Shineco(SISI) - 2019 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements Unaudited condensed consolidated financial statements for March 31, 2019, show a significant decline in revenue and net income, with total assets at $85.3 million and liabilities at $11.6 million Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (Unaudited) | Account | March 31, 2019 | June 30, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash | $34,032,952 | $31,487,053 | | Accounts receivable, net | $10,926,123 | $15,478,336 | | Total Current Assets | $61,572,950 | $56,164,395 | | Total Assets | $85,329,083 | $83,100,417 | | Liabilities & Equity | | | | Total Current Liabilities | $10,887,089 | $9,529,899 | | Total Liabilities | $11,572,274 | $10,226,736 | | Total Equity | $73,756,809 | $72,873,681 | Condensed Consolidated Statements of Income and Comprehensive Income (Loss) Condensed Consolidated Statements of Income Highlights (Unaudited) | Metric | Nine Months Ended Mar 31, 2019 | Nine Months Ended Mar 31, 2018 | Three Months Ended Mar 31, 2019 | Three Months Ended Mar 31, 2018 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $23,673,611 | $35,282,977 | $7,702,598 | $13,341,281 | | Gross Profit | $6,867,869 | $12,168,024 | $2,356,863 | $5,261,877 | | Income (Loss) from Operations | ($444,687) | $8,114,622 | ($1,378,581) | $3,917,618 | | Net Income (Loss) | $322,957 | $9,353,025 | ($1,066,983) | $4,511,818 | | Net Income (Loss) Attributable to Shineco, Inc. | $274,978 | $9,405,537 | ($1,081,726) | $4,551,902 | | Basic and Diluted EPS | $0.01 | $0.45 | ($0.05) | $0.21 | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows Highlights (Unaudited, Nine Months Ended) | Cash Flow Activity | March 31, 2019 | March 31, 2018 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $1,439,061 | $5,343,660 | | Net Cash Used in Investing Activities | ($248,800) | ($896,712) | | Net Cash Provided by (Used in) Financing Activities | $1,814,273 | ($445,491) | | Effect of Exchange Rate Change on Cash | ($458,635) | $1,276,201 | | Net Increase in Cash | $2,545,899 | $5,277,658 | Notes to the Condensed Consolidated Financial Statements The notes detail the company's structure, accounting policies, segment performance, customer concentration risks, and a $6 million legal contingency - The Company operates through a holding company structure with subsidiaries and Variable Interest Entities (VIEs) in the PRC, conducting business across three main segments: Luobuma products, Agricultural Products, and traditional Chinese medicinal herbal products[12][15][23] - The Company adopted the new revenue standard ASC 606 on July 1, 2018, using a modified retrospective approach, concluding no significant impact as previous policies were generally consistent[37] - For the nine months ended March 31, 2019, five customers accounted for approximately 55% of total sales, and at March 31, 2019, five customers represented approximately 71% of the Company's accounts receivable, indicating significant customer concentration risk[123] - The Company is involved in a lawsuit with Bonwick Capital Partners, LLC, alleging breach of agreement and seeking damages up to $6 million, which the Company believes are without merit[131] Segment Revenue (Nine Months Ended March 31) | Segment | 2019 Revenue | 2018 Revenue | | :--- | :--- | :--- | | Luobuma products | $641,877 | $10,411,292 | | Herbal products | $10,050,987 | $10,231,923 | | Other agricultural products | $12,980,747 | $14,639,762 | | Total | $23,673,611 | $35,282,977 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the significant decline in financial performance to a 93.8% drop in Luobuma product revenue due to permit delays, increased operating expenses from a $3.9 million bad debt, and an operating loss of $445,000 Results of Operations for the Nine Months Ended March 31, 2019 and 2018 Nine-month revenue decreased 32.9% to $23.7 million, primarily due to a 93.8% decline in Luobuma product sales from permit delays, leading to a $445,000 operating loss and a 96.6% drop in net income Revenue by Segment (Nine Months Ended March 31) | Segment | 2019 Revenue | 2018 Revenue | Change (%) | | :--- | :--- | :--- | :--- | | Luobuma products | $641,877 | $10,411,292 | (93.83)% | | Chinese medicinal herbal products | $10,050,987 | $10,231,923 | (1.77)% | | Other agricultural products | $12,980,747 | $14,639,762 | (11.33)% | | Total | $23,673,611 | $35,282,977 | (32.90)% | - The primary cause for the revenue decline was a $9.8 