Shineco(SISI) - 2024 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The unaudited financial statements reflect significant revenue growth, a reduced net loss, and major balance sheet changes from recent acquisitions and divestitures Condensed Consolidated Balance Sheets (unaudited) The balance sheet reflects substantial growth in total assets and liabilities, driven by business acquisitions and the reclassification of discontinued operations Balance Sheet Summary | Metric | March 31, 2024 (Unaudited) | June 30, 2023 | |:---|:---|:---| | Total Assets | $101,688,272 | $63,469,139 | | Total Liabilities | $54,984,231 | $26,616,093 | | Total Equity | $46,704,041 | $36,853,046 | - Current assets held for discontinued operations decreased from $37,109,046 to $0, reflecting the reclassification of these segments[7] - Intangible assets, net, increased significantly from $12,049,473 to $44,250,977, and Goodwill increased from $6,574,743 to $28,015,104, largely due to recent acquisitions[7] Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) (unaudited) Income statements show substantial revenue growth from continuing operations, though higher expenses increased the operating loss, offset by income from discontinued operations Nine Months Ended March 31, 2024 vs 2023 (Continuing Operations) | Metric | 2024 | 2023 | Change (USD) | Change (%) | |:---|:---|:---|:---|:---| | Revenue | $5,304,159 | $231,513 | $5,072,646 | 2,191.08% | | Gross Income | $602,940 | $11,156 | $591,784 | 5,304.63% | | Operating Expenses | $12,447,244 | $6,120,050 | $6,327,194 | 103.38% | | Net Loss from Continuing Operations | $(12,937,954) | $(6,886,985) | $(6,050,969) | 87.86% | | Net Income (Loss) from Discontinued Operations | $8,855,247 | $(937,831) | $9,793,078 | (1,044.23)% | | Net Loss | $(4,082,707) | $(7,824,816) | $3,742,109 | (47.82)% | | Basic and Diluted Loss per Common Share | $(0.47) | $(4.46) | $3.99 | (89.46)% | Three Months Ended March 31, 2024 vs 2023 (Continuing Operations) | Metric | 2024 | 2023 | Change (USD) | Change (%) | |:---|:---|:---|:---|:---| | Revenue | $1,351,400 | $231,513 | $1,119,887 | 483.73% | | Gross Income | $191,667 | $11,156 | $180,511 | 1,618.06% | | Operating Expenses | $3,417,758 | $2,825,270 | $592,488 | 20.97% | | Net Loss from Continuing Operations | $(4,368,728) | $(2,939,166) | $(1,429,562) | 48.64% | | Net Income (Loss) from Discontinued Operations | $0 | $329,181 | $(329,181) | (100.00)% | | Net Loss | $(4,368,728) | $(2,609,985) | $(1,758,743) | 67.39% | | Basic and Diluted Loss per Common Share | $(0.52) | $(1.30) | $0.78 | (60.00)% | Condensed Consolidated Statements of Changes in Equity (unaudited) Equity increased due to strategic acquisitions and stock issuances, despite the impact of accumulated deficits and the disposal of a subsidiary - Total equity increased from $36,853,046 at June 30, 2023, to $46,704,041 at March 31, 2024[13][15] - Key changes include the acquisition of Wintus ($10,386,685 impact on equity) and the disposal of Tenet-Jove ($(4,024,538) impact on equity)[13] - Stock issuances contributed $1,440,000 to equity during the nine months ended March 31, 2024[13] Condensed Consolidated Statements of Cash Flows (unaudited) Cash flows show increased cash usage in operations and a significant outflow from investing activities, leading to a net decrease in cash and cash equivalents Cash Flow Summary (Nine Months Ended March 31) | Activity | 2024 | 2023 | |:---|:---|:---| | Net cash used in operating activities | $(3,062,020) | $(2,853,387) | | Net cash provided by (used in) investing activities | $(13,939,717) | $1,013,586 | | Net cash provided by financing activities | $3,184,948 | $2,421,005 | | Net increase (decrease) in cash and cash equivalents | $(13,601,276) | $229,944 | | Cash and cash equivalents - End of period | $565,483 | $15,395,175 | - The significant cash outflow from investing activities in 2024 was primarily due to the disposal of Tenet-Jove ($13,889,752 used)[21] - Financing activities were supported by proceeds from short-term loans ($15,411,974) and issuance of common stock ($2,020,030)[21] Notes to the Condensed Consolidated Financial Statements (unaudited) These notes detail the company's accounting policies, recent acquisitions, discontinued operations, going concern issues, and breakdowns of financial statement items NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS The company is a holding company that has refocused