Business Context and Reporting Period
Singularity Future Technology Ltd. filed an unaudited Form 10-Q for the quarter and six months ended December 31, 2021, its fiscal second quarter. The company was formerly named Sino-Global Shipping America, Ltd.; the corporate name changed on January 3, 2022. Its legacy business provides freight logistics and shipping-related services in the U.S. and China, while management is pursuing diversification into digital assets, cryptocurrency mining, smart warehousing and related technology businesses.
The company operated primarily through freight logistics services during the period. Shipping agency and management services generated no revenue in either the quarter or six-month period ended December 31, 2021.
Financial Highlights
| Metric | Three months ended December 31, 2021 | Three months ended December 31, 2020 | Six months ended December 31, 2021 | Six months ended December 31, 2020 |
|---|---|---|---|---|
| Revenue | $1.04 million | $1.88 million | $2.84 million | $3.02 million |
| Gross profit | $17,034 | $195,976 | $186,376 | $237,549 |
| Gross margin | 1.6% | 10.4% | 6.6% | 7.9% |
| Operating loss | $2.76 million | $1.18 million | $5.63 million | $1.92 million |
| Net loss | $8.92 million | $1.09 million | $11.84 million | $1.84 million |
| Net loss attributable to controlling shareholders | $8.85 million | $1.10 million | $11.71 million | $1.84 million |
| Basic and diluted loss per share | $(0.55) | $(0.23) | $(0.74) | $(0.42) |
- Quarterly revenue declined 44.7%, primarily because a major customer reduced demand amid COVID-19 impacts in China. Six-month revenue declined 6.1%.
- Quarterly gross profit declined 91.3%, and six-month gross profit declined 21.5%. Management attributed margin pressure to rising freight costs and the loss of higher-margin shipping agency revenue.
- Operating expenses were $2.77 million in the quarter and $5.81 million for the six months. Six-month expenses included $3.30 million of stock-based compensation, $50,127 of cryptocurrency impairment and a $1.93 million recovery related to doubtful accounts.
- Net loss included a $6.13 million loss from disposing of the former VIE Sino-Global Shipping Agency Ltd. and dissolving Sino-Global Shipping LA, Inc. The disposal was not classified as discontinued operations because the entities had no material operations.
Cash Flow, Liquidity and Capitalization
- Cash was $51.40 million at December 31, 2021, compared with $44.84 million at June 30, 2021.
- Six-month operating cash flow was negative $5.24 million, compared with negative $2.97 million in the prior-year period.
- Six-month investing cash flow was negative $2.21 million, including $624,086 of property and equipment purchases, a $210,000 investment in an unconsolidated entity and advances to related parties.
- Six-month financing cash flow was positive $14.41 million, including $10.0 million of convertible-note proceeds and $4.56 million from common-stock issuance.
- Working capital was $52.13 million, compared with $41.52 million at June 30, 2021. The current ratio was 10.63, compared with 8.77.
- The company had $10.0 million of unsecured senior convertible notes outstanding, bearing 5% annual interest and maturing December 18, 2023. The notes are convertible beginning June 19, 2022 at $3.76 per share.
- Current liabilities were $5.41 million, including $3.64 million of taxes payable. Lease liabilities totaled $1.56 million, including current and noncurrent portions.
- Cash concentration and uninsured-deposit risk are significant: approximately $49.16 million of U.S. bank deposits were not covered by FDIC or other insurance limits at December 31, 2021.
Material Changes and Unusual Items
- The company terminated its VIE structure and disposed of Sino-China on December 31, 2021, recognizing a $6.13 million loss, largely from writing off amounts due from non-controlling interests.
- The company issued 1.02 million shares as one-time stock compensation to employees and directors, valued at $2.93 million, and issued an additional 100,000 shares to a former director valued at $377,000.
- At December 31, 2021, the company had 17.65 million shares outstanding and 17.46 million warrants outstanding, with a weighted-average exercise price of $4.94. As of February 14, 2022, reported shares outstanding were 21.88 million.
- Other receivables increased to $3.49 million from $2,558 at June 30, 2021, including a $3.30 million advance under a computer-equipment trading project. The company is entitled to 90% of that project's profit.
- The company had $4.76 million of loans receivable from related parties and $1.77 million due from related parties. These balances are generally unsecured, non-interest-bearing and subject to collection risk.
- Cryptocurrency assets were $211,211 at December 31, 2021 after a $50,127 impairment charge.
- Management reported that disclosure controls were not effective because of inadequate segregation of accounting duties and the lack of full-time U.S. GAAP personnel. The company engaged an outside CPA firm to assist with U.S. GAAP and SEC reporting.
Outlook, Commentary and Risks
- Management intends to continue the traditional logistics business while expanding into digital assets, cryptocurrency mining, smart warehousing and other technology-related activities.
- Thor Miner Inc., a 51%-owned joint venture, entered into a purchase and sale agreement for up to $200.0 million of cryptocurrency-mining hardware and equipment. The first order was $80.0 million, and Thor had received $40.0 million as of the report date. Completion depends on chip supply and timely delivery; management estimated gross margin of approximately 10% on the orders.
- The filing provides no formal company-wide revenue or earnings guidance. The reported 10% gross-margin estimate applies to the referenced Thor orders and is not a consolidated forecast.
- COVID-19 continued to reduce customer demand, disrupt logistics activity and increase freight costs. The filing states that the effects of future outbreaks remain difficult to estimate.
- Revenue and supplier concentration remain material. For the quarter, four customers represented approximately 32.3%, 29.6%, 21.5% and 16.6% of revenue; three suppliers represented approximately 54.7%, 22.8% and 11.7% of cost of revenue.
- Other risks include dependence on related parties and a limited customer base, PRC political and regulatory conditions, foreign-exchange fluctuations, cryptocurrency price volatility, execution and supply-chain risks for the Thor business, and the effectiveness of internal controls.
- Management stated that existing cash and working capital were sufficient for operations and debt obligations for at least one year from the report date; however, the company continued to generate operating losses and negative operating cash flow.
Important Facts for Investors to Verify
- Whether the Thor hardware agreement is completed, the timing and collectability of the reported $40.0 million receipt, and the actual gross margin achieved.
- Whether the company can replace declining logistics revenue and improve the 1.6% quarterly gross margin.
- The collectability and business purpose of related-party loans, advances and receivables totaling approximately $6.53 million.
- The extent of dilution from convertible notes, outstanding warrants, subsequent stock issuances and stock-based compensation.
- Whether the disclosed material weaknesses in internal controls are remediated and whether future filings contain additional accounting corrections.
- The financial and regulatory implications of terminating the VIE structure and shifting toward cryptocurrency-related businesses.
- The status and cost of the January 2022 repurchase and cancellation of approximately 3.97 million warrants, as well as subsequent equity grants and advisory-share issuances.