million (93.8%) decrease in the Luobuma products segment, mainly due to a delay in obtaining a harvesting permit in Xinjiang, resulting in no revenue from the Xinjiang Taihe subsidiary[185] - General and administrative expenses increased by $3.8 million (136.4%), largely due to a significant rise in bad debt expense of $3.9 million and a write-off of offering costs valued at $434,000 related to a terminated stock purchase agreement[197] Results of Operations for the Three Months Ended March 31, 2019 and 2018 Third-quarter revenue decreased 42.3% to $7.7 million, primarily due to a 97.6% drop in Luobuma product sales from permit delays, leading to a $1.4 million operating loss and a $1.1 million net loss Revenue by Segment (Three Months Ended March 31) | Segment | 2019 Revenue | 2018 Revenue | Change (%) | | :--- | :--- | :--- | :--- | | Luobuma products | $131,153 | $5,477,219 | (97.61)% | | Chinese medicinal herbal products | $3,253,083 | $3,303,784 | (1.53)% | | Other agricultural products | $4,318,362 | $4,560,278 | (5.30)% | | Total | $7,702,598 | $13,341,281 | (42.26)% | - The significant decrease in quarterly revenue was driven by a $5.3 million (97.6%) fall in the Luobuma products segment, as the delay in obtaining a harvesting permit in Xinjiang prevented revenue generation[210] - General and administrative expenses for the quarter increased by $2.6 million (274%), primarily due to a $2.8 million bad debt expense[223] Liquidity and Capital Resources The company finances operations through cash flow and equity offerings, with working capital at $50.7 million, and net cash from operating activities at $1.4 million for the nine-month period - In September 2018, the company raised approximately $1.6 million in net proceeds from the sale of 1,637,700 shares of common stock at $1 per share[238] Working Capital | | March 31, 2019 | June 30, 2018 | | :--- | :--- | :--- | | Current Assets | $61,572,950 | $56,164,395 | | Current Liabilities | $10,887,089 | $9,529,899 | | Working Capital | $50,685,861 | $46,634,496 | - Net cash provided by operating activities decreased to $1.4 million for the nine months ended March 31, 2019, down from $5.3 million in the prior-year period, mainly due to lower net income and increased advances to suppliers[244][245] Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Shineco, Inc. is exempt from providing quantitative and qualitative disclosures about market risk - The company is not required to provide quantitative and qualitative disclosures about market risk because it qualifies as a smaller reporting company[249] Controls and Procedures Management concluded that disclosure controls and procedures were ineffective due to material weaknesses, including insufficient U.S. GAAP personnel and lack of segregation of duties, with remediation plans underway - Management identified material weaknesses in internal controls, concluding they were not effective[250] - Specific weaknesses include: - Lack of full-time U.S. GAAP personnel in the accounting department - Lack of segregation of duties for accounting personnel[250] - Remediation plans involve hiring qualified professionals, improving communication between management and the board, and obtaining proper approvals for non-routine transactions[251] PART II. OTHER INFORMATION Legal Proceedings The company may be involved in routine litigation in the ordinary course of business, with no specific ongoing proceedings detailed in this section - The company is and may become involved in routine litigation and other legal proceedings in the ordinary course of business[255] Risk Factors As a smaller reporting company, Shineco, Inc. is exempt from providing risk factor disclosures - The company is not required to provide risk factor disclosures because it qualifies as a smaller reporting company[256] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities occurred during the quarter, and approximately $1.6 million in net proceeds from a September 2018 offering were used for general corporate purposes - No unregistered sales of equity securities occurred during the quarter ended March 31, 2019[257] - Net proceeds of approximately $1.6 million from the September 2018 registered offering were used for general corporate purposes, including working capital and capital expenditures[258] Other Information No other information is reported for this period - None[259] Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, material contracts, and CEO/CFO certifications