Business Context and Reporting Period
The supplied filing is a Form 10-Q for Sino-Global Shipping America, Ltd., not Singularity Future Technology Ltd. It covers the three months ended September 30, 2018, the company’s fiscal first quarter of 2019. Sino-Global is a non-asset-based global shipping and freight logistics provider operating through subsidiaries in the U.S., PRC, Hong Kong, Australia and Canada. Its segments are inland transportation management, freight logistics and container trucking.
The financial statements are unaudited and prepared under U.S. GAAP. The company adopted ASC Topic 606 revenue recognition on July 1, 2018, with no material transition adjustment.
Financial Performance and Position
| Metric | Three months ended September 30, 2018 | Comparable 2017 period | Change |
|---|---|---|---|
| Total revenue | $6.50 million | $5.38 million | Up 20.8% |
| Gross profit | $1.42 million | $1.71 million | Down 17.4% |
| Gross margin | 21.8% | 31.9% | Down 10.1 percentage points |
| Operating income (loss) | $(1.35) million | $0.93 million | Shifted to loss |
| Net income (loss) | $(1.29) million | $0.72 million | Shifted to loss |
| Net loss attributable to Sino-Global | $(1.32) million | $0.62 million | Shifted to loss |
| Basic and diluted EPS | $(0.10) | $0.07 | Declined |
| Net cash used in operating activities | $(5.84) million | $(0.82) million | Greater outflow |
- Freight logistics revenue increased 56.4% to $5.49 million, but its gross margin declined to 9.5% from 10.5%.
- Inland transportation revenue declined 35.1% to $0.92 million, while segment gross margin increased to 93.5% from 87.2%.
- Container trucking revenue declined 79.7% to $91,980, which management attributed partly to lower China-U.S. container shipments and the disposition of a former joint venture.
- General and administrative expense increased 248.7% to $2.66 million, including substantial stock-based compensation and higher doubtful-account provisions. Selling expense increased 382.4% to $108,369.
- Accounts receivable, net, was $11.20 million at September 30, 2018, with an allowance for doubtful accounts of $2.64 million. The quarter included approximately $951,832 of doubtful-account provision.
- Cash was $987,031 at September 30, 2018, down from $7.10 million at June 30, 2018. Total assets were $22.33 million and total equity was $18.60 million.
- Current assets were $15.54 million versus current liabilities of $3.73 million, producing working capital of $11.81 million and a current ratio of 4.17.
- The filing does not disclose outstanding debt or borrowings; total liabilities were $3.73 million and consisted of current liabilities.
- Capital expenditures were minimal at $830. Foreign-currency translation losses reduced comprehensive income attributable to the company to a loss of $1.86 million.
Material Changes Versus the Prior Comparable Period
- Revenue grew 20.8%, driven primarily by freight logistics, but cost of revenue grew 38.7%, reducing gross margin from 31.9% to 21.8%.
- The company moved from operating income of $928,270 to an operating loss of $1.35 million, principally because of higher freight costs, fuel costs, stock-based compensation, selling costs and doubtful-account provisions.
- Operating cash outflow increased to $5.84 million, mainly due to the net loss, a $3.71 million increase in accounts receivable, $2.51 million of deposits, and $0.79 million of prepaid freight fees. A $3.32 million reimbursement from a related-party supplier partially offset these uses.
- Accounts payable declined to $470,720 from $3.23 million, while freight logistics deposits increased to approximately $2.99 million from $83,526. Approximately $2.91 million was deposited with BaoSteel as security for shipments and merchandise.
- Common shares outstanding increased to 13,575,535 from 13,095,535 at June 30, 2018. The company also had 4.0 million exercisable warrants at a $1.75 exercise price and 85,000 exercisable options.
- The company formed Bright Far East International Shipping Agency in Hong Kong, owning 51%, to pursue worldwide shipping agency and management operations.
Outlook, Commentary, Risks and Unusual Items
Management stated that it intends to redirect greater focus toward shipping agency services, develop a shipping agency network in China and Southeast Asia over the next three years, and expand globally through acquisitions or strategic partnerships. It also entered a five-year strategic cooperation agreement with Sinco Pharmaceuticals Holdings Ltd. to develop cold-chain logistics in China. No quantitative revenue, earnings or cash-flow guidance was provided.
- Management believes existing working capital and potential funding sources will support continuing operations, but this assessment is challenged by the sharp cash decline and substantial operating cash outflow.
- Revenue concentration is significant: three customers represented 27.8%, 22.2% and 18.5% of quarterly revenue, respectively. Three customers represented approximately 30.1% of accounts receivable at quarter-end.
- The company depends on major customers and related parties, including Tianjin Zhiyuan Investment Group. Related-party revenue was $322,000, and $1.36 million was due from the related party after allowance.
- Key risks include PRC political, economic, regulatory and currency conditions; customer and supplier concentration; foreign-exchange fluctuations; trade negotiations affecting China-U.S. shipments; demand for new business lines; natural disasters; and the ability to attract personnel.
- Contractual commitments included approximately $200,000 due for IT infrastructure services in fiscal 2020 and approximately $142,643 due for the ERP project in fiscal 2021, in addition to lease obligations.
- The company estimated approximately $58,746 of potential PRC severance obligations that were not recorded because the timing and amount were uncertain.
- A $225,000 breach-of-service-contract dispute was stayed pending arbitration. Management considered the outcome premature to assess but did not expect a material effect.
- Disclosure controls and procedures were deemed ineffective due to insufficient segregation of duties, inadequate technical resources for complex transactions and the absence of full-time U.S. GAAP accounting personnel. No material changes to internal control over financial reporting were reported during the quarter.
Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing is for Sino-Global Shipping America, Ltd., whereas the request identifies Singularity Future Technology Ltd.
- Assess collectability and aging of the $11.20 million net accounts receivable and the adequacy of the $2.64 million allowance.
- Reconcile the $5.84 million quarterly operating cash outflow with reported earnings, deposits, receivables and related-party transactions.
- Review customer concentration, related-party balances and the expected collection of the $1.36 million due from Zhiyuan.
- Evaluate the effect of 4.0 million warrants, 85,000 options and additional stock-based compensation on dilution and future expenses.
- Monitor whether the proposed shipping-agency expansion and Sinco cold-chain cooperation generate measurable revenue and cash flow.
- Review remediation of the disclosed material weaknesses in disclosure controls and financial reporting.
- Verify the status of the arbitration, IT and ERP commitments, BaoSteel deposit and other contingencies.