Shineco(US:SISI)2020-09-28 16:16Part I Business Shineco, Inc. operates in China through subsidiaries and VIEs, focusing on plant-based health products across three segments: herbal medicine, agricultural produce, and specialized textiles - FY2019 Revenue Breakdown by Segment | Business Segment | Description | FY2019 Revenue Contribution (%) | | :--- | :--- | :--- | | Chinese Herbal Medicine | Processing and distributing traditional Chinese medicine products via Ankang Longevity Group | ~38% | | Agricultural Produce | Growing and cultivating yew trees and other organic produce via Zhisheng Group | ~58% | | Specialized Textiles | Developing and distributing fabrics from the Luobuma plant via Tenet-Jove | ~4% | - The company operates through directly-owned subsidiaries and VIEs (Ankang Longevity Group, Zhisheng Group) due to PRC restrictions on foreign investment in traditional Chinese medicine preparation232425 - A key PRC patent for Luobuma fiber yarn preparation is expected to increase fiber yield over one hundredfold and reduce extraction costs by approximately 50%676971 - Employee Distribution as of June 30, 2020 | Department | Number of Employees | | :--- | :--- | | Senior Management | 24 | | Human Resource & Administration | 19 | | Finance | 25 | | Research & Development | 11 | | Production & Procurement | 114 | | Sales & Marketing | 125 | | Total | 318 | Risk Factors As a smaller reporting company, the company is exempt from providing specific risk factor disclosures - Risk factor disclosure is not required as the company qualifies as a smaller reporting company153 Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - The company has no unresolved staff comments154 Properties The company's properties in China include leased and owned facilities such as offices, factories, warehouses, and farmland for agricultural and pharmaceutical operations - Main properties include an office in Beijing, a factory in Yantai, a medicine logistics warehouse in Ankang City, and various production facilities for Ankang Longevity Group157158 Legal Proceedings The company faces a lawsuit from Bonwick Capital Partners, LLC, seeking up to $6 million for alleged breach of IPO financial advisory services - Bonwick Capital Partners, LLC filed a lawsuit in May 2017, alleging breach of contract for IPO financial advisory services and seeking damages up to $6 million159 Mine Safety Disclosures This item is not applicable as the company has no mining operations - This section is not applicable to the company160 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities The company's common stock trades on NASDAQ (TYHT), with no anticipated cash dividends due to a focus on retaining earnings and PRC dividend restrictions - Quarterly Stock Price (Fiscal Years 2020 & 2019) | Fiscal Year | Quarter | High ($) | Low ($) | | :--- | :--- | :--- | :--- | | 2020 | Q1 | 0.85 | 0.515 | | | Q2 | 1.07 | 0.461 | | | Q3 | 0.76 | 0.35 | | | Q4 | 0.67 | 0.361 | | 2019 | Q1 | 1.14 | 0.83 | | | Q2 | 1.03 | 0.5 | | | Q3 | 1.60 | 0.43 | | | Q4 | 1.66 | 0.61 | - The company does not anticipate paying cash dividends, intending to retain earnings for growth, with 174 registered stockholders as of September 18, 2020163164 - PRC regulations restrict dividend distributions from subsidiaries, requiring a 10% after-tax profit allocation to a statutory reserve and imposing a 10% withholding tax165166 Selected Financial Data As a smaller reporting company, the company is exempt from providing selected financial data - Selected financial data disclosure is not required as the company qualifies as a smaller reporting company170 Management's Discussion and Analysis of Financial Conditions and Results of Operations FY2020 revenue decreased by 24.1% to $23.7 million due to COVID-19, resulting in a $6.5 million net loss from a $0.9 million net income in FY2019, with a significant reversal in operating cash flow - The COVID-19 pandemic significantly impacted H2 FY2020 operations, causing revenue to decrease by approximately $6.5 million, or 42.5%, year-over-year199 - Results of Operations (FY2020 vs. FY2019) | Metric | FY 2020 ($) | FY 2019 ($) | Change (%) | | :--- | :--- | :--- | :--- | | Revenue | 23,684,626 | 31,220,040 | (24.14)% | | Gross Profit | 6,119,812 | 8,971,596 | (31.79)% | | Income (Loss) from Operations | (3,489,612) | 115,415 | (3,123.53)% | | Net Income (Loss) | (6,510,541) | 881,787 | (838.33)% | - Revenue from other agricultural products decreased by 39.17% to $10.3 million, Luobuma products fell 74.58% to $0.17 million, while herbal products saw a slight 3.23% decrease, all impacted by COVID-19215216217 - A $2.1 million impairment loss was recorded on the Tiancang Systematic Warehousing project investment due to unlikely future income generation232 - Cash Flow Summary (FY2020 vs. FY2019) | Cash Flow Activity | FY 2020 ($) | FY 2019 ($) | | :--- | :--- | :--- | | Net cash from operating activities | (4,656,007) | 3,498,371 | | Net cash from investing activities | 104,776 | (246,391) | | Net cash from financing activities | 2,625,407 | 1,812,471 | Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, the company is exempt from providing quantitative and qualitative market risk disclosures - Quantitative and qualitative market risk disclosure is not required as the company qualifies as a smaller reporting company254 Financial Statements and Supplementary Data This section refers to the consolidated financial statements located in Part III, Item 15 of this report - Consolidated financial statements are included in Part III, Item 15 of this report254 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting and financial disclosure - The company reported no disagreements with its accountants254 Controls and Procedures Management concluded disclosure controls were ineffective as of June 30, 2020, due to material weaknesses in U.S. GAAP qualified personnel and segregation of duties, with remediation plans underway - Management identified material weaknesses in internal controls, specifically a lack of U.S. GAAP qualified personnel and inadequate segregation of duties for accounting staff255262264 - Due to material weaknesses, management concluded that disclosure controls and procedures were not effective as of June 30, 2020255262 - Remediation plans include recruiting qualified professionals, enhancing management-board communication, and ensuring proper approval for significant transactions256 Other Information Effective September 24, 2020, Fenming Liu resigned as CEO and Guocong Zhou, with prior company experience, was appointed as the new Chief Executive Officer - Effective September 24, 2020, CEO Fenming Liu resigned and was replaced by Guocong Zhou269270 - New CEO Guocong Zhou, 64, previously served as deputy general manager of Beijing TenetJove and will receive an initial annual salary of $100,000270271 Part III Directors, Executive Officers and Corporate Governance As of June 30, 2020, the board comprised seven directors, including four independent members, with an executive team led by Chairman and CEO YuYing Zhang and CFO Sai (Sam) Wang - The Board of Directors consists of seven members, including four independent directors: Jin Liu, Yanzeng An, Ning Chen, and Harry Edelson288 - The company established Audit, Compensation, and Nominating committees, all composed of independent directors, with Jin Liu serving as the audit committee financial expert290292 Executive Compensation In FY2020, CEO YuYing Zhang received $141,130 in total compensation, while independent directors received an annual cash retainer of $10,000, with one receiving $36,000 - CEO Compensation (FY2020 vs. FY2019) | Name and Principal Position | Fiscal Year | Salary ($) | Other Compensation ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | | YuYing Zhang (Chairman) | 2020 | 120,000 | 21,130 | 141,130 | | | 2019 | 120,000 | 18,180 | 138,180 | - Independent directors received an annual cash retainer of $10,000 for their service during the fiscal year ended June 30, 2020304 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of September 28, 2020, officers and directors collectively owned 10.2% of common stock, with Jiping Chen being the largest beneficial owner at 8.02% - Beneficial Ownership as of September 28, 2020 | Name | Amount of Beneficial Ownership | Percent of Class (%) | | :--- | :--- | :--- | | Yuying