NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 PRINCIPAL ACTIVITIES
AND ORGANIZATION
The consolidated financial statements include
the financial statements of Nocera, Inc. ( “Nocera”) and its subsidiaries, Grand Smooth Inc Limited (“GSI”)
and Guizhou Grand Smooth Technology Ltd. (“GZ GST” or “WFOE”), and Guizhou Wan Feng Hu Intelligent Aquatic
Technology Co. Limited (“GZ WFH”) that is controlled through contractual arrangements. Nocera, GSI, GZ GST and GZ WFH
are collectively referred to as the “Company”.
Nocera was incorporated in the State of
Nevada on February 1, 2002 and is based in Atlanta, Georgia. It did not engage in any operations and was dormant from its inception
until its reverse merger of GSI on December 31, 2018.
Reverse merger
Effective December 31, 2018, Nocera completed
a reverse merger transaction (the “Transaction”) pursuant to an Agreement and Plan of Merger (the “Agreement”),
with (i) GSI, (ii) GSI’s shareholders, Yin-Chieh Cheng and Bi Zhang, who together owned shares constituting 100% of the issued
and outstanding ordinary shares of GSI (the “GSI Shares”) and (iii) GSI Acquisition Corp. Under the terms of the Agreement,
the GSI Shareholders transferred to Nocera all of the GSI Shares in exchange for the issuance of 10,000,000 shares (the “Shares”)
of Nocera’s common stock (the “Share Exchange”). As a result of the reverse merger, GSI became Nocera’s
wholly-owned subsidiary and Yin-Chieh Cheng and Bi Zhang, the former shareholders of GSI, became Nocera’s controlling shareholders.
The share exchange transaction with GSI was treated as a reverse merger, with GSI as the accounting acquirer and Nocera as the
acquired party.
GSI is a limited company established under
the laws and regulations of Hong Kong on August 1, 2014, and is a holding company without any operation.
GZ WFH was incorporated in Xingyi City,
Guizhou Province, People’s Republic of China (“PRC”) on October 25, 2017, and is engaged in providing fish farming
containers service, which integrates sales, installments, and maintenance of aquaculture equipment. The registered capital of GZ
WFH is RMB$5,000,000 (equal to US$733,138).
On November 13, 2018, GSI incorporated
GZ GST in PRC with registered capital of US$15,000.
Reorganization
In anticipation of the reverse merger,
GSI undertook a reorganization and became the ultimate holding company of WFOE and GZ WFH, which were all controlled by the same
shareholders before and after the Reorganization.
Effective on December 31, 2018, shareholders
of GZ WFH and WFOE entered into a series of contractual agreements (“VIE Agreements” which are described below). As
a result, GSI, through WFOE, has been determined to be the primary beneficiary of GZ WFH and GZ WFH became VIE of GSI. Accordingly,
GSI consolidates GZ WFH’s operations, assets, and liabilities.
Immediately before and after reorganization
completed on December 31, 2018 as described above, GSI together with WFOE and its VIE were effectively controlled by the same shareholders,
therefore, the reorganization was accounted for as a recapitalization. The accompanying consolidated financial statements have
been prepared as if the current corporate structure has been in existence throughout the periods presented. The consolidation of
the GSI and its subsidiary and VIE has been accounted for at historical cost as of the beginning of the first period presented
in the accompanying financial statements.
Note 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICY
Basis of Presentation
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(“GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”)
for interim financial information. Accordingly, these financial statements do not include all of the information and footnotes
required for complete financial statements and should be read in conjunction with the audited consolidated financial statements
and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with
the SEC on April 15, 2019.
In the opinion of management, all adjustments
(which include normal recurring adjustments) necessary to present a fair presentation of the Company’s unaudited condensed
consolidated financial position as of March 31, 2019, its consolidated results of operations for the three months ended March 31,
2019, cash flows for the three months ended March 31, 2019 and change in equity for the three months ended March 31, 2019, as applicable,
have been made. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the operating results
that may be expected for the year ending December 31, 2019 or any future periods.
Concentrations of Credit Risk
There were two customers accounted for
100% of net sales for the three months ended March 31, 2019. Net sales for the three months ended March 31, 2018 was nil, as the
Company started to deliver goods to customers since November 2018.
