Shineco(SISI) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of income, comprehensive income, changes in equity, and cash flows, along with detailed notes Condensed Consolidated Balance Sheets (unaudited) Balance Sheet Highlights | Metric | Sep 30, 2022 (Unaudited) | Jun 30, 2022 | | :---------------------------- | :----------------------- | :----------- | | Cash and cash equivalents | $24,238,173 | $15,165,231 | | Total Current Assets | $53,785,997 | $59,735,425 | | Total Assets | $57,420,167 | $63,826,017 | | Total Current Liabilities | $20,371,268 | $29,040,302 | | Total Liabilities | $21,691,301 | $30,513,129 | | Total Equity | $35,728,866 | $33,312,888 | Condensed Consolidated Statements of Income and Comprehensive Income (unaudited) Income and Comprehensive Income Highlights (Three Months Ended September 30) | Metric | 2022 (Unaudited) | 2021 (Unaudited) | Change (YoY) | | :------------------------------------------------ | :--------------- | :--------------- | :----------- | | Revenue | $535,698 | $629,758 | -$94,060 (-14.94%) | | Cost of Revenue | $626,575 | $1,359,303 | -$732,728 (-53.90%) | | Gross Loss | $(90,877) | $(729,545) | +$638,668 (-87.54%) | | Operating Expenses | $1,899,544 | $9,722,549 | -$7,823,005 (-80.46%) | | Loss from Operations | $(1,990,421) | $(10,452,094) | +$8,461,673 (-80.96%) | | Net Loss from Continuing Operations | $(2,442,320) | $(11,108,221) | +$8,665,901 (-78.01%) | | Net Loss from Discontinued Operations | $0 | $(3,135,237) | +$3,135,237 (-100.00%) | | Net Loss | $(2,442,320) | $(14,243,458) | +$11,801,138 (-82.85%) | | Net Loss Attributable to Shineco, Inc. | $(2,439,722) | $(14,238,332) | +$11,798,610 (-82.86%) | | Basic and Diluted Loss per Common Share | $(0.17) | $(1.71) | +$1.54 (-90.06%) | | Comprehensive Loss Attributable to Shineco, Inc. | $(4,744,406) | $(14,258,967) | +$9,514,561 (-66.73%) | Condensed Consolidated Statements of Changes in Equity (unaudited) Equity Changes (Three Months Ended September 30, 2022) | Equity Component | Balance at June 30, 2022 | Stock Issuance | Restricted Shares Issued for Management | Net Loss for the Period | Foreign Currency Translation Gain (Loss) | Balance at September 30, 2022 | | :------------------------------------ | :----------------------- | :------------- | :------------------------------------ | :---------------------- | :--------------------------------------- | :---------------------------- | | Common Stock (Shares) | 10,983,863 | 4,276,183 | 600,000 | - | - | 16,397,356 | | Common Stock (Amount) | $10,984 | $4,276 | $600 | - | - | $16,397 | | Additional Paid-in Capital | $52,998,924 | $6,754,064 | $611,400 | - | - | $60,891,487 | | Accumulated Deficit | $(18,372,023) | - | - | $(2,439,722) | - | $(20,811,745) | | Accumulated Other Comprehensive Loss | $(2,100,756) | - | - | - | $(2,304,684) | $(4,405,440) | | Total Equity | $33,312,888 | - | - | - | - | $35,728,866 | Condensed Consolidated Statements of Cash Flows (unaudited) Cash Flow Highlights (Three Months Ended September 30) | Cash Flow Activity | 2022 (Unaudited) | 2021 (Unaudited) | | :------------------------------------------------ | :--------------- | :--------------- | | Net cash used in operating activities | $(2,109,145) | $(5,264,781) | | Net cash provided by (used in) investing activities | $11,083,120 | $(25,954,544) | | Net cash provided by financing activities | $921,047 | $20,436,888 | | Effect of exchange rate change on cash and cash equivalents | $(822,080) | $(11,884) | | Net increase (decrease) in cash and cash equivalents | $9,072,942 | $(10,794,321) | | Cash and cash equivalents - End of the period | $24,238,173 | $18,230,073 | Notes to the Condensed Consolidated Financial Statements (unaudited) Provides detailed explanations and breakdowns of the figures presented in the financial statements, covering the company's organization, significant accounting policies, financial instrument details, and specific transactions, offering crucial context for understanding the financial health and performance NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS - Shineco, Inc. is a holding company incorporated in Delaware, conducting most operations through VIEs in the PRC[19] - The company's business segments include manufacturing and selling Bluish Dogbane products, planting and distributing green agricultural produce, and providing domestic and international logistic services[29] - Ankang Longevity Group, which manufactured traditional Chinese medicinal herbal products, has been reclassified as discontinued operations[29] NOTE 2. GOING CONCERN UNCERTAINTIES - The Company had recurring net losses of US$2,442,320 (2022) and US$14,243,458 (2021) and continuing cash outflow from operating activities, raising substantial doubt about its ability to continue as a going concern[31] - Management has taken measures to enhance liquidity, including a securities purchase agreement for up to US$1,758,340 (US$1.0 million received) and holding approximately US$24.2 million in cash and cash equivalents as of September 30, 2022[32] NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This section outlines the Company's key accounting principles, including consolidation, revenue recognition, asset valuation, and financial instrument fair value measurements Basis of Presentation and Principles of Consolidation - Financial statements are prepared in conformity with US GAAP for interim financial information[34] - The statements consolidate the Company, its subsidiaries, and VIEs, with all intercompany accounts and transactions eliminated[35] Consolidation of Variable Interest Entities - The Company consolidates VIEs where it is the primary beneficiary, absorbing a majority of risks and entitled to a majority of residual returns[36] VIEs Financial Information (September 30, 2022 vs. June 30, 2022) | Metric | Sep 30, 2022 | Jun 30, 2022 | | :-------------------------- | :----------- | :----------- | | Total assets | $33,936,245 | $35,935,994 | | Total liabilities | $(4,398,252) | $(5,719,289) | | Net assets | $29,537,993 | $30,216,705 | VIEs Income Information (Three Months Ended September 30) | Metric | 2022 | 2021 | | :-------------------------- | :------- | :----------- | | Net sales | $530,124 | $616,250 | | Gross loss | $(96,245) | $(601,215) | | Income (loss) from operations | $387,905 | $(7,751,663) | | Net income (loss) | $399,732 | $(7,743,264) | Non-controlling Interests - Non-controlling interests are reported in the equity section of the balance sheet and their attributable net income/loss is reported separately in the consolidated statements of loss and comprehensive loss[41] Risks and Uncertainties - Operations in the PRC are subject to political, economic, legal, and foreign currency exchange risks[42] - Contractual arrangements with VIEs, controlled by the same majority shareholders, pose risks if agreements are challenged or terminated[43] Use of Estimates - Significant estimates include useful lives of property and equipment, intangible assets, recoverability of long-lived assets, and valuation of accounts receivable, advances to suppliers, deferred taxes, and inventory reserves[44] Revenue Recognition - Revenue is recognized following ASC 606's five-step model, including identifying contracts, performance obligations, transaction price, allocation, and satisfaction of obligations[48] - The Company acts as a principal for product sales and an agent for freight services, recognizing gross or net amounts accordingly[48] Cash and Cash Equivalents - Cash and cash equivalents consist of cash on hand and deposits with original maturities of three months or less, primarily in PRC banks[49] - As of September 30, 2022, and June 30, 2022, the Company had no cash equivalents[49] Accounts Receivable, Net Accounts Receivable, Net | Metric | Sep 30, 2022 | Jun 30, 2022 | | :---------------------------- | :----------- | :----------- | | Accounts receivable | $9,167,155 | $9,138,790 | | Less: allowance for doubtful accounts | $(7,205,783) | $(7,317,236) | | Accounts receivable, net | $1,961,372 | $1,821,554 | Movement of Allowance for Doubtful Accounts | Metric | Sep 30, 2022 | Jun 30, 2022 | | :-------------------------------- | :----------- | :----------- | | Beginning balance | $7,317,236 | $13,481,021 | | Charge to expense | $327,925 | $1,632,670 | | Foreign currency translation adjustments | $(439,378) | $(272,345) | | Ending balance | $7,205,783 | $7,317,236 | Inventories, Net Inventories, Net | Metric | Sep 30, 2022 | Jun 30, 2022 | | :-------------------------- | :----------- | :----------- | | Raw materials | $60,555 | $67,467 | | Work-in-process | $18,046,891 | $18,709,325 | | Finished goods | $1,122,368 | $1,191,275 | | Less: inventory reserve | $(1,173,594) | $(1,249,543) | | Total inventories, net | $18,056,220 | $18,718,524 | - Inventory write-offs due to natural disaster (damage and death of yew trees) amounted to US$241,754 for the three months ended September 30, 2022, and US$492,987 for the same period in 2021[85] Advances to Suppliers, Net Advances to Suppliers, Net | Metric | Sep 30, 2022 | Jun 30, 2022 | | :---------------------------- | :----------- | :----------- | | Advances to suppliers | $11,904,432 | $13,548,178 | | Less: allowance for doubtful accounts | $(11,904,432) | $(13,544,627) | | Advance to suppliers, net | $0 | $3,551 | Movement of Allowance for Doubtful Accounts (Advances to Suppliers) | Metric | Sep 30, 2022 | Jun 30, 2022 | | :-------------------------------- | :----------- | :----------- | | Beginning balance | $13,544,627 | $13,320,307 | | Charge to (reversal of) expense | $(882,854) | $4,938,064 | | Foreign currency translation adjustments | $(757,341) | $(503,337) | | Ending balance | $11,904,432 | $13,544,627 | Business Acquisitions - Business acquisitions are accounted for under the acquisition method, recognizing identifiable assets and liabilities at fair value[54] - Excess purchase price over net assets is recorded as goodwill, or a bargain purchase gain if the fair value of net assets exceeds the purchase price[54] Goodwill - Goodwill is tested for impairment at least annually by comparing the fair value of a reporting unit to its carrying amount[56] - Fair value is determined using discounted cash flow methodology, corroborated by a market approach[56] Leases - The Company adopted ASU 2016-02 "Leases" on July 1, 2019, recognizing ROU assets and lease liabilities for operating leases[57] - The Company elected the "package of practical expedients" and the short-term lease exemption[57] Property and Equipment, Net - Property and equipment are stated at cost, less accumulated depreciation and amortization, with depreciation on a straight-line basis[58] Estimated Useful Lives of Property and Equipment | Asset Category | Estimated Useful Lives | | :---------------------------- | :--------------------- | | Buildings | 20-50 years | | Machinery equipment | 5-10 years | | Motor vehicles | 5-10 years | | Office equipment | 5-10 years | | Farmland leasehold improvements | 12-18 years | | Leasehold improvement | Lesser of useful life and lease term | Long-lived Assets - Long-lived assets are reviewed for impairment when circumstances require, and written down to fair value if undiscounted future cash flows are insufficient to recover the carrying amount[60] - No impairment of long-lived assets was recognized for the three months ended September 30, 2022 and 2021[60] Fair Value of Financial Instruments - Fair value measurements are classified into Level 1, Level 2, and Level 3 based on the observability of inputs[61][62] - The carrying value of current financial instruments approximates their fair values due to their short-term nature[62] Income