10-K/A: Nocera, Inc. Files Amended Annual Report, Restating Q1-Q3 2024 Financials Amidst Operational Challenges and Going Concern Doubts

Nocera, Inc. has filed an amended annual report for fiscal year 2024, restating its interim financial statements due to errors in warrant liability valuation and asset misclassifications, while reporting a significant decline in net sales and ongoing concerns about its ability to continue as a going concern.

Summary

• Nocera, Inc. filed an Amendment No. 2 to its Annual Report on Form 10-K for the fiscal year ended December 31, 2024, to restate unaudited interim condensed consolidated financial statements for the quarters ended March 31, June 30, and September 30, 2024.
• The restatement corrects errors related to the fair value calculation of warrant liabilities and misclassifications of non-current assets and liabilities, which materially changed net loss to net income and loss per share to positive earnings per share in the affected quarters.
• The company reported net sales of approximately $17.01 million for the year ended December 31, 2024, a decrease of 28.3% from approximately $23.9 million in 2023.
• Gross profit increased to $334,261 in 2024 from $194,959 in 2023, primarily driven by increased demand in the e-commerce business.
• Net loss attributable to Nocera Shareholders decreased to approximately $2.35 million in 2024 from $4.10 million in 2023.
• The company incurred operating losses of $2,393,803 in 2024 and had an accumulated deficit of $21,238,881 as of December 31, 2024.
• Net cash used in operating activities increased to $1,574,709 in 2024 from $1,084,595 in 2023.
• Goodwill impairment charges were $1,159,172 in 2024, down from $2,250,553 in 2023, primarily due to the loss of a major customer in the Meixin catering business.
• Nocera acquired 100% controlling interest in Zhejiang Xinca Mutual Entertainment Culture Media Co., Ltd. (Xinca) on January 31, 2024, and 100% equity in Hangzhou SY Culture Media Co. Ltd. (SY Culture) on April 14, 2024, expanding its e-commerce business in China.
• The company received a Nasdaq deficiency letter for not maintaining a minimum bid price of $1.00 per share, with a compliance date of July 14, 2025.
• Material weaknesses in internal control over financial reporting were identified, including lack of written documentation, insufficient monitoring, inadequate segregation of duties, and issues with cash management practices.

Sentiment

Score: 3

Explanation: The company faces significant challenges, including a going concern doubt, declining sales, increased cash burn, and Nasdaq listing issues. While there are strategic acquisitions and a plan for capital raise, the fundamental financial health and internal control weaknesses present substantial risks. The restatement, while correcting errors, highlights past financial reporting deficiencies.

Positives

• Gross profit increased to $334,261 in 2024 from $194,959 in 2023, largely due to increased demand in the e-commerce business.
• Net loss attributable to Nocera Shareholders decreased significantly to $2.35 million in 2024 from $4.10 million in 2023.
• The restatement of interim financial statements corrected errors, changing previously reported net losses to net income and loss per share to positive earnings per share in the affected quarters.
• The company expanded its e-commerce business in China through the acquisitions of Xinca and SY Culture in 2024, aiming to diversify revenue streams and enhance market reach.
• Management is focused on growing existing product offerings and customer base, with plans to expand into North and South America and build demo sites in the U.S., Japan, and Thailand.

Negatives

• Net sales decreased by 28.3% from $23.9 million in 2023 to $17.01 million in 2024, primarily due to a downturn in the fish market and significant loss of eel fry.
• The company incurred operating losses of $2,393,803 in 2024 and had an accumulated deficit of $21,238,881 as of December 31, 2024.
• Net cash used in operating activities increased to $1,574,709 in 2024 from $1,084,595 in 2023, indicating a higher cash burn.
• Auditors expressed substantial doubt about the company's ability to continue as a going concern.
• Goodwill impairment charges of $1,159,172 were recognized in 2024, reflecting a reduced long-term outlook for the Meixin catering unit due to the loss of a major customer.
• The company received a Nasdaq deficiency letter for failing to maintain the minimum $1.00 bid price, risking delisting.
• The catering business experienced decreased volume and average prices for both bento boxes and fruit/vegetable processing services in 2024 compared to 2023.
• The fish trading business saw a decrease in volume from 1083 tons in 2023 to 770 tons in 2024.