Two customers accounted for 99.47% and
99.29% of accounts receivables as of March 31, 2019 and December 31, 2018, respectively.
During the three months ended March 31,
2019, there was one major suppliers accounted for 91% of our total purchase amount. There were two suppliers accounted for 31.6%
and 57.4% respectively of our total purchase amount during the three months ended March 31, 2018.
Recently Issued Accounting Pronouncements
Recently Adopted Accounting Standards
ASU No. 2016-02. In February 2016,
the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02,
“Lease (Topic 842)”
, a new
lease standard requiring lessees to recognize lease assets and lease liabilities for most leases classified as operating leases
under previous U.S. GAAP. A lessee should recognize in the statement of financial position a liability to make lease payments (the
lease liability) and a right-of-use asset (“ROU” asset) representing its right to use the underlying asset for the
lease term. The guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company
has adopted this standard effective January 1, 2019. The Company elected the optional transition method that permits adoption of
the new standard prospectively, as of the effective date, without adjusting comparative periods presented. Adoption of the standard
resulted in the recognition of $155,982 of ROU assets and $8,378 of lease liabilities on the consolidated balance sheet as of March
31, 2019 at adoption related to office space, data and fulfillment centers, and other corporate assets.
See Note 6 for disclosure required by ASC
842.
Except for the ASUs issued but not yet
adopted disclosed in Note 3 to the financial statements on Form 10-K for the fiscal year ended December 31, 2018, previously filed
with the SEC, there is no ASU issued by the FASB that is expected to have a material impact on the condensed consolidated financial
statements upon adoption.
Note 3 INVENTORIES
As of March 31, 2019 and December 31, 2018,
inventory consisted of the following:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
$
|
|
|
$
|
|
Raw materials
|
|
|
201,098
|
|
|
|
63,401
|
|
WIP
|
|
|
4,341
|
|
|
|
–
|
|
Total
|
|
|
205,439
|
|
|
|
63,401
|
|
Note 4 PREPAID EXPENSES AND
OTHER ASSETS, NET
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
$
|
|
|
$
|
|
Receivable from a third party (1)
|
|
|
550,332
|
|
|
|
551,464
|
|
Other receivables from third party
|
|
|
15,830
|
|
|
|
15,565
|
|
Prepaid rent expense
|
|
|
–
|
|
|
|
3,895
|
|
Others
|
|
|
7,717
|
|
|
|
2,214
|
|
|
|
|
573,879
|
|
|
|
573,138
|
|
Allowance for doubtful accounts
|
|
|
(82,550
|
)
|
|
|
(82,720
|
)
|
Prepaid expenses and other assets, net
|
|
|
491,329
|
|
|
|
490,418
|
|
(1)
|
The balance as of March 31, 2019 represented the receivable from a concert host. The Company sponsored a concert which was held in Taiwan in November 2018 for branding purpose. As of March 31, 2019 and December 31, 2018, the Company provided bad debt provision amounting to $82,550 and $82,720, respectively. The difference was caused by exchange rate fluctuation.
|
Note 5 PROPERTY AND EQUIPMENT,
NET
As of March 31, 2019 and December 31,
2018, property and equipment consisted of the following:
|
|
March 31,
2019
|
|
December 31,
2018
|
|
|
(Unaudited)
|
|
|
|
|
|
$
|
|
|
|
$
|
|
Furniture and fixtures
|
|
|
3,857
|
|
|
|
3,793
|
|
Equipment
|
|
|
12,826
|
|
|
|
12,612
|
|
Leasehold improvement
|
|
|
10,237
|
|
|
|
10,066
|
|
Vehicle
|
|
|
42,376
|
|
|
|
41,665
|
|
|
|
|
69,296
|
|
|
|
68,136
|
|
Accumulated depreciation
|
|
|
(13,297
|
)
|
|
|
(9,434)
|
|
Property and equipment, net
|
|
|
55,999
|
|
|
|
58,702
|
|
Depreciation expenses for the three months
ended March 31, 2019 and 2018 were $3,716 and
$
24, respectively.
