Nocera, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited statements are prepared under U.S. GAAP. Nocera provides land-based recirculating aquaculture systems, equipment, consulting and related services. Its reported results include subsidiaries and a China variable-interest entity (VIE) whose agreements were terminated in September 2020.
Financial results
| Metric | Three months 2020 | Three months 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $2,842 | $50,180 | $1,162,573 | $72,916 |
| Gross profit | $283 | $201 | $655,679 | $22,937 |
| General and administrative expenses | $604,566 | $122,418 | $1,032,613 | $462,963 |
| Net loss attributable to Nocera | $(715,581) | $(76,320) | $(462,788) | $(371,994) |
| Basic and diluted loss per share | $(0.0543) | $(0.0062) | $(0.0351) | $(0.0301) |
- Nine-month gross margin was approximately 56%; Q3 gross margin was approximately 10%, on very low sales.
- Operating cash flow was $(435,833) for the first nine months, compared with $309,229 provided in 2019. Investing used $17,264; financing provided $682,247, primarily from related parties. Cash increased $223,327 to $251,866.
- At September 30, current assets were $508,708 and current liabilities $40,423; total assets were $511,310 and equity $470,887. The balance sheet reported no bank borrowing or lease liabilities. Related-party amounts due to the company were $19,453 and due to related parties $7,681.
- Share-based compensation was $162,240 for the nine months. The cash-flow statement also adds back a $421,419 impairment of GZ WFH.
Material changes and business developments
- Nine-month sales rose substantially year over year, largely from recognition of previously deferred JCD franchise-fee revenue, fish brokerage and distribution, and after-sales service. Q3 sales fell from $50,180 to $2,842; management attributed the near-absence of Q3 revenue mainly to a one-year deferral of the sales-agency license amid the COVID-19 disruption.
- Management attributed higher general and administrative expense and the increased net loss to an impairment associated with problems involving GZ WFH. The company’s relationship and VIE agreements with GZ WFH were terminated on September 21, 2020, following a lack of communication.
- On October 8, 2020, Nocera, GZ WFH and Zhang Bi settled and mutually waived claims. Zhang Bi’s 4,750,000 Nocera shares were cancelled under the agreement. The filing reports 13,181,786 shares at September 30, but 8,431,786 shares outstanding on November 15.
- The company said it planned to move manufacturing and operations from Guizhou, China, to Taiwan. It stated that its second-generation RAS technology was owned by the WFOE and was not affected by the GZ WFH dispute.
Outlook, risks and controls
- Management said COVID-19 had disrupted business and was expected to negatively affect operating results, while noting uncertainty over the duration. No quantified earnings or revenue guidance was provided.
- Nocera planned demonstration sites in the U.S., Taiwan, Japan and Thailand and expected to need additional capital for construction, marketing and operations. It anticipated shareholder support and considered equity or debt financing, but gave no assurance it could raise the required funds.
- Revenue was highly concentrated: one customer represented all Q3 2020 revenue, and two parties represented all nine-month 2020 revenue. Management also reported that a single customer represented all receivables at September 30.
- Disclosure controls and internal control over financial reporting were deemed ineffective, with material weaknesses including no written control procedures, no independent audit committee, insufficient financial-reporting review and inadequate segregation of duties. Management described planned remediation, including independent directors, experienced accounting staff and third-party consultants.
- The filing states there were no material legal proceedings. It says the company had no off-balance-sheet arrangements. Management asserted there was no substantial doubt about going concern, although the company had operating cash outflows and anticipated needing additional financing.
Important facts for investors to verify
- Reconcile the filing’s Q3 revenue discussion: the statement reports $2,842, while MD&A also says no revenue was recognized and describes the $2,842 as primarily a foreign-exchange difference.
- Check the tax disclosures: the statements indicate Q3 income tax expense of $111,298, while MD&A says $11,298; the nine-month statements show $92,562 of expense.
- Verify the liquidity narrative: MD&A refers to a $435,833 cash balance, but the balance sheet and cash-flow statement report $251,866 cash and $435,833 used in operating activities.
- Review the attached pro forma information and subsequent accounting for the VIE termination, settlement, share cancellation and planned operational relocation; the filing says the pro forma adjustments are preliminary.
- Assess the effects of customer concentration, related-party funding dependence, ineffective controls, and the company’s ability to finance its plans and sustain operations.