Risks

• Substantial doubt about the company's ability to continue as a going concern due to net losses and cash outflows.
• Limited operating history in an evolving industry makes future prospects difficult to evaluate.
• Failure to raise additional capital when needed would materially adversely affect business, financial condition, and results of operations.
• Inability to successfully market brands could result in adverse financial consequences.
• No assurance that the shift from general construction to fish farming and trading will generate previous revenue levels.
• No assurance that the company will be profitable or sustain profitability.
• Inability to manage anticipated significant expansion and growth effectively.
• Reliance on executive officers and highly skilled personnel, with the loss of key individuals posing a risk.
• Potential inadvertent violation of Section 13(k) of the Exchange Act (Sarbanes-Oxley Act) regarding personal loans to officers, which could lead to sanctions.
• Future acquisitions may adversely affect the ability to manage the business due to integration challenges and unforeseen liabilities.
• The value of seafood sold (e.g., eel) is subject to fluctuation, leading to volatility in results of operations.
• High susceptibility to changes in market demand for seafood types used in recirculating aquaculture systems.
• A significant portion of revenues derived from a single product (eel), making the company highly susceptible to changes in its market demand.
• Risks associated with outsourced production, including delivery delays and product defects.
• Limited insurance coverage for business liability, disruption, or litigation in Taiwan.
• Intense competition from larger entities and small regional suppliers.
• Risk of producing inferior quality products, leading to customer loss.
• Risk of technologies or products being stolen, misappropriated, or reverse-engineered, especially without patents or intellectual property rights.
• Risks associated with international operations, including recruiting/retaining multi-lingual employees, increased competition, compliance with foreign laws, credit risk, currency fluctuations, political/economic instability, and double taxation.
• Significant risk of natural disasters (earthquakes, typhoons) in Taiwan, where manufacturers are located, potentially causing production delays.
• Primary revenues derived from Taiwan, making the business vulnerable to economic downturns in Taiwan.
• Exposure to foreign exchange rate fluctuations, particularly with the NT dollar.
• Potential product liability claims if services or components sold cause harm, with no third-party liability or product liability insurance.
• Risk of litigation, which can be time-consuming, divert resources, and incur significant expenses.
• Third parties asserting wrongful use or disclosure of confidential information or misappropriation of trade secrets by employees/consultants.
• Cash assets held at financial institutions may exceed FDIC insurance coverage, leading to potential losses.
• Compliance with the Foreign Corrupt Practices Act while competitors may not, potentially leading to a disadvantage.
• Future laws, regulations, and standards relating to corporate governance and public disclosure may increase compliance costs and uncertainty.
• Relations between the PRC and Taiwan could negatively affect business and financial status.
• Disruption in operations of suppliers in Taiwan due to trade wars or political unrest.
• Risks associated with manufacturing, including supply chain disruptions and increased raw material costs.
• Potential delisting or prohibition from trading on Nasdaq due to the Holding Foreign Companies Accountable Act (HFCAA) if the company remains a Commission-Identified Issuer for three consecutive years (or two if AHFCAA is enacted).
• Contractual arrangements with Variable Interest Entities (VIEs) may not be as effective as direct ownership in providing operational control.
• Risk of losing the ability to use licenses and assets held by VIEs, hindering business operations and growth.
• Geopolitical conditions, including trade disputes and acts of war or terrorism (e.g., Russia-Ukraine war, Middle East conflicts), could adversely affect operations and financial results.
• Evolving U.S. trade regulations and policies with China may adversely affect business, costs, and supply chain.
• Common stock listed under alternative initial listing standard could suppress trading price and liquidity.
• Material weaknesses in internal control over financial reporting could cause investors to lose confidence.
• Large number of authorized but unissued common stock shares could dilute ownership.
• Sales of currently issued and outstanding shares and shares underlying warrants may become freely tradable, diluting the market and depressing prices.
• An active, liquid, and orderly market for common stock may not develop or be sustained.
• Inability to satisfy Nasdaq's continued listing requirements could lead to delisting.
• Reduced disclosure requirements as an emerging growth company and smaller reporting company may make common stock less attractive to investors.
• Elimination of personal liability for directors and officers and indemnification rights may result in substantial expenses.
• Lack of research coverage from securities or industry analysts could adversely affect stock price and trading volume.
• Inability to use Form S-3 for securities offerings due to past financial information issues (Meixin acquisition) could hinder access to capital and growth strategies.

Future Outlook

Nocera plans to grow its existing operations in Taiwan and expand into the development and management of land-based fish farms in Taiwan and North and South America, with a goal to become a global leader in the land-based aquaculture business. The company expects to sell over five thousand RAS tanks in the next five years and plans to build a hatchery system. It aims to enhance market penetration through its own fish farms and diversify revenue streams via direct wholesale, restaurants, supermarkets, specialty stores, and online marketing, including e-commerce live-streaming in China. The company anticipates that adverse factors like limited eel fry catch and increased natural disasters may continue to impact operating results in the near term.