Taxes - Deferred tax assets and liabilities are recognized for temporary differences using enacted tax rates, with a valuation allowance established if necessary[63] - The Company's policy is to indefinitely reinvest undistributed earnings of non-U.S. subsidiaries, thus no deferred taxes are provided for them[64] - The U.S. corporate tax rate decreased from 35% to 21% due to the "Tax Cuts and Jobs Act" (2017), impacting the Company's tax liability[67] Value-Added Tax - Sales revenue is net of VAT, which has decreased from 17% to 13% in the PRC since May 1, 2018[68] - No penalties for late or deficient VAT were assessed during the three months ended September 30, 2022 and 2021[146] Foreign Currency Translation - Financial reporting is in USD; subsidiaries and VIEs use RMB as functional currency[69] - Assets and liabilities are translated at balance sheet date rates, income and cash flows at average rates, and equity at historical rates[70] Exchange Rates | Period | RMB to USD Exchange Rate | | :-------------------------------- | :----------------------- | | September 30, 2022 (Balance Sheet) | 0.1406 | | June 30, 2022 (Balance Sheet) | 0.1493 | | Three Months Ended Sep 30, 2022 (Average) | 0.1461 | | Three Months Ended Sep 30, 2021 (Average) | 0.1545 | Convertible Notes Payable - Embedded beneficial conversion features in convertible instruments are recognized separately, with proceeds allocated to additional paid-in capital[72] - Issuance costs are allocated proportionally to the debt host and conversion feature, and convertible notes are carried at amortized cost[72] Comprehensive Loss - Comprehensive loss consists of net loss and other comprehensive income (loss), including foreign currency translation gains or losses[73] Equity Investment - Investments with significant influence (20-50% ownership) are accounted for using the equity method[74] Loss per Share - EPS is computed in accordance with ASC 260, presenting both basic and diluted EPS[75] Loss per Share Reconciliation (Three Months Ended September 30) | Metric | 2022 | 2021 | | :-------------------------------------------------------------------------------- | :------- | :----------- | | Net loss from continuing operations attributable to Shineco | $(2,439,722) | $(11,103,095) | | Net loss from discontinued operations attributable to Shineco | $0 | $(3,135,237) | | Net loss attributable to Shineco | $(2,439,722) | $(14,238,332) | | Weighted average shares outstanding - basic and diluted | 14,649,132 | 8,314,996 | | Net loss from continuing operations per share of common share Basic and diluted | $(0.17) | $(1.33) | | Net loss from discontinued operations per share of common share Basic and diluted | $0 | $(0.38) | | Net loss per share of common share Basic and diluted | $(0.17) | $(1.71) | New Accounting Pronouncements - Adopted ASU No. 2019-12 (Income Taxes) on July 1, 2021, with no material impact[78] - Currently evaluating ASU No. 2020-04 (Reference Rate Reform) for potential impacts on financial condition, results of operations, cash flows, and disclosures[79] NOTE 4 – ACCOUNTS RECEIVABLE, NET Accounts Receivable, Net | Metric | Sep 30, 2022 | Jun 30, 2022 | | :---------------------------- | :----------- | :----------- | | Accounts receivable | $9,167,155 | $9,138,790 | | Less: allowance for doubtful accounts | $(7,205,783) | $(7,317,236) | | Accounts receivable, net | $1,961,372 | $1,821,554 | Movement of Allowance for Doubtful Accounts | Metric | Sep 30, 2022 | Jun 30, 2022 | | :-------------------------------- | :----------- | :----------- | | Beginning balance | $7,317,236 | $13,481,021 | | Charge to expense | $327,925 | $1,632,670 | | Less: cessation of subsidiaries and disposal of VIE | $0 | $(7,524,110) | | Foreign currency translation adjustments | $(439,378) | $(272,345) | | Ending balance | $7,205,783 | $7,317,236 | NOTE 5 – INVENTORIES, NET Inventories, Net | Metric | Sep 30, 2022 | Jun 30, 2022 | | :-------------------------- | :----------- | :----------- | | Raw materials | $60,555 | $67,467 | | Work-in-process | $18,046,891 | $18,709,325 | | Finished goods | $1,122,368 | $1,191,275 | | Less: inventory reserve | $(1,173,594) | $(1,249,543) | | Total inventories, net | $18,056,220 | $18,718,524 | - Inventory write-offs due to natural disaster (damage and death of yew trees from COVID-19) amounted to US$241,754 for the three months ended September 30, 2022, and US$492,987 for the same period in 2021[85] NOTE 6 – ADVANCES TO SUPPLIERS, NET Advances to Suppliers, Net | Metric | Sep 30, 2022 | Jun 30, 2022 | | :---------------------------- | :----------- | :----------- | | Advances to suppliers | $11,904,432 | $13,548,178 | | Less: allowance for doubtful accounts | $(11,904,432) | $(13,544,627) | | Advance to suppliers, net | $0 | $3,551 | Movement of Allowance for Doubtful Accounts (Advances to Suppliers) | Metric | Sep 30, 2022 | Jun 30, 2022 | | :-------------------------------- | :----------- | :----------- | | Beginning balance | $13,544,627 | $13,320,307 | | Charge to (reversal of) expense | $(882,854) | $4,938,064 | | Foreign currency translation adjustments | $(757,341) | $(503,337) | | Ending balance | $11,904,432 | $13,544,627 | NOTE 7 – OTHER CURRENT ASSETS Other Current Assets, Net | Metric | Sep 30, 2022 | Jun 30, 2022 | | :---------------------------- | :----------- | :----------- | | Loan to third parties | $2,373,854 | $16,345,717 | | Other receivables | $2,205,091 | $3,246,293 | | Short-term deposit | $1,066,520 | $164,261 | | Prepaid expenses | $14,897 | $20,872 | | Subtotal | $5,660,362 | $19,777,143 | | Less: allowance for doubtful accounts | $2,404,614 | $2,545,565 | | Total other current assets, net | $3,255,748 | $17,231,578 | - Loans to third parties are mainly for short-term funding to business partners or employees, bearing interest or no interest, with terms of no more