Nocera, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed May 14, 2020. This is an annual report, not a standalone fourth-quarter report. The company operates land-based recirculating aquaculture systems (RAS) and related services primarily in China through a Hong Kong subsidiary, a PRC subsidiary, and a variable interest entity (VIE). Nocera entered this business through a reverse merger effective December 31, 2018, so 2018 is the principal comparable period.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $456,860 | $4,812,788 |
| Gross profit / gross margin | $352,623 / 77.1% | $2,839,248 / 59.0% |
| General and administrative expenses | $1,733,092 | $337,471 |
| Operating income (loss) | $(1,380,469) | $2,501,777 |
| Net income (loss) | $(1,325,343) | $1,890,037 |
| Net income (loss) attributable to Nocera | $(1,256,752) | $1,791,349 |
| Basic and diluted EPS | $(0.1017) | $0.1790 |
| Cash from operating activities | $266,825 | $(790,332) |
| Cash from investing activities | $(712,975) | $(68,404) |
| Cash from financing activities | $468,390 | $844,844 |
- Revenue fell about 90.5% year over year. Management attributed the decline to sharply lower equipment sales while awaiting customer payments and notices to begin unfinished orders. It said 2019 revenue was mainly from the JC Development exclusive sales-agency license.
- The reported gross margin rose, but gross profit fell substantially with sales. G&A increased by about $1.40 million, primarily due to a $1,084,534 provision for doubtful accounts. Other expense was $34,842, compared with other income of $47,783 in 2018.
- At year-end, cash was $28,539; current assets were $2,502,640 and current liabilities were $2,596,776, a working-capital deficit of $94,136. Total liabilities were $2,596,776, including $15,367 of bank borrowing, $405,772 due to related parties, and $608,598 of income tax payable. The 2018 convertible note had been repaid in January 2019.
- Accounts receivable, net, was $1,483,583 after a $1,073,743 allowance. Total assets were $3,359,189 and total equity was $762,413. Operating cash flow was positive despite the net loss, reflecting noncash adjustments and working-capital movements; the filing reports a $1.0 million amount due from a related party in the cash-flow reconciliation.
- The company reported no cash dividends and no off-balance-sheet arrangements. Its financial statements received an unqualified audit opinion; the auditor did not express an opinion on internal-control effectiveness.
Material changes and unusual items
- Revenue restatement: Nocera concluded that the $1 million received under its September 2019 exclusive distribution agreement with JC Development should be recognized over the license’s estimated economic life, not at receipt. It restated its previously issued September 2019 interim statements, reducing nine-month revenue by $960,784 and changing previously reported interim net income into a net loss. The correction affected revenue, deferred revenue, tax amounts, and earnings, but the company said it did not affect previously reported cash.
- Credit exposure: The $1,084,534 bad-debt provision drove much of the increase in G&A. Three customers represented all reported year-end receivables, with individual concentrations of 38.97%, 32.24%, and 28.79%. Two suppliers accounted for 92.08% of 2019 purchases.
- Related-party transactions: CEO and chairman Yin-Chieh Cheng collected $1 million from JC Development on the company’s behalf. The filing reports a $683,521 year-end amount due from him and also describes related-party balances being netted. It separately warns that the collection could have implicated Exchange Act Section 13(k); the filing says the receivable was repaid in January 2020. The detailed settlement and balance reconciliation merit review.
- Control weaknesses: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end. Reported material weaknesses included undocumented controls, no independent audit committee, inadequate review of the close process, and insufficient segregation of duties. The board planned to add independent directors and accounting support.
Outlook, risks, and contingencies
- Management stated that the net loss and $28,539 year-end cash raised substantial doubt about the company’s ability to continue as a going concern. Its plan relied on an expected $1 million JC Development payment by June 1, 2020 and a financial-support letter from CEO/chairman Yin-Chieh Cheng. Management said further capital would be needed for its longer-term plans and gave no assurance it could raise it.
- The company reported a firm CIMC-related order for 800 container sets, estimated at approximately $8.2 million, with 473 delivered in 2018 and remaining deliveries expected during 2020. A July 2019 agreement covered another 400 sets for approximately $5.7 million; the company expected a 40% deposit in third-quarter 2020 and targeted completion in fourth-quarter 2020. These were expectations, not completed deliveries or recognized revenue at year-end.
- In September 2019, JC Development agreed to pay a total of $5 million over five years for Asia-Pacific exclusive agency rights; Nocera agreed to pay an 8% commission on applicable sales. In March 2020, the company announced a $573,029 agreement to supply 58 tank systems and reported a $287,233 advance. Other 2020 agreements and advances are described as subsequent events, not 2019 revenue.
- COVID-19 disrupted supply and production; the company said suspension of its main PE-sheet supplier delayed several RAS projects and revenue recognition. It expected adverse effects but could not quantify the duration or full impact. The filing provides no formal earnings or revenue guidance.
- Other significant risks include dependence on China and government policy, currency conversion and exchange-rate exposure, enforceability of the VIE contracts, customer and supplier concentration, limited insurance, and competition. The company disclosed delinquent PRC social-insurance and housing-fund contributions that could lead to back payments, late charges, or penalties; it said it was unaware of government enforcement action as of the filing date. It reported no significant pending litigation.
Investor verification priorities
- Reconcile reported 2019 sales of $456,860 with the VIE note’s reported revenue of $56,860, and confirm the revenue recognized from the JC Development agreement after restatement.
- Verify collection and accounting for the JC Development installments, the $683,521 year-end related-party receivable, and the reported January 2020 repayment.
- Assess collectability and aging of receivables, including the large doubtful-account provision and customer concentration, and confirm subsequent cash collections.
- Check whether the expected financing and customer deposits were received, whether the CIMC and 2020 contracts were completed, and how COVID-related delays affected revenue and cash needs.
- Track remediation of material control weaknesses, compliance with PRC employee contribution requirements, and the company’s ability to fund operations given the going-concern warning and limited cash.