its PRC operations on diagnostics, agricultural products, and healthy meals through recent strategic transactions - Shineco, Inc is a holding company incorporated in Delaware, with primary operations in the People's Republic of China[24] - The company completed the acquisition of 51% equity interest in Changzhou Biowin Pharmaceutical Co, Ltd (Biowin) on December 30, 2022, entering the Rapid Diagnostic and Other Products segment[37] - On May 29, 2023, Life Science HK acquired 71.42% equity interest in Chongqing Wintus Group (Wintus), entering the Other Agricultural Products segment (silk, silk fabrics, fresh fruit trading)[38][39] - Fuzhou Meida Health Management Co, Ltd operates a health-oriented chain restaurant specializing in healthy meals, forming the 'Healthy meals products' segment[39] NOTE 2. GOING CONCERN UNCERTAINTIES The company faces going concern uncertainties due to recurring losses and negative working capital, with management implementing measures to enhance liquidity - The company had recurring net losses of US$12.9 million and US$6.9 million from continuing operations for the nine months ended March 31, 2024 and 2023, respectively[40] - As of March 31, 2024, the company had negative working capital of US$20.9 million[40] - Management's measures to enhance liquidity include sales of common stock, a securities purchase agreement, and expected loan renewals[42][43] NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Financial statements are prepared under US GAAP, consolidating subsidiaries and VIEs, with key policies for revenue recognition, credit losses, and fair value - The unaudited condensed consolidated financial statements are prepared in conformity with US GAAP and include the Company, its subsidiaries, and Variable Interest Entities (VIEs)[45][46] - The Company adopted Accounting Standards Update 2016-13 (CECL methodology) on July 1, 2023, for measuring credit losses, with no material impact on financial statements as of that date[64] - Revenue is recognized when performance obligations are satisfied, primarily from sales of products and provision of logistic services[57][59] - The Company's operations are primarily in the PRC, exposing it to political, economic, and legal environment risks, including foreign currency exchange fluctuations[53] NOTE 4 – ACCOUNTS RECEIVABLE, NET Accounts receivable from continuing operations increased significantly, while the allowance for credit losses decreased due to the disposal of VIEs Accounts Receivable, Net (Continuing Operations) | Metric | March 31, 2024 | June 30, 2023 | |:---|:---|:---| | Accounts receivable, net held for continuing operations | $4,676,210 | $34,586 | - The allowance for credit losses decreased from $8,153,850 to $2,052,321, primarily due to the disposal of VIEs ($7,136,817 reduction)[105] NOTE 5 – INVENTORIES, NET Inventories from continuing operations increased substantially, while the inventory reserve decreased, with no write-offs for discontinued operations in the current period Inventories, Net (Continuing Operations) | Metric | March 31, 2024 | June 30, 2023 | |:---|:---|:---| | Inventories, net, held for continuing operations | $1,446,334 | $324,406 | - The inventory reserve for continuing operations decreased from $56,655 to $30,634[68][106] - No inventory write-offs for discontinued operations occurred in the nine months ended March 31, 2024, compared to US$668,088 in the prior year[107] NOTE 6 – ADVANCES TO SUPPLIERS, NET Advances to suppliers for continuing operations increased significantly, while the allowance for doubtful accounts decreased due to the disposal of VIEs Advances to Suppliers, Net (Continuing Operations) | Metric | March 31, 2024 | June 30, 2023 | |:---|:---|:---| | Advance to supplier, net, held for continuing operations | $12,751,020 | $2,697 | - The allowance for doubtful accounts decreased from $10,167,448 to $624,892, largely due to the disposal of VIEs ($10,241,295 reduction)[110] NOTE 7 – OTHER CURRENT ASSETS, NET Other current assets for continuing operations decreased, with an increase in loans to third parties offset by a decrease in other receivables Other Current Assets, Net (Continuing Operations) | Metric | March 31, 2024 | June 30, 2023 | |:---|:---|:---| | Other current assets, net, held for continuing operations | $2,560,304 | $2,827,042 | | Loans to third parties | $2,576,064 | $1,481,101 | | Other receivables | $2,440,400 | $2,629,733 | - The