than one year, and are expected to be paid in full by June 2023[90] NOTE 8 - PROPERTY AND EQUIPMENT, NET Property and Equipment, Net | Metric | Sep 30, 2022 | Jun 30, 2022 | | :---------------------------------------- | :----------- | :----------- | | Buildings | $1,702,641 | $1,808,172 | | Machinery and equipment | $25,755 | $27,351 | | Motor vehicles | $130,960 | $139,077 | | Office equipment | $160,857 | $178,271 | | Leasehold improvement | $175,440 | $186,314 | | Farmland leasehold improvements | $2,956,484 | $3,139,729 | | Subtotal | $5,152,137 | $5,478,914 | | Less: accumulated depreciation and amortization | $(3,213,660) | $(3,388,640) | | Less: impairment for property and equipment | $(673,084) | $(714,802) | | Total property and equipment, net | $1,265,393 | $1,375,472 | - Depreciation and amortization expense was US$30,966 for the three months ended September 30, 2022, compared to US$81,473 for the same period in 2021[95] - Farmland leasehold improvements were fully impaired as of June 30, 2022, due to the continuous impact from the COVID-19 pandemic, making farmlands unlikely to generate enough future profit and cash flow[96] NOTE 9 - DISTRIBUTION RIGHTS - Distribution rights for Daiso 100-yen shops products were acquired through Tianjin Tajite and determined to have an indefinite life[98] - A full impairment loss on distribution rights was recorded during the year ended June 30, 2022, due to unfavorable China Customs policy and COVID-19 impact preventing revenue generation[98][119] NOTE 10 - INVESTMENTS - The Company recorded a loss of US$6,304 from its 32% equity investment in Shanghai Gaojing Private Fund Management for the three months ended September 30, 2022, a decrease from US$23,734 in 2021[100][241] - No loss was recorded from the 20% equity investment in Yushe Pharmaceutical for the three months ended September 30, 2022, as the investment was fully impaired subsequently[99][240] - The Company has agreements to acquire 51% of XPYK and to jointly manufacture nuclear medical imaging devices with WJM, but neither project has started as of the report date[101][102] Total Investments | Metric | Sep 30, 2022 | Jun 30, 2022 | | :----------------------- | :----------- | :----------- | | Gaojing Private Fund | $611,142 | $617,446 | | Total investments | $611,142 | $617,446 | NOTE 11 - LEASES Operating Lease Related Assets and Liabilities | Metric | Sep 30, 2022 | Jun 30, 2022 | | :-------------------------------- | :----------- | :----------- | | ROU lease assets | $1,749,663 | $2,088,149 | | Operating lease liabilities – current | $586,553 | $959,909 | | Operating lease liabilities – non-current | $873,173 | $1,025,967 | | Total operating lease liabilities | $1,459,726 | $1,985,876 | - Rent expenses totaled US$214,440 for the three months ended September 30, 2022, a decrease from US$230,548 in 2021[113] - An impairment loss of US$2,268,344 for ROU lease assets was recorded in the year ended June 30, 2022, due to the COVID-19 pandemic's impact on the profitability of leased farmlands[114] NOTE 12 - ACQUISITION - The Company acquired 51% of Tianjin Tajite in 2017 for approximately US$2.1 million, gaining distribution rights for Daiso 100-yen shops products[116] - A full impairment loss on Tianjin Tajite's goodwill was recorded in June 2018 due to lower than expected revenue and profit, and an impairment loss on distribution rights was fully recorded in FY2022 due to unfavorable China Customs policy and COVID-19[118][119] - In 2021, the Company acquired Guangyuan by transferring its rights in Ankang Longevity, aiming to enter the market of planting fast-growing bamboo willows and scenic greening trees[121][122] Guangyuan Net Assets Acquired (July 5, 2021) | Metric | Amount | | :------------------------------------------ | :----------- | | Due from related party | $108,296 | | Inventory | $18,115,423 | | Other current assets | $224,522 | | Right of use assets | $1,127,130 | | Long-term investments and other non-current assets | $166,107 | | Other payables and other current assets | $(2,503,607) | | Operating lease liabilities | $(1,013,492) | | Total purchase price for acquisition, net of cash | $16,224,379 | NOTE 13 - RELATED PARTY TRANSACTIONS Due from Related Parties | Related Party | Sep 30, 2022 | Jun 30, 2022 | | :--------------------------------------------------- | :----------- | :----------- | | Zhao Min | $1,327 | $1,410 | | Shanghai Gaojing Private Fund Management | $404,902 | $429,998 | | Zhongjian Yijia Health Technology (Qingdao) Co., Ltd. | $1,431,710 | $1,719,568 | | Zhongjian (Qingdao) International Logistics Development Co., Ltd. | $4,436,545 | $4,644,011 | | Total due from related parties | $6,274,484 | $6,794,987 | - Loans to Zhongjian Yijia Health Technology (Qingdao) Co., Ltd. and Zhongjian (Qingdao) International Logistics Development Co., Ltd. bear 6.0% annual interest, with extensions granted for repayment[128][129] Due to Related Parties | Related Party | Sep 30, 2022 | Jun 30, 2022 | | :--------------------------- | :----------- | :----------- | | Wu Yang | $0 | $95,630 | | Wang Sai Zhou Guocong | $120,081 | $96,081 | | Lin Baolin | $1,968 | $0 | | Zhao Min | $431,238 | $562,528 | | Zhou Shunfang | $1,925,234 | $2,044,561 | | Total due to related parties | $2,480,548 | $2,798,800 | - Payables to related parties are unsecured, non-interest bearing, and due on demand, mainly from principal stockholders or their relatives[131] NOTE 14 - CONVERTIBLE NOTES PAYABLE - The Company issued multiple unsecured convertible promissory notes to Streeterville Capital, LLC, with a 6% annual interest rate[134][135][137][138] - Maturity dates for some notes were extended to June 15, 2023, and August 18, 2023[134][137] - As of September 30, 2022, 2,374,465 common shares were issued for $7,892,638 in principal and interest, with a remaining convertible note