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SINO > SEC Filings for SINO > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for SINO-GLOBAL SHIPPING AMERICA, LTD.

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


14-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our company's financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in thisreport. 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 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's 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.

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.

Revenues

We provided shipping agency services to 124 ships including loading/discharging service to 73 ships and protective services to 51 ships for the three months ended September 30, 2012, compared to our services to 106 ships of which loading/discharging service to 92 ships and protective services to 14 ships for the three months ended September 30, 2011. Although the total number of ships increased in the first quarter of fiscal 2013, our total revenues decreased as we served fewer ships that required our higher-fee loading/discharging services. Our total revenues amounted to approximately $7.88 million for the three months ended September 30, 2012, compared to our total revenues of $8.59 million for the three months ended September 30, 2011.

We recognized more than 99% 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.

The Chinese Ministry of Finance and the State Administration of Taxation jointly set out the Value Added Tax (VAT) reform plan, which will see the business tax replaced by VAT commencing from Shanghai on January 1, 2012, and then be extended to all other provinces and autonomies in mainland China. As we recorded most of our revenues outside of China, there is little effect of ongoing VAT reform to our operating results.

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 types of services we provide, for example loading/discharging, protective, owner's affairs or other services;

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, as the rate of service fees has largely similar among our competitors. 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. Our total operating costs and expenses decreased as a percentage of total revenues for the three months ended September 30, 2012 mainly due to our budget control efforts on general and administrative expenses. The following table sets forth the components of our Company's costs and expenses for the periods indicated.

For the three months ended September 30,
2012 2011 Change
US$ % US$ % US$ %

Revenues                   7,882,068        100.00        8,592,707        100.00       (710,639 )       (8.27 )

Costs and expenses
Cost of revenues          (7,118,163 )      (90.31 )     (7,754,218 )      (90.24 )      636,055         (8.20 )

General and
administrative
expense                     (996,273 )      (12.64 )     (1,381,913 )      (16.08 )      385,640        (27.91 )
Selling expense              (86,508 )       (1.10 )       (104,582 )       (1.22 )       18,074        (17.28 )
                          (8,200,944 )                   (9,240,713 )

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 ships require more towboats to park at harbor;

the nationality of ships we serve, as foreign ships pay different tonnage taxes depending on its nationality;

the complexity of service processing;

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

the number of days a ship loading or discharging; and

the number of days ships 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 the local currency, for example the 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 slightly from 90.24% to 90.31% for the three months ended September 30, 2012, primarily because the U.S. dollar devalued by 1.02% against the Chinese RMB for the three months ended September 30, 2012 compared to the three months ended September 30, 2011.

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 three months ended September 30, 2012 and 2011, our general and administrative expenses as a percentage of our total revenues decreased from 16.08% in 2011 to 12.64% in 2012. This is mainly because we slowed down our business expansion in China and overseas to face the economic recession. In particular, the general and administrative expenses of our Australian and Hong Kong offices constituted about 10.22% of our total general and administrative expenses for the period ended September 30, 2012, compared to about 11.84% for the period ended September 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 fall in our revenues, our selling expenses decreased in absolute amount and as a percentage of our total net revenues for the three months ended September 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.

There have been no material changes during the three months ended September 30, 2012 in the Company's significant accounting policies from those previously disclosed in the 2012 annual report.

2013 Trends

Because our principal operating market is based in PRC, our business strategies are heavily influenced by the developments occurring in the Chinese economic and political environments. Since the end of calendar 2011, the Chinese government has exercised significant control to slow the pace of growth of the Chinese economy. Whether these control policies will continue or there will be a new incentive plan to promote Chinese economic growth will depend on the policies initiated by the incoming 18th Chinese Communist Party National Congress. Recently, nine Chinese government authorities, including the Development and Reform Committee, the Ministry of Finance, the National Asset Administrative Committee, the Securities and Exchange Committee and so on, jointly considered a set of restructuring plans for the steel manufacturing, automobile, concrete, machinery, information technology, chemical and other industries. This adds uncertainty to our business decision-making and strategy implementation.

In this difficult macro economic environment, our revenues decreased 8.27% in the first quarter of fiscal 2013. Although it is difficult for us to predict future trends under economic uncertainties, we still believe that growth is a key for a small company like us to survive and develop. As such, we will continue setting the top line growth as our first priority. We try to achieve growth in fiscal 2013, supported by our efforts to maintain our current clients, attract new clients and increase in 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 to be 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 decreased with our lower revenue. In the 2013 fiscal year, we will continue our combined effort to control our budget and promote business growth.

