Singularity Future Technology Ltd. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in the Report. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors. Overview We previously focused on providing customized freight logistics services, but starting in 2017, we began exploring new opportunities to expand our business and generate more revenue. These opportunities ranged from complementary businesses to other new service and product initiatives. In the fiscal years 2022 and 2023, while we continued to provide our freight logistics business, we expanded our services to include warehousing services provided by our US subsidiary Brilliant Warehouse Service Inc. On January 3, 2022, we changed our corporate name to Singularity Future Technology Ltd. to align with our entry into the digital assets business through our U.S. subsidiaries. During 2022, we engaged in purchases and sales of cryptocurrency mining machines through our U.S. subsidiaries. For the fiscal year ended June 30, 2023 and 2022, we operated in two operating segments: (1) freight logistics services, through our subsidiaries in the U.S and PRC; and (2) the purchase and sales of crypto mining machines, through our subsidiary Thor Miner. The Company no longer operates in the shipping agency segment because it did not receive any new orders for its services due to the uncertainty of the shipping management market which was negatively impacted by the COVID-19 pandemic. Recent Developments The following events had a material impact on our financial statements. For other recent developments, see “Item 1. Business – Recent Developments.” On January 10, 2022, Thor Miner entered into a purchase agreement with HighSharp. Pursuant to the agreement, Thor Miner agreed to purchase certain cryptocurrency mining equipment from HighSharp. In January and April 2022, Thor Miner prepaid $35,406,649 for the order. Thor Miner also entered into a PSA with SOSNY for the purchase of $200,000,000 in crypto mining rigs and received a deposit form SOSNY in the amount of $48,930,000. 26 Due to HighSharp’s production issue, Thor Miner was unable to timely deliver the products to SOSNY according to the delivery terms of the PSA and was sued by SOSNY for breach of contract on December 9, 2022. . As of December 22, 2022, the balance of the advance made to HighSharp and deposit from SOSNY amounted to $27,927,583 and $40,560,569, respectively. On December 23, 2022, the Company entered into the Settlement Agreement with SOSNY pursuant to which the Company paid $13.0 million to SOSNY in exchange for SOSNY dismissing the lawsuit and agreed to transfer any additional funds it receives from HighSharp to SOSNY in an amount not to exceed $40,560,569. Thor Miner wrote off the balance of the deposit it received from SOSNY and the balance of its payment to HighSharp. Impact of COVID-19 The outbreak of the COVID-19 starting from late January 2020 in the PRC spread rapidly to many parts of the world. In March 2020, the World Health Organization declared COVID-19 as a pandemic. In early December 2022, Chinese government eased the strict control measures for COVID-19, which led to a surge in increased infections and disruption to our business operations. In 2023, our China operation continued to suffer from the impact of COVID-19, although to a lesser extent. The impact of any future spread of COVID-19 on the Company’s China operation will depend, to a large extent, on the duration and resurgence of COVID-19 variants and the actions taken by government authorities to contain COVID-19 or treat its impact, almost all of which is beyond our control. The impact of COVID-19 on our business, financial condition, and results of operations include, but are not limited to, the following: ● Our customers have been negatively impacted by the pandemic, which reduced their demand for freight logistics services. As a result, our revenue for the year ended June 30, 2022 was down by approximately $1.2 million, or 22.6% and our freight revenue declined slightly in the year ended June 30, 2023. ● Due to travel restrictions between US and China, our new business development for existing segments or new ventures has been slowed down. ● Our sales of crypto mining machines were materially adversely affected by COVID-19. Specifically, Crypto mining