payable balance of $14,283,239[139] - Amortization of debt issuance costs decreased from $458,978 (2021) to $154,403 (2022) for the three months ended September 30[139][242] NOTE 15 - TAXES - Shineco is subject to US income tax (21%), while its PRC operating entities are subject to 25% tax, with exemptions for agricultural enterprises[140] Deferred Tax Assets | Metric | Sep 30, 2022 | Jun 30, 2022 | | :---------------------------- | :----------- | :----------- | | Allowance for doubtful accounts | $1,190,068 | $1,252,245 | | Inventory reserve | $292,503 | $311,439 | | Net operating loss carry-forwards | $922,505 | $979,682 | | Total | $2,405,076 | $2,543,366 | | Valuation allowance | $(2,405,076) | $(2,543,366) | | Total deferred tax assets | $0 | $0 | - PRC VAT rates decreased from 17% to 13% between May 2018 and April 2019[145] Taxes Payable | Metric | Sep 30, 2022 | Jun 30, 2022 | | :---------------------------------------- | :----------- | :----------- | | Income tax payable | $978,305 | $992,780 | | Value added tax payable | $32,880 | $34,925 | | Business tax and other taxes payable | $4,810 | $3,375 | | Total tax payable | $1,015,995 | $1,031,080 | | Less: income tax payable - current portion | $(569,135) | $(584,220) | | Income tax payable - noncurrent portion | $446,860 | $446,860 | NOTE 16 - STOCKHOLDERS' EQUITY - The Company completed its IPO on September 28, 2016, raising US$7.7 million gross proceeds[149] - A 1-for-9 reverse stock split was approved in July 2020, effective August 2020, retroactively restating shares and per share data[153] - The Company issued 600,000 restricted shares for management under the 2022 Equity Incentive Plan, valued at US$612,000, which vested immediately on July 27, 2022[157] - The Company entered into a securities purchase agreement on August 11, 2022, to sell up to 1,921,683 shares for gross proceeds of up to US$1,758,340, with US$1.0 million received and the remainder expected by December 31, 2022[159] NOTE 17 - CONCENTRATIONS AND RISKS - Almost 100% of the Company's assets and revenues are located in and derived from the PRC[160] - Four customers accounted for approximately 80% of total sales for the three months ended September 30, 2022[160] - One vendor accounted for approximately 94% of total purchases for the three months ended September 30, 2022 and 2021[161] NOTE 18 - COMMITMENTS AND CONTINGENCIES - The Company accrued US$829,969 for a lawsuit by Mrs. Guiqin Li in China regarding stock losses, with an appeal pending[163] - The Company is suing Lei Zhang and Yan Li in New York for $9,088,125 for unpaid restricted shares, with a trial scheduled for September 18, 2023[165][168] - As of September 30, 2022, the subscription receivable for unpaid shares from Lei Zhang and Yan Li amounted to US$3,024,000[168] NOTE 19 - SEGMENT REPORTING - The Company has three continuing operating segments: Luobuma products, other agricultural products (green and organic produce, yew trees, bamboo willows), and freight services[169][171][172] - The Herbal products segment (Ankang Longevity Group) has been reclassified as discontinued operations[170] Segment Revenue (Three Months Ended September 30) | Segment | 2022 Revenue | 2022 % of Total | 2021 Revenue | 2021 % of Total | Variance Amount | % Change | | :---------------------- | :----------- | :-------------- | :----------- | :-------------- | :-------------- | :--------- | | Luobuma products | $5,574 | 1.04% | $13,508 | 2.14% | $(7,934) | (58.74)% | | Other agricultural products | $428,596 | 80.01% | $452,387 | 71.84% | $(23,791) | (5.26)% | | Freight services | $101,528 | 18.95% | $163,863 | 26.02% | $(62,335) | (38.04)% | | Total | $535,698 | 100.00% | $629,758 | 100.00% | $(94,060) | (14.94)% | Segment Gross Profit (Loss) (Three Months Ended September 30) | Segment | 2022 Gross Profit (Loss) | 2022 Gross Profit (Loss) % | 2021 Gross Profit (Loss) | 2021 Gross Profit (Loss) % | Variance Amount | % Change | | :---------------------- | :----------------------- | :------------------------- | :----------------------- | :------------------------- | :-------------- | :--------- | | Luobuma products | $5,368 | (5.91)% | $(128,330) | 17.59% | $133,698 | (104.18)% | | Other agricultural products | $(120,346) | 132.43% | $(615,867) | 84.42% | $495,521 | (80.46)% | | Freight services | $24,101 | (26.52)% | $14,652 | (2.01)% | $9,449 | 64.49% | | Total | $(90,877) | 100.00% | $(729,545) | 100.00% | $638,668 | (87.54)% | Total Assets by Segment | Segment | Sep 30, 2022 | Jun 30, 2022 | | :---------------------- | :----------- | :----------- | | Luobuma products | $9,388,729 | $10,982,562 | | Other agricultural products | $43,159,007 | $46,488,334 | | Freight services | $4,872,431 | $6,355,121 | | Total assets | $57,420,167 | $63,826,017 | NOTE 20 - DISCONTINUED OPERATIONS - The Company disposed of Ankang Longevity Group on July 5, 2021, reclassifying its operations as discontinued[178][180] - A loss on disposal of discontinued operations of US$3,135,237 was recorded for the three months ended September 30, 2021[180] NOTE 21 - SUBSEQUENT EVENTS - On October 21, 2022, Life Science agreed to acquire 51% of Changzhou Biowin Pharmaceutical Co., Ltd. for US$9 million cash and 3,260,000 common shares[181] - No other subsequent events required adjustments or disclosure as of November 14, 2022[182] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS This section provides management's perspective on the Company's financial condition and results of operations for the three months ended September 30, 2022, compared to 2021, covering revenue, expenses, liquidity, and capital resources, highlighting the impact of business strategy changes, COVID-19, and legal proceedings Forward-Looking Statements - The report contains forward-looking statements regarding future products, financial projections, and market