Nocera, Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018, compared with 2017. The filing does not provide a clear standalone fourth-quarter result. Nocera completed its acquisition of Grand Smooth Inc. (GSI) effective December 31, 2018; the financial statements treat GSI as the accounting acquirer and present its operating business for the periods shown.
Business context
Following the transaction, Nocera’s principal business is aquaculture consulting and management in China, including sales, installation, and maintenance of fish-farming container systems using recirculating aquaculture technology. Operations are conducted through a Hong Kong holding company, a PRC wholly foreign-owned enterprise, and a PRC variable interest entity (VIE) consolidated under contractual arrangements. The company says it was previously dormant and emerged from shell status through the transaction.
Nocera reports a firm order from CIMC subsidiaries for 800 fish-farming container sets, estimated at approximately $8.2 million. It says 473 sets were delivered during 2018 and expected further deliveries during 2019. The filing describes demand and international expansion opportunities, but does not provide formal earnings guidance.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $4,812,788 | $0 |
| Gross profit / gross margin | $2,839,248 / approximately 59.0% | $0 |
| Operating income (loss) | $2,501,777 | ($1,218) |
| Net income (loss) | $1,890,037 | ($1,218) |
| Net income attributable to Nocera | $1,791,349 | ($1,175) |
| Basic and diluted earnings (loss) per share | $0.1790 | ($0.0001) |
| Operating cash flow | ($790,332) | ($104,996) |
| Investing cash flow | ($68,404) | $0 |
| Financing cash flow | $844,844 | $106,379 |
2018 general and administrative expense was $337,471, including a $105,945 increase in salaries and an $82,720 allowance for doubtful accounts. Other income was $47,783, and income-tax expense was $659,523. The reported net margin was approximately 39.3% on consolidated net income, or 37.2% on income attributable to Nocera.
At year-end, assets were $4.24 million, including $3.55 million of accounts receivable, $490,418 of prepaid expenses and other assets (net of an $82,720 allowance), and only $7,207 of cash. Current liabilities were $2.21 million; total liabilities were $2.29 million. Current assets were $4.18 million. Related-party amounts due were $819,351. The filing reports a $10,000 convertible note bearing 24% interest, with $3,465 net carrying value at year-end; it says the note and interest were repaid January 3, 2019. No separate long-term debt balance is reported.
Changes, outlook, and material risks
- Change from 2017: The operating business began generating sales in 2018; revenue rose from nil to $4.81 million and Nocera reported attributable income of $1.79 million versus a small loss in 2017. Management attributes the gross profit to operations beginning and low labor and supplier costs in Xingyi City.
- Cash and going concern: Despite reported profit, operating cash outflow was $790,332, primarily reflecting a $3.66 million increase in receivables. Management and the auditor’s disclosures identify substantial doubt about the company’s ability to continue as a going concern. Management expects to rely on collections, continued deliveries, and a financial-support letter from major shareholder Yin-Chieh Cheng; it gives no assurance that additional funding will be available.
- Funding needs: Management estimates an additional $5–10 million will be needed for longer-term operations and planned demonstration sites and marketing in the U.S., Taiwan, Japan, and Thailand. Potential funding sources include shareholders and equity or debt issuance.
- Customer and supplier concentration: Two customers accounted for 100% of 2018 sales and 99.29% of year-end receivables. Three suppliers accounted for 49% of total purchases.
- VIE and China exposure: Nocera’s control of its PRC operating entity depends on contractual VIE arrangements, not direct ownership. The filing warns that PRC authorities could challenge the arrangements, impair control or consolidation, or restrict operations and transfers of funds. Other risks include regulatory change, currency conversion and repatriation, and PRC legal and tax uncertainty.
- Controls and governance: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end, citing undocumented procedures, no independent audit committee, inadequate review and segregation of duties, and insufficient GAAP/SEC reporting expertise. The company also reported no independent directors or board committees.
- Other items: A concert sponsorship receivable was impaired by $82,720. A consulting agreement with Chairman/CFO Yin-Chieh Cheng granted options for up to 5 million shares over five years; $667 was recognized in 2018 and $303,489 remained unrecognized. The company reported no significant pending litigation and no off-balance-sheet arrangements. The auditor gave an unqualified opinion on the financial statements but did not opine on internal-control effectiveness.
Important facts for investors to verify
- Collection timing and recoverability of the $3.55 million receivable, including exposure to the two customers representing nearly all sales and receivables.
- Whether the 800-set order is enforceable, the value and status of undelivered units, and the revenue recognized versus remaining performance obligations. The filing reports $3,443,570 of future revenue related to unsatisfied or partially unsatisfied obligations at year-end.
- Cash availability and the terms, capacity, and durability of the promised shareholder support; also, the feasibility and dilution or debt impact of the stated $5–10 million funding need.
- Legal enforceability and continued compliance of the VIE agreements, and the ability to move cash from PRC operations to the U.S. parent.
- Remediation of material weaknesses, the referenced prior financial-statement restatement, and the company’s ability to meet public-company reporting requirements.
- Related-party balances and transactions, management and beneficial ownership, and the potential dilution from the 5 million-share option award.