Management Comments

• "Our current mission is to provide consulting services and solutions in aquaculture projects to reduce water pollution and decrease the disease problems of fisheries."
• "Our goal is to become a global leader in the land-based aquaculture business."
• "We are now poised to grow our existing operations in Taiwan and expand into the development and management of land-based fish farms in Taiwan and North and South America."
• "We do not currently have any intentions of conducting operations in China or Hong Kong."
• "We believe that the RASs, with its proven advantage in producing more fish in a more cost-effective and environmentally friendly manner while offering greater location flexibility and the potential for a solar-fish sharing mode, is a perfect solution to address the opportunities highlighted above."
• "We plan to go global through building demo sites promoting our RASs and selling our price-competitive systems in these countries to meet their demand for food and to satisfy their desire for a greener environment."
• "We expect to sell over five thousand tanks in the next five years."
• "We also intend to expend the fish farming demo sites in Taiwan by adding 20 units of RAS eel farming equipment with outsourcing construction services and build the catfish farm in the U.S. by the end of 2024 to promote our fish farming systems to the global market."
• "We are expecting more customers from various countries actively inquiring about our equipment."
• "We are confident that profitability can be achieved by optimizing management expenses and enhancing profit margins."
• "Management believes that its current cash balances coupled with anticipated cash flow from operating activities will be sufficient to meet our working capital requirements for at least one year from the date of issuance of the accompanying consolidated financial statements."
• "Management believes that the anticipated financing arrangements will provide sufficient liquidity to meet our obligations as they come due and to fund the Company’s ongoing and planned strategic initiatives over the next twelve months."

Industry Context

The global fish consumption is rising faster than any other animal protein source, with a projected shift towards farm-raised seafood due to overfishing. The U.S.-China trade conflict has increased demand for non-Chinese seafood. Nocera's recirculating aquaculture systems (RASs) are positioned to address this demand by offering a cost-effective, environmentally friendly, and location-flexible solution, potentially integrating with solar energy. The company's expansion into e-commerce, particularly in China, aligns with broader trends in online retail and social commerce for food products. However, the aquaculture industry faces challenges from natural disasters and supply chain volatility, as evidenced by Nocera's reduced eel availability due to low fry catch and typhoon impacts in Taiwan.

Management Changes

Corporate Governance

Legal Proceedings

• The company is currently not a party to any material legal or administrative proceedings and is not aware of any pending or threatened material legal or administrative proceedings against it.

Related Party Transactions

• As of December 31, 2024, the company had $7,681 due to Mountain Share Transfer, LLC, a company 100% controlled by Erik S. Nelson, a former corporate secretary and director.
• As of December 31, 2024, the company had $19,435 due to the Estate of Mr. Yin-Chieh Cheng, the former President, Chief Executive Officer, Chairman of the Board, and principal stockholder.
• The company obtained a financial support letter from Ms. Min-Huay Cheng Lu, the estate of Mr. Yin-Chieh Cheng, on January 25, 2025, committing to provide additional financing if needed.
• The company's principal executive offices are rented by Taiwan Grand Smooth Enterprise Co., Ltd., a company 100% controlled by Yin-Chieh Cheng, and sub-leased to Nocera free of charge by Mr. Cheng's estate.

Stakeholder Impact

• **Shareholders**: Face significant risks including potential dilution from future capital raises, volatility in stock price, and the risk of delisting from Nasdaq. The going concern doubt and material weaknesses in internal controls could erode confidence and investment value. The restatement, while correcting errors, highlights past financial reporting issues.
• **Employees**: The company's ability to continue as a going concern directly impacts job security. The identified material weaknesses in internal controls, particularly the lack of sufficient staff with GAAP/SEC expertise, may indicate a need for more resources and training for accounting and financial personnel.
• **Customers**: The downturn in the fish market, significant loss of eel fry, and natural disasters impacting production could affect product availability and consistency. The company's shift in operations and expansion plans aim to diversify offerings and improve service, but current challenges may impact customer satisfaction.
• **Suppliers**: The company's reliance on multiple suppliers in Taiwan and plans for expansion suggest continued demand for raw materials and equipment. However, the company's financial health and ability to raise capital could affect its ability to meet payment obligations or scale orders.
• **Creditors**: The going concern doubt and the company's need for future debt financing pose risks to creditors. The financial support letter from a principal stockholder's estate may provide some comfort regarding liquidity, but overall financial stability remains a concern.

Next Steps

• Continue funding operations through equity and debt financing arrangements.
• Grow existing product offerings and customer base to increase revenues.
• Expand into the development and management of land-based fish farms in Taiwan and North and South America.
• Build demo sites in the U.S., Japan, and Thailand to promote fish farming systems.
• Build a catfish farm in the U.S. by the end of 2024.
• Develop cultivation of alternative aquaculture species to diversify product offerings.
• Expand and strengthen various sales channels, including online marketing and direct wholesale options.
• Remediate identified material weaknesses in internal control over financial reporting by investing in IT systems, enhancing organizational structure, providing employee training, and documenting policies and procedures.
• Address the Nasdaq bid price deficiency by July 14, 2025, potentially through a reverse stock split if necessary.

Key Dates

Recommendation

Keywords

Aquaculture, Recirculating Aquaculture Systems, RAS, Fish Farming, Eel Trading, Catering Services, E-commerce, SEC Filing, 10-K/A, Financial Restatement, Going Concern, Nasdaq Listing, Internal Controls, Corporate Governance, Taiwan, China, Seafood Industry, Food Processing, VIE Agreements, Warrant Liabilities, Goodwill Impairment