conditions, subject to known and unknown risks and uncertainties[185][186] - The Company undertakes no obligation to update forward-looking statements to reflect events or circumstances after their making[187] General Overview - Shineco, Inc. is a Delaware holding company operating primarily through PRC VIEs, providing health and well-being focused plant-based products[190] - Business segments include Luobuma products, green and organic agricultural produce (yew trees, bamboo willows), and domestic/international freight forwarding services[194][195][196] - The traditional Chinese herbal medicine segment (Ankang Longevity Group) was disposed of in July 2021 and reclassified as discontinued operations[192] Financing Activities - The Company issued multiple unsecured convertible promissory notes to Streeterville Capital, LLC, with 6% annual interest, extending some maturity dates to 2023[197][198][199] - As of September 30, 2022, $7,472,638 of notes were fully converted into 1,946,766 common shares, and another $420,000 was converted into 427,699 shares[198][199] - The Company raised $5.0 million gross proceeds from a stock purchase agreement in July 2022 and is selling up to $1.76 million in shares from an August 2022 agreement, with $1.0 million received to date[201][202] Factors Affecting Financial Performance - Increasing demand for agricultural products is expected to positively impact financial performance, with plans for new products, distribution expansion, and potential M&A[203] - Effective cost control is a focus, achieved by maintaining adequate material supplies at competitive prices, establishing long-term supplier alliances, and optimizing quality management and procurement[204] - Operations in the PRC are subject to significant political, economic, and legal risks, including changes in governmental policies and foreign currency exchange[205] COVID-19 Impact - COVID-19 caused significant disruptions, including office closures, transportation issues, and delays in sales, order fulfillment, and payment collection[206][207] - The resurgence of COVID-19 in Beijing in April 2022 negatively affected business, but the impact is currently considered temporary, with future extent highly uncertain[207] Critical Accounting Policies and Estimates - Critical accounting policies involve significant judgments and estimates, including consolidation of VIEs, useful lives of assets, and recoverability of long-lived assets[208][209][211] - Key estimates also include the valuation of accounts receivable, advances to suppliers, deferred taxes, and inventory reserves[211][212][213] - Revenue recognition follows ASC 606, with no material changes upon adoption, and fair value measurements adhere to ASC 820's hierarchy[217][218] Results of Operations for the Three Months Ended September 30, 2022 and 2021 The Company experienced a significant reduction in net loss for the three months ended September 30, 2022, compared to 2021, primarily due to decreased operating expenses and the absence of discontinued operations, with revenue declining across all segments, but gross loss improving due to lower cost of revenue Results of Operations Summary (Three Months Ended September 30) | Metric | 2022 | 2021 | Variance Amount | % | | :------------------------------------------------ | :----------- | :----------- | :-------------- | :-------- | | Revenue | $535,698 | $629,758 | $(94,060) | (14.94)% | | Cost of revenue | $626,575 | $1,359,303 | $(732,728) | (53.90)% | | Gross loss | $(90,877) | $(729,545) | $638,668 | (87.54)% | | Operating expenses | $1,899,544 | $9,722,549 | $(7,823,005) | (80.46)% | | Loss from operations | $(1,990,421) | $(10,452,094) | $8,461,673 | (80.96)% | | Net loss from continuing operations | $(2,442,320) | $(11,108,221) | $8,665,901 | (78.01)% | | Net loss from discontinued operations | $0 | $(3,135,237) | $3,135,237 | (100.00)% | | Net loss | $(2,442,320) | $(14,243,458) | $11,801,138 | (82.85)% | Revenue Revenue by Segment (Three Months Ended September 30) | Segment | 2022 Revenue | 2021 Revenue | Variance Amount | % Change | | :---------------------- | :----------- | :----------- | :-------------- | :--------- | | Luobuma products | $5,574 | $13,508 | $(7,934) | (58.74)% | | Other agricultural products | $428,596 | $452,387 | $(23,791) | (5.26)% | | Freight services | $101,528 | $163,863 | $(62,335) | (38.04)% | | Total Amount | $535,698 | $629,758 | $(94,060) | (14.94)% | - Revenue from Luobuma products decreased by 58.74% due to no new product launches and reduced investment in e-commerce[225] - Revenue from other agricultural products decreased by 5.26% due to a strategic shift from selling unmatured yew trees to cultivating matured ones for Taxol extraction[226] - Revenue from freight services decreased by 38.04% due to outsourcing and recognizing revenue on a net basis as an agent[227] Cost of Revenue and Related Tax Cost of Revenue by Segment (Three Months Ended September 30) | Segment | 2022 Cost of Revenue | 2021 Cost of Revenue | Variance Amount | % Change | | :--------------------------------------- | :------------------- | :------------------- | :-------------- | :--------- | | Luobuma products | $206 | $141,838 | $(141,632) | (99.85)% | | Other agricultural products | $548,942 | $1,068,254 | $(519,312) | (48.61)% | | Freight services | $77,427 | $147,956 | $(70,529) | (47.67)% | | Business and sales related tax | $0 | $1,255 | $(1,255) | (100.00)% | | Total Amount | $626,575 | $1,359,303 | $(732,728) | (53.90)% | - Cost of revenue for Luobuma products decreased by 99.85% due to a decreased allowance for slow-moving inventories[229] - Cost of revenue for other agricultural products decreased by 48.61% due to less stock written off, despite continued COVID-19 impact on yew trees[230] - Cost of revenue for freight services decreased by 47.67% due to