machine manufacturers were impacted by the constrained supply of the semiconductors used in the production of the highly specialized crypto mining machines. COVID-related issues exacerbated port congestion and intermittent supplier shutdowns and delays, resulted in delayed shipments and additional expenses to expedite delivery. As a result, we were unable to fulfil our customer orders on a timely basis, resulting in the cancellation of orders and the partial refund of purchases, as evident from the SOSNY settlement. Although the impact of COVID-19 on our operations decreased in 2023, such impact still exists and may continue to exist for an unforeseeable period of time. The impact of any future spread of COVID-19 on the Company’s China operation will depend, to a large extent, on the duration and resurgence of COVID-19 variants and the actions taken by government authorities to contain COVID-19 or treat its impact, almost all of which is beyond our control. Results of Operations Comparison of the Years Ended June 30, 2023 and 2022 The following table sets forth the results of our operations for the periods indicated: For the Years Ended June 30, 2023 2022 Change US $ % US $ % US $ % Revenues 4,538,723 100 % 3,988,415 100.0 % 550,308 13.8 % Cost of revenues 3,990,654 87.9 % 4,136,474 103.7 % (145,820 ) (3.5 )% Gross margin 12.1 % N/A (3.7 )% N/A 15.8 % N/A Selling expenses 232,569 5.1 % 385,890 9.7 % (153,321 ) (39.7 )% General and administrative expenses 11,572,888 255.0 % 9,301,784 233.2 % 2,271,104 24.4 % Impairment loss of investment 128,369 2.8 % - - 128,369 100 % Impairment loss of Cryptocurrencies 18,279 0.4 % 170,880 4.3 % (152,601 ) (89.3 )% Impairment loss of fixed assets and right of use asset 33,469 0.7 % 1,006,305 25.2 % (972,836 ) (96.7 )% Provision for doubtful accounts, net of recovery 2,827,511 62.3 % 1,613,504 40.5 % 1,214,007 75.2 % Stock-based compensation 329,778 7.3 % 10,064,622 252.3 % (9,734,844 ) (96.7 )% Total costs and expenses 19,133,517 421.6 % 26,679,459 668.9 % (7,545,942 ) (28.3 )% 27 Revenues Revenues increased by $550,308, or approximately 13.8%, to $4,538,723 for the year ended June 30, 2023 from $3,988,415 for the year ended June 30, 2022. The increase was primarily due to increased revenue from our sale of crypto mining equipment. The Company ceased to sell crypto-mining equipment since January 1, 2023. The following tables present summary information by segments for the years ended June 30, 2023 and 2022: For the Year Ended June 30, 2023 Freight Logistics Services Sales of Crypto Mining Machines Total Net revenues* $ 3,806,158 $ 732,565 $ 4,538,723 Cost of revenues $ 3,990,654 $ - $ 3,990,654 Gross profit $ (184,496 ) $ 732,565 $ 548,069 Depreciation and amortization $ 163,635 $ 713 $ 164,348 Total capital expenditures $ (38,440 ) $ 2,852 $ (35,588 ) Gross margin (4.8 )% 100 % 12.1 % * Including related party revenue of $222,963 from Zhejiang Jinbang Fuel Energy Co., Ltd for the year ended June 30, 2022. For the Year Ended June 30, 2022 Freight Logistics Services Sales of Crypto Mining Machines Total Net revenues $ 3,830,615 $ 157,800 $ 3,988,415 Cost of revenues $ 4,136,474 $ - $ 4,136,474 Gross profit $ (305,859 ) $ 157,800 $ (148,059 ) Depreciation and amortization $ 512,586 $ 21,052 $ 533,638 Total capital expenditures $ 840,319 $ 34,199 $ 874,518 Gross margin (8.0 )% 100.0 % (3.7 )% % Changes For the Years Ended June 30, 2023 and 2022 Freight Logistics Services Sales of Crypto Mining Machines Total Net revenues (0.6 )% 364.2 % 13.8 % Cost of revenues (3.5 )% 100 % (3.5 )% Gross profit (39.7 )% 364.2 % (470.2 )% Depreciation and amortization (68.1 )% (96.6 )% (69.2 )% Total capital expenditures (104.6 )% (91.7 )% (104.1 )% Gross margin 3.2 % 0 % 15.8 % 28 Disaggregated information of revenues by geographic locations are as follows: For the Years Ended June 30, June 30, 2023 2022 PRC 2,529,449 2,982,691 U.S. 2,009,274 1,005,724 Total revenues $ 4,538,723 $ 3,988,415 Revenues Freight Logistics Services Freight logistics services primarily consist of cargo forwarding, brokerage, warehouse and other freight services. Revenues from freight logistics services were $3,806,158 for the year ended June 30, 2023, a decrease of $24,457, or approximately 0.6%, as compared to $3,830,615 for the year ended June 