allowance for credit losses decreased from $3,287,793 to $2,503,102, with a significant reduction from the disposal of VIEs ($605,786)[114] NOTE 8 - PROPERTY AND EQUIPMENT, NET Property and equipment for continuing operations increased substantially, along with a corresponding rise in depreciation and amortization expenses Property and Equipment, Net (Continuing Operations) | Metric | March 31, 2024 | June 30, 2023 | |:---|:---|:---| | Property and equipment, net held for continuing operations | $6,224,380 | $1,213,116 | Depreciation and Amortization Expense (Continuing Operations) | Period | 2024 | 2023 | |:---|:---|:---| | Nine months ended March 31 | $355,676 | $5,022 | | Three months ended March 31 | $112,487 | $4,737 | - No impairment loss on property and equipment was recognized for continuing or discontinued operations for the nine and three months ended March 31, 2024 and 2023[118] NOTE 9 - LAND USE RIGHTS, NET Land use rights for continuing operations were newly recognized in 2024, resulting in associated amortization expenses for the period Land Use Rights, Net (Continuing Operations) | Metric | March 31, 2024 | June 30, 2023 | |:---|:---|:---| | Land use rights, net, held for continuing operations | $613,133 | $0 | Amortization Expense (Continuing Operations) | Period | 2024 | 2023 | |:---|:---|:---| | Nine months ended March 31 | $14,982 | $0 | | Three months ended March 31 | $5,627 | $0 | NOTE 10 - LEASES The company's operating lease assets and liabilities for continuing operations remained stable, while those for discontinued operations were eliminated Operating Lease Assets and Liabilities (Continuing Operations) | Metric | March 31, 2024 | June 30, 2023 | |:---|:---|:---| | ROU lease assets | $110,227 | $132,366 | | Total operating lease liabilities | $139,679 | $131,447 | - Operating lease ROU assets and liabilities for discontinued operations were $0 as of March 31, 2024, down from $2,538,037 and $1,956,325 respectively at June 30, 2023[130] Rent Expenses (Continuing Operations) | Period | 2024 | 2023 | |:---|:---|:---| | Nine months ended March 31 | $132,035 | $168,952 | | Three months ended March 31 | $45,896 | $36,543 | NOTE 11 - ACQUISITION Recent acquisitions, particularly of Wintus, have significantly reshaped the company's business segments and financial structure by adding substantial goodwill and intangible assets - Acquisition of Biowin (January 1, 2023): Total consideration of US$12,097,000, resulted in US$6,574,743 in goodwill and US$12,683,656 in intangible assets[140][143][144] - Acquisition of Wintus (July 31, 2023): Consideration included cash, stock, and the transfer of Tenet-Jove, resulting in US$21,440,360 in goodwill and US$36,117,041 in intangible assets[149][151][152] Amortization Expense of Intangible Assets (Continuing Operations) | Period | 2024 | 2023 | |:---|:---|:---| | Nine months ended March 31 | $951,273 (Biowin) / $2,365,819 (Wintus) | $317,091 (Biowin) / $0 (Wintus) | | Three months ended March 31 | $317,091 (Biowin) / $887,183 (Wintus) | $317,091 (Biowin) / $0 (Wintus) | NOTE 12 - RELATED PARTY TRANSACTIONS The company engages in significant related party transactions, including receivables, payables, sales, and loan guarantees, which have increased with recent business changes Due from Related Parties, Net (Continuing Operations) | Metric | March 31, 2024 | June 30, 2023 | |:---|:---|:---| | Total due from related parties, net held for continuing operations | $448,811 | $0 | Due to Related Parties (Continuing Operations) | Metric | March 31, 2024 | June 30, 2023 | |:---|:---|:---| | Total due to related parties, held for continuing operations | $2,276,248 | $48,046 | - The company made sales of US$797,506 to a related party for the nine months ended March 31, 2024[168] - The company pledged property with a net book value of US$1,045,883 as collateral to guarantee a personal loan of a former chairman[170] NOTE 13 – LOANS The company utilizes various short-term and long-term bank loans, often guaranteed by related parties, resulting in a significant increase in interest expenses Short-term Loans (Continuing Operations) | Lender | March 31, 2024 | Maturity Date | Int. Rate/Year | |:---|:---|:---|:---| | Loan from a third party | $800,000 | 2024/9/29 | 15.0% | | Short-term bank loans | $12,606,523 | Various | 3.45%-4.65% | Long-term Loans (Continuing Operations) | Lender | March 31, 2024 | Maturity Date | Int. Rate/Year | |:---|:---|:---|:---| | Chongqing Rural Commercial Bank | $623,089 | 2024/9/7 | 4.85% | | Bank of Chongqing | $1,100,791 | 2026/7/3 | 4.00% | - Interest expenses from continuing operations increased from US$17,312 to US$440,742 for the nine months ended March 31, 2024[180] - Loans are guaranteed by former CEO, shareholders, their family members, and company subsidiaries, with some properties pledged as collateral[173][174][178][179] NOTE 14 - CONVERTIBLE NOTES PAYABLE The company has outstanding unsecured convertible promissory notes with an institutional investor, which have undergone extensions and partial conversions into common stock - As of March 31, 2024, the total outstanding convertible notes balance was US$14,824,553, with a carrying value of US$15,076,774[187] - For the nine months ended March 31, 2024, US$612,072 in amortization of debt issuance and other costs was recorded[187] - Shares totaling 1,500,396 were issued to the investor, equaling principal and interests of US$9,988,359, as of March 31, 2024[187] NOTE 15 - TAXES Subsidiaries are subject to various PRC tax rates, with some benefiting from exemptions or reduced rates, while deferred tax liabilities have increased due to acquisitions - Biowin is subject to a reduced corporate income tax rate of 15% as a High and New Technology Enterprise through December 2025[189] - Certain Wintus subsidiaries are subject to a reduced effective tax rate of 5% on taxable income not exceeding RMB3 million until December 31, 2024[189] Deferred Tax Liability, Net (Continuing Operations) | Metric | March 31, 2024 | June 30, 2023 | |:---|:---|:---| | Deferred tax liability, net, held for continuing operations | $(10,138,018) | $(1,416,592) | | Intangible assets (deferred tax liability) | $(10,542,990) | $(1,810,615) | Taxes Payable (Continuing Operations) | Metric | March 31, 2024 | June 30, 2023 | |:---|:---|:---| | Income tax payable | $1,236,597 | $1,048,188 | | Value added tax payable | $240,403 | $46,451 | | Total tax payable, held for continuing operations | $1,477,832 | $836,014 | NOTE 16 - STOCKHOLDERS' EQUITY Stockholders' equity was affected by a reverse stock split, various stock issuances for capital raising and acquisitions, and the establishment of a statutory reserve - A 1-for-10 reverse stock split became effective on February 16, 2024, retroactively restating share and per share data[213] - As of May 15, 2024, there were 6,445,963 shares of common stock outstanding, reflecting the reverse stock split[3] - The company issued 380,500 shares under the 2023 Equity Incentive Plan in September 2023, valued at US$540,310[211] - In December 2023, 1,200,000 shares were issued for gross proceeds of US$1,440,000[212][215] NOTE 17 - CONCENTRATIONS AND RISKS The company faces significant concentration risks, with nearly all assets and revenue in the PRC and heavy reliance on a few key customers and vendors - Almost 100% of the company's assets and revenue are located in or derived from the PRC[216] - For the nine months ended March 31, 2024, three customers accounted for approximately 44% of total sales from continuing operations[217] - As of March 31, 2024, three customers accounted for approximately 50% of accounts receivable from continuing operations[217] - For the nine months ended March 31, 2024, two vendors accounted for approximately 35% of total purchases from continuing operations[218] NOTE 18 - COMMITMENTS AND CONTINGENCIES The company has resolved two legal matters, one through a settlement payment and another by discontinuing a lawsuit, which resulted in a significant waiver - A lawsuit filed by Ms Guiqin Li was settled in January 2023, with the company paying US$700,645 (approximately RMB 4.8 million)[220][221][371][372] - A lawsuit against Lei Zhang and Yan Li was discontinued in December 2023, resulting in the waiver of US$3,024,000 in subscription receivable[222][224][355][357][373][375] NOTE 19 - SEGMENT REPORTING Operating segments have been redefined following recent transactions, with continuing operations now focused on diagnostics, agricultural products, and healthy meals - Continuing operations segments: Rapid Diagnostic and Other Products (Biowin), Other Agricultural Products (Wintus), and Healthy Meals Products (Fuzhou Meida)[230][231] - Discontinued operations segments: Luobuma products, Other agricultural products (Qingdao Zhihesheng and Guangyuan), and Freight services (Zhisheng Freight)[225][226][229] Segment