Note 6 LEASES
The Company has two non-cancelable lease
agreements for certain of the office and accommodation as well as fish farming containers for research and develop advanced technology
for water circulation applying in fishery with original lease periods expiring between 2022 and 2023. The lease terms may include
options to extend or terminate the lease when it is reasonably certain the Company will exercise that option. The Company recognizes
rental expense on a straight-line basis over the lease term.
The following table provides a summary of leases by balance
sheet location as of March 31, 2019:
|
|
Balance Sheet Location
|
|
March 31, 2019
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
$
|
|
Assets
|
|
|
|
|
|
|
Operating- noncurrent
|
|
Operating lease right-of-use assets
|
|
|
155,982
|
|
Total leased assets
|
|
|
|
|
155,982
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Operating – noncurrent
|
|
Operating lease liabilities, non-current
|
|
|
8,378
|
|
Total lease liabilities
|
|
|
|
|
8,378
|
|
The components of lease expense for the three months ended March
31, 2019 were as follows:
|
|
Statement of Income Location
|
|
Three months ended March 31, 2019
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
$
|
|
Lease Costs
|
|
|
|
|
|
|
Operating lease expense
|
|
General and administrative expenses
|
|
|
4,886
|
|
Total net lease costs
|
|
|
|
|
4,886
|
|
Maturity of lease liabilities under our non-cancelable operating
leases as of March 31, 2019 are as follows:
|
|
Operating
|
|
|
|
(Unaudited)
|
|
|
|
$
|
|
Remaining 2019
|
|
|
–
|
|
2020
|
|
|
8,911
|
|
2021
|
|
|
–
|
|
2022
|
|
|
–
|
|
2023
|
|
|
–
|
|
Total lease payments
|
|
|
8,911
|
|
Less: interest
|
|
|
(533
|
)
|
Present value of lease liabilities
|
|
|
8,378
|
|
Future minimum rental payments under our
non-cancelable operating leases as of December 31, 2018 were as follows:
|
|
Leases (1)
|
|
|
|
$
|
|
2019
|
|
|
–
|
|
2020
|
|
|
8,911
|
|
2021
|
|
|
–
|
|
2022
|
|
|
–
|
|
2023
|
|
|
–
|
|
Total
|
|
|
8,911
|
|
(1) Amounts are based on ASC 840, Leases that was superseded
upon our adoption of ASC 842, Leases on January 1, 2019.
Following table provides a summary of the lease terms and discount
rates for the three months ended March 31, 2019:
|
|
Three months ended March 31, 2019
|
|
Weighted Average Remaining Lease Term
|
|
|
|
|
Operating leases
|
|
|
3.50 years
|
|
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
|
|
Operating leases
|
|
|
6.18%
|
|
As most of the leases do not provide an implicit rate, the Company
use the incremental borrowing rate based on the information available at the lease commencement date to determine the present value
of lease payments.
Supplemental information related to the leases for the three
months ended March 31, 2019 is as follows:
|
|
Three months ended March 31, 2019
|
|
|
|
(Unaudited)
|
|
|
|
$
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
|
149,060
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for new lease obligations:
|
|
|
|
|
Operating leases
|
|
|
148,511
|
|
Note 7 CONVERTIBLE
NOTE
On September 20, 2018, Nocera, Inc. entered
into a one year $10,000 Convertible Note (“Note”) with Coral Investment Partners, LP. (“CIP”), an entity
controlled by Erik Nelson, the Company’s corporate secretary and director. The Note carries an interest rate of twenty-four
percent (24%), and is convertible into shares of the Company’s common stock at a price of $0.01 per share. As an inducement
to issue the Note, CIP received 150,000 Class A Warrants and 150,000 Class B warrants at strike prices of $0.50 and $1.00, respectively.
The Company evaluates convertible instruments,
such as the warrants issued in connection with the Note under Accounting Standards Codification (“ASC”) 815 “Derivatives
and Hedging” to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted
for at fair value with changes in fair value recorded in earnings. The Company determined that the conversion features in the warrants
should not be treated as an embedded derivative, and therefore ASC 815 was not applicable.
If the conversion feature does not require
derivative treatment under ASC 815, the instrument is then evaluated under ASC 470-20 “Debt with Conversion and other Options”
for consideration of any beneficial conversion features (“BCF”) requiring separate recognition. The Company determined
that a BCF existed because the conversion price on the Note was lower than the market price of the Company’s common stock.
