Nocera, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed April 15, 2021. This is an annual report, and the filing does not provide a separate fourth-quarter income statement.
Business context
Nocera supplies land-based recirculating aquaculture systems (RAS), related equipment, and aquaculture consulting and management services, principally targeting China and Taiwan. During 2020, it terminated its VIE arrangements with Guizhou Wan Feng Hu (GZ WFH) and, effective December 31, entered into arrangements to consolidate Taiwan-based Xin Feng Construction (XFC). The company describes plans to develop RAS farms and pursue international markets.
Financial results and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $1.170 million | $456,860 |
| Gross profit / gross margin | $643,813 / 55.0% | $352,623 / 77.2% |
| Operating loss | $681,883 | $1.380 million |
| Net loss | $639,070 | $1.325 million |
| Net loss attributable to Nocera | $632,365 | $1.257 million |
| Operating cash flow | $(129,824) | $266,825 |
| Cash at year-end | $1.024 million | $28,539 |
Revenue increased about 156%, while gross margin fell. Management says 2020 revenue included recognition over time of deferred fees under the JC Development (JCD) exclusive agency arrangement; therefore, the increase should not be read as evidence of a comparable rise in product sales. The company remained loss-making, although its net loss narrowed, partly reflecting the prior-year bad-debt provision and lower general and administrative expense.
At December 31, 2020, current assets were $4.081 million and current liabilities $2.375 million. Current liabilities included $532,824 of bank borrowings and $187,447 of notes payable; no long-term liabilities were reported. Inventory was $1.724 million, including $1.608 million of work in process. Operating cash use was $129,824. Investing cash inflow of $770,943 principally reflected $857,555 of cash acquired with XFC; financing cash inflow of $217,479 was primarily related-party funding. The company disclosed substantial doubt about its ability to continue as a going concern, notwithstanding its year-end cash balance.
Material changes and unusual items
- The company recognized a $522,291 impairment related to GZ WFH and reported a $460,117 loss on its disposal. It also cancelled 4.75 million shares held by Zhang Bi under the October settlement.
- The XFC transaction added $2.156 million of net assets and $332,040 of goodwill. The company reported $896,876 due from related parties at year-end, including $877,809 acquired from XFC and attributed to Taixi Electrical & Plumbing.
- The company restated its unaudited 2019 third-quarter financial statements: a $1 million JCD agency fee initially recorded immediately should instead have been recognized over the license’s estimated economic life. The restatement materially reduced reported interim revenue and earnings, changed tax and deferred-revenue balances, and had no effect on previously reported cash. The 2019 annual comparison reflects the restated accounting.
- A December 2020 VIE arrangement with Shunda Feed was rescinded on March 18, 2021, after the company said it could not obtain information needed for the audit; 300,000 related shares were cancelled.
Outlook, risks and controls
- Management says its liquidity plan, including continued sales and a financial-support letter from CEO and Chairman Yin-Chieh Cheng, is intended to cover anticipated needs for at least 12 months after the financial statements’ issuance. It also says further capital may be needed for longer-term plans and gives no assurance it can raise it. The filing’s stated expectation of a $1 million JCD payment “on or before June 1, 2020” is already past as of the report date and should be clarified.
- COVID-19 and suspension of a key PE-sheet supplier delayed RAS projects and revenue recognition. The company cites uncertainty about the duration and impact of disruption.
- Revenue was highly concentrated: two customers represented 96.44% of 2020 sales. One supplier represented 100% of 2020 purchases.
- The company disclosed that it was delinquent in required PRC employee social-insurance and housing-fund contributions, potentially exposing it to back payments, fees, or penalties. It reported no known enforcement action as of the filing.
- Management concluded disclosure controls and internal control over financial reporting were ineffective, citing material weaknesses including no written control documentation, no independent audit committee, inadequate review and GAAP expertise, and insufficient segregation of duties. The auditor expressed an unqualified opinion on the financial statements but did not attest to internal control.
- Other significant risks include dependence on contractual VIE arrangements and their enforceability, China/Taiwan regulatory and currency exposure, limited insurance, related-party balances, and a limited OTC trading market. Management disclosed no significant pending litigation.
Important facts for investors to verify
- How much of 2020 sales and gross profit came from delivered RAS equipment versus JCD agency-license revenue, and what future recognition remains under the JCD agreement?
- Whether the company has collected the JCD amounts described in its liquidity plan, and whether the CEO’s support letter represents committed, available funding.
- The recoverability, aging, and terms of the $896,876 related-party receivable and the large work-in-process inventory balance.
- The status and terms of bank borrowings and notes payable, and the funding required to address going-concern concerns and expansion plans.
- Progress in remediating control weaknesses, compliance with employee contribution requirements, and the legal and operational status of the XFC VIE and post-year-end SFC rescission.