Shineco(SISI) - 2021 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS This section presents Shineco, Inc.'s unaudited condensed consolidated financial statements, including balance sheets, income statements, equity changes, cash flows, and explanatory notes Condensed Consolidated Balance Sheets (unaudited) This section provides the unaudited condensed consolidated balance sheets, detailing the company's assets, liabilities, and equity as of September 30, 2020, and June 30, 2020 Condensed Consolidated Balance Sheet Highlights (USD) | Metric | Sep 30, 2020 (USD) | Jun 30, 2020 (USD) | Change (USD) | % Change | | :-------------------------- | :----------------- | :----------------- | :----------- | :------- | | Assets | | | | | | Total Current Assets | 63,164,137 | 59,519,998 | 3,644,139 | 6.12% | | Total Assets | 83,205,624 | 79,088,611 | 4,117,013 | 5.21% | | Liabilities & Equity | | | | | | Total Current Liabilities | 13,816,372 | 11,347,325 | 2,469,047 | 21.76% | | Total Liabilities | 15,078,272 | 12,576,210 | 2,502,062 | 19.90% | | Total Equity | 68,127,352 | 66,512,401 | 1,614,951 | 2.43% | | Total Liabilities and Equity | 83,205,624 | 79,088,611 | 4,117,013 | 5.21% | - Cash decreased by $9,241,266 from $32,371,372 on June 30, 2020, to $23,130,106 on September 30, 2020[4] - Accounts receivable, net increased by $1,248,795 from $11,008,485 on June 30, 2020, to $12,257,280 on September 30, 2020[4] Condensed Consolidated Statements of Income and Comprehensive Income (unaudited) This section presents the unaudited condensed consolidated statements of income and comprehensive income, outlining revenue, expenses, and net loss for the three months ended September 30, 2020 and 2019 Condensed Consolidated Statements of Income and Comprehensive Income (Loss) Highlights (USD) | Metric | Three Months Ended Sep 30, 2020 (USD) | Three Months Ended Sep 30, 2019 (USD) | Change (USD) | % Change | | :------------------------------------------------ | :------------------------------------ | :------------------------------------ | :----------- | :------- | | Revenue | 4,143,383 | 7,046,781 | (2,903,398) | (41.20)% | | Gross Profit | 908,581 | 1,639,895 | (731,314) | (44.60)% | | Loss From Operations | (945,786) | (1,836,634) | 890,848 | (48.50)% | | Net Loss | (1,052,980) | (1,774,832) | 721,852 | (40.67)% | | Net Loss Attributable to Shineco, Inc. | (1,057,510) | (1,792,637) | 735,127 | (41.01)% | | Comprehensive Income (Loss) Attributable to Shineco, Inc. | 1,563,509 | (4,609,009) | 6,172,518 | (133.92)% | | Basic and Diluted Loss Per Common Share | (0.35) | (0.67) | 0.32 | (47.76)% | - Comprehensive income (loss) attributable to Shineco, Inc. significantly improved from a loss of $4,609,009 in Q3 2019 to an income of $1,563,509 in Q3 2020, primarily due to a foreign currency translation gain of $2,667,931[5] Condensed Consolidated Statements of Changes in Equity (unaudited) This section details the unaudited condensed consolidated statements of changes in equity, showing movements in total equity, net income, and foreign currency translation gains Condensed Consolidated Statements of Changes in Equity Highlights (USD) | Metric | June 30, 2020 (USD) | Net Income (Loss) (USD) | Foreign Currency Translation Gain (USD) | September 30, 2020 (USD) | | :-------------------------------- | :------------------ | :---------------------- | :-------------------------------------- | :----------------------- | | Total Equity | 66,512,401 | (1,052,980) | 2,667,931 | 68,127,352 | - The company's total equity increased by $1,614,951 from $66,512,401 on June 30, 2020, to $68,127,352 on September 30, 2020, despite a net loss, primarily driven by a significant foreign currency translation gain[6][8] Condensed Consolidated Statements of Cash Flows (unaudited) This section presents the unaudited condensed consolidated statements of cash flows, detailing cash movements from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows Highlights (USD) | Metric | Three Months Ended Sep 30, 2020 (USD) | Three Months Ended Sep 30, 2019 (USD) | Change (USD) | % Change | | :------------------------------------------ | :------------------------------------ | :------------------------------------ | :----------- | :------- | | Net Cash Provided by (Used in) Operating Activities | (9,100,028) | 2,145,875 | (11,245,903) | (524.09)% | | Net Cash Provided by (Used in) Investing Activities | (1,228,630) | 18,780 | (1,247,410) | (6642.23)% | | Net Cash Provided by (Used in) Financing Activities | (11,429) | 1,555,631 | (1,567,060) | (100.73)% | | Effect of Exchange Rate Change on Cash | 1,098,821 | (1,438,380) | 2,537,201 | (176.39)% | | Net Increase (Decrease) in Cash | (9,241,266) | 2,281,906 | (11,523,172) | (504.90)% | | Cash - End of the Period | 23,130,106 | 37,612,582 | (14,482,476) | (38.50)% | - Net cash used in operating activities significantly increased to $9.1 million in Q3 2020 from cash provided of $2.1 million in Q3 2019, primarily due to increases in advances to suppliers, inventories, and accounts receivables[9][221] - Net cash used in investing activities was $1.2 million in Q3 2020, a substantial shift from cash provided of $18,780 in Q3 2019, mainly due to advances of loans to third parties[9][222] Notes to the Condensed Consolidated Financial Statements (unaudited) This section provides detailed notes to the unaudited condensed consolidated financial statements, explaining the company's organization, accounting policies, and specific financial line items NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS This note describes Shineco, Inc.'s corporate structure, primary business segments in China, and recent operational changes - Shineco, Inc. is a Delaware holding company