Revenue (Nine Months Ended March 31, 2024) | Segment | Revenue | |:---|:---| | Rapid diagnostic and other products | $441,927 | | Other agricultural products | $4,844,587 | | Healthy meals products | $17,645 | | Luobuma products (Discontinued) | $4,439 | | Total | $5,308,598 | Total Assets by Segment (March 31, 2024) | Segment | Total Assets | |:---|:---| | Other agricultural products | $82,814,678 | | Rapid diagnostic and other products | $18,686,680 | | Healthy meals products | $186,914 | | Total assets, held for continuing operations | $101,688,272 | NOTE 20 - DISCONTINUED OPERATIONS The Tenet-Jove Disposal Group has been reclassified as discontinued operations, significantly impacting the company's financial statements by separating its assets and results - The Tenet-Jove Disposal Group was reclassified as discontinued operations due to the acquisition of Wintus and the transfer of the company's equity interest in Tenet-Jove[239][240] Assets and Liabilities of Discontinued Operations | Metric | March 31, 2024 | June 30, 2023 | |:---|:---|:---| | Total assets of discontinued operation | $0 | $39,684,744 | | Total liabilities of discontinued operation | $0 | $6,798,667 | Operating Results of Discontinued Operations (Nine Months Ended March 31) | Metric | 2024 | 2023 | |:---|:---|:---| | Revenue | $4,439 | $1,536,464 | | Gross Profit (Loss) | $256 | $(311,767) | | Net Income (Loss) from Discontinued Operations | $(49,455) | $(937,831) | | Income on Disposal of Discontinued Operations | $8,904,702 | $0 | | Total Net Income (Loss) from Discontinued Operations | $8,855,247 | $(937,831) | NOTE 21 - SUBSEQUENT EVENTS The company evaluated subsequent events through May 15, 2024, and identified no events requiring adjustment to or disclosure in the financial statements - No subsequent events required adjustments to or disclosure in the unaudited condensed consolidated financial statements as of May 15, 2024[244] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the financial impact of recent acquisitions and divestitures, revenue and expense trends, liquidity challenges, and critical accounting policies Forward-Looking Statements This section contains forward-looking statements about future plans and financial projections that are subject to risks and uncertainties - The report contains forward-looking statements about future products, revenue, earnings, capital structure, and business expansions, which are subject to known and unknown risks and events[247][248][249] General Overview The company has reshaped its PRC operations through acquisitions and divestitures to focus on diagnostics, agricultural products, and healthy meals - Shineco, Inc operates through PRC entities and has terminated its VIE structure by divesting Tenet-Jove[253][255] - Current continuing business segments include Rapid Diagnostic and Other Products (Biowin), Other Agricultural Products (Wintus), and Healthy Meals Products (Fuzhou Meida)[256][258][259] - Former business segments operated by the Tenet-Jove Disposal Group are reclassified as discontinued operations[260] Financing Activities The company has raised capital through convertible notes and common stock sales to institutional investors, non-US investors, and employees - The company issued several unsecured convertible promissory notes to Streeterville Capital, LLC, with principal amounts totaling over US$17 million[261][263][264] - As of March 31, 2024, 1,500,396 common shares were issued to the investor from convertible note conversions, totaling US$9,988,359 in principal and interest[264] - The company sold common stock to non-US investors for gross proceeds of US$1,758,340 (August 2022), US$1,440,000 (December 2023), and up to US$285,714 (March 2024)[265][266][267] - Sales of common stock to employees for up to US$650,000 were approved, with US$178,332 in subscription receivable outstanding as of March 31, 2024[265] Factors Affecting Financial Performance Financial performance is influenced by product demand, cost control, PRC-related risks, and the lingering, uncertain impact of the COVID-19 pandemic - Increasing demand for products and expansion through new product development, distribution networks, and potential M&A are expected to positively impact financial performance[269] - Maintaining effective control of costs and expenses, including material supplies and long-term alliances with suppliers, is crucial[270] - Operations in the PRC are