Shineco(SISI) - 2022 Q4 - Annual Report

Part I Business Shineco, Inc. operates through PRC VIEs, focusing on plant-based health products, textiles, and freight services, having discontinued its herbal medicine segment - The company is a Delaware holding company conducting the majority of its operations through Variable Interest Entities (VIEs) in the PRC, a structure that carries risks of being disallowed by Chinese regulatory authorities[13] - The business is divided into three major segments: green/organic agricultural produce (yew trees, bamboo willows), specialized Luobuma textiles, and domestic freight forwarding services[16][17] - The traditional Chinese herbal medicine segment, previously operated through Ankang Longevity Group, was disposed of on July 5, 2021, and is now classified as a discontinued operation. This was part of a restructuring to acquire the Guangyuan VIE[15] - The company utilizes a vertically integrated model for its plant-based products, leveraging modern biotechnologies for production and distributing them through various channels including retail stores, institutional sales, and e-commerce platforms like Tmall and Taobao[14][57][61] Corporate Structure and VIE Arrangements Shineco uses a complex VIE structure in China due to foreign investment restrictions, controlling VIEs contractually, which carries significant legal and enforcement risks - The company uses a VIE structure because direct foreign investment is prohibited in key business areas like the preparation of traditional Chinese medicines[23] - Control over the VIEs is maintained through four key types of contractual arrangements: Exclusive Business Cooperation Agreements, Equity Interest Pledge Agreements, Exclusive Option Agreements, and Powers of Attorney[26] - There are significant risks associated with the VIE structure, including the potential for the PRC government to disallow it and difficulties in enforcing the contractual agreements in Chinese courts, which could lead to a loss of economic benefits from the VIEs[36] - In fiscal year 2022, Shineco transferred $3.72 million to its WFOE for operational purposes, and the WFOE paid approximately $1.56 million in expenses on behalf of Shineco. No earnings were distributed from the PRC entities to the holding company[38] Products and Strategy The company's portfolio includes yew trees, bamboo willows, and Luobuma textiles, with R&D focused on proprietary patents and strategic alliances - The company cultivates and sells yew trees, with a long-term focus on extracting taxol, a mitotic inhibitor used in cancer chemotherapy[43] - Luobuma textiles are a core product, marketed for their natural Far Infrared (FIR) radiating properties, which are believed to have positive effects on human body functions. The company has developed advanced "Third Generation" FIR textiles using nanotechnology[46][51] - The company's R&D strategy is centered on keeping products proprietary and patented, developing new byproducts from Luobuma and other plants, and building strategic alliances with universities and scientific institutions[54] Market and Competition Shineco targets China's growing health market, competing with larger firms, and leverages advanced Luobuma fiber technology for competitive advantage - The primary market is China, with growth drivers identified as the expanding middle class, an aging population, and increased health awareness[62] - The company faces competition from larger, more established companies in both the textile and agricultural sectors. Prominent competitors include Luolai Home Textile Co. and Shenyang Xincheng Garden Engineering Co., Ltd[66][67] - The company's competitive advantage in the textile market is its use of advanced technologies for Luobuma fiber production, distinguishing it from competitors using traditional methods[58] Employees As of June 30, 2022, Shineco employed 74 full-time employees across various functions, and contributed approximately $136,398 to employee social insurance Employee Distribution by Department (as of June 30, 2022) | Department | Number of Employees | | :--- | :--- | | Senior Management | 12 | | Human Resource & Administration | 15 | | Finance | 12 | | Research & Development | 6 | | Production & Procurement | 20 | | Sales & Marketing | 9 | | Total | 74 | - The company contributed approximately $136,398 to employee social insurance in fiscal year 2022, in compliance with PRC law[73] Risk Factors As a smaller reporting company, Shineco, Inc. is not required to provide the information for this item - The Company is a smaller reporting company and is not required to provide the information required by this Item[76] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - There are no unresolved staff comments[76] Properties The company's properties are all located in China and consist of both leased facilities and properties for which it holds land use rights, with none encumbered by