focused on business opportunities in the People's Republic of China (PRC), operating through its wholly-owned subsidiary Tenet-Jove and various Variable Interest Entities (VIEs) like Zhisheng Group and Ankang Longevity Group[11][12][14] - The company's three main business segments are: 1) manufacturing and selling Bluish Dogbane (Luobuma) products, 2) planting, processing, and distributing green agricultural produce and providing logistics services, and 3) manufacturing traditional Chinese medicinal herbal products and retail pharmaceuticals[23] - Recent operational changes include the cessation of business operations for Tiankunrunze and its subsidiaries in July 2019, and for Xinjiang Taihe and Runze in September and October 2020, respectively[22] NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines the significant accounting policies used in preparing the financial statements, including consolidation principles, revenue recognition, and recent accounting standard adoptions - The unaudited condensed consolidated financial statements are prepared in conformity with US GAAP, consolidating the Company, its subsidiaries, VIEs, and VIEs' subsidiaries, with all intercompany accounts and transactions eliminated[25][26] VIEs' Financial Information (USD) | Metric | Sep 30, 2020 (USD) | Jun 30, 2020 (USD) | Change (USD) | % Change | | :-------------------------- | :----------------- | :----------------- | :----------- | :------- | | Total Assets | 79,171,441 | 77,574,113 | 1,597,328 | 2.06% | | Total Liabilities | (7,496,725) | (6,189,172) | (1,307,553) | 21.13% | | Net Assets | 71,674,716 | 71,384,941 | 289,775 | 0.41% | | Metric | Three Months Ended Sep 30, 2020 (USD) | Three Months Ended Sep 30, 2019 (USD) | Change (USD) | % Change | | :-------------------------------- | :------------------------------------ | :------------------------------------ | :----------- | :------- | | Net Sales | 4,122,691 | 7,011,877 | (2,889,186) | (41.20)% | | Net Income (Loss) | (400,077) | 569,490 | (969,567) | (170.26)% | - The company's operations are primarily located in the PRC, exposing it to significant political, economic, and legal environment risks, including potential challenges to contractual arrangements with VIEs[30][31] - The allowance for doubtful accounts increased to $6,065,185 as of September 30, 2020, from $5,235,436 as of June 30, 2020, reflecting management's assessment of collectability[37] - The company adopted ASU 2016-02, 'Leases,' on July 1, 2019, recognizing approximately $0.5 million in operating liabilities and $3.6 million in corresponding Right-of-use (ROU) assets, with no cumulative effect on adoption[41] - The company expects ASU No. 2018-15, 'Intangibles - Goodwill and Other - Internal-Use Software,' to have a material impact on its financial statements upon adoption[64] NOTE 3 – INVENTORIES, NET This note provides a breakdown of the company's inventories, net, including raw materials, work-in-process, and finished goods, along with changes over the period Inventories, Net (USD) | Category | Sep 30, 2020 (USD) | Jun 30, 2020 (USD) | Change (USD) | % Change | | :------------------ | :----------------- | :----------------- | :------- | :------- | | Raw materials | 702,649 | 958,206 | (255,557) | (26.67)% | | Work-in-process | 2,621,429 | 529,655 | 2,091,774 | 394.94% | | Finished goods | 1,699,609 | 1,433,423 | 266,186 | 18.57% | | Less: inventory reserve | (1,179,743) | (1,121,408) | (58,335) | 5.20% | | Total inventories, net | 3,843,944 | 1,799,876 | 2,094,068 | 116.35% | - Work-in-process inventory saw a substantial increase of 394.94% from June 30, 2020, to September 30, 2020, indicating increased production activity or accumulation of costs for agricultural products[69] NOTE 4 - PROPERTY AND EQUIPMENT, NET This note details the company's property and equipment, net, including buildings, machinery, and farmland leasehold improvements, and related depreciation Property and Equipment, Net (USD) | Category | Sep 30, 2020 (USD) | Jun 30, 2020 (USD) | Change (USD) | % Change | | :---------------------------------- | :----------------- | :----------------- | :------- | :------- | | Buildings | 11,980,396 | 11,525,458 | 454,938 | 3.95% | | Machinery and equipment | 894,580 | 860,610 | 33,970 | 3.95% | | Motor vehicles | 59,905 | 57,630 | 2,275 | 3.95% | | Office equipment | 240,300 | 231,174 | 9,126 | 3.95% | | Farmland leasehold improvements | 3,091,919 | 2,974,508 | 117,411 | 3.95% | | Less: accumulated depreciation and amortization | (6,557,766) | (6,159,896) | (397,870) | 6.46% | | Total property and equipment, net | 9,709,334 | 9,489,484 | 219,850 | 2.32% | - Depreciation and amortization expense decreased by 14.65% from $178,215 in Q3 2019 to $152,107 in Q3 2020[70] - Farmland leasehold improvements include investments in blueberry farmland, yew tree planting base reconstruction, and greenhouse renovation[71] NOTE 5 - LAND USE RIGHTS, NET This note describes the company's land use rights, net, including their amortization policy and changes over the period Land Use Rights, Net (USD) | Category | Sep 30, 2020 (USD) | Jun 30, 2020 (USD) | Change (USD) | % Change | | :-------------------------- | :----------------- | :----------------- | :------- | :------- | | Land use rights | 1,635,428 | 1,573,325 | 62,103 | 3.95% | | Less: accumulated amortization | (400,622) | (377,382) | (23,240) | 6.16% | | Total land use rights, net | 1,234,806 | 1,195,943 | 38,863 | 3.25% | - Amortization expense for land use rights remained stable, with $9,300 recognized in Q3 2020 compared to $9,214 in Q3 2019[74] - The company holds land use rights for 50 years and amortizes them on a straight-line basis over this period[73] NOTE 6 - DISTRIBUTION