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SINO > SEC Filings for SINO > Form 10-K on 28-Sep-2012All Recent SEC Filings

Show all filings for SINO-GLOBAL SHIPPING AMERICA, LTD. | Request a Trial to NEW EDGAR Online Pro

Form 10-K for SINO-GLOBAL SHIPPING AMERICA, LTD.


28-Sep-2012

Annual Report


Item 7. Management's Discussion and Analysis or Plan of Operation.

The following discussion and analysis of our company's financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the related notes included elsewhere in the Annual 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 are a shipping agency service provider for ships coming to and departing from Chinese ports. Our company was incorporated in New York in February 2001. On September 18, 2007, we amended the Articles of Incorporation and Bylaws of our New York corporation to merge into a new Virginia corporation, Sino-Global Shipping America, Ltd.

Our principal geographic market is in the People's Republic of China ("PRC"). As PRC laws and regulations restrict foreign ownership of shipping agency service businesses, we operate our business in the PRC through Sino-Global Shipping Agency, Ltd. ("Sino-China"), a PRC limited liability company wholly owned by our founder and Chief Executive Officer, Cao Lei, and Chief Financial Officer, Zhang Mingwei, both of whom are PRC citizens. Sino-China holds the licenses and permits necessary to provide shipping services in the PRC. Headquartered in Beijing with branches in Qingdao, Tianjin, Qinhuangdao and Fangchenggang, we provide general shipping agency services in all commercial ports in China.

On November 13, 2007, the Company formed a wholly owned foreign-owned enterprise, Trans Pacific Shipping Limited ("Trans Pacific Beijing"), which invested in one 90%-owned subsidiary on May 31, 2009, Trans Pacific Logistics Shanghai Limited ("Trans Pacific Shanghai"; Trans Pacific Beijing and Trans Pacific Shanghai are referred to collectively as "Trans Pacific"). Trans Pacific invested another 40%-owned subsidiary, Sino-Global Shipping Agency Development Co., Limited ("Sino-Global Development"), on November 6, 2009. On October 31, 2011, Trans Pacific Beijing reduced its investment in Sino-Global Development from 40% to 19.8% by transferring 20.2% of its interest to the other shareholder due to successive operating losses on Sino-Global Development. On February 7, 2012, Trans Pacific Beijing transferred its remaining 19.8% of interest to a new shareholder due to successive operating losses in Sino-Global Development.

Trans Pacific Beijing and Sino-China do not have a parent-subsidiary relationship. Trans Pacific Beijing has contractual arrangements with Sino-China and its shareholders that enable the Company to substantially control Sino-China.

For the purpose of building up an international shipping agency service network, we formed a wholly-owned subsidiary, Sino-Global Shipping Australia Pty Ltd. ("Sino-Global AUS") in Perth, Australia on July 3, 2008, which serves the needs of customers shipping into and out of Western Australia. The Company also signed an agreement with Monson Agencies Australia ("Monson"),one of the largest shipping agency service providers in Australia. Through the Company's relationship with Monson, the Company is able to provide general shipping agency services to all ports in Australia.

We established another wholly-owned subsidiary, Sino-Global Shipping (HK) Limited ("Sino-Global HK") on September 22, 2008. Sino-Global HK is our control and management center for southern Chinese ports and enables our company to extend its offering of comprehensive shipping agency services to vessels going to and from one of the world's busiest ports. On July 27, 2009, Sino-Global HK signed an exclusive partnership agreement with Forbes & Company Limited
("Forbes"), which is a listed company on the Bombay Stock Exchange (BOM: 502865)
and one of the largest shipping and logistic service providers in India. Through our relationship with Forbes, we are able to provide general shipping agency services to all ports in India.

On July 5, 2011, Sino-China signed a Strategic Cooperative Agreement with COSCO Container Shipping Agency Co. Limited, one of the largest state-owned shipping agents in China. The Agreement entitles us to use COSCO Container Shipping Agency's name to market business in China and overseas. In addition, we are able to provide shipping agency services through over 50 COSCO offices in China.