debt List of Properties | Property Description | Location | Term | Space (sq. meters) | | :--- | :--- | :--- | :--- | | Office (leased out) | Chaoyang District, Beijing | Company owns property right | 280 | | General Office | Chaoyang District, Beijing | Leased (July 2021 - Aug 2024) | 573.30 | | General Office | Chengyang District, Qingdao | Leased (Mar 2019 - Feb 2025) | 234.16 | | Factory | Muping District, Yantai | Land Use Right (Apr 2011 - Apr 2041) | 13,333 | | Production Facility | Pinggu District, Beijing | Land Use Right (Aug 2012 - Aug 2030) | 26,666 | | Production Facility | Chaoyang District, Beijing | Land Use Right (Aug 2012 - Jul 2024) | 73,333 | Legal Proceedings The company faces a 2017 lawsuit for alleged IPO stock misguidance, accruing $0.78 million, and a 2021 complaint for non-payment of shares with $9 million counterclaims - A lawsuit by Mrs. Guiqin Li alleges misguidance on stock sales during the IPO. The company has accrued $0.78 million for this lawsuit as of December 31, 2021, and is appealing the initial judgment[82] - The company filed a complaint against Lei Zhang and Yan Li for non-payment for restricted shares. They have counterclaimed, seeking at least $9 million in damages for alleged breach of contract and fraud. The trial is scheduled for September 18, 2023[83][84] Mine Safety Disclosures This item is not applicable as the company has no mining operations - The information required by Item 4 is not applicable as the company has no mining operations in the United States[85] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities Shineco's common stock trades on NASDAQ under 'SISI', with 16.4 million shares outstanding; the company retains earnings for growth and has issued 1.5 million shares under its 2022 Equity Incentive Plan - The company's common stock trades on the NASDAQ Capital Market under the symbol "SISI". As of September 27, 2022, there were 16.4 million shares outstanding[87] - The company does not anticipate paying cash dividends, intending to retain earnings to finance business growth. Dividend payments from PRC subsidiaries are also subject to Chinese regulations, including statutory reserve requirements and withholding taxes[89][90] - Shareholders approved the 2022 Equity Incentive Plan on July 21, 2022, reserving 1.5 million shares of common stock for issuance to directors, officers, employees, and consultants[96][99] - The company conducted multiple sales of unregistered securities and convertible notes to raise capital, including issuing shares at $3.0/share in Jan 2021, $3.2/share in Apr 2021, and $2.12/share in June 2022, as well as issuing convertible promissory notes in June and August 2021[102][103][104] Selected Financial Data As a smaller reporting company, Shineco, Inc. is not required to provide the information for this item - The Company is a smaller reporting company and is not required to provide the information required by this Item[106] Management's Discussion and Analysis of Financial Conditions and Results of Operations In FY2022, revenue from continuing operations decreased by 27.6% to $2.2 million, resulting in a net loss of $27.1 million, while liquidity was supported by $17.0 million in convertible notes and $9.7 million in stock issuance, despite going concern doubts Results of Operations For FY2022, total revenue from continuing operations decreased 27.6% to $2.19 million, leading to a wider loss from operations of $23.0 million due to increased G&A expenses and a $1.14 million impairment loss Consolidated Results of Operations (Years Ended June 30) | Metric | 2022 ($) | 2021 ($) | Change (%) | | :--- | :--- | :--- | :--- | | Revenue | $2,186,460 | $3,021,704 | (27.6)% | | Gross Loss | ($1,610,663) | ($4,236,151) | (62.0)% | | Loss from Operations | ($23,011,213) | ($21,412,935) | 7.5% | | Net Loss from Continuing Operations | ($24,633,744) | ($21,439,445) | 14.9% | | Net Loss from Discontinued Operations | ($2,433,395) | ($10,616,988) | (77.1)% | | Net Loss | ($27,067,139) | ($32,056,433) | (15.6)% | Revenue Breakdown by Segment (Years Ended June 30) | Segment | 2022 Revenue ($) | 2021 Revenue ($) | Change (%) | | :--- | :--- | :--- | :--- | | Luobuma products | $43,949 | $115,590 | (62.0)% | | Other agricultural products | $1,687,884 | $2,120,484 | (20.4)% | | Freight services | $454,627 | $785,630 | (42.1)% | | Total | $2,186,460 | $3,021,704 | (27.6)% | - General and administrative expenses increased by 18.0% to $20.2 million in FY2022, due to higher professional fees, compensation expenses, rental costs, and impairment charges on assets[162] - A full impairment loss of $1.14 million was recorded on the distribution rights of Tianjin Tajite, as the company was unable to generate revenue from this asset due to unfavorable customs policies and the impact of COVID-19[164] Discontinued Operations The traditional Chinese medicinal herbal products segment was disposed of on July 5, 2021, resulting