subject to political, economic, legal, and foreign currency exchange risks[271] - The COVID-19 pandemic caused disruptions in operations, transportation, and supply chains, and its future impact remains highly uncertain[272] Critical Accounting Policies and Estimates Financial results rely on significant judgments and estimates, particularly regarding VIE consolidation, credit losses, inventory valuation, and revenue recognition - Critical accounting policies include the consolidation of Variable Interest Entities (VIEs), requiring evaluation to determine the primary beneficiary[275] - Significant estimates are made for useful lives of assets, recoverability of long-lived assets, expected credit losses (CECL), deferred tax valuation allowances, and inventory reserves[277] - The company adopted the Current Expected Credit Loss (CECL) methodology on July 1, 2023, for financial instruments[279][280][281] - Revenue recognition follows ASC 606, with revenue recognized upon delivery and title transfer or service performance[283][285] Results of Operations for the Nine Months Ended March 31, 2024 and 2023 Revenue from continuing operations grew substantially due to acquisitions, but higher expenses led to a larger operating loss, offset by income from discontinued operations Key Financial Results (Nine Months Ended March 31) | Metric | 2024 | 2023 | Variance Amount | % Change | |:---|:---|:---|:---|:---| | Revenue | $5,304,159 | $231,513 | $5,072,646 | 2,191.08% | | Gross profit | $602,940 | $11,156 | $591,784 | 5,304.63% | | General and administrative expenses | $12,155,801 | $5,986,324 | $6,169,477 | 103.06% | | Net loss from continuing operations | $(12,937,954) | $(6,886,985) | $(6,050,969) | 87.86% | | Net income (loss) from discontinued operations | $8,855,247 | $(937,831) | $9,793,078 | (1,044.23)% | | Net loss | $(4,082,707) | $(7,824,816) | $3,742,109 | (47.82)% | - Revenue from other agricultural products (Wintus) increased by $4,844,587 (100%) and rapid diagnostic products (Biowin) increased by $210,414 (90.89%) due to new acquisitions[293] - General and administrative expenses increased by $6,169,477 (103.06%) due to forgiveness of subscription receivable and increased professional fees[304] - Net income from discontinued operations significantly improved to $8,855,247 in 2024 from a loss of $937,831 in 2023, primarily due to income on disposal[311][312] Results of Operations for the Three Months Ended March 31, 2024 and 2023 Quarterly revenue grew significantly from the Wintus acquisition, but higher operating and interest expenses led to an increased net loss Key Financial Results (Three Months Ended March 31) | Metric | 2024 | 2023 | Variance Amount | % Change | |:---|:---|:---|:---|:---| | Revenue | $1,351,400 | $231,513 | $1,119,887 | 483.73% | | Gross profit | $191,667 | $11,156 | $180,511 | 1,618.06% | | General and administrative expenses | $3,304,426 | $2,691,544 | $612,882 | 22.77% | | Net loss from continuing operations | $(4,368,728) | $(2,939,166) | $(1,429,562) | 48.64% | | Net income from discontinued operations | $0 | $329,181 | $(329,181) | (100.00)% | | Net loss | $(4,368,728) | $(2,609,985) | $(1,758,743) | 67.39% | - Revenue from other agricultural products (Wintus) increased by $1,202,054 (100%) due to its acquisition, while rapid diagnostic products revenue decreased by $88,708 (38.32%)[318][319] - Net other income decreased by $238,501 (92.59%) due to prior year's recognition of income on advances and decreased government subsidies[331] - Interest expenses, net, increased by $241,200 (136.01%) due to increased interest on loans from the newly acquired Wintus[332] Treasury Policies Treasury policies focus on minimizing interest and currency risks through central monitoring and loan management, while avoiding speculative derivatives - Treasury policies focus on minimizing interest risk through loan re-financing and negotiation, and minimizing currency risk by monitoring foreign currency borrowings[341] - The company does not engage in derivative contracts for speculative activities[341] Liquidity and Capital Resources The company finances operations through various loans and equity sales and believes it has sufficient liquidity for the next 12 months despite negative working capital - Primary funding sources include advances from related parties, short-term and long-term loans, convertible notes, and common stock sales[342] - As of March 31, 2024, the