RIGHTS This note explains the company's distribution rights acquired through the Tianjin Tajite acquisition, their valuation, and impairment assessment policy - The company acquired distribution rights for Daiso 100-yen shops branded products through the acquisition of Tianjin Tajite, valued at $1,085,092 as of June 30, 2020[76] - These distribution rights have an indefinite life and are evaluated for impairment at least annually[76] NOTE 7 - INVESTMENTS This note details the company's investments in unconsolidated entities and income from equity method investments, including impairment events Investments in Unconsolidated Entities (USD) | Entity | Sep 30, 2020 (USD) | Jun 30, 2020 (USD) | Change (USD) | % Change | | :-------------------------------------------------------------------------------- | :----------------- | :----------------- | :------- | :------- | | Shaanxi Pharmaceutical Holding Group Longevity Pharmacy Co., Ltd. | 3,853,750 | 3,690,419 | 163,331 | 4.43% | | Shaanxi Pharmaceutical Sunsimiao Drugstores Ankang Chain Co., Ltd. | 855,148 | 824,705 | 30,443 | 3.69% | | Total investment | 4,708,898 | 4,515,124 | 193,774 | 4.29% | Income from Equity Method Investments (USD) | Metric | Three Months Ended Sep 30, 2020 (USD) | Three Months Ended Sep 30, 2019 (USD) | Change (USD) | % Change | | :---------------------------- | :------------------------------------ | :------------------------------------ | :----------- | :------- | | Income from equity method investments | 15,287 | 69,899 | (54,612) | (78.13)% | - The company fully impaired its investment in the Tiancang Systematic Warehousing project during the fiscal year ended June 30, 2020, and its investment in Original Lab Inc. during the fiscal year ended June 30, 2019, due to unlikelihood of future investment income[80][81] NOTE 8 - LEASES This note provides information on the company's operating leases, including rights-of-use assets, lease liabilities, and related expenses Operating Lease Related Assets and Liabilities (USD) | Category | Sep 30, 2020 (USD) | Jun 30, 2020 (USD) | Change (USD) | % Change | | :---------------------------------- | :----------------- | :----------------- | :------- | :------- | | Rights of use lease assets | 3,204,393 | 3,227,895 | (23,502) | (0.73)% | | Operating lease liabilities – current | 92,909 | 97,633 | (4,724) | (4.84)% | | Operating lease liabilities – non-current | 424,605 | 401,891 | 22,714 | 5.65% | | Total operating lease liabilities | 517,514 | 499,524 | 17,990 | 3.60% | - The weighted average remaining lease term for operating leases was 9.23 years as of September 30, 2020, with a weighted average discount rate of 5.0%[91] - Rent expense increased by 22.52% from $92,325 in Q3 2019 to $113,115 in Q3 2020[91] NOTE 9 - SHORT-TERM LOANS This note details the company's short-term loans, including lenders, outstanding balances, interest rates, and collateral arrangements Short-Term Loans (USD) | Lender | Sep 30, 2020 (USD) | Jun 30, 2020 (USD) | Interest Rate/Year (Sep 30, 2020) | | :-------------------------- | :----------------- | :----------------- | :-------------------------------- | | Agricultural Bank of China-a | 661,642 | 636,517 | 4.65% | | Agricultural Bank of China-a | 1,470,314 | 1,414,481 | 5.66% | | Agricultural Bank of China-b | 294,063 | 282,896 | 5.66% | | Total short-term loans | 2,426,019 | 2,333,894 | 5.31% (Weighted Average) | - Short-term loans are guaranteed by a commercial credit guaranty company and a shareholder (Jiping Chen), or collateralized by buildings owned by related parties (Xiaoyan Chen and Jing Chen)[95][96] - Interest expense for short-term loans was $29,622 in Q3 2020, a slight decrease from $30,277 in Q3 2019, with the annual weighted average interest rate remaining at 5.31% for both periods[97] NOTE 10 - ACQUISITION This note describes the acquisition of Tianjin Tajite E-Commerce Co., Ltd., including the recognized goodwill, distribution rights, and subsequent impairment - The company completed the acquisition of a 51% equity interest in Tianjin Tajite E-Commerce Co., Ltd. on October 26, 2017, for approximately $2.1 million, aiming to enter the Luobuma fabric and Daiso branded products market[99][100] - Goodwill of $2,059,939 was recognized in the acquisition but was fully impaired in June 2018 due to lower than expected revenue and an unfavorable business environment[103][104] - Distribution rights, valued at $1,085,092, were identified as an intangible asset with an indefinite life in the Tianjin Tajite acquisition[103][104] NOTE 11 - RELATED PARTY TRANSACTIONS This note outlines the company's transactions and balances with related parties, including accounts receivable and payable, and sales to affiliated entities Related Party Balances (USD) | Category | Sep 30, 2020 (USD) | Jun 30, 2020 (USD) | Change (USD) | % Change | | :-------------------------- | :----------------- | :----------------- | :------- | :------- | | Due from related parties | 125,713 | 120,939 | 4,774 | 3.95% | | Due to related parties | 1,383,813 | 1,355,919 | 27,894 | 2.06% | | Accounts receivable from Shaanxi Pharmaceutical Group | 1,722,124 | 1,567,160 | 154,964 | 9.89% | - Sales to Shaanxi Pharmaceutical Group, a related party, decreased by 4.54% from $795,548 in Q3 2019 to $759,366 in Q3 2020[110] - Both 'Due from related parties' and 'Due to related parties' are unsecured, non-interest bearing, and due on demand[106][108] NOTE 12 - TAXES This note details the company's income tax expense, corporate income tax rates for its PRC subsidiaries, and various taxes payable Income Tax Expense (Benefit) (USD) | Category | Three Months Ended Sep 30, 2020 (USD) | Three Months Ended Sep 30, 2019 (USD) | Change (USD) | % Change | | :-------------------------- | :------------------------------------ | :------------------------------------ | :----------- | :------- | | Current income tax provision | 105,297 | 140,841 | (35,544) | (25.24)% | | Deferred income tax provision (benefit) | - | (145,624) | 145,624 | (100.00)% | | Total income tax expense | 105,297 | (4,783) | 110,080 | (2301.48)% | - The company's PRC subsidiaries are generally subject to a 25% corporate income tax rate, though two VIEs and Xinjiang Taihe receive full income tax exemption as agricultural enterprises[112] Taxes Payable (USD) | Category | Sep 30, 2020 (USD) | Jun 30, 2020 (USD) | Change (USD) | % Change | | :-------------------------- | :----------------- | :----------------- | :------- | :------- | | Income tax payable | 3,457,740 | 3,424,043 | 33,697 | 0.98% | | Value added tax payable | 540,730 | 522,615 | 18,115 | 3.47% | | Business tax and other taxes payable | 6,325 | 6,026 | 299 | 4.96% | | Total tax payable | 4,004,795 | 3,952,684 | 52,111 | 1.32% | NOTE 13 - SHAREHOLDERS' EQUITY This note provides information on shareholders' equity, including the impact of a reverse stock split, common stock outstanding, and statutory reserves - The company completed a 1-for-9 reverse stock split of its common stock, effective August 14, 2020, retroactively restating shares and per share data[129] - The number of common stock outstanding after the reverse stock split was 3,037,048, down from 27,333,428 pre-split[129] - The statutory reserve, required by PRC GAAP, increased slightly to $4,199,964 as of September 30, 2020, from $4,198,107 as of June 30, 2020[122] NOTE 14 - CONCENTRATIONS AND RISKS This note highlights the company's operational concentration in the PRC, cash balances, and significant customer concentration risks - The company's operations are highly concentrated in the PRC, with almost 100% of assets and revenues derived from its subsidiaries and VIEs located there[130] - Cash balances are primarily held in PRC bank accounts, totaling $23,113,638 as of September 30, 2020[130] - Customer concentration is significant, with four customers accounting for approximately 18%, 15%, 14%, and 10% of total sales, respectively, and five customers representing 64% of accounts receivable for Q3 2020[131] NOTE 15 - COMMITMENTS AND CONTIGENCIES This note discloses the company's material legal proceedings and confirms the absence of other significant capital commitments or contingent liabilities - The company is involved in a lawsuit filed by Bonwick Capital Partners, LLC in May 2017, seeking up to $6 million for alleged breach of a financial advisory services agreement, which the company intends to vigorously defend[133] - As of September 30, 2020, the company reported no other material capital commitments or contingent liabilities[219] NOTE 16 - SEGMENT REPORTING This note provides financial information by operating segment, including revenue, gross profit, and total assets for Luobuma, herbal, and other agricultural products - The company operates three main segments: Luobuma products, Herbal products, and Other agricultural products, with operations primarily in various regions of Mainland China[136][137][138] Segment Revenue (USD) | Segment | Three Months Ended Sep 30, 2020 (USD) | % of Total (2020) | Three Months Ended Sep 30, 2019 (USD) | % of Total (2019) | Change (USD) | % Change | | :-------------------------- | :------------------------------------ | :---------------- | :------------------------------------ | :---------------- | :----------- | :------- | | Luobuma products | 24,615 | 0.60% | 65,519 | 2.12% | (40,904) | (62.43)% | | Chinese medicinal herbal products | 3,135,406 | 75.67% | 3,300,321 | 43.91% | (164,915) | (5.00)% | | Other agricultural products | 983,362 | 23.73% | 3,680,941 | 53.97% | (2,697,579) | (73.29)% | | Total Segment Revenue | 4,143,383 | 100.00% | 7,046,781 | 100.00% | (2,903,398) | (41.20)% | Segment Gross Profit (USD) | Segment | Three Months Ended Sep 30, 2020 (USD) | % of Total (2020) | Three Months Ended Sep 30, 2019 (USD) | % of Total (2019) | Change (USD) | % Change | | :-------------------------- | :------------------------------------ | :---------------- | :------------------------------------ | :---------------- | :----------- | :------- | | Luobuma products | (3,847) | (0.42)% | (165,985) | (10.12)% | 162,138 | (97.68)% | | Chinese medicinal herbal products | 642,943 | 70.76% | 700,917 | 42.74% | (57,974) | (8.27)% | | Other agricultural products | 269,485 | 29.66% | 1,104,963 | 67.38% | (835,478) | (75.61)% | | Total Gross Profit | 908,581 | 100.00% | 1,639,895 | 100.00% | (731,314) | (44.60)% | Total Assets by Segment (USD) | Segment | Sep 30, 2020 (USD) | Jun 30, 2020 (USD) | Change (USD) | % Change | | :-------------------------- | :----------------- | :----------------- | :------- | :------- | | Luobuma products | 3,265,271 | 2,836,450 | 428,821 | 15.12% | | Herbal products | 45,107,523 | 43,855,815 | 1,251,708 | 2.85% | | Other agricultural products | 34,832,830 | 32,396,346 | 2,436,484 | 7.52% | | Total Assets | 83,205,624 | 79,088,611 | 4,117,013 | 5.21% | NOTE 17 - SUBSEQUENT EVENTS This note confirms that no subsequent events requiring adjustment or disclosure were identified up to the financial statement approval date - No subsequent events requiring adjustments or disclosure were identified through November 16, 2020, the date the financial statements were approved for issuance[142] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of Shineco, Inc.'s financial condition and results of operations, covering business overview, performance factors, risks, and cash flows Forward-Looking Statements This section cautions readers about forward-looking statements, highlighting