Zhang | 127,016 | 4.18% | | Sai (Sam) Wang | 83,294 | 2.74% | | Baolin Li | 99,565 | 3.28% | | All Officers and Directors as a Group (7 total) | 309,875 | 10.2% | | Jiping Chen (5% Shareholder) | 243,791 | 8.02% | Certain Relationships and Related Transactions, and Director Independence The company conducts related party transactions, including with VIEs, reporting $1.36 million due to and $0.12 million due from related parties, and $3.0 million in sales to Shaanxi Pharmaceutical Group in FY2020 - As of June 30, 2020, the company had $1,355,919 in unsecured, non-interest bearing, demand payables to principal shareholders and their relatives for operational funding314315 - In FY2020, sales to related party Shaanxi Pharmaceutical Group totaled $2,990,910, with $1,567,160 in outstanding accounts receivable at year-end317 Principal Accounting Fees and Services Centurion ZD CPA billed $195,000 for audit services in both FY2020 and FY2019, with no other accounting fees incurred - Accountant Fees (FY2020 vs. FY2019) | Fee Category | FY 2020 ($) | FY 2019 ($) | | :--- | :--- | :--- | | Audit Fees | 195,000 | 195,000 | | Audit-related Fees | - | - | | Tax Fees | - | - | | All Other Fees | - | - | | Total | 195,000 | 195,000 | Part IV Exhibits and Financial Statement Schedules This section lists financial statements, schedules, and exhibits, including corporate governance documents, VIE agreements, and officer certifications - This section indexes all Form 10-K exhibits, including corporate governance documents, VIE contractual agreements, and Sarbanes-Oxley Act certifications324326327 Form 10-K Summary The company did not provide a summary for this item - No summary was provided for this item333 Financial Statements Report of Independent Registered Public Accounting Firm Centurion ZD CPA & Co. issued an unqualified opinion on the consolidated financial statements for FY2020 and FY2019, confirming fair presentation in conformity with U.S. GAAP - The auditor issued an unqualified opinion, stating financial statements are fairly presented in accordance with U.S. GAAP336 - The audit did not include internal control over financial reporting, as the company is not required to have one338 Consolidated Financial Statements FY2020 consolidated financial statements show total assets decreased to $79.1 million, total equity to $66.5 million, and a net loss of $6.5 million, a significant downturn from prior year's net income - Consolidated Balance Sheet Highlights (as of June 30) | Account | 2020 ($) | 2019 ($) | | :--- | :--- | :--- | | Cash | 32,371,372 | 35,330,676 | | Total Current Assets | 59,519,998 | 60,962,375 | | Total Assets | 79,088,611 | 83,739,473 | | Total Current Liabilities | 11,347,325 | 10,481,756 | | Total Liabilities | 12,576,210 | 11,107,359 | | Total Equity | 66,512,401 | 72,632,114 | - Consolidated Statement of Income Highlights (for the year ended June 30) | Account | 2020 ($) | 2019 ($) | | :--- | :--- | :--- | | Revenue | 23,684,626 | 31,220,040 | | Gross Profit | 6,119,812 | 8,971,596 | | Net Income (Loss) | (6,510,541) | 881,787 | | Basic and Diluted EPS | (2.25) | 0.32 | Notes to Consolidated Financial Statements Notes detail accounting policies, VIE structure, segment performance, related party transactions, and subsequent events, including significant customer concentration and a 1-for-9 reverse stock split - Operations are conducted through a WFOE (Tenet-Jove) controlling VIEs (Zhisheng Group, Ankang Longevity Group) via contractual agreements due to foreign ownership restrictions350351 - Segment Revenue (for the year ended June 30) | Segment | 2020 Revenue ($) | 2019 Revenue ($) | | :--- | :--- | :--- | | Luobuma products | 168,241 | 661,778 | | Herbal products | 13,266,050 | 13,708,166 | | Other agricultural products | 10,250,335 | 16,850,096 | | Total | 23,684,626 | 31,220,040 | - In FY2020, three customers accounted for 15%, 13%, and 10% of total sales, and four vendors for 30%, 16%, 12%, and 11% of purchases, indicating significant concentration risk470471 - On August 14, 2020, a 1-for-9 reverse stock split was effected, with all share and per-share data retroactively restated in the financial statements480