outsourcing, leading to the Company acting as an agent[230] Gross Loss Gross Loss by Segment (Three Months Ended September 30) | Segment | 2022 Gross Loss | 2021 Gross Loss | Variance Amount | % Change | | :---------------------- | :-------------- | :-------------- | :-------------- | :--------- | | Luobuma products | $5,368 | $(128,330) | $133,698 | (104.18)% | | Other agricultural products | $(120,346) | $(615,867) | $495,521 | (80.46)% | | Freight services | $24,101 | $14,652 | $9,449 | 64.49% | | Total Amount | $(90,877) | $(729,545) | $638,668 | (87.54)% | - Gross loss from Luobuma product sales decreased by 104.18% due to a decrease in allowance for slow-moving inventories[233] - Gross loss from other agricultural products decreased by 80.46% due to less stock written off and fewer price discounts[234] - Gross income from freight services increased by 64.49% due to improved operating efficiency from outsourcing[234] Expenses Operating Expenses (Three Months Ended September 30) | Expense Category | 2022 | 2021 | Variance Amount | % Change | | :-------------------------------- | :----------- | :----------- | :-------------- | :--------- | | General and administrative expenses | $1,886,443 | $8,573,656 | $(6,687,213) | (78.00)% | | Selling expenses | $13,101 | $8,342 | $4,759 | 57.05% | | Impairment loss of distribution rights | $0 | $1,140,551 | $(1,140,551) | (100.00)% | | Total Amount | $1,899,544 | $9,722,549 | $(7,823,005) | (80.46)% | General and Administrative Expenses - General and administrative expenses decreased by 78.00% to US$1,886,443, primarily due to a significant decrease in bad debt expense[237] - The decrease was partially offset by increased intermediary fees for intended acquisitions and increased stock compensation expenses[237] Impairment Loss of Distribution Rights - No impairment loss of distribution rights was recorded for the three months ended September 30, 2022, compared to US$1,140,551 in the same period of 2021[239] - The prior year's impairment was due to the inability to generate revenue from distribution rights due to unfavorable China Customs policy and COVID-19 impact[239] Loss from Equity Method Investments - Loss from equity method investments decreased from US$27,920 (2021) to US$6,304 (2022)[240][241] - The decrease is attributed to the full impairment of Yushe Pharmaceutical investment in the prior year and lower net loss from Shanghai Gaojing Private Fund Management in the current period[240][241] Amortization of Debt Issuance Costs - Amortization of debt issuance costs decreased by 66.36% to US$154,403, from US$458,978 in the prior year[242] - The decrease is due to two of the four convertible note agreements being fully converted[242] Interest Expenses, Net - Net interest expenses increased by 79.75% to US$305,927, from US$170,199 in the prior year[243] - The increase was primarily due to higher interest expenses on loans from third parties and convertible notes, partially offset by interest income from loans to third and related parties[243] Net Loss from Continuing Operations - Net loss from continuing operations decreased by 78.01% to US$2,442,320, from US$11,108,221 in the prior year[244] - The decrease was primarily due to reduced general and administrative expenses, impairment loss of distribution rights, and amortization of debt issuance costs[244] Net Loss from Discontinued Operations - No net loss from discontinued operations was recorded for the three months ended September 30, 2022, compared to US$3,135,237 in the same period of 2021[246] - This is due to the disposal of Ankang Longevity Group on July 5, 2021, and its reclassification as discontinued operations[246] Net Loss - Total net loss decreased by 82.85% to US$2,442,320, from US$14,243,458 in the prior year[247] - The decrease was primarily due to reduced net loss from continuing operations and the absence of net loss from discontinued operations[247] Comprehensive Loss - Comprehensive loss attributable to Shineco, Inc. decreased by 66.73% to US$4,744,406, from US$14,258,967 in the prior year[248] - The decrease in comprehensive loss was primarily due to the overall decrease in net loss[248] Treasury Policies - Treasury policies aim to minimize interest and currency risks through central review and monitoring[249] - Interest risk is managed through loan re-financing and negotiation, while currency risk is managed by monitoring foreign currency borrowings[249][250] - As of September 30, 2022, the Company did not engage in any foreign currency borrowings or loan contracts, except for the convertible note[250] Liquidity and Capital Resources - The Company finances operations primarily through advances from related parties, convertible notes, and common stock sales[252] - Management believes current cash, future operations cash flows, and access to loans will provide sufficient liquidity for at least the next 12 months[259] - As of September 30, 2022, the Company had $24,238,173 in cash and cash equivalents[7] Working Capital Working Capital | Metric | Sep 30, 2022 | Jun 30, 2022 | | :------------------ | :----------- | :----------- | | Current Assets | $53,785,997 | $59,735,425 | | Current Liabilities | $20,371,268 | $29,040,302 | | Working Capital | $33,414,729 | $30,695,123 | - Working capital increased by US$2,719,606 (8.9%) due to an increase in cash and cash equivalents and a decrease in other payables and accrued expenses[261] Capital Commitments and Contingencies - The Company accrued US$829,969 for a lawsuit by Mrs. Guiqin Li in China regarding stock losses[263] - The Company is seeking US$9,088,125 in damages from Lei Zhang and Yan Li for unpaid restricted shares, with a trial scheduled for September 18, 2023[265][268] - As of September 30, 2022, the subscription receivable for unpaid shares from Lei Zhang and Yan Li amounted to US$3,024,000[268] Off-Balance