On October 12, 2011, the Company signed a Memorandum of Understanding with King & Sons Shipping Agency ("King & Sons"), subsidiary of Grindrod Limited, a public company listed on the Johannesburg Securities Exchange (JSE: GNDP) and one of the oldest shipping agents in South Africa. Through the Company's relationship with King & Sons, it is able to provide general shipping agency services to all ports in South Africa in fiscal year 2012.

On November 8, 2011, the Company signed a Memorandum of Understanding with Wilson Sons Shipping Agency ("Wilson Sons"), the oldest and the leading independent Brazilian ship agent. Through the Company's relationship with Wilson Sons, it is able to provide general shipping agency services to all ports in Brazil fiscal year 2012.

Revenues

China's economy slowed down during the fiscal 2012 and the volume of iron ore imported to China has been significantly reduced. Although fewer ships discharged iron ore at Chinese ports, we managed a marginal increase in our revenues largely relying on our intensive marketing activities to the new customers who load iron ore in overseas ports. The number of ships we served increased from 421 for the 2011 fiscal year to 477 for the 2012 fiscal year. However, the increased number of ships served primarily used our protective services, which generate lower agency fees per ship compared to fees per ship in loading and discharging agency services. For the year ended June 30, 2012, our total revenues amounted to approximately $33.88 million, compared to our total revenues of $32.94 million for the year ended June 30, 2011. As the table below demonstrates, this is a much slower rate of increase then we have historically encountered.

                       Year       Revenue (USD)       Growth (%)
                        2012         33,881,248           2.87
                        2011         32,935,823           22.71
                        2010         26,841,336           46.40
                        2009         18,334,359           21.52
                        2008         15,087,238           49.51
                        2007         10,090,879           13.07
                        2006         8,924,786            31.69

We recognized more than 96% of our revenues in our locations in the United States, Australia and Hong Kong. The revenues recorded in China are subject to a 5% business tax as well as an additional 0.5% surcharge after deducting the costs of services. We deduct these business taxes and related surcharges from our gross revenues to arrive at our total revenues.

We charge the shipping agency fees in two ways: (1) the fixed fees are predetermined with a customer, and (2) the cost-plus fees are calculated based on the actual costs incurred plus a mark up. We generally require payments in advance from customers and bill them the balances within 30 days after the transactions are completed.

We believe the most significant factors that directly or indirectly affect our shipping agency service revenues are:

the number of ships to which we provide port loading/discharging services;

the size and types of ships we serve;

the type of services we provide, for example loading/discharging, protective, owner's affairs and so on;

the rate of service fees we charge;

the number of ports at which we provide services; and

the number of customers we serve.

Historically, our services have primarily been driven by the increase in the number of ships and customers, provided that the rate of service fees is determined by market competition. We believe that an increase in the number of ports served generally leads to an increase in the number of ships and customers. We expect that we will continue to earn a substantial majority of our revenues from our shipping agency services. As a result, we plan to continue to focus most of our resources on expanding our business to cover more ports in the PRC. In addition, we will allocate our resources in marketing our brand to customers, including ship owners and charters, which transport goods from all ports around the world to China. We believe that our diversified focus on loading and discharging cargo in both Chinese and overseas ports will enable us to continue growing quickly and also place us in a better position to manage the exchange rate risk associated with the trend of the U.S. dollar's devaluation against the RMB because our overseas revenues and port charges are normally paid in foreign currencies. To the extent these other foreign currencies devalue against the RMB, of course, we would still face exchange rate risks.

Operating Costs and Expenses

Our operating costs and expenses consist of costs of revenues, general and administrative expenses, selling expenses and other expenses. Our company's total operating costs and expenses increased as a percentage of total revenues for the year ended June 30, 2012 mainly due to an increase in costs paid to Chinese local ports. To maintain our top line growth, we conducted intensive market activities to attract new clients. As a result, our general and administrative expenses and selling expenses increased accordingly. The following table sets forth the components of our company's costs and expenses for the periods indicated.