30, 2022. The decrease in shipping revenue of approximately $0.45 million from our PRC operation was due to a decrease in demand from a major customer, offset in part to an increase of revenue from our U.S. subsidiary, Brilliant Warehouse, of approximately $0.43 million. Sales of Crypto Mining Machines On January 10, 2022, Thor Miner entered into the PSA with SOSNY, a wholly owned subsidiary of SOS Ltd. Pursuant to the PSA, Thor Miner agreed to sell to SOSNY certain cryptocurrency mining hardware and other equipment. The total purchase price was $200,000,000 and the purchase was expected to be completed under separate purchase orders. We recognized the sales of cryptocurrency mining equipment based on a net basis as the manufacturer of the products was responsible for shipping and custom clearing for the products. The net revenue amounted to $732,565 and $157,800, respectively, for the years ended June 30, 2023 and 2022. We ceased to sell crypto-mining equipment since January 1, 2023. Cost of Revenues Cost of revenues for our freight logistics services segment mainly consisted of freight costs to various freight carriers, cost of labor, warehouse rent and other overhead and sundry costs. Cost of revenues for our freight logistics services segment was $3,990,654 for the year ended June 30, 2023, a decrease of $145,820, or approximately 3.5%, as compared to $4,136,474 for the year ended June 30, 2022 as a result of the decrease in freight costs of our PRC operations caused by the decrease in shipping volume due to the pandemic. Our gross margin was 12.1% and (3.7%) for the years ended June 30, 2023 and 2022, respectively. This increase in gross margin in freight logistics segment was mainly due to increased revenue from our sale of crypto mining equipment. We recognized this revenue on a net basis, thus increasing the overall margin of our operations. Operating Costs and Expenses Operating costs and expenses decreased by $ 7,545,942 or approximately 28.3% from $19,133,517 for the year ended June 30, 2023 compared to $26,679,459 for the year ended June 30, 2022. This decrease was mainly due to the decrease in stock-based compensation, impairment loss of fixed assets and right of use assets as more fully discussed below. Selling Expenses Our selling expenses consisted primarily of salaries, meals and entertainment and travel expenses for our sales representatives. For the year ended June 30, 2023, we had $232,569 in selling expenses, as compared to $385,890 for the year ended June 30, 2022, which represents a decrease of $153,321 or approximately 39.7%. The decrease was mainly due to a decrease in marketing expenses for our freight logistics segment in the PRC compared to the year ended June 30, 2022. 29 General and Administrative Expenses Our general and administrative expenses consist primarily of salaries and benefits, travel expenses for our administration department, office expenses, and regulatory filing and professional service fees for auditing, legal and IT consulting. For the year ended June 30, 2023, we had $11,572,888 of general and administrative expenses, as compared to $9,301,784 for the year ended June 30, 2022, representing an increase of $2,271,104, or approximately 24.4%. The increase was mainly due to the increased professional fees of approximately $4.0 million which are mainly legal fees relating to the Company’s special committee’s investigation of claims of alleged fraud, misrepresentation, and inadequate disclosure related to the Company and certain of its management personnel raised in the Hindenburg Report and other related matters. Impairment Loss of Cryptocurrencies We recorded an impairment loss of $18,279 for the year ended June 30, 2023 due to price drops in bitcoin, which the Company deemed a triggering event for impairment testing. Impairment Loss of Fixed Assets and Right of Use Assets We recorded impairment losses of $33,469 and $1,006,305 for the year ended June 30, 2023 and 2022. We performed our annual goodwill impairment analysis as of June 30, 2023 and concluded we had approximately an $0.03 million impairment loss for fixed assets and right of use assets, as our carrying value exceeds the fair value. The fair values are determined by income approach where projected future cash flows discounted at rates