inherent risks and uncertainties that may cause actual results to differ materially - The document contains forward-looking statements regarding future plans, objectives, expectations, and financial items, which involve known and unknown risks and uncertainties that could cause actual results to differ materially[144][146] - The company explicitly states it undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made, except as required by law[147] Business Overview and Corporate Structure This section outlines Shineco, Inc.'s operational structure in China, its primary business segments, and recent changes in its subsidiary operations - Shineco, Inc. operates primarily in China through its wholly-owned subsidiary Tenet-Jove and various Variable Interest Entities (VIEs), including Zhisheng Group and Ankang Longevity Group, which are consolidated due to contractual control[150][153] - The company's business segments include Luobuma products, green agricultural produce and logistics services, and traditional Chinese medicinal herbal products[164] - Recent operational adjustments include the cessation of business for Tiankunrunze and its subsidiaries in July 2019, and for Xinjiang Taihe and Runze in September and October 2020, respectively[160][163] Financing Activities This section details the company's past financing activities, including common stock purchase agreements and share offerings, and their net proceeds - The company previously entered into a Common Stock Purchase Agreement with IFG Opportunity Fund LLC in January 2018 for up to $15 million in common stock, which was terminated in July 2018[166] - In September 2018, the company completed an offering of 181,967 common shares at $9 per share, generating net proceeds of approximately $1.59 million[167] - In September 2019, the company sold 310,977 shares of common stock at $4.68 per share, resulting in net proceeds of approximately $1.5 million[170] Factors Affecting Financial Performance This section discusses key factors influencing the company's financial performance, including demand, supply, production capacity, sales networks, and cost control strategies - Key factors influencing financial performance include increasing demand for products, expansion of supply sources, production capacity, and sales networks, and maintaining effective control of costs and expenses[171][172][173] - The company plans to develop new products, expand its distribution network, and pursue mergers and acquisitions to increase brand awareness and customer loyalty[171] - Strategies for cost control include establishing long-term alliances with suppliers, leveraging economies of scale, and focusing on higher value-added Luobuma products using patented technology[173] Economic and Political Risks This section highlights the economic and political risks associated with the company's operations primarily located in the People's Republic of China - The company's operations are primarily in the PRC, making its business, financial condition, and results susceptible to the political, economic, and legal environment in China[174] - Adverse effects could arise from changes in political and social conditions, governmental policies, anti-inflationary measures, currency conversions, remittances abroad, and taxation rates[175] COVID-19 Impact This section assesses the impact of the COVID-19 pandemic on the company's operations, including office closures, supply chain disruptions, and revenue decline - The COVID-19 pandemic led to significant governmental measures in China, causing company offices and retail stores to close or operate with limitations until early April 2020[177] - The outbreak resulted in severe disruptions to transportation, limited facility access, and workforce support, causing delays in product delivery and financial distress for some customers and suppliers[177] - Revenue for the three months ended September 30, 2020, decreased by approximately $2.9 million (41.2%) compared to the same period in 2019, attributed to the negative impact of COVID-19[177] Critical Accounting Policies and Estimates This section describes the critical accounting policies and significant management estimates used in preparing the financial statements, such as asset valuation and revenue recognition - The preparation of financial statements requires significant management estimates and assumptions, particularly for useful lives of assets, recoverability of long-lived assets, and valuation of accounts receivable, deferred taxes, and inventory reserves[180] - The company consolidates Variable Interest Entities (VIEs) where it is the primary beneficiary, meaning it absorbs the majority of risks and receives the majority of residual returns[179] - Revenue recognition follows ASC 606, where revenue is recognized when performance obligations are satisfied, with no significant impact from the adoption of the new standard[186] Results of Operations for the Three Months Ended September 30, 2020 and 2019 This section provides a detailed analysis of the company's results of operations for the three months ended September 30, 2020 and 2019, covering revenue, expenses, and net loss Overview This overview summarizes the key financial performance metrics for the three months ended September 30, 2020 and 2019, including revenue, gross profit, and net loss Results of Operations Overview (USD) | Metric | Three Months Ended Sep 30, 2020 (USD) | Three Months Ended Sep 30, 2019 (USD) | Change (USD) | % Change | | :------------------------------------------------ | :------------------------------------ | :------------------------------------ | :----------- | :------- | | Revenue | 4,143,383 | 7,046,781 | (2,903,398) | (41.20)% | | Gross