Nocera, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2021. Unaudited statements are presented in U.S. dollars. Nocera provides land-based recirculating aquaculture systems (RAS), related equipment and services; reported revenue also includes construction activity from Xin Feng Construction Co., Ltd. (XFC), consolidated through a variable-interest-entity arrangement.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue, 2021 | $18,366 | $2,865,399 |
| Revenue, 2020 comparable period | $2,842 | $1,162,573 |
| Gross profit (loss), 2021 | $(52,136) | $369,998 |
| Gross profit, 2020 comparable period | $283 | $655,679 |
| Operating loss, 2021 | $(291,598) | $(439,690) |
| Net loss attributable to Nocera, 2021 | $(275,123) | $(497,766) |
| Net loss attributable to Nocera, 2020 comparable period | $(715,581) | $(462,788) |
| Basic and diluted loss per share, 2021 | $(0.0297) | $(0.0537) |
- Nine-month revenue increased approximately 146% year over year, primarily reflecting XFC construction revenue. Gross profit fell approximately 44%; gross margin was about 13%, versus 56% in 2020. In the third quarter, cost of sales exceeded revenue, producing a gross loss.
- Nine-month operating expenses declined to $809,688 from $1,032,613, mainly due to lower legal, accounting and consulting fees. Nine-month net loss attributable to Nocera increased from $462,788 to $497,766.
- Nine-month operating cash outflow was $36,401, compared with $435,833 in 2020. Investing cash outflow was $25,062; financing cash outflow was $301,488, mainly from bank-loan repayments. Cash fell by $347,791 to $675,740.
- At September 30, current assets were $5.96 million and current liabilities $4.17 million, implying working capital of approximately $1.79 million and a current ratio of 1.43. Total assets were $6.59 million, liabilities $4.17 million and reported stockholders’ equity $2.42 million.
- Current debt included $244,011 of notes payable and $238,772 of bank borrowing. Other notable current liabilities were $2.99 million of advance receipts and a $312,320 warrant liability.
- Inventories rose to $3.06 million from $1.72 million, mostly work in process. Due from related parties was $1.43 million, including $1.43 million due from an entity controlled by an XFC director. The company reported no allowance for doubtful accounts.
Changes, outlook and risks
- The company launched its first Taiwan RAS demonstration site and said it was testing the site to raise eel. It described plans to promote RAS in Taiwan, explore cooperation with the solar-energy industry and pursue demo sites in the U.S., Taiwan, Japan and Thailand.
- Management said additional capital would be needed for construction, marketing and operating needs. It expected to seek shareholder support or raise equity or debt, but gave no assurance that financing would be available. Management nevertheless stated that there was no substantial doubt about going concern.
- Customer concentration is significant: four customers represented 99% of nine-month 2021 revenue. Three customers represented 91% of accounts receivable at period-end. Collection risk and reliance on a small customer base warrant attention.
- Management concluded disclosure controls and internal control over financial reporting were ineffective. Cited material weaknesses included no written control procedures, no independent audit committee, inadequate review of financial reporting and insufficient segregation of duties. The filing says management planned remediation, including independent directors, experienced finance personnel and outside consultants.
- The filing describes the XFC VIE arrangement as giving Nocera control and economic benefits through contractual agreements. The arrangement, and its enforceability and dependence on contract rights, are relevant structural risks.
- The company issued preferred shares and warrants in 2021. The preferred shares are non-voting, non-redeemable and senior to common stock in a liquidation. The filing reports 9,266,150 common shares outstanding at September 30 and 80,000 preferred shares.
- No material legal proceedings were reported. The company said it had no off-balance-sheet arrangements. COVID-related disruption was described as a risk to operating results, although the discussion refers to reduced revenue in December 2019.
Important facts for investors to verify
- Reconcile warrant disclosures: the warrant note describes 256,000 warrants granted, while the EPS note refers to 5,473,636 warrants outstanding; the warrant activity table also appears to end at June 30 despite September reporting.
- Assess whether XFC construction revenue, its associated costs and the large work-in-process balance can convert into profitable, collected sales; verify the timing and terms behind the $2.99 million of advance receipts.
- Review collectability and governance around the $1.43 million related-party receivable, particularly the balance due from an entity controlled by an XFC director.
- Track liquidity and financing needs, including whether planned shareholder or external funding is secured and how further securities issuance could dilute common shareholders.
- Monitor remediation of the disclosed material weaknesses and confirm that future filings address the identified control and financial-reporting deficiencies.
- Resolve filing inconsistencies: MD&A says greater general and administrative expenses contributed to the nine-month loss increase, although reported expenses declined; MD&A cites net assets of $2,409,649, while the balance sheet reports equity of $2,417,329.