Shineco(SISI) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The unaudited condensed consolidated financial statements for the period ended December 31, 2021, show an increase in total assets to $74.8 million from $61.3 million at June 30, 2021, primarily due to a significant rise in inventories, with total liabilities more than doubling to $32.9 million, driven by the issuance of convertible notes, and a net loss of $17.1 million on revenues that decreased to $1.36 million Condensed Consolidated Balance Sheets As of December 31, 2021, total assets increased to $74.8 million from $61.3 million at June 30, 2021, largely driven by a substantial increase in inventories to $21.0 million and other current assets, while total liabilities rose significantly to $32.9 million from $15.9 million, mainly due to an increase in convertible notes payable to $14.8 million, consequently decreasing total equity from $45.4 million to $41.8 million Condensed Consolidated Balance Sheet Highlights (Unaudited) | Account | Dec 31, 2021 ($) | June 30, 2021 ($) | | :--- | :--- | :--- | | Total Current Assets | 66,641,593 | 49,278,577 | | Total Assets | 74,752,610 | 61,318,599 | | Total Current Liabilities | 30,376,977 | 14,795,390 | | Convertible note payable | 14,840,874 | 2,933,030 | | Total Liabilities | 32,918,168 | 15,940,393 | | Total Equity | 41,834,442 | 45,378,206 | Condensed Consolidated Statements of Loss and Comprehensive Loss For the six months ended December 31, 2021, revenue decreased to $1.36 million from $1.80 million in the prior-year period, resulting in a gross loss of $1.29 million and a loss from operations of $12.96 million, which widened significantly from a loss of $7.36 million YoY, leading to a net loss attributable to Shineco, Inc. of $17.12 million and a basic and diluted loss per share of ($1.96) Six Months Ended December 31, (Unaudited) | Metric | 2021 ($) | 2020 ($) | | :--- | :--- | :--- | | Revenue | 1,362,332 | 1,797,639 | | Gross Loss | (1,291,236) | (2,705,309) | | Loss from Operations | (12,956,585) | (7,364,765) | | Net Loss from Continuing Operations | (13,992,621) | (7,271,692) | | Net Loss from Discontinued Operations | (3,135,237) | (7,264,815) | | Net Loss Attributable to Shineco, Inc. | (17,116,043) | (14,076,423) | | Basic and Diluted Loss Per Share | (1.96) | (4.52) | Condensed Consolidated Statements of Changes in Equity For the six months ended December 31, 2021, total equity decreased from $45.4 million to $41.8 million, primarily driven by a net loss of $17.1 million, partially offset by proceeds from stock issuances and common shares issued for convertible note redemption totaling approximately $13.5 million, and a positive foreign currency translation adjustment of $0.8 million - Key equity changes for the six months ended Dec 31, 2021 include a net loss of $17.1 million, stock issuances of $7.5 million, and issuance of common shares for convertible notes redemption valued at $6.0 million[13] Condensed Consolidated Statements of Cash Flows For the six months ended December 31, 2021, net cash used in operating activities was $5.6 million, net cash used in investing activities was significant at $32.5 million, mainly due to loans to third parties and the disposal of a VIE, and net cash provided by financing activities was $25.2 million, primarily from the issuance of common stock and convertible notes, resulting in an overall cash decrease from $29.0 million to $16.6 million during the period Cash Flow Summary for the Six Months Ended December 31, (Unaudited) | Cash Flow Activity | 2021 ($) | 2020 ($) | | :--- | :--- | :--- | | Net cash used in operating activities | (5,610,545) | (11,436,484) | | Net cash provided (used in) by investing activities | (32,450,291) | 221,518 | | Net cash provided by financing activities | 25,235,511 | 957,325 | | Net Decrease in Cash | (12,403,499) | (8,012,380) | Notes to the Condensed Consolidated Financial Statements The notes detail the company's structure, including its reliance on Variable Interest Entities (VIEs) in the PRC, and significant accounting policies, highlighting key events such as the July 5, 2021 restructuring where the company disposed of its Ankang Longevity Group and acquired Guangyuan, the issuance of significant convertible notes totaling over $17 million in principal, and breakdowns of balance sheet accounts, segment performance, related party transactions, and legal contingencies - The company operates through a VIE structure in the PRC, which is essential for its control over entities like the Zhisheng VIEs and the newly acquired Guangyuan[21][22] - On July 5, 2021, the company completed a major restructuring, disposing of the Ankang Longevity Group in exchange for control over Yushe County Guangyuan Forest Development Co., Ltd. ("Guangyuan") Ankang is now treated as a discontinued operation[28][188][190] - During the six months ended December 31, 2021, the company issued multiple convertible promissory notes to an institutional investor, raising a total of $17.0 million in proceeds[149][150] - The company is involved in a lawsuit with Mrs. Guiqin Li, for which it has accrued approximately $781,700 It is also in litigation with Lei Zhang and Yan Li over unpaid restricted shares, facing a counterclaim seeking at least $19 million in damages[175][176] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's structure as a Delaware holding company operating through VIEs in the PRC, a structure that carries regulatory risks, and analyzes the six months ended December 31, 2021, revealing a 24.2% decrease in revenue from continuing operations to $1.36 million, a widening net loss from continuing operations to $14.0 million, driven by increased G&A expenses and an impairment loss, with liquidity supported by recent financing activities Results of Operations for the Six Months Ended December 31, 2021 and 2020 For the six months ended Dec 31, 2021, revenue from continuing operations fell 24.2% to $1.36 million, with Luobuma products down 52.4% and agricultural products down 23.0%, while gross loss narrowed to $1.29 million from $2.71 million YoY due to lower inventory write-offs, but a 126.6% surge in G&A expenses to $10.5 million and a new $1.14 million impairment charge on distribution rights