The intrinsic value of the BCF was determined
to be approximately $330,000. In accordance with ASC 470-20-30-8, the amount of the discount assigned to the BCF equal to the lower
amount of either i) the Intrinsic Value of the BCF or ii) the proceeds realized upon the issuance of the note, therefore the Company
recorded the discount assigned to the BCF of $10,000. Under the guidelines of ASC 470-20-55-11, the Company determined based on
a $10,000 value of the Note and a $7,095 value for the Warrants; that approximately 58.5% of the Note should be allocated to the
BCF, or $5,850. The BCF was recognized as note discount, and amortized through the maturity of the Note, with a corresponding increase
to additional paid-in capital. For the year ended December 31, 2018, the interest accretion of the BCF was $1,635. The remaining
41.5% of the Note or $7,095 should be allocated to the warrants. Since the allocation cannot exceed the Note value, the value of
the warrants was determined to be $4,150, and it was recognized as note discount to be amortized during the period of Note. The
interest accretion of the warrants was $1,160.
As of December 31, 2018, the remaining
principle amount of the Note was $10,000, and the remaining unamortized note discount was $7,205. The aggregate effective interest
rate on the Note is approximately 24%. For the year ended December 31, 2018, the interest accretion and the contractual interest
coupon of the Note was $2,795 and $671, respectively.
The fair value of 150,000 Class A Warrants
and 150,000 Class B warrants issued on September 20, 2018 were measured by the Black-Scholes pricing model with the following assumptions.
|
|
September 20, 2018
|
|
|
|
Dividend yield
|
|
|
–
|
|
Risk-free interest rate
|
|
|
2.96%
|
|
Expected term (in years)
|
|
|
4.57
|
|
Volatility
|
|
|
25.3%
|
|
The Company has repaid the Note together
with the interest on January 3, 2019.
Note 8 INCOME TAXES
The Company and its subsidiary, and the
consolidated VIE file tax returns separately.
United States
On December 22, 2017, the Tax Cuts and
Jobs Act (the “Tax Act”) was signed into legislation. The 2017 Tax Act significantly revises the U.S. corporate income
tax by, among other things, lowering the statutory corporate tax rate from 34% to 21%, imposing a mandatory one-time tax on accumulated
earnings of foreign subsidiaries, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax.
On December 22, 2017, Staff Accounting
Bulletin No. 118 ("SAB 118") was issued to provide guidance on accounting for the tax effects of the Tax Act. SAB 118
provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete
the accounting under ASC 740. The Company has completed the assessment of the income tax effect of the Tax Act and there were no
adjustments recorded to the provisional amounts.
Since the VIE suffered loss during the
three months ended March 31, 2019, it has no additional provision amount resulted by the Global Intangible Low Taxed Income inclusion
on current earnings and profits of its foreign controlled corporations as. The Company has no transition tax for the same reason.
Hong Kong
The HK tax reform has introduced two-tiered
profits tax rates for corporations. Under the two-tiered profits tax rates regime, the profits tax rate for the first $2 million
of assessable profits will be lowered to 8.25% (half of the rate specified in Schedule 8 to the Inland Revenue Ordinance (IRO))
for corporations. Assessable profits above $2 million will continue to be subject to the rate of 16.5% for corporations. The Company
assessed that the HK entity will not earned profit greater than $2 million, it is subject to a corporate income tax rate of 8.25%.
PRC
WFOE and the consolidated VIE established in the PRC are subject
to the PRC statutory income tax rate of 25%, according to the PRC Enterprise Income Tax (“EIT”) law.