Sheet Commitments and Arrangements - The Company has no financial guarantees or other commitments to guarantee third-party payment obligations[268] - No derivative contracts indexed to common stock are classified as stockholders' equity or unreflected in financial statements[268] Cash Flows For Q3 2022, net cash used in operating activities was $2.1 million, net cash provided by investing activities was $11.1 million (primarily from loan repayments), and net cash provided by financing activities was $0.9 million (from stock issuance, offset by related party repayments), with overall cash and cash equivalents increasing by $9.1 million Net Cash Flows (Three Months Ended September 30) | Cash Flow Activity | 2022 | 2021 | | :------------------------------------------------ | :----------- | :----------- | | Net cash used in operating activities | $(2,109,145) | $(5,264,781) | | Net cash provided by (used in) investing activities | $11,083,120 | $(25,954,544) | | Net cash provided by financing activities | $921,047 | $20,436,888 | | Effect of exchange rate changes on cash and cash equivalents | $(822,080) | $(11,884) | | Net increase (decrease) in cash and cash equivalents | $9,072,942 | $(10,794,321) | | Cash and cash equivalents, end of the period | $24,238,173 | $18,230,073 | Operating Activities - Net cash used in operating activities was US$2.1 million in Q3 2022, an improvement from US$5.3 million in Q3 2021[271][272] - Key factors for Q3 2022 included a net loss of US$2.4 million, net recovery of bad debt expenses of US$0.6 million, and restricted shares issued for management of US$0.6 million[271] Investing Activities - Net cash provided by investing activities was US$11.1 million in Q3 2022, a significant increase from US$26.0 million used in Q3 2021[273] - The primary driver for Q3 2022 was US$11.0 million in repayments of loans to third parties[273] Financing Activities - Net cash provided by financing activities was US$0.9 million in Q3 2022, a decrease from US$20.4 million in Q3 2021[274] - Q3 2022 financing activities included US$1.0 million from common stock issuance, partially offset by US$0.1 million in repayments of advances from related parties[274] 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 - As a smaller reporting company, Shineco, Inc. is exempt from providing quantitative and qualitative disclosures about market risk[276] ITEM 4. CONTROLS AND PROCEDURES Management concluded that disclosure controls and procedures were not effective as of September 30, 2022, due to a lack of full-time U.S. GAAP personnel and insufficient segregation of duties, with remedial actions including recruiting qualified professionals, engaging external consultants, improving communication, and obtaining proper approvals for significant transactions, and no material changes in internal control over financial reporting occurred during the quarter Evaluation of Controls and Procedures - Disclosure controls and procedures were not effective as of September 30, 2022, due to a lack of full-time U.S. GAAP personnel and insufficient segregation of duties[277] - Remedial actions include recruiting qualified professionals, engaging an outside consulting firm, improving communication, and obtaining proper approvals for significant transactions[278] Changes in Internal Control over Financial Reporting - No material changes in internal control over financial reporting occurred during the fiscal quarter ended September 30, 2022[279] PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is involved in two significant legal proceedings: a lawsuit in China by Mrs. Guiqin Li for stock losses, with $829,969 accrued, and a lawsuit in New York against Lei Zhang and Yan Li for $9,088,125 in unpaid restricted shares, with a trial scheduled for September 18, 2023 - The Company is involved in a lawsuit in China by Mrs. Guiqin Li, with US$829,969 accrued as of September 30, 2022[282] - The Company filed a lawsuit in New York against Lei Zhang and Yan Li, seeking US$9,088,125 for unpaid restricted shares, with a trial scheduled for September 18, 2023[283][286] - As of September 30, 2022, the subscription receivable for unpaid shares from Lei Zhang and Yan Li amounted to US$3,024,000[286] ITEM 1A. RISK FACTORS As a smaller reporting company, Shineco, Inc. is not required to provide the information regarding risk factors - As a smaller reporting company, Shineco, Inc. is exempt from providing risk factor disclosures[287] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Disclosures related to unregistered sales of equity securities and use of proceeds are incorporated by reference from Note 17, "Stockholders' Equity," in Part I, Item 1 - Information on unregistered sales of equity securities and use of proceeds is incorporated by reference from Note 17, "Stockholders' Equity"[287] ITEM 3. DEFAULTS UPON SENIOR SECURITIES The Company reported no defaults upon senior securities - The Company reported no defaults upon senior securities[287] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to the Company - This item is not applicable to the Company[288] ITEM 5. OTHER INFORMATION The Company reported no other information required under this item - The Company reported no other information required under this item[288] ITEM 6. EXHIBITS This section lists all exhibits filed with the Form 10-Q, including organizational documents, incentive plans, securities purchase agreements, certifications, and XBRL-related documents - The exhibits include Certificate of Incorporation, Bylaws, Stock Incentive Plans (2016, 2022), Securities Purchase Agreements, and various certifications (CEO, CFO)[289] - XBRL instance, schema, calculation, definition, and label linkbase documents are also included[289] SIGNATURES - The report was signed on November 14, 2022, by Jennifer Zhan (CEO) and Sai (Sam) Wang (CFO)[292]