in a $2.43 million loss on disposal in FY2022, a significant reduction from the prior year's $10.62 million net loss Summarized Results of Discontinued Operations (Years Ended June 30) | Metric | 2022 ($) | 2021 ($) | | :--- | :--- | :--- | | Revenues | $0 | $8,085,527 | | Gross profit | $0 | $986,174 | | Net loss from discontinued operations | $0 | ($10,616,988) | | Loss from disposal | ($2,433,395) | $0 | | Total net loss from discontinued operations | ($2,433,395) | ($10,616,988) | Liquidity and Capital Resources In FY22, net cash used in operating activities improved to $5.71 million, while financing provided $28.41 million from notes and stock, supporting liquidity Working Capital (as of June 30) | | 2022 ($) | 2021 ($) | | :--- | :--- | :--- | | Current Assets | $59,735,425 | $49,278,577 | | Current Liabilities | $29,040,302 | $14,795,390 | | Working Capital | $30,695,123 | $34,483,187 | Summary of Cash Flows (Years Ended June 30) | Cash Flow Activity ($) | 2022 ($) | 2021 ($) | | :--- | :--- | :--- | | Net cash used in operating activities | ($5,712,562) | ($14,649,557) | | Net cash provided by (used in) investing activities | ($36,016,193) | $1,262,305 | | Net cash provided by financing activities | $28,412,235 | $7,235,931 | | Net decrease in cash | ($13,859,163) | ($3,346,978) | - Financing activities in FY2022 were substantial, including $17.0 million from issuing convertible notes and $9.7 million from issuing common stock[197] 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 a smaller reporting company and is not required to provide the information required by this Item[199] Financial Statements and Supplementary Data This section indicates that the required financial statements are provided starting on page F-1 of the report - The financial statements required by this item are set forth beginning on page F-1[199] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[424] Controls and Procedures Management concluded that the company's disclosure controls and procedures were not effective as of June 30, 2022, due to material weaknesses in accounting personnel and segregation of duties - Management concluded that disclosure controls and procedures were not effective as of the end of the fiscal year[425] - Identified material weaknesses include: lack of U.S. GAAP qualified personnel in the accounting department and a lack of segregation of duties for preparing and reviewing journal entries[425][432] - Remediation plans include recruiting qualified professionals, improving communication between management and the CFO, and ensuring Board of Directors approval for significant transactions[426] Other Information The company reports no other information for this item - None[437] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[437] Part III Directors, Executive Officers and Corporate Governance The company's leadership includes CEO Jennifer Zhan, CFO Sai (Sam) Wang, and COO Xiqiao Liu, with a seven-member board, four of whom are independent, overseeing three standing committees Executive Officers and Directors | Name | Age | Role | Since | | :--- | :--- | :--- | :--- | | Xiqiao Liu | 42 | Chief Operating Officer and Director | 2022 | | Sai (Sam) Wang | 37 | Chief Financial Officer and Director | 2015* | | Jennifer Zhan | 34 | Chief Executive Officer and Director | 2021 | | Jin Liu | 56 | Director (Independent) | 2020 | | Aamir Ali Quraishi | 52 | Director (Independent) | 2022 | | Mike Zhao | 58 | Chair of the Board (Independent) | 2022 | | Hu Li | 48 | Director (Independent) | 2021 | - The Board of Directors has seven members, with four being independent. It maintains an Audit Committee, a Compensation Committee, and a Nominating Committee, each composed of independent directors[452][453] Executive Compensation For FY2022, CEO Jennifer Zhan received $60,000 and CFO Sai (Sam) Wang received $96,000 in salary, with independent directors receiving an annual cash retainer of $10,000 Summary Compensation Table (FY 2022) | Name and Principal Position | Salary ($) | Total ($) | | :--- | :--- | :--- | | Jennifer Zhan (CEO) | 60,000 | 60,000 | | Sai (Sam) Wang (CFO) | 96,000 | 96,000 | - Independent directors were paid an annual cash retainer of $10,000 for their service during the fiscal year ended June 30, 2022[465] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of September 27, 2022, directors and executive officers collectively owned 169,294 shares (0.99%), while two beneficial owners held over 5% of the common stock - All directors and executive officers as a group beneficially own 169,294 shares, or 0.99% of the class, as of September 27, 2022[468] - There are two beneficial owners holding over 5% of the common stock, with ownership of 6.60% and 15.18% respectively[468] Certain Relationships and Related Transactions, and Director Independence The company engages in related party transactions with its VIEs, resulting in approximately $6.79 million