 1, 2019, recognizing a $155,982 right-of-use asset and $8,378 lease liability at quarter-end. The filing reports no material legal proceedings and no material subsequent events identified through issuance.
- The business relies on contractual VIE arrangements to consolidate its PRC operating entity. The supplied text does not quantify the potential effects if those arrangements were challenged.
Investor verification priorities
- Assess receivable collectability, particularly given the concentration in two customers and the low cash balance.
- Clarify the funding timetable and terms for the projected $5–10 million capital need, and the enforceability and capacity of shareholder support.
- Track progress in correcting material control weaknesses and confirm whether independent oversight and qualified financial reporting resources are established.
- Reconcile share and diluted-loss-per-share disclosures: the statements show 12,349,447 weighted-average shares for basic and diluted loss per share, while Note 10 lists 13,249,447 diluted weighted-average shares and says 900,000 options were excluded as antidilutive.
- Evaluate VIE-related legal and operating risks, supplier concentration, and the sustainability of revenue from a small after-sales service base.