commensurate with the risks involved, (“Discounted Cash Flow” or “DCF” of the income approach). Assumptions used in a DCF analysis require the exercise of significant judgment, including judgment about appropriate discount rates and terminal values, growth rates, and the amount and timing of expected future cash flows. Impairment Loss of Investment The Company recorded $128,369 for the year ended June 30, 2023 due to the impairment of the Company’s investment in LSM Trading Ltd. No impairment loss was recorded for the year ended June 30, 2022. Provision for Doubtful Accounts, Net of Recovery Our total bad debt expenses amounted to approximately $2.8 million, mostly due to a $3 million wire transfer made by our former COO, Jing Shan to Goalowen Inc. on May 5, 2023 without the Board’s authorization, as payment for the transfer by Goalowen to the Company of an operating income right to be derived from fishing activities. The Company has demanded the return of the $3 million but has not been successful. As of June 30, 2023, the Company reviewed the unauthorized transfer, evaluated the collection possibility, and decided to provide 100% allowance provision with amount of USD 3 million. Stock-based Compensation Stock-based compensation was $329,778 for the year ended June 30, 2023, a decrease of $9,734,844 or 96.7%, as compared to $10,064,622 for the year ended June 30, 2022, as we issued less stock compensation to employees and directors. 30 Loss from disposal of subsidiaries and VIE On December 31, 2021, the Company entered into a series of agreements to terminate its VIE structure and deconsolidated its formerly controlled entity Sino-China. The Company controlled Sino-China through its wholly owned subsidiary Trans Pacific Beijing. The Company made the decision to dissolve the VIE structure and Sino-China because Sino-China has no active operations and the Company wanted to remove any potential risks associated with VIE structures. The Company also dissolved its subsidiary Sino-Global Shipping LA, Inc., and on March 14, 2022, the Company discontinued its subsidiary Sino-Global Shipping Canada, Inc. The total loss related to the three disposals amounted to approximately $6.1 million for the year ended June 30, 2022. The Company also dissolved its subsidiary Sino-Global Shipping Australia Pty Ltd. (“SGS AUS”) in November 2022. Since these entities did not have any active operations prior to their disposal, the disposal did not represent a strategic change in the Company’s business. As such, the disposal was not presented as a discontinued operation. Lawsuit settlement expenses We recorded $8.4 million in lawsuit settlement expenses for the year ended June 30, 2023, compared to nil in lawsuit settlement expenses for the year ended June 30, 2022. The expenses were related to the lawsuits in connection with the Securities Purchase Agreement and the Financial Advisory Agreement described in Item 1. Business – Litigation. . Other Expenses, Net Other expenses, net was $0.07 million for the year ended June 30, 2023, which mainly consisted of interest expense for our convertible debt of approximately $0.25 million and the gain on disposal of right of use assets and fixed assets of $0.19 million, compared to $0.1 million of interest expenses for our convertible debt and other finance charges, net of interest earned in the year ended June 30, 2022. Taxes Our income tax expenses amounted to $135,855 and nil for the years ended June 30, 2023 and 2022, respectively. We have incurred a cumulative U.S. federal net operating loss (“NOL”) of approximately $22,000,000 as of June 30, 2022, which may reduce future federal taxable income. The NOL generated for the year ended June 30, 2023 amounted to approximately $19,700,000. The Tax benefit derived from this NOL was approximately $8,775,000. As of June 30, 2023, our cumulative NOL amounted to approximately $41,700,000. Our operations in China have incurred a cumulative NOL of approximately $1,333,000 as of June 30, 2022, which was mainly from Sino -China which was disposed of in the year ended June 30, 2022. During the year ended June 30, 2023, we generated an additional NOL of approximately $370,000 due to increased third party service cots as a result of our special committee’s investigation. Our PRC