in receivables and $2.80 million in payables as of June 30, 2022 - The company's VIEs are owned by members of the current management team[473] Related Party Balances (as of June 30, 2022) | Type | Amount ($) | | :--- | :--- | | Due from Related Parties | $6,794,987 | | Due to Related Parties | $2,798,800 | Principal Accounting Fees and Services For FY2022, the company was billed a total of $208,900 by Assentsure PAC, including $200,000 for audit fees and $8,900 for audit-related fees Accountant Fees (Years Ended June 30) | Fee Type | 2022 ($) | 2021 ($) | | :--- | :--- | :--- | | Audit Fees | $200,000 | $195,000 | | Audit-related Fees | $8,900 | $0 | | Total | $208,900 | $195,000 | Part IV Exhibits and Financial Statement Schedules This section provides an index of all exhibits filed with the Form 10-K, including corporate governance documents, material contracts, and certifications from the CEO and CFO - The exhibit index lists key corporate documents, including the Certificate of Incorporation, Bylaws, and Equity Incentive Plans[485] - Numerous VIE-related agreements are filed as exhibits, detailing the contractual arrangements that allow the company to control its PRC operating entities[485][487] - Certifications from the CEO and CFO pursuant to the Sarbanes-Oxley Act are included as exhibits[495] Form 10-K Summary This item is not applicable - Not applicable[495] Financial Statements Report of Independent Registered Public Accounting Firm The auditor issued a qualified opinion with a going concern uncertainty due to a $27.07 million net loss and $5.71 million cash outflow, highlighting critical audit matters in receivables and inventory reserves - The auditor's report contains a "Material Uncertainty Related to Going Concern" due to a net loss of $27.07 million and cash outflow from operations of $5.71 million for the year ended June 30, 2022[203] - Critical Audit Matters identified include the allowance for accounts receivable and the provision for inventory reserve, both of which involve significant management judgment[207][208][209] Consolidated Financial Statements For FY2022, total assets increased to $63.8 million, liabilities nearly doubled to $30.5 million, and total equity decreased to $33.3 million, with a net loss of $27.1 million and cash decreasing to $15.2 million Consolidated Balance Sheet Highlights (as of June 30) | | 2022 ($) | 2021 ($) | | :--- | :--- | :--- | | Total Current Assets | $59,735,425 | $49,278,577 | | Total Assets | $63,826,017 | $61,318,599 | | Total Current Liabilities | $29,040,302 | $14,795,390 | | Total Liabilities | $30,513,129 | $15,940,393 | | Total Equity | $33,312,888 | $45,378,206 | Consolidated Statement of Loss Highlights (Years Ended June 30) | | 2022 ($) | 2021 ($) | | :--- | :--- | :--- | | Revenue | $2,186,460 | $3,021,704 | | Gross Loss | ($1,610,663) | ($4,236,151) | | Net Loss from Continuing Operations | ($24,633,744) | ($21,439,445) | | Net Loss from Discontinued Operations | ($2,433,395) | ($10,616,988) | | Net Loss | ($27,067,139) | ($32,056,433) | Consolidated Cash Flow Highlights (Years Ended June 30) | Cash Flow Activity ($) | 2022 ($) | 2021 ($) | | :--- | :--- | :--- | | Net cash used in operating activities | ($5,712,562) | ($14,649,557) | | Net cash provided by (used in) investing activities | ($36,016,193) | $1,262,305 | | Net cash provided by financing activities | $28,412,235 | $7,235,931 | | Cash, end of the year | $15,165,231 | $29,024,394 | Notes to Consolidated Financial Statements The notes detail the VIE structure, going concern doubts due to recurring losses, the $2.43 million loss from discontinued operations, $20 million in convertible notes, related party transactions, and legal contingencies - Going Concern: Management acknowledges that recurring net losses ($27.1 million in FY22, $32.1 million in FY21) and cash outflows from operations raise substantial doubt about the company's ability to continue as a going concern. However, they believe recent and planned stock sales will provide sufficient liquidity for the next 12 months[251][253] - Discontinued Operations: The Ankang Longevity Group was disposed of on July 5, 2021. Its assets and liabilities have been reclassified on the balance sheet, and its operating results are reported separately. The disposal resulted in a loss of $2.43 million in FY2022[414][415] - Financing: The company issued multiple unsecured convertible promissory notes to Streeterville Capital, LLC in June, July, and August 2021, raising a total of $20 million in proceeds. As of June 30, 2022, the outstanding balance on these notes was $14.4 million[374][375][376] - Impairments: In FY2022, the company recorded significant impairment losses, including $1.14 million on distribution rights, $0.74 million on property and equipment, and $2.27 million on Right-of-use lease assets, primarily due to the impact of COVID-19 and unfavorable business conditions[320][325][344]