Results of Operations

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

Revenues. Our total revenues decreased by 8.27% from $8,592,707 for the three months ended September 30, 2011 to $7,882,068 in the comparable three months in 2012. The number of ships that generated revenues for us increased from 106 for the first quarter of fiscal 2012 to 124 for the comparable quarter of fiscal 2013. In contrast to the increased total numbers of ships we served, our revenues decreased because we provided protective services for more ships, and this type of service generates significantly lower revenues per ship. For the three months ended September 30, 2012, we provided protective services to 51 ships, compared to 14 ships for the first quarter of 2011. We provided our higher-revenue loading/discharging services to 73 and 92 ships for the three months ended September 30, 2012 and 2011, respectively.

Total Operating Costs and Expenses. Our total operating costs and expenses decreased by 11.25% from $9,240,713 for the three months ended September 30, 2011 to $8,200,944 for the three months ended September 30, 2012. This decrease was primarily due to decreases in our costs of revenues and general and administrative expenses, as discussed below.

Costs of Revenues. Our cost of revenues decreased by 8.20% from $7,754,218 for the three months ended September 30, 2011 to $7,118,163 for the three months ended September 30, 2012. Revenues decreased slightly more rapidly than costs of revenues, and gross margins decreased from 9.76% down to 9.69% for the comparative three months ended September 30, 2011 and 2012, respectively. The 0.07% decrease in gross margin was largely due to the devaluation of the U.S. dollar against the Chinese currency. The average foreign exchange rate was $1.00 to RMB6.3524 for the three months ended September 30, 2012 compared to $1.00 to RMB6.4176 for the three months ended September 30, 2011, a 1.02% increase during the period.

General and Administrative Expenses. Our general and administrative expenses decreased by 27.91% from $1,381,913 for the three months ended September 30, 2011 to $996,273 for the three months ended September 30, 2012. This mainly due to (1) decreased bad debts provision of $67,827, and (2) a decrease of $268,981 in business promotion. In our current difficult business environment, we will continue our budget control to reduce the general and administrative expenses.

Selling Expenses. Our selling expenses decreased by 17.28% from $104,582 for the quarter ended September 30, 2011 to $86,508 for the quarter ended September 30, 2012. Most selling expenses are commissions paid to business partners who refer shipping agency businesses to us, and the average rate of commissions decreased in the period.

Operating Loss. We had an operating loss of $318,876 for the three months ended September 30, 2012, compared to an operating loss of $648,006 for the comparable three months ended September 30, 2011. The operating loss for the first quarter of fiscal 2013 was decreased primarily due to reduced general and administrative expenses.

Financial Expense, Net. Our net financial expense was $2,568 for the three months ended September 30, 2012, compared to our net financial expense of $44,003 for the three months ended September 30, 2011. The net financial expenses were derived largely from the foreign exchange losses recognized in the financial statement consolidation. Foreign exchange losses resulting from the settlement of foreign exchange transactions are recognized in the condensed consolidated statements of operations.

Taxation. Our income tax expense was $157,200 for the three months ended September 30, 2012, compared to income tax benefits of $23,121 for the three months ended September 30, 2011. We made a current tax provision of $24,200 and recognized a $133,000 deferred tax expense. The deferred tax expense consisted of an increase to the deferred tax asset valuation allowance to approximately 50% in the first quarter of 2013.

Net Loss. As a result of the foregoing, we had a net loss of $442,157 for the quarter ended September 30, 2012, compared to net loss of $826,940 for the quarter ended September 30, 2011. After deduction of non-controlling interest in loss, net loss attributable to Sino-Global Shipping America, Ltd. was $190,233 for the three months ended September 30, 2012, compared to net loss of $665,787 for the three months ended September 30, 2011. With other comprehensive loss foreign currency translation, comprehensive loss was $199,016 for the three months ended September 30, 2012, compared to comprehensive loss of $625,357 for the three months ended September 30, 2011.

Liquidity and Capital Resources

Cash Flows and Working Capital

We have financed our operations primarily through cash flows from operations and IPO proceeds. As of September 30, 2012, we had $3,117,556 in cash and cash equivalents. Our cash and cash equivalents primarily consist of cash on hand and cash in banks. We deposited approximately 89.14% of our cash in banks in the USA, Australia and Hong Kong.