subsidiaries’ cumulative NOL amounted to approximately $1,703,000 as of June 30, 2023, which may reduce future taxable income and will expire by 2026. We periodically evaluate the likelihood of the realization of our deferred tax assets and reduce the carrying amount of the deferred tax assets by a valuation allowance to the extent we believe a portion will not be realized. Management considers new evidence, both positive and negative, that could affect our future realization of deferred tax assets including our recent cumulative earnings experience, expectation of future income, the carry forward periods available for tax reporting purposes and other relevant factors. We determined that it is more likely than not our deferred tax assets would not be realized due to uncertainty on future earnings as a result of the Company’s reorganization and venture into new businesses. We provided a 100% allowance for deferred tax assets as of June 30, 2023. The net decrease in valuation for the year ended June 30, 2023 amounted to approximately $4,696,000 based on management’s reassessment of the amount of our deferred tax assets that are more likely than not to be realized. Net Loss As a result of the foregoing, we had a net loss of $23,098,342 for the year ended June 30, 2023, compared to a net loss of $28,928,369 for the year ended June 30, 2022. After the deduction of non-controlling interest, net loss attributable to us was $22,996,846 for the year ended June 30, 2023, compared to $28,257,830 for the same period in 2022. Comprehensive loss attributable to us was $22,952,349 for the year ended June 30, 2023, as compared to $27,482,995 for the year ended June 30, 2022. 31 Liquidity and Capital Resources Cash Flows and Working Capital As of June 30, 2023, we had $17,390,156 in cash (including cash on hand and cash in bank). The majority of our cash is in banks located in the U.S. On December 19, 2021, the Company issued two convertible notes to two non-U.S. investors for an aggregate purchase price of $10,000,000 (the “December 2021 Convertible Notes”). The December 2021 Convertible Notes bear interest at 5% annually and may be converted into shares of the Company’s common stock at a conversion price of $3.76 per share. At the investors’ request, we prepaid $5,000,000 in the aggregate principal amount, without interest, of the December 2021 Convertible Notes on March 8, 2022. Interest for the $5,000,000 principal that was repaid was waived. As of June 30, 2023, we had the following loan outstanding: Loans Maturity Interest rate Amount Convertible Notes December 2023 5 % $ 5,000,000 The following table sets forth a summary of our cash flows for the periods as indicated: For the Years Ended June 30, 2023 2022 Net cash (used in) provided by operating activities $ (33,643,405 ) $ 5,918,070 Net cash used in investing activities $ (2,225,708 ) $ (3,581,676 ) Net cash (used in) provided by financing activities $ (2,125,420 ) $ 8,351,964 Effect of exchange rate fluctuations on cash $ (448,593 ) $ 307,607 Net (decrease) increase in cash $ (38,443,126 ) $ 10,995,965 Cash at the beginning of period $ 55,833,282 $ 44,837,317 Cash at the end of period $ 17,390,156 $ 55,833,282 The following table sets forth a summary of our working capital: June 30, June 30, 2023 2022 Variation % Total Current Assets $ 18,192,716 $ 63,165,462 $ (44,972,746 ) (71 )% Total Current Liabilities $ 5,031,769 $ 25,212,959 $ (20,181,190 ) (80 )% Working Capital $ 13,160,947 $ 37,952,503 $ (24,791,556 ) (65 )% Current Ratio 3.62 2.51 1.11 44 % In assessing the liquidity, we monitor and analyze our cash on-hand and our operating and capital expenditure commitments. Our liquidity needs are to meet our working capital requirements, operating expenses and capital expenditure obligations. As of June 30, 2023, our working capital was approximately $13.2 million and we had cash of approximately $17.4 million. We believe our current working capital is sufficient to support our operations and debt obligations as they become due within one year from the date of this Report. 