Profit | 908,581 | 1,639,895 | (731,314) | (44.60)% | | Loss From Operations | (945,786) | (1,836,634) | 890,848 | (48.50)% | | Net Loss | (1,052,980) | (1,774,832) | 721,852 | (40.67)% | | Comprehensive Income (Loss) Attributable to Shineco Inc. | 1,563,509 | (4,609,009) | 6,172,518 | (133.92)% | Revenue This section analyzes the company's revenue performance by segment for the three months ended September 30, 2020 and 2019, highlighting changes and contributing factors Revenue by Segment (USD) | Segment | Three Months Ended Sep 30, 2020 (USD) | % of Total (2020) | Three Months Ended Sep 30, 2019 (USD) | % of Total (2019) | Change (USD) | % Change | | :-------------------------- | :------------------------------------ | :---------------- | :------------------------------------ | :---------------- | :----------- | :------- | | Luobuma products | 24,615 | 0.60% | 65,519 | 2.12% | (40,904) | (62.43)% | | Chinese medicinal herbal products | 3,135,406 | 75.67% | 3,300,321 | 43.91% | (164,915) | (5.00)% | | Other agricultural products | 983,362 | 23.73% | 3,680,941 | 53.97% | (2,697,579) | (73.29)% | | Total Revenue | 4,143,383 | 100.00% | 7,046,781 | 100.00% | (2,903,398) | (41.20)% | - Revenue from Luobuma products decreased by 62.43% due to a focus on clearing old stocks and the impact of the COVID-19 outbreak[192] - Other agricultural products revenue declined by 73.29%, primarily due to fewer yew trees sold and a strategic shift towards cultivating matured yew trees for Taxol extraction[194] Cost of Revenue and related tax This section details the cost of revenue and related taxes by segment for the three months ended September 30, 2020 and 2019, explaining changes in costs Cost of Revenue by Segment (USD) | Segment | Three Months Ended Sep 30, 2020 (USD) | % of Total (2020) | Three Months Ended Sep 30, 2019 (USD) | % of Total (2019) | Change (USD) | % Change | | :-------------------------- | :------------------------------------ | :---------------- | :------------------------------------ | :---------------- | :----------- | :------- | | Luobuma products | 28,462 | 0.87% | 231,381 | 4.28% | (202,919) | (87.70)% | | Chinese medicinal herbal products | 2,481,321 | 76.71% | 2,589,930 | 47.90% | (108,609) | (4.19)% | | Other agricultural products | 712,828 | 22.04% | 2,573,112 | 47.59% | (1,860,284) | (72.30)% | | Business and sales related tax | 12,191 | 0.38% | 12,463 | 0.23% | (272) | (2.18)% | | Total Cost of Revenue | 3,234,802 | 100.00% | 5,406,886 | 100.00% | (2,172,084) | (40.17)% | - Cost of revenue for Luobuma products decreased by 87.70% due to lower sales volume and a reduced allowance for slow-moving inventories[196] - The decrease in cost of revenue for Chinese medicinal herbal products and other agricultural products was proportional to their respective sales declines[197][198] Gross Profit This section analyzes the company's gross profit by segment for the three months ended September 30, 2020 and 2019, explaining changes and contributing factors Gross Profit by Segment (USD) | Segment | Three Months Ended Sep 30, 2020 (USD) | % of Total (2020) | Three Months Ended Sep 30, 2019 (USD) | % of Total (2019) | Change (USD) | % Change | | :-------------------------- | :------------------------------------ | :---------------- | :------------------------------------ | :---------------- | :----------- | :------- | | Luobuma products | (3,847) | (0.42)% | (165,985) | (10.12)% | 162,138 | (97.68)% | | Chinese medicinal herbal products | 642,943 | 70.76% | 700,917 | 42.74% | (57,974) | (8.27)% | | Other agricultural products | 269,485 | 29.66% | 1,104,963 | 67.38% | (835,478) | (75.61)% | | Total Gross Profit | 908,581 | 100.00% | 1,639,895 | 100.00% | (731,314) | (44.60)% | - The gross loss from Luobuma product sales significantly reduced by 97.68% to $3,847, primarily due to a decreased allowance for slow-moving inventories, despite selling some products below cost[199] - Gross profit from other agricultural products decreased by 75.61%, consistent with the decline in yew tree sales[202] Expenses This section examines the company's operating expenses, including general and administrative, and selling expenses, for the three months ended September 30, 2020 and 2019 General and Administrative Expenses This section details the changes in general and administrative expenses for the three months ended September 30, 2020 and 2019, and their primary drivers General and Administrative Expenses (USD) | Metric | Three Months Ended Sep 30, 2020 (USD) | Three Months Ended Sep 30, 2019 (USD) | Change (USD) | % Change | | :---------------------------------- | :------------------------------------ | :------------------------------------ | :----------- | :------- | | General and administrative expenses | 1,820,732 | 3,354,643 | (1,533,911) | (45.73)% | - General and administrative expenses decreased by 45.73%, mainly due to lower staff salary expenses (following restricted shares issued as compensation in the prior year) and a $284,994 decrease in bad debt expense[203] Selling Expenses This section analyzes the changes in selling expenses for the three months ended September 30, 2020 and 2019, attributing them to reduced promotional activities and staff costs Selling Expenses (USD) | Metric | Three Months Ended Sep 30, 2020 (USD) | Three Months Ended Sep 30, 2019 (USD) | Change (USD) | % Change | | :--------------- | :------------------------------------ | :------------------------------------ | :------- | :------- | | Selling expenses | 33,635 | 121,886 | (88,251) | (72.40)% | - Selling expenses decreased by 72.40%, primarily due to reduced promotion and commission expenses for online shops, aligning with the decrease in sales, and a reduction in staff-related