The following table sets forth a summary of our cash flows for the periods indicated:

                                                       For the three months ended September 30,
                                                            2012                       2011

Net cash used in operating activities               $          (1,192,349 )     $          (380,144 )
Net cash used in investing activities                            (144,248 )                  (1,796 )
Net cash used in financing activities                                (285 )                  (8,993 )
Net decrease in cash and cash equivalents                      (1,315,777 )                (389,630 )
Cash and cash equivalents at beginning of Period                4,433,333                 4,878,828
Cash and cash equivalents at end of Period                      3,117,556                 4,489,198

Operating Activities

Net cash used in operating activities was $1,192,349 for the three months ended September 30, 2012, compared to net cash used in operating activities of $380,144 for the comparable period in 2011. The increased use in operating cash flows is mainly attributable to a net loss of $442,157, an increase in deferred tax expense of $133,000, offset by a decrease in advances from customers of $136,672 and a decrease in accounts payable of $1,010,652. Under the tightened financing policies imposed by the Chinese government, we had to accelerate our payments to local port agents and our accounts payable balance was significantly reduced. Should the tightening financing situation continue in China, we will be under pressure to accelerate payments to local agents and our cash balance will continue to decline.

Since we collect most of our revenues in U.S. dollars and pay most of our costs and expenses in RMB, the increase in the valuation of RMB against U.S. dollar has caused a decline in gross margin for our Company for the period ended September 30, 2012.

We expect we will be substantially dependent on the value of the U.S. dollar for the foreseeable future, even where the revenues are not paid in U.S. dollars.

Investing Activities

Net cash used in investing activities was $144,248 compared to net cash used in investing activities of $1,796 for the three months ended September 30, 2012 and 2011, respectively. We made capital expenditures of $144,248 and $1,796 for the first quarter of fiscal 2012 and 2011, representing 1.60% and 0.02% of our total assets, respectively.

Financing Activities

Net cash used in financing activities was $285 for the three months ended September 30, 2012 from the increase of non-controlling interest in majority-owned subsidiary.

Working Capital

Total working capital as of September 30, 2012 amounted to $1,387,603, compared to $1,753,974 as of June 30, 2012. Total current assets as of September 30, 2012 amounted to $8,332,125, a decrease of $1,454,276 compared to June 30, 2012.

Current liabilities amounted to $6,944,522 at September 30, 2012, in comparison to $8,032,427 at June 30, 2012. The decrease was attributable mainly to a decrease in accounts payable of $1,010,652.

The current ratio decreased slightly from 1.22 at June 30, 2012 to 1.20 at September 30, 2012.

We believe that current cash, cash equivalents, and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs, including cash needs for working capital and capital expenditures, for at least the next 12 months. We may, however, require additional cash due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our existing cash is insufficient to meet our requirements, we may seek to sell additional securities or borrow from banks. However, financing may not be available in the amounts we need or on terms acceptable to us, if at all. The sale of additional equity securities, including convertible debt securities, would dilute our shareholders. The incurrence of debt would divert cash from working capital and capital expenditures to service debt obligations and could result in operating and financial covenants that would restrict our operations and our ability to pay dividends to our shareholders. If we are unable to obtain additional equity or debt financing as required, our business, operations and prospects may suffer.

Contractual Obligations and Commercial Commitments



We have leased certain office premises and apartments for employees under
operating leases through September 30, 2014. Below is a summary of our company's
contractual obligations and commitments as of September 30, 2012:



                                                         Payment Due by Period
                                  Total        Less than 1 year       1-3 years        More than 3 years
Contractual Obligations
Operating leases               $   221,990     $         156,199     $     65,791     $                 -

Company Structure

We conduct our operations primarily through our wholly-owned subsidiaries, Trans Pacific, Sino-AUS and Sino-HK and our variable interest entity, Sino-China. As a result, our ability to pay dividends and to finance any debt we may incur depends upon dividends paid by our subsidiaries and management fees paid by Sino-China. If our subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, Trans Pacific is permitted to pay dividends to us only out of its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, wholly foreign-owned enterprises like Trans Pacific are required to set aside at least 10% of their after-tax profit each year to fund a statutory reserve until the amount of the reserve reaches 50% of such entity's registered capital.

To the extent Trans Pacific does not generate sufficient after-tax profits to fund this statutory reserve, its ability to pay dividends to us may be limited. Although these statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, these reserve funds are not distributable as cash dividends except in the event of a solvent liquidation of the companies. Other than as described in the previous sentences, China's State Administration of Foreign Exchange ("SAFE") has approved the company structure between our company and Trans Pacific, and Trans Pacific is permitted to pay dividends to our company.

Off-Balance Sheet Commitments and Arrangements

We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholders' equity or that are not reflected in our condensed consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serve as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

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