Nocera, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; filed August 14, 2019. All amounts are U.S. dollars. Nocera’s operating business is aquaculture consulting and management, including fish-farming containers, conducted through subsidiaries and a PRC variable interest entity (VIE). The company completed a reverse merger with Grand Smooth Inc. on December 31, 2018; GSI was the accounting acquirer.
Financial results and position
| Metric | Q2 2019 | Six months 2019 |
|---|---|---|
| Net sales | $11,262 | $22,736 |
| Gross profit | $11,262 | $22,736 |
| General and administrative expense | $177,029 | $340,545 |
| Operating loss | $165,767 | $317,809 |
| Net loss | $141,050 | $300,117 |
| Net loss attributable to Nocera | $137,295 | $295,674 |
| Basic and diluted loss per share | $0.0111 | $0.0239 |
Sales were after-sales service for 473 fish-farming container sets delivered in 2018; management reported no direct cost for this service, so reported gross profit equaled sales. The resulting 100% gross margin should be interpreted in that context. Sales were nil in the 2018 comparison periods. G&A increased substantially, which management attributed primarily to legal, accounting and consulting fees and research and development.
- Cash flow: Six-month operating cash inflow was $305,078, versus $315,743 in 2018. Investing used $725,852, including $551,710 for intangible assets and $174,142 for property. Financing provided $412,802, mainly from related parties. Cash declined $4,640 to just $2,567.
- Liquidity and balance sheet: Current assets were $3.354 million and current liabilities $2.522 million at June 30, 2019; working capital was $832,532. Accounts receivable was $2.604 million, with three customers representing 99.32% of receivables. Management said approximately $945,000 was collected in the first half and expected the balance to be collected within 12 months.
- Debt and related parties: Current amounts due to related parties totaled $1.217 million, up from $819,351 at year-end. A $10,000 convertible note was repaid with interest in January 2019. A short-term bank loan began in May; bank borrowing on the balance sheet was $15,564 at quarter-end.
- Other balance-sheet changes: The company recorded $525,306 of net intangible assets for smart-fish-farming software and $222,192 of net property and equipment. Adoption of the lease standard resulted in a $140,057 right-of-use asset and an $8,334 lease liability.
Changes, outlook and risks
Compared with the prior periods, revenue began to be reported in 2019, but remained very small relative to overhead; company-attributable losses increased from $29,069 to $137,295 for Q2 and from $37,947 to $295,674 for the six-month period. Share-based compensation and currency translation also affected equity and comprehensive loss. The company reported 12,354,200 shares outstanding at June 30, 2019, versus 12,349,200 at December 31, 2018.
No quantitative earnings or revenue guidance was provided. Management said it planned to develop demonstration sites in the U.S., Taiwan, Japan and Thailand and expected to need shareholder financing or additional equity or debt capital. Shareholders were described as committed to provide financing while the company seeks third-party capital, but management cautioned there was no assurance that additional capital could be raised. Management stated it saw no substantial doubt about going concern, citing receivable collections; however, very low cash, dependence on collections and related-party funding are important liquidity considerations.
- Customer and supplier concentration is significant: two customers accounted for all reported sales, while supplier concentration was also high.
- The business relies on contractual VIE arrangements to consolidate its PRC operating entity; investors should consider the associated structural and enforceability risks.
- Management concluded disclosure controls and internal control over financial reporting were ineffective, citing material weaknesses including no written control procedures, no independent audit committee, insufficient review and GAAP expertise, and inadequate segregation of duties. Planned remediation included adding independent directors and experienced finance personnel and engaging consultants; effectiveness was not assured.
- The filing reported no material legal proceedings and no identified subsequent event requiring adjustment or disclosure.
Important facts for investors to verify
- Whether the $2.604 million receivable balance has been collected as expected, and the credit quality and timing of the remaining collections.
- Available liquidity, the terms and repayment status of the bank borrowing, and the extent of future related-party support or outside financing.
- Revenue growth, service economics and whether the reported absence of direct service costs is sustainable and complete.
- Progress in remediating the disclosed material weaknesses and whether controls become effective.
- The six-month company-attributable net loss: the financial statements report $295,674, while one MD&A comparison prints the 2018 amount as $37,347; the financial statements and loss-per-share note report $37,947 for 2018.