32 Operating Activities Our net cash used in operating activities was approximately $33.6 million for the year ended June 30, 2023. The operating cash outflow for the year ended June 30, 2023 was primarily attributable to our net loss of approximately $23.1 million which included a $8.4 million lawsuit settlement. Our cash outflow also included deferred revenue of approximately $6.9 million where we realized revenue from the sale of crypto mining equipment and a decrease in refund payable of $13.0 million as a result of the settlement payment to SOSNY, offset by cash inflow consisting of advance to a related party supplier of approximately $6.2 million which we realized as the cost for the sale of cryptocurrency equipment. Our net cash provided by operating activities was approximately $5.9 million for the year ended June 30, 2022. The operating cash inflow for the year ended June 30, 2022 was primarily attributable to our net loss of approximately $28.9 million, adjusted by non-cash stock-based compensation of approximately $10.0 million, loss on disposal of subsidiaries and VIE of approximately $6.1 million and provision for doubtful accounts of approximately $1.6 million. We had an increase in cash inflow of other receivables of approximately $1.4 million and we received a total of $47.0 million from SOSNY, approximately $34.1 million was an advanced payment we received for the sale of cryptocurrency mining machines, while we refunded $13.0 million to SOSNY in December 2022. Our cash inflow was decreased by an advance to a related party supplier of approximately $34.1 million which was for the purchase of cryptocurrency mining machines. Investing Activities Net cash used in investing activities was approximately $2.2 million for the year ended June 30, 2023. This is mainly due to an amount of $3.0 million paid to Goalowen Inc. with an operating income right transfer contract. We also had cash inflows from repayment of a loan receivable of approximately $0.5 million from Qinggang Wang and Lei Cao, who are related parties, and $0.09 million from the sale of property and equipment, and repayments from related parties of approximately $0.3 million, Net cash used in investing activities was approximately $3.5 million for the year ended June 30, 2022 due to the acquisition of property and equipment of approximately $0.9 million and an investment of approximately $0.2 million to a 40% owned joint venture. We made an additional loan of $0.5 million to Wang Qinggang, a related party to the Company, and CEO and legal representative of Trans Pacific Shanghai which is due in June 2024. We also made related party advances of approximately $1.9 million, which includes $1.3 million to Shanghai Baoyin which is 30% owned by Wang Qinggang, and approximately $0.6 million in advances to LSM Trading Ltd, of which we hold a 40% ownership interest. The outstanding personal loan owed by Wang Qinggang was fully repaid in December 2022. The Company is taking actions in order to pursue all available legal remedies including lawsuits to recover the $0.6 million advanced to LSM Trading Ltd. Financing Activities Financing activities for the year ended June 30, 2023 was mainly payment of $2.1 million for fair value of shares to be cancelled in our legal settlement. Net cash provided by financing activities was approximately $8.3 million for the year ended June 30, 2022 due to issuances of common stock in private placements of approximately $10.5 million and proceeds from convertible notes of $10 million, repayment of convertible notes of $5.0 million and warrant repurchase of approximately $7.9 million. We also had cash from warrants exercise of approximately $0.9 million and repayment of Economic Injury Disaster Loan. Critical Accounting Estimates The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported. Note 2, “Summary of Significant Accounting Policies” of the notes to the financial statements included elsewhere in this Report describe the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. There have been no material changes to the Company’s critical accounting estimates since the date of this Report. Off-Balance Sheet Arrangements None. 33 Item 7A. Quantitative and Qualitative Disclosures about Market Risk. Not applicable. Item 8. Financial Statements and Supplementary Data. The Company’s financial statements and the related notes, together with the report of Audit Alliance LLP, are set forth following the signature pages of this Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.