caused the loss from operations to widen to $13.0 million, and the net loss from continuing operations increased to $14.0 million from $7.3 million in the prior year period Revenue Breakdown (Six Months Ended Dec 31) | Segment | 2021 Revenue ($) | 2020 Revenue ($) | % Change | | :--- | :--- | :--- | :--- | | Luobuma products | 34,768 | 73,009 | (52.38)% | | Other agricultural products | 1,327,564 | 1,724,630 | (23.02)% | | Total | 1,362,332 | 1,797,639 | (24.22)% | - General and administrative expenses increased by 126.6% to $10.5 million, primarily due to a $2.5 million increase in bad debt expenses, costs from the newly acquired Guangyuan VIE, and higher professional service fees[247] - A full impairment loss of $1,140,551 was recorded on the distribution rights of Tianjin Tajite due to lower than expected revenue and an unfavorable business environment[248] - Net loss from discontinued operations (Ankang Group) was $3.1 million, reflecting the loss on disposal, compared to a $7.3 million operating loss from that segment in the prior year period[255][258] Results of Operations for the Three Months Ended December 31, 2021 and 2020 For the three months ended Dec 31, 2021, revenue decreased slightly by 7.2% to $732,574, but a significant reduction in cost of revenue, mainly from lower inventory write-offs, led to a much smaller gross loss of $561,691 compared to $2.97 million in the prior-year quarter, and general and administrative expenses decreased by 39.9% to $1.9 million, largely due to a reversal of bad debt allowance, consequently narrowing the net loss from continuing operations substantially to $2.88 million from $6.11 million YoY Quarterly Performance Highlights (Three Months Ended Dec 31) | Metric | 2021 ($) | 2020 ($) | % Change | | :--- | :--- | :--- | :--- | | Revenue | 732,574 | 789,662 | (7.2)% | | Gross Loss | (561,691) | (2,970,947) | (81.1)% | | Loss from Operations | (2,504,491) | (6,194,447) | (59.6)% | | Net Loss from Continuing Operations | (2,884,400) | (6,108,387) | (52.8)% | - The significant improvement in gross loss was primarily due to lower inventory write-offs in the agricultural segment compared to the same period in 2020, when severe weather caused substantial damage[271][274] - General and administrative expenses decreased mainly due to a reversal of bad debt allowance of $1.5 million in Q4 2021, compared to a provision of $2.6 million in Q4 2020[276] Liquidity and Capital Resources The company finances its operations through stock offerings, convertible notes, and short-term loans, with working capital increasing by $1.8 million to $36.3 million as of December 31, 2021, and significant capital raised during the six-month period, including $17.0 million from convertible notes and $7.5 million from common stock issuance, despite high cash used in investing activities at $32.5 million, with management believing current cash and future cash flows are sufficient for the next 12 months - The company raised approximately $26.5 million through the issuance of convertible notes and common stock in the second half of 2021[294][295] Cash Flow Summary (Six Months Ended Dec 31) | Cash Flow Activity | 2021 ($) | 2020 ($) | | :--- | :--- | :--- | | Net cash used in operating activities | (5,610,545) | (11,436,484) | | Net cash used in/provided by investing activities | (32,450,291) | 221,518 | | Net cash provided by financing activities | 25,235,511 | 957,325 | - Working capital increased by $1.8 million to $36.3 million as of December 31, 2021, compared to June 30, 2021[296] Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Shineco, Inc. is not required to provide the information for this item - The company is not required to provide quantitative and qualitative disclosures about market risk as it qualifies as a smaller reporting company[306] Controls and Procedures Management concluded that the company's disclosure controls and procedures were not effective as of December 31, 2021, due to material weaknesses, including a lack of full-time U.S. GAAP personnel in the accounting department and a lack of segregation of duties, with the company taking remedial steps such as recruiting qualified professionals and engaging an outside consulting firm, and no material changes to internal control over financial reporting occurred during the quarter - Management identified material weaknesses in internal controls, concluding that disclosure controls and procedures were not effective[307] - Specific weaknesses include a lack of U.S. GAAP accounting personnel and inadequate segregation of duties[307] - Remediation efforts include recruiting qualified staff and engaging an external consulting firm to improve internal controls[308] PART II. OTHER INFORMATION Legal Proceedings The company discloses two significant legal proceedings: a lawsuit by Mrs. Guiqin Li related to stock sale losses from the IPO, for which the company has accrued approximately $781,700, and a complaint filed by the company against Lei Zhang and Yan Li for non-payment for restricted shares, which has resulted in a counterclaim against the company seeking at least $9 million in damages and $10 million in punitive damages - A lawsuit by Mrs. Guiqin Li concerning losses from the company's IPO has resulted in an accrued liability of approximately $781,700 as of December 31, 2021 The company is appealing the initial judgment[312] - The company is suing Lei Zhang and Yan Li for non-payment of 982,500 restricted shares, with a corresponding subscription receivable of $3.024 million on its balance sheet The defendants have filed a counterclaim alleging misleading statements and are seeking damages of at least $9 million plus $10 million in punitive damages[313] Risk Factors As a smaller reporting company, Shineco, Inc. is not required to provide the information for this item - The company is not required to provide risk factor disclosures in this report as it qualifies as a smaller reporting company[314] Unregistered Sales of Equity Securities and Use of Proceeds Information regarding this item is referenced in the Management's Discussion and Analysis section under "Financing Activities" - Details on unregistered sales of equity securities are provided in the MD&A section concerning financing activities[315]