                                                    For the years ended June 30,
                                2012                             2011                           Change
                         US$              %               US$              %              US$              %

Revenues               33,881,248         100.00        32,935,823         100.00          945,425           2.87

Costs and
expenses
Costs of services     (31,184,331 )       (92.04 )     (29,619,765 )       (89.93 )     (1,564,566 )         5.28

General and
administrative
expense                (5,236,167 )       (15.45 )      (4,544,578 )       (13.80 )       (691,589 )        15.22
Selling expense          (385,064 )        (1.14 )        (341,665 )        (1.04 )        (43,399 )        12.70
                      (36,805,562 )                    (34,506,008 )                    (2,299,554 )

Costs of Revenues. Costs of revenues represent the expenses incurred in the periods when a ship docks in a harbor to load and discharge cargo. We believe the most significant factors that directly or indirectly affect our costs of revenues are:

the number of ships to which we provide port loading/discharging services;

the size of ships we serve, as large ship requires more towboats to park at harbor;

the nationality of ships we serve, as a foreign ship pays different tonnage taxes;

the complexity of service processing;

the operating condition of a particular port for ships loading or discharging;

the number of days a ship requires for loading or discharging; and

the number of days a ship requires for loading or discharging during overtime period and public holidays.

We typically pay the costs of revenues on behalf of our customers. Except for Australia and Canada where our revenues and costs are settled in the local currencies, we receive most revenues from our clients in U.S. dollars and pay most costs of revenues to the local port agents in local currency, for example RMB in China. As such, the costs of revenues will change if the foreign currency exchange rates change.

Our costs of revenues as a percentage of our total revenues increased from 89.93% to 92.04% for the year ended June 30, 2012, primarily because the U.S. dollars devaluated approximately 4.14% against the Chinese RMB for the year ended June 30, 2012 compared to the year ended June 30, 2011, resulting in the increase of costs of revenues.

General and Administrative Expenses. Our general and administrative expenses primarily consist of salaries and benefits for our staff (both operating and administrative personnel), business promotion, depreciation expenses, office rental expenses and expenses for legal, accounting and other professional services. For the year ended June 30, 2012, our general and administrative expenses as a percentage of our total revenues increased from 13.80% to 15.45% compared to the year ended June 30, 2011 because of the increase of expenses in implementing our international expansion strategies. The general and administrative expenses of our Australian and Hong Kong offices constituted about 10.92% of our total general and administrative expenses for the year ended June 30, 2012, compared to that of 7.64% for the year ended June 30, 2011.

Selling Expenses. Our selling expenses primarily consist of commissions and traveling expenses for our operating staff to the ports at which we provide services. In line with our efforts to promote rapid business growth, our selling expenses increased in absolute amount and as a percentage of our total net revenues for the year ended June 30, 2012.

Critical Accounting Policies

We prepare the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). These accounting principles require us to make judgments, estimates and assumptions on the reported amounts of assets and liabilities at the end of each fiscal period, and the reported amounts of revenues and expenses during each fiscal period. We continually evaluate these judgments and estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and assumptions that we believe to be reasonable.

The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our financial statements. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

Revenue comprises the value of charges for the services in the ordinary course of our company's activities and disbursements made on behalf of customers. Revenues are recognized from shipping agency services upon completion of the services, which generally coincides with the date of departure of the relevant vessel from port. Advance payments and deposits received from customers prior to the provision of services and recognition of the related revenues are presented as current liabilities.

Some contracts include provisions for revenues to be recognized as a mark up of actual expenses incurred. In a situation where the services are completed but the information on the actual expenses is not available at the end of the fiscal period, we estimate revenues and expenses based on our previous experience for the revenues of the same kind of vessels, port charges on the vessel's particulars/movement and costs rate of the port. In general, the estimated revenue are based on the contract amount. In other situations, the estimated revenues are based on the contract amounts plus any additional costs incurred, such as extra weight taxes because of extended parking time at a harbor, additional tow boats used because of inclement weather, overtime during public holidays and so on. If such contributory factors change, our revenues will increase or decrease accordingly. The estimated costs of revenue are based on the cost information provided by the local port and /or our historical experience of similar transactions. Since all estimated costs and expenses are paid in RMB, if the valuation of the RMB increases compared to USD, then the estimated costs and expenses will increase accordingly.