expenses[204] Income from Equity Method Investments This section reports the income from equity method investments for the three months ended September 30, 2020 and 2019, and explains the decrease Income from Equity Method Investments (USD) | Metric | Three Months Ended Sep 30, 2020 (USD) | Three Months Ended Sep 30, 2019 (USD) | Change (USD) | % Change | | :-------------------------------- | :------------------------------------ | :------------------------------------ | :----------- | :------- | | Income from equity method investments | 15,287 | 69,899 | (54,612) | (78.13)% | - Income from equity method investments decreased by 78.13%, primarily due to lower net profit generated by the two 49% equity investment companies[205] Provision for Income Taxes This section details the provision for income taxes for the three months ended September 30, 2020 and 2019, explaining the significant increase Provision for Income Taxes (USD) | Metric | Three Months Ended Sep 30, 2020 (USD) | Three Months Ended Sep 30, 2019 (USD) | Change (USD) | % Change | | :-------------------------------- | :------------------------------------ | :------------------------------------ | :----------- | :------- | | Provision for income taxes | 104,204 | (4,783) | 108,987 | (2278.63)% | - The provision for income taxes significantly increased by 2,278.63% to $104,204, mainly due to decreased deferred income tax benefits from the allowance for doubtful accounts and inventory reserve[207] Net Loss This section analyzes the company's net loss for the three months ended September 30, 2020 and 2019, highlighting the primary factors contributing to its change Net Loss (USD) | Metric | Three Months Ended Sep 30, 2020 (USD) | Three Months Ended Sep 30, 2019 (USD) | Change (USD) | % Change | | :--------------- | :------------------------------------ | :------------------------------------ | :----------- | :------- | | Net Loss | (1,052,980) | (1,774,832) | 721,852 | (40.67)% | - Net loss decreased by 40.67%, primarily due to a decrease in general and administrative expenses, partially offset by a decrease in gross profit[208] Comprehensive Income (Loss) This section reports the comprehensive income (loss) attributable to Shineco, Inc. for the three months ended September 30, 2020 and 2019, and its main drivers Comprehensive Income (Loss) Attributable to Shineco, Inc. (USD) | Metric | Three Months Ended Sep 30, 2020 (USD) | Three Months Ended Sep 30, 2019 (USD) | Change (USD) | % Change | | :------------------------------------------------ | :------------------------------------ | :------------------------------------ | :----------- | :------- | | Comprehensive Income (Loss) Attributable to Shineco, Inc. | 1,563,509 | (4,609,009) | 6,172,518 | (133.92)% | - Comprehensive income attributable to Shineco, Inc. significantly increased from a loss of $4,609,009 in Q3 2019 to an income of $1,563,509 in Q3 2020, mainly driven by a foreign currency translation gain[208] Treasury Policies This section outlines the company's treasury policies aimed at controlling operations, lowering funding costs, and managing interest and currency risks - The company's treasury policies aim to achieve effective control of treasury operations and lower the cost of funds through centralized review and monitoring of funding and foreign exchange exposure[209] - The policy prohibits speculative derivative contracts and focuses on minimizing interest risk through loan re-financing and negotiation, and currency risk by closely monitoring foreign currency borrowings[210] - As of September 30, 2020, and June 30, 2020, the company did not engage in any foreign currency borrowings or loan contracts[210] Liquidity and Capital Resources This section discusses the company's liquidity and capital resources, including working capital, capital commitments, and cash flow analysis from various activities - The company finances its operations primarily through cash flows, IPO proceeds, short-term loans, and common stock sales, with cash mainly held in PRC bank accounts[211] - As of September 30, 2020, the company had $2,426,019 in outstanding bank loans and expects to renew existing loans based on past experience and credit history[214] - Management believes current cash, future operating cash flows, and access to loans will be sufficient to meet working capital needs for at least the next 12 months[215] Working Capital This section analyzes the company's working capital, including current assets and liabilities, and explains the factors contributing to its change Working Capital (USD) | Metric | Sep 30, 2020 (USD) | Jun 30, 2020 (USD) | Change (USD) | % Change | | :---------------- | :----------------- | :----------------- | :------- | :------- | | Current Assets | 63,164,137 | 59,519,998 | 3,644,139 | 6.12% | | Current Liabilities | 13,816,372 | 11,347,325 | 2,469,047 | 21.76% | | Working Capital | 49,347,765 | 48,172,673 | 1,175,092 | 2.44% | - Working capital increased by 2.4% due to increases in advances to suppliers, inventories, other current assets, and accounts receivables, partially offset by a decrease in cash[216] - Accounts receivable increased by 11.3% to $12,257,280 as of September 30, 2020, with slower collection attributed to the COVID-19 outbreak affecting customer businesses[217] Capital Commitments and Contingencies This section confirms the absence of material capital commitments or contingent liabilities as of September 30, 2020 - As of September 30, 2020, the company reported no material capital commitments or contingent liabilities[219] Cash Flows This section provides a summary of the company's cash flows from operating, investing, and financing activities for the three months ended September 30, 2020 