SAI.TECH (SAI) - 2022 Q4 - Annual Report

PART I Key Information This section details significant investment risks, including limited operating history, bitcoin price dependency, regulatory uncertainty, operational disruptions in Kazakhstan, and material weaknesses in internal controls - The company has a limited operating history since 2019 in the highly volatile cryptocurrency industry, making future prospects difficult to evaluate[36][41] - Bitcoin mining is energy-intensive, posing a significant operational risk if government regulators restrict electricity supply[36][51] - Regulatory uncertainty is a major risk, with potential violations of the Investment Company Act if cryptocurrencies are deemed securities, and adverse effects from changing regulations in any country of operation[38] - Material weaknesses in internal control over financial reporting could affect financial statement reliability if not corrected[25][346] - Operations in Kazakhstan faced disruptions from national unrest and regulatory tightening, leading to the termination of a significant expansion plan[42][301] - Trading of the company's securities could be prohibited under the HFCAA if the PCAOB is unable to inspect its Singapore-based auditor due to foreign authority positions[38][226] Information on the Company SAI.TECH, founded in 2019, is a global energy-saving Bitcoin mining and clean-tech company, expanding into North America and diversifying into SMR and crypto exchange services - The company's core business integrates bitcoin mining with power and heating industries, utilizing proprietary liquid cooling and waste heat recovery technology (SAIHUB) for 90% thermal efficiency[365] - Following China's digital asset mining ban in May 2021, the company terminated its China operations and began a strategic global transition, initially to Kazakhstan[372] - The company is expanding into North America, opening a distribution center in Ohio in August 2022 for product assembly, service, and heating technology demonstrations[380] - In 2023, the company purchased 420 Whatsminer M30s++ machines for self-mining and expanded hosting services in Mexico, bringing total machines there to 900[381][382][383] - The company diversified strategic initiatives in March 2023 by acquiring Atomic Evolution Limited for SMR opportunities and establishing Boltbit Limited for cryptocurrency exchange services[386][387] Pilot Program Operating Statistics (Heating Season Oct 2020 - Apr 2021) | Code of Pilot Project | Heat Output (KW) | Electricity Consumed (KW) | Outdoor Temp (°C) | Indoor Temp (°C) | Hot Water Output Temp (°C) | Cooled Water Input Temp (°C) | Thermal Efficiency (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | HM | 1,467 | 1,631 | (10) | 24 | 53 | 45 | 89.71% | | DQ | 200 | 223 | (11) | 22 | 51 | 43 | 89.78% | | JY* | 90 | 101 | NA | NA | 51 | 43 | 88.95% | Operating and Financial Review and Prospects The company's financial performance in 2022 saw a 38% revenue decrease to $10.6 million and an improved net loss of $8.8 million, driven by volatile bitcoin markets, regulatory changes, and internal control weaknesses Key Financial Results (in thousands USD) | Metric | FY 2021 | FY 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | $17,038 | $10,638 | (38%) | | Gross Profit | $1,264 | $1,140 | (10%) | | Operating Expenses | $17,716 | $8,605 | (51%) | | Net Loss | $(16,704) | $(8,845) | 47% (Improvement) | Revenue Breakdown by Segment (in thousands USD) | Revenue Source | FY 2021 | FY 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Sales of products | $6,958 | $8,626 | 24% | | Hosting service | $2,600 | $1,303 | (50%) | | Mining pool | $7,480 | $676 | (91%) | | Mining | $0 | $33 | N/A | - The significant decrease in total revenue in 2022 was primarily driven by a $6.8 million (91%) decline in mining pool revenue due to a major hosting customer switching suppliers[481] - General and administrative expenses increased by 155% to $6.08 million in 2022, primarily due to a $2.4 million increase in salary and benefits and a $1.18 million increase in depreciation for idle miners[487][488] - Material weaknesses were identified in the internal audit function and lack of formal financial closing policies, with remediation efforts underway[347][557] Cash Flow Summary (in thousands USD) | Cash Flow | FY 2021 | FY 