The components of the income tax provision
are:
|
|
Three months ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
$
|
|
|
$
|
|
Current
|
|
|
750
|
|
|
|
–
|
|
Deferred
|
|
|
(929
|
)
|
|
|
–
|
|
Total income tax benefit
|
|
|
(179
|
)
|
|
|
–
|
|
The reconciliation of income taxes expenses
computed at the PRC statutory tax rate applicable to income tax expense is as follows:
|
|
Three months ended
March
31,
|
|
|
|
2019
|
|
|
2018
|
|
PRC income tax statutory rate
|
|
|
25.00%
|
|
|
|
25.00%
|
|
Impact of different tax rates in other jurisdictions
|
|
|
(13.35%
|
)
|
|
|
–
|
|
Tax effect of non-deductible entertainment
|
|
|
(2.1%
|
)
|
|
|
–
|
|
Tax effect of non-deductible welfare
|
|
|
(0.02%
|
)
|
|
|
(0.90%
|
)
|
Changes in valuation allowance
|
|
|
(9.42%
|
)
|
|
|
–
|
|
Effective tax rate
|
|
|
0.11%
|
|
|
|
24.10%
|
|
Note 9 RELATED PARTY BALANCES
AND TRANSACTIONS
Due to related parties
The balance due to related parties was
as following:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
|
$
|
|
|
$
|
|
Mr. Zhang Bi (1)
|
|
|
423,249
|
|
|
|
245,545
|
|
Mr. Yin-Chieh Cheng (2)
|
|
|
693,932
|
|
|
|
556,464
|
|
Coral Capital Partners (3)
|
|
|
–
|
|
|
|
10,718
|
|
Mountain Share Transfer, LLC (3)
|
|
|
–
|
|
|
|
6,624
|
|
Total
|
|
|
1,117,181
|
|
|
|
819,351
|
|
Note:
(1)
|
Mr. Zhang Bi is the chief executive officer of GZ WFH, and he holds 38.5% shares of the Company. The balance represented the amount paid by Mr. Zhang on behalf of the Company for purchase of the raw materials.
|
(2)
|
Mr. Cheng Yin-Chieh is the chief financial officer of the Company, and he holds 42.5% shares of the Company. The balance represented the amount paid by Mr. Cheng on behalf of the Company for its daily operation purpose.
|
(3)
|
Coral Capital Partners and Mountain Share Transfer, LLC are companies 100% controlled by Erik S. Nelson, the corporate secretary and director of the Company. The balances as of December 31, 2018 had been paid off in 2019 Q1.
|
Related party transactions
The details of the related party transactions
were as follows:
|
|
For three months ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
$
|
|
|
$
|
|
Purchase from related party
|
|
|
|
|
|
|
|
|
Mr. Zhang Bi (1)
|
|
|
–
|
|
|
|
174,454
|
|
|
|
|
|
|
|
|
|
|
Paid on behalf of the Company
|
|
|
|
|
|
|
|
|
Mr. Zhang Bi (2)
|
|
|
174,162
|
|
|
|
–
|
|
Mr. Yin-Chieh Cheng (2)
|
|
|
138,600
|
|
|
|
–
|
|
Note:
(1)
|
The transaction represents the inventory sold by Mr. Zhang Bi to the Company at the market value.
|
(2)
|
The transactions represent the amount paid by Mr. Zhang Bi, Mr. Cheng Yin-Chieh on behalf of the Company for its daily operation.
|
Note 10 LOSS PER SHARE
The following table sets forth the computation
of basic and diluted loss per common share for the quarters ended March 31, 2019 and 2018.
|
|
For three months ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
$
|
|
|
$
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss attributable to the Company
|
|
|
(158,379
|
)
|
|
|
(8,878
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
|
|
|
|
|
|
|
- Basic
|
|
|
12,349,447
|
|
|
|
10,000,000
|
|
- Diluted
|
|
|
13,249,447
|
|
|
|
10,000,000
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
- Basic
|
|
|
(0.0128
|
)
|
|
|
(0.0009
|
)
|
- Diluted
|
|
|
(0.0128
|
)
|
|
|
(0.0009
|
)
|
Basic net loss per common share is computed
using the weighted average number of the common shares outstanding during the period. Diluted loss per share is computed using
the weighted average number of ordinary shares and ordinary equivalent shares outstanding during the period.
Due to the loss from Nocera, Inc. for the
period, 900,000 and nil share options were excluded from the calculation of diluted earnings per share for the quarters ended March
31, 2019 and 2018.
Note 11 SUBSEQUENT EVENT
The Company has evaluated subsequent events
through the issuance of the unaudited condensed consolidated financial statements and no subsequent event is identified that would
have required adjustment or disclosure in the consolidated financial statements.