and 2019 Cash Flow Summary (USD) | Category | Three Months Ended Sep 30, 2020 (USD) | Three Months Ended Sep 30, 2019 (USD) | Change (USD) | | :------------------------------------------ | :------------------------------------ | :------------------------------------ | :----------- | | Net cash provided by (used in) operating activities | (9,100,028) | 2,145,875 | (11,245,903) | | Net cash provided by (used in) investing activities | (1,228,630) | 18,780 | (1,247,410) | | Net cash provided by (used in) financing activities | (11,429) | 1,555,631 | (1,567,060) | | Effect of exchange rate changes on cash | 1,098,821 | (1,438,380) | 2,537,201 | | Net increase (decrease) in cash | (9,241,266) | 2,281,906 | (11,523,172) | Operating Activities This section details the net cash used in operating activities for the three months ended September 30, 2020, and the primary reasons for its change - Net cash used in operating activities was approximately $9.1 million in Q3 2020, a significant shift from $2.1 million provided in Q3 2019, primarily due to increases in advances to suppliers, inventories, other receivables, and accounts receivables[221] Investing Activities This section analyzes the net cash used in investing activities for the three months ended September 30, 2020, primarily due to loans to third parties - Net cash used in investing activities was $1.2 million in Q3 2020, compared to $18,780 provided in Q3 2019, mainly driven by advances of loans to third parties[222] Financing Activities This section details the net cash used in financing activities for the three months ended September 30, 2020, primarily due to repayment of related party advances - Net cash used in financing activities was approximately $11,429 in Q3 2020, a sharp decrease from $1.6 million provided in Q3 2019, primarily due to the repayment of advances from related parties[223] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Shineco, Inc. is not required to provide quantitative and qualitative disclosures about market risk - The company is exempt from providing quantitative and qualitative disclosures about market risk due to its status as a smaller reporting company[225] ITEM 4. Controls and Procedures This section details the evaluation of the company's disclosure controls and procedures, identifying material weaknesses and outlining management's remediation plans Evaluation of Controls and Procedures This section reports the ineffectiveness of disclosure controls and procedures due to staffing and segregation of duties issues, along with remediation plans - The company's disclosure controls and procedures were deemed ineffective as of September 30, 2020, due to a lack of full-time U.S. GAAP personnel and insufficient segregation of duties within the accounting department[226] - Management plans to remediate these weaknesses by recruiting qualified professionals, engaging an outside consulting firm, improving communication, and ensuring proper approval for significant transactions[227] Changes in Internal Control over Financial Reporting This section confirms no material changes in the company's internal control over financial reporting during the first fiscal quarter of 2021 - There have been no material changes in the company's internal control over financial reporting during the first fiscal quarter of 2021[229] PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS This section discloses a material legal proceeding against the company, specifically a lawsuit seeking up to $6 million for alleged breach of a financial advisory services agreement - The company is a defendant in a lawsuit filed by Bonwick Capital Partners, LLC, alleging breach of a financial advisory services agreement and seeking up to $6 million in damages[232] - The company believes the claims are without merit and intends to vigorously defend its position[232] ITEM 1A. Risk Factors As a smaller reporting company, Shineco, Inc. is not required to provide specific risk factor disclosures in this report - The company is exempt from providing specific risk factor disclosures in this report due to its status as a smaller reporting company[233] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds This section confirms that there were no unregistered sales of equity securities during the three months ended September 30, 2020 - There were no unregistered sales of equity securities during the three months ended September 30, 2020[233] ITEM 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - The company reported no defaults upon senior securities[233] ITEM 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable to the company[233] ITEM 5. Other Information The company reported no other information required under this item - The company reported no other information[233] ITEM 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate documents, contractual agreements, and required certifications - The exhibits include foundational corporate documents such as the Certificate of Incorporation and Amended and Restated Bylaws[231] - Numerous contractual agreements related to the company's Variable Interest Entities (VIEs) and their operations are listed, including Exclusive Business Cooperation Agreements and Equity Interest Pledge Agreements[234][235][236][237][238] - Certifications from the Chief Executive Officer and Chief Financial Officer, as required by Rule 13a-14(a) and Section 1350 of Title 18, are filed or furnished[241] SIGNATURES The report is duly signed on behalf of Shineco, Inc. by its Chief Executive Officer and Chief Financial Officer on November 16, 2020 - The report was signed by Guocong Zhou, Chief Executive Officer, and Sai (Sam) Wang, Chief Financial Officer, on November 16, 2020[244]