Basis of Consolidation

The consolidated financial statements include the accounts of the parent and its subsidiaries. All significant inter-company transaction and balances are eliminated in consolidation. Sino-China is considered to be a Variable Interest Entity (VIE) and we are the primary beneficiary. On November 14, 2007, our company through Trans Pacific entered into agreements with Sino-China, pursuant to which we receive 90% of Sino-China's net income. We do not receive any payment from Sino-China unless Sino-China recognizes net income during its fiscal year. These agreements do not entitle us to any consideration if Sino-China incurs a net loss during its fiscal year. In accordance with the agreements, Sino-China pays consulting and marketing fees equal to 85% and 5%, respectively, of its net income to our new wholly foreign-owned subsidiary, Trans Pacific, and Trans Pacific supplies the technology and personnel needed to service Sino-China. Sino-China was designed to operate in China for the benefit of our company.

The accounts of Sino-China are consolidated in the accompanying consolidated financial statements pursuant to Accounting Standard Codification ("ASC") 810-10, "Consolidation". As a VIE, Sino-China's sales are included in our total sales, its income (loss) from operations is consolidated with our company's, and our net income (loss) from continuing operations before non-controlling interest in income (loss) includes all of Sino-China's net income (loss). Our non-controlling interest in its income (loss) is then subtracted in calculating the net income (loss) attributable to our company. Because of the contractual arrangements, our company had a pecuniary interest in Sino-China that requires consolidation of our and Sino-China's financial statements.

Equity Investment

Investments in companies that are owned 20% to 50% for which we have significant influence but not control are accounted for by the equity method. Under the equity method, we recognize in earnings our proportionate share of the income or loss of the investee.

With an expectation to open additional business opportunity to the Company, Sino-Global Development was formed on November 9, 2009. Initially, Trans Pacific Beijing held a 40% interest in Sino-Global Development. Since Sino-Global Development has reported successive losses and is insolvent, Trans Pacific Beijing has recognized an investment loss of $190,026 for the year ended June 30, 2012. On October 31, 2011, Trans Pacific Beijing reduced its investment in Sino-Global Development from 40% to 19.8% by transferring 20.2% of its interest to the other shareholder due to successive operating losses on Sino-Global Development. On February 7, 2012, Trans Pacific Beijing transferred its remaining 19.8% of interest to a new shareholder due to successive operating losses in Sino-Global Development.

Accounts Receivable and Advances

Accounts receivable are recognized at net realizable value. We maintain allowances for doubtful accounts for estimated losses resulting from the failure of customers to make required payments in the relevant time period. We review the accounts receivable on a periodic basis and record general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, we consider many factors, including the age of the balance, the customer's historical payment history, its current credit-worthiness and current economic trends. Receivables are considered past due after 365 days. Accounts are written off only after exhaustive collection efforts. Because of the worldwide financial crisis, we have experienced difficulties in collecting cash from some of our customers. In accordance with the Company's accounting policies, management has determined that an allowance of $357,042 was required at June 30, 2012, compared to $194,955 as at June 30, 2011. In order to increase our allowance, we provided for a charge to earnings of $162,087 during the 2012 fiscal year, which increased our net loss and loss per share.

We generally obtain advance payment of our shipping agency fees prior to providing service to our clients. This significantly reduces the amount of accounts receivable when the shipping agency fees are recognized. To the extent our estimates are insufficient, we bill our clients for the balance, which is expected to be paid within 30 days.

We use advance payments to pay a number of fees on behalf of our clients before their ships arrive in port, including harbor, berthing, mooring/unmooring, tonnage, immigration, quarantine and tug hire fees. We record the amounts we receive as Advances from Customers and the amounts we pay as Advances to Suppliers. We recognize revenues and expenses once the client's ship leaves the harbor and the client pays any outstanding amounts. In some cases, a delay in receiving bills will require us to estimate the Service Revenues and Costs of Services in accordance with the rate and formulas approved by China's Ministry of Communications. When this happens, we record the difference between Service Revenues (as recognized) and Advances from Customers as Accounts Receivable and the difference between Cost of Services and Advances to Suppliers as Accounts Payable. To the extent we recognize revenues and costs in this way, our Accounts Receivable and Accounts Payable will reflect this estimation until we receive the bills and information we require to adjust revenues and expenses to reflect our actual Service Revenues and Cost of Services. Any adjustment to actual from the estimated Revenues and Cost of Services recorded has been and is expected to be immaterial.