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(983) | $(4,962) | | Net cash used in investing activities | $(3,970) | $(6,424) | | Net cash provided by financing activities | $8,191 | $18,533 | Directors, Senior Management and Employees The company's leadership includes a 5-member Board with three independent directors, operating as a "controlled company" due to the founder's majority voting power, and had 28 employees as of December 31, 2022 - The Board of Directors comprises 5 members across three classes with staggered terms, with three directors (Yao Shi, Yusen Chen, and Jinlong Zhu) deemed independent[591][592] - The company is a "controlled company" under Nasdaq rules, as Founder Risheng Li holds over 50% of the voting power, granting exemptions from certain corporate governance requirements[323] - The 2021 Equity Incentive Plan, effective April 29, 2022, reserves an initial 1,812,663 Class A Ordinary Shares for awards to employees, directors, and consultants[569][571] - As of December 31, 2022, the company had 28 employees: 17 in General Management and Administration, 8 in Technology and Product Development, and 3 in Sales, Marketing and Operating[607][608] Major Shareholders and Related Party Transactions This section details the company's ownership structure, with founder Risheng Li holding 87.9% of voting power, and outlines related party transaction policies and business combination agreements - Founder Risheng Li beneficially owns 100% of 9,630,634 outstanding Class B Ordinary Shares, representing 87.9% of total voting power[612] Principal Shareholders (5% or more of Class A Shares) | Holder | Class A Shares | % of Class A | | :--- | :--- | :--- | | TradeUp Global Sponsor LLC | 1,287,027 | 9.7% | | Eternal Selead Technology Holding Limited | 668,902 | 5.0% | | Haonan Technology Holding Limited | 668,902 | 5.0% | | Tospring Technology Limited | 974,919 | 7.3% | | Fan Yinliang | 1,201,101 | 9.0% | | ZenGolden L.P. | 1,606,838 | 12.1% | | LilOrange Holding Limited | 1,070,017 | 8.0% | | Tao Huang | 1,310,542 | 9.84% | - Key shareholders entered into lock-up agreements restricting share transfers for generally one year post-closing, with early release provisions based on share price performance, in connection with the Business Combination[626][627][628] - The company adopted a written policy for audit committee review and approval of related person transactions exceeding $120,000[635][636] Financial Information This section references the consolidated financial statements in Item 18 and states the company's policy to reinvest all funds for growth, with no current plans for cash dividends - The company's audited consolidated financial statements are provided under Item 18 of this report[640] - The company intends to retain all available funds and future earnings to fund business growth, with no expectation of paying cash dividends in the foreseeable future[641] The Offer and Listing This section confirms the company's Class A Ordinary Shares and IPO Warrants are listed and traded on the Nasdaq Capital Market - The company's Class A Ordinary Shares are listed on the Nasdaq Capital Market under the trading symbol "SAI"[643][644] - The company's IPO Warrants are listed on the Nasdaq Capital Market under the trading symbol "SAITW"[643][644] Additional Information This section provides supplementary corporate information, including a February 2023 purchase order for 420 Whatsminer M30s++ machines and tax considerations for investors - On February 2, 2023, the company purchased 420 Whatsminer M30s++ bitcoin mining machines for $633,360 for self-mining operations[651] - As a Cayman Islands incorporated entity, the company is not subject to exchange control legislation or regulations in its home jurisdiction[652] - The company discusses potential U.S. federal income tax consequences for U.S. holders, not expecting to be a Passive Foreign Investment Company (PFIC) for the 2023 taxable year, though no assurance is given[356][667] - Under Cayman Islands law, payments of dividends and capital are not subject to taxation, with the company receiving a 20-year tax concession undertaking effective January 29, 2021[670][674] Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to market risks, including significant customer concentration, liquidity risk, and foreign currency risk, particularly with the Chinese RMB - The company