Shineco(SISI) - 2022 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements The company reported a significant net loss increase to $14.2 million for Q3 2021, driven by revenue decline and gross loss, with balance sheet liabilities rising due to new convertible note financing Condensed Consolidated Balance Sheets Total assets increased to $68.3 million by September 30, 2021, while total liabilities surged to $31.6 million, primarily from convertible notes, leading to a decline in total equity Condensed Consolidated Balance Sheet Highlights (Unaudited) | Balance Sheet Item | Sep 30, 2021 | June 30, 2021 | | :--- | :--- | :--- | | Total Current Assets | $59,523,586 | $49,278,577 | | Total Assets | $68,261,157 | $61,318,599 | | Total Current Liabilities | $29,008,848 | $14,795,390 | | Convertible note payable | $16,352,339 | $2,933,030 | | Total Liabilities | $31,612,254 | $15,940,393 | | Total Equity | $36,648,903 | $45,378,206 | Condensed Consolidated Statements of Loss and Comprehensive Income (Loss) Revenue declined 37.5% to $629,758 for Q3 2021, resulting in a gross loss and a total net loss of $14.2 million, including discontinued operations, with diluted loss per share at $1.71 Quarterly Income Statement Summary (Unaudited) | Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Revenue | $629,758 | $1,007,977 | | Gross Profit (Loss) | ($729,545) | $265,638 | | Loss from Operations | ($10,452,094) | ($1,170,318) | | Net Loss from Continuing Operations | ($11,108,221) | ($1,163,305) | | Net (Loss) Income from Discontinued Operations | ($3,135,237) | $110,325 | | Net Loss | ($14,243,458) | ($1,052,980) | | Basic and Diluted Loss Per Share | ($1.71) | ($0.35) | Condensed Consolidated Statements of Cash Flows Net cash used in operations was $5.3 million, while investing activities consumed $26.0 million, offset by $20.4 million from financing, leading to a $10.8 million decrease in cash for the quarter Quarterly Cash Flow Summary (Unaudited) | Cash Flow Activity | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | ($5,264,781) | ($9,100,028) | | Net Cash Used in Investing Activities | ($25,954,544) | ($1,228,630) | | Net Cash Provided by (Used in) Financing Activities | $20,436,888 | ($11,429) | | Net Decrease in Cash | ($10,794,321) | ($9,241,266) | | Cash - End of Period | $18,230,073 | $23,130,106 | Notes to the Condensed Consolidated Financial Statements The notes detail the company's VIE structure, a major restructuring involving the disposal of Ankang Longevity and acquisition of Guangyuan, significant convertible note financing, and a $1.14 million impairment loss on distribution rights - The company operates through a VIE structure in the PRC, completing a major restructuring on July 5, 2021, by disposing of Ankang Longevity Group and acquiring Guangyuan[9][71][94] - The disposal of Ankang Longevity Group is reported as a discontinued operation, recognizing a loss on disposal of $3,135,237 for the quarter[94][97] - The company issued unsecured convertible promissory notes in July and August 2021, raising $17.0 million with a one-year maturity and 6% interest rate[78] - A full impairment loss of $1,140,551 was recorded on Tianjin Tajite distribution rights due to underperforming revenue and an unfavorable business environment[51][70] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's VIE structure, operational restructuring, a 37.5% revenue decline to $0.6 million, and a net loss increase to $14.2 million, with liquidity bolstered by $17 million in convertible notes Results of Operations Revenue decreased 37.5% to $629,758 for Q3 2021, resulting in a gross loss of $729,545 due to inventory write-offs, while G&A expenses surged 502% from increased bad debt, leading to an $11.1 million net loss from continuing operations Revenue by Segment (Continuing Operations) | Segment | Q3 2021 Revenue | Q3 2020 Revenue | % Change | | :--- | :--- | :--- | :--- | | Luobuma products | $13,508 | $24,615 | (45.12)% | | Other agricultural products | $616,250 | $983,362 | (37.33)% | | Total | $629,758 | $1,007,977 | (37.52)% | - Cost of revenue increased 83.1% year-over-year, primarily due to a $492,987 inventory write-off from flood damage and a $120,273 allowance for slow-moving inventory[119] - General and administrative expenses increased by $7.2 million (502.37%) year-over-year, mainly due to a $6.6 million increase in bad debt expenses[122] - A full impairment loss of $1,140,551 was recorded on Tianjin Tajite distribution rights due to underperformance[124] Liquidity and Capital Resources Liquidity is supported by $17.0 million from convertible notes and $2.4 million from stock sales, despite $5.3 million net cash used in operations and $26.0 million in investing activities, with working capital at $30.5 million - The company raised significant capital, including $17.0 million from convertible notes and $2.4 million from common stock issuance during the quarter[140] Working Capital Summary | Metric | Sep 30, 2021 | June 30, 2021 | | :--- | :--- | :--- | | Current Assets | $59,523,586 | $49,278,577 | | Current Liabilities | $29,008,848 | $14,795,390 | | Working Capital | $30,514,738 | $34,483,187 | Quantitative and Qualitative Disclosures About Market Risk The company is exempt from providing market risk disclosures as it qualifies as a smaller reporting company - The company is exempt from this disclosure requirement as it qualifies as a smaller reporting company[142] Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of September 30, 2021, due to material weaknesses including a lack of U.S. GAAP personnel and inadequate segregation of duties, with remediation efforts underway - Management identified material weaknesses in internal controls over financial reporting[143] - Specific weaknesses include a lack of U.S. GAAP personnel and inadequate segregation of duties in the accounting department[143] - Remediation efforts include recruiting qualified professionals and engaging an outside consulting firm[143] PART II. OTHER INFORMATION Legal Proceedings A 2017 lawsuit related to IPO financial advisory services was settled in March 2021 for $47,500, with no other material legal proceedings currently pending - A lawsuit filed by Bonwick Capital Partners, LLC in 2017, seeking up to $6 million in damages, was settled in March 2021 for a payment of $47,500[145] Risk Factors The company is exempt from providing risk factor disclosures as it qualifies as a smaller reporting company - The company is exempt from this disclosure requirement as it qualifies as a smaller reporting company[145]