Translation of Foreign Currency

The accounts of our company and Sino-China are measured using the currency of the primary economic environment in which the entity operates (the "functional currency"). Our functional currency is the U.S. dollar, while Trans Pacific and Sino-China report their financial position and results of operations in Renminbi. The accompanying consolidated financial statements are presented in U.S. dollars. Foreign currency transactions are translated into U.S. dollars using the fixed exchange rates in effect at the time of the transaction. Generally foreign exchange gains and losses resulting from the settlement of such transactions are recognized in the consolidated statements of operations. We translate foreign currency financial statements of Sino-China, Trans Pacific, Sino-Global HK and Sino-Global AUS in accordance with ASC 830-10, "Foreign Currency Matters". Assets and liabilities are translated at current exchange rates quoted by the People's Bank of China at the balance sheet dates and revenues and expenses are translated at average exchange rates in effect during the periods.

Taxation

Because we and Sino-China are incorporated in different jurisdictions, we file separate income tax returns. We are subject to income and capital gains taxes in the United States. Additionally, dividend payments made by our company are subject to withholding tax in the United States.

We follow the provisions of ASC 740-10, "Accounting for Income Taxes", which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740-10, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position would be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740-10 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.

The implementation of ASC 740-10 resulted in no material liability for unrecognized tax benefits and no material change to the beginning retained earnings of our company. Our company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Statement of Operations. We use the liability method of accounting for income taxes in accordance with US GAAP. Deferred taxes, if any, are recognized for the future tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. We may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position would be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.

2013 Trends

Shipping industries have experienced economic downturn all over the world. In addition, the Chinese government has also exercised significant control to slow the pace of growth of the Chinese economy. We expect these trends will continue in our fiscal 2013.

In this difficult macroeconomic environment, our revenues slightly increased 2.87% in fiscal 2012, due to our efforts to implement our international network strategies. We believe that growth is a key for a small company like us to survive and develop. As such, we will continue setting top line growth as our first priority and focus on increasing revenues from our agency services to vessels coming to Chinese ports as well as expanding business activities at the loading ports in Australia, Canada, South Africa, Brazil and other countries with which China has major trading activities.

In addition to the difficulties in revenue growth, we have experienced significant difficulties in managing our foreign exchange risks. Because we receive most of our revenues in U.S. dollars and pay most of our expenses in Chinese RMB, we have faced increased costs of revenues due to the devaluation of the U.S. dollar against the RMB over the last few years. Although the U.S. dollar devaluation appears slowing down, we anticipate the trend will continue in fiscal 2013 and our gross margin will continue to be negatively affected by the devalued U.S. dollar.

Our general and administrative expenses are significantly higher as a result of our domestic and international business expansion. In the 2013 fiscal year, we will continue our combined effort to control our budget and promote business growth.

Results of Operations

Year Ended June 30, 2012 Compared to Year Ended June 30, 2011

Revenues. Our total revenues increased by 2.87% from $32,935,823 for the year ended June 30, 2011 to $33,881,248 for the year ended June 30, 2012. The number of ships that generated revenues for us increased from 421 to 477 during the year ended June 30, 2012. In contrast the larger increased numbers of ships we served, we only achieved a minor increase in revenues. This is because we provided protective services for more ships, which generated significantly lower revenues per ship. For the year ended June 30, 2012, we provided protective services to 114 ships, compared to 42 ships for the fiscal year 2011. We provided loading/discharging service to 363 and 379 ships during the fiscal year 2012 and 2011, respectively.

Total Operating Costs and Expenses. Our total operating costs and expenses increased by 6.66% from $34,506,008 for the year ended June 30, 2011 to $36,805,562 for the year ended June 30, 2012. This increase was primarily due to increases in our costs of revenues and general and administrative expenses, as discussed below.

Cost of Revenues. Our cost of revenues increased by 5.28% from $29,619,765 for the 2011 fiscal year to $31,184,331 for the 2012 fiscal year. Costs of revenues increased faster than revenues, resulting in the decrease of gross margins from 10.07% down to 7.96% for the comparative years ended June 30, 2011 and 2012, . . .

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