faces significant customer concentration risk, with four customers accounting for 88% of total revenues in FY 2022, and one customer representing 96% of accounts receivable as of December 31, 2022[680][681] - The company is exposed to foreign currency risk, primarily with the Chinese RMB, recognizing a foreign currency exchange net loss of $0.54 million in 2022[683][684] - Liquidity risk is present as the company manages capital to meet commitments, potentially seeking loans from financial institutions for short-term funding[682] PART II Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of December 31, 2022, due to material weaknesses in internal control over financial reporting, with remediation efforts targeting completion by end of 2023 - Management concluded that the company's disclosure controls and procedures were ineffective as of December 31, 2022[695] - Two material weaknesses were identified: lack of an internal audit department and absence of formal financial closing policies and controls[696] - Remediation efforts, including establishing an internal audit department and implementing review controls, are expected to be completed by the end of 2023[698][700] Audit Committee Financial Expert The board of directors has determined that Yao Shi, an independent director and audit committee chairman, qualifies as an audit committee financial expert - The Board of Directors has identified Mr. Yao Shi as the audit committee financial expert[701] Code of Ethics The company has adopted a Code of Business Conduct and Ethics applicable to all employees, officers, and directors, available on its website - A Code of Business Conduct and Ethics has been adopted, applying to all directors, officers, and employees[702] Principal Accountant Fees and Services This section summarizes $215,100 in fees paid to principal accountant Audit Alliance LLP for services from May 30, 2022, through December 31, 2022 Accountant Fees (May 30, 2022 - Dec 31, 2022) | Fee Type | Amount (USD) | | :--- | :--- | | Audit Fees | $198,550 | | Audit-Related Fees | $16,550 | | Tax Fees | $0 | | All Other Fees | $0 | | Total | $215,100 | Corporate Governance As a foreign private issuer, the company may follow Cayman Islands corporate governance practices, potentially exempting it from certain Nasdaq standards, which could offer shareholders fewer protections - The company, as a foreign private issuer, is permitted to follow Cayman Islands corporate governance practices instead of certain Nasdaq listing standards[710] - Potential exemptions include not having a majority of independent directors on the board or fully independent compensation or nominating committees[710] - While not currently relying on home country practice exemptions, the company may do so in the future, potentially affording shareholders less protection[710][711] PART III Financial Statements This section presents the company's consolidated financial statements for FY2020-2022, showing a net loss of $8.85 million in 2022 and total assets growing to $21.1 million, reflecting the 2022 reverse recapitalization Consolidated Balance Sheet Highlights (in thousands USD) | Account | Dec 31, 2021 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $4,477 | $11,215 | | Total current assets | $6,880 | $18,691 | | Total assets | $11,533 | $21,100 | | Total current liabilities | $1,396 | $555 | | Total Liabilities | $1,423 | $786 | | Total shareholders' equity | $(2,363) | $20,314 | Consolidated Statement of Operations Highlights (in thousands USD) | Account | FY 2020 | FY 2021 | FY 2022 | | :--- | :--- | :--- | :--- | | Total Revenues | $1,957 | $17,038 | $10,638 | | Gross Profit | $902 | $1,264 | $1,140 | | Net (Loss)/Income | $403 | $(16,704) | $(8,845) | | Basic & Diluted (Loss)/Gain per share | $0.00 | $(1.4274) | $(0.4601) | - The company's financial statements are prepared under U.S. GAAP, with the TradeUP Global Corporation transaction accounted for as a reverse recapitalization, designating SAITECH Limited as the accounting predecessor[744][760] - Cryptocurrencies are accounted for as indefinite-lived intangible assets, assessed for impairment quarterly, with an impairment loss of $64 thousand recorded in FY 2022[771] - The company has two reportable segments: equipment sales & hosting and mining pool business, with a third segment, mining, added in 2022[854][856]