Singularity Future Technology Ltd. — Form 10-Q Summary
Business context and reporting period
This unaudited Form 10-Q covers the three and six months ended December 31, 2022, the Company’s fiscal second quarter. Singularity operates two segments: freight logistics services, including shipping and warehousing, and sales of cryptocurrency-mining machines through its 51%-owned Thor Miner subsidiary. The Company serves customers primarily in the United States and China and changed its name from Sino-Global Shipping America, Ltd. in January 2022.
The Company terminated and deconsolidated its former VIE, Sino-Global Shipping Agency Ltd., on December 31, 2021, and dissolved or discontinued certain other subsidiaries. Prior-period results were restated for a $980,200 revenue-recognition error and related doubtful-account adjustments.
Financial performance and key metrics
| Metric | Three months ended Dec. 31, 2022 | Three months ended Dec. 31, 2021 | Six months ended Dec. 31, 2022 | Six months ended Dec. 31, 2021 |
|---|---|---|---|---|
| Revenue | $1.491 million | $1.042 million | $2.712 million | $1.858 million |
| Gross profit/(loss) | $179,794 | $17,034 | $655,371 | $(213,824) |
| Gross margin | 12.1% | 1.6% | 24.2% | (11.5)% |
| Operating loss | $(3.686) million | $(2.654) million | $(6.474) million | $(7.819) million |
| Net loss | $(3.747) million | $(8.816) million | $(6.697) million | $(14.033) million |
| Net loss attributable to controlling shareholders | $(3.732) million | $(8.761) million | $(6.817) million | $(13.722) million |
| Basic and diluted loss per share | $(0.18) | $(0.54) | $(0.32) | $(0.87) |
- Six-month revenue comprised $1.980 million from freight logistics and $732,565 from crypto-mining-machine sales. Crypto-mining revenue was recognized on a net basis because the manufacturer handled shipping and customs and the Company did not bear inventory risk.
- Freight logistics produced gross losses of $55,726 in the quarter and $77,194 for the six-month period. Crypto-mining-machine sales generated reported gross profit of $235,520 in the quarter and $732,565 for the six-month period.
- Six-month operating expenses were $7.130 million, including $6.724 million of general and administrative expenses, $329,777 of stock-based compensation, and $14,801 of cryptocurrency impairment.
- General and administrative expense increased primarily because of added personnel, new offices, professional fees, and approximately $3.6 million of legal and special-committee expenses related to investigations and related matters.
- Cash used in operating activities was $19.365 million for the six months ended December 31, 2022, compared with $5.640 million in the restated prior-year period. Investing activities provided $474,563, financing activities provided no cash, and exchange-rate effects reduced cash by $874,454.
- Cash declined from $55.833 million at June 30, 2022 to $36.069 million at December 31, 2022. Working capital was $26.821 million, with a current ratio of 3.51.
- Total assets were $38.816 million and total liabilities were $11.285 million at December 31, 2022. Equity was $27.531 million, including an accumulated deficit of $69.396 million.
- Debt consisted primarily of $5.0 million of unsecured senior convertible notes bearing 5% annual interest and maturing in December 2023. The notes are convertible at $3.76 per share. Operating lease liabilities totaled $1.045 million.
Material changes versus the prior comparable period
- Quarterly revenue increased 43.1% and six-month revenue increased 46.0%, largely because crypto-mining-machine sales began contributing revenue and U.S. warehouse activity increased.
- Gross margin improved substantially because of the reported high-margin, net-basis crypto-mining sales; however, the core freight logistics segment remained unprofitable.
- Quarterly net loss improved because the prior-year period included a $6.132 million loss from disposal of the former VIE and subsidiaries. The six-month loss also improved for the same reason, despite higher legal and administrative costs.
- Cash flow deteriorated materially because of the $13.0 million settlement payment to SOS Information Technology New York, Inc., the release of approximately $6.8 million of deferred revenue, and continuing operating losses.
- Current liabilities fell from $25.213 million to $10.689 million, principally because the $13.0 million refund payable and $6.756 million of deferred revenue outstanding at June 30, 2022 were substantially resolved or recognized.
- The Company recorded a restatement of the six months ended December 31, 2021, reducing previously reported revenue by $980,200 and increasing reported net loss by $2.193 million.
Guidance, outlook, commentary, risks, and unusual items
- No quantitative revenue or earnings guidance was provided. Management stated that available working capital was sufficient for operations and debt obligations for at least one year from the filing date.
- The crypto-mining-machine contract with SOSNY was terminated after production and delivery problems. Thor Miner paid a $13.0 million settlement on December 23, 2022, received by SOSNY on December 28, and SOSNY dismissed its lawsuit with prejudice against Singularity and other settling defendants.
- Thor Miner assigned to SOSNY rights related to its HighSharp claims and deposits. The filing states that Thor Miner recorded net bad-debt expense of $367,014 related to the remaining HighSharp deposit and SOSNY-related balances.
- Risks include dependence on a limited number of customers and suppliers, customer concentration, cryptocurrency and bitcoin-price volatility, supply-chain and semiconductor constraints, COVID-19 disruptions, U.S.-China political and regulatory developments, foreign-exchange movements, and the ability to resume or expand crypto-mining-machine sales after investigations.
- For the six months ended December 31, 2022, two customers represented 12.7% and 77.6% of gross revenue; one customer represented 74.1% of net accounts receivable. One supplier represented 74.9% of gross purchases.
- The Company disclosed SEC and U.S. Attorney investigations following a May 2022 Hindenburg Research publication. The Company is cooperating but stated that it cannot estimate the outcome or duration.
- Investor lawsuits and a putative securities class action were disclosed. The Hexin and St. Hudson claims sought at least $6.0 million and $4.4 million, respectively; the Jinhe claim sought at least $575,000 and potentially more than $1.8 million. The three consolidated investor actions were dismissed without prejudice on February 24, 2023, in furtherance of an agreement in principle to settle. The putative class action remained unresolved and its outcome was not estimable.
- Disclosure controls were deemed ineffective because of material weaknesses involving segregation of duties, U.S. GAAP expertise, complex transactions, related-party identification, supporting documentation, management review, and cash-disbursement oversight. Management described remediation plans, but no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Verify the status and final terms of the SOSNY settlement, the HighSharp claims and assigned rights, and any additional amounts potentially payable under the settlement.
- Verify the status, scope, and potential financial impact of the SEC and U.S. Attorney investigations.
- Verify the resolution and economic terms of the investor lawsuits, the putative class action, and other contractual litigation.
- Assess whether the Company can reduce operating cash burn while its freight logistics segment remains loss-making and crypto-mining sales have been disrupted or suspended.
- Review customer and supplier concentration, collectability of receivables, and related-party balances, including the $422,207 net amount due from related parties and substantial associated allowances.
- Evaluate repayment, conversion, or refinancing requirements for the $5.0 million convertible notes maturing in December 2023.
- Monitor remediation of the disclosed material weaknesses and the reliability of future financial reporting, particularly given the prior-period restatement.
- Confirm share-count and dilution implications from 21.944 million shares outstanding as of March 3, 2023, approximately 12.192 million outstanding warrants, and the convertible notes.