company had US$13.4 million in short-term loans and US$1.7 million in long-term loans outstanding, with expectations for renewal[342] - Working capital decreased by US$38,503,538 (219.0%) from June 30, 2023, resulting in a negative working capital of US$20,925,946[352] - Management believes current cash, future cash flows, and access to loans will be sufficient for the next 12 months[350] Capital Commitments and Contingencies The company has resolved recent legal proceedings and reports no other material capital commitments or contingent liabilities as of March 31, 2024 - A lawsuit filed by Ms Guiqin Li was settled for approximately US$0.7 million[372] - A lawsuit against Lei Zhang and Yan Li was discontinued, leading to the waiver of US$3,024,000 in subscription receivable[357][375] - As of March 31, 2024, there were no other material capital commitments or contingent liabilities[358] Off-Balance Sheet Commitments and Arrangements The company has an off-balance sheet commitment involving a property pledge to guarantee a personal loan for a related party - The company pledged property with a net book value of US$1,045,883 as collateral to guarantee a personal loan of Mr Yuying Zhang, a related party[358] - The loan is expected to be repaid, and the pledge released, by May 31, 2024[358] Cash Flows Cash used in operations increased, investing activities shifted to a significant use of cash, and financing provided cash, resulting in a net decrease in cash Cash Flow Summary (Nine Months Ended March 31) | Activity | 2024 | 2023 | |:---|:---|:---| | Net cash used in operating activities | $(3,062,020) | $(2,853,387) | | Net cash provided by (used in) investing activities | $(13,939,717) | $1,013,586 | | Net cash provided by financing activities | $3,184,948 | $2,421,005 | | Net increase (decrease) in cash and cash equivalents | $(13,601,276) | $229,944 | | Cash and cash equivalents, end of the period | $565,483 | $15,395,175 | - Net cash used in investing activities in 2024 was primarily due to the disposal of Tenet-Jove ($13.9 million) and payments for loans to third parties ($1.5 million)[364] - Net cash provided by financing activities in 2024 was driven by proceeds from common stock issuance ($2.0 million) and short-term loans ($15.4 million)[365] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, the company is not required to provide disclosures about market risk - The company is not required to provide quantitative and qualitative disclosures about market risk as it is a smaller reporting company[367] Item 4. Controls and Procedures Management concluded that disclosure controls were not effective due to material weaknesses in accounting personnel and segregation of duties - Disclosure controls and procedures were not effective at the reasonable assurance level as of March 31, 2024[368] - Material weaknesses identified include a lack of full-time U.S. GAAP personnel and a lack of segregation of duties for accounting personnel[368] - Remediation steps include recruiting qualified professionals, engaging an outside consulting firm, and improving internal approval processes[369] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company has concluded two material legal proceedings, one via settlement and the other via discontinuation, resulting in a significant receivable waiver - A lawsuit filed by Ms Guiqin Li was settled in January 2023 for US$700,645 (approximately RMB 4.8 million)[371][372] - A lawsuit against Lei Zhang and Yan Li was discontinued in December 2023, leading to the waiver of US$3,024,000 in subscription receivable[373][375] Item 1A. Risk Factors As a smaller reporting company, the company is not required to provide risk factor disclosures in this report - The company is not required to provide risk factor information as it is a smaller reporting company[376] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report for the period - No unregistered sales of equity securities and use of proceeds to report[376] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities to report for the period - No defaults upon senior securities to report[376] Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to the company's business operations - Mine safety disclosures are not applicable[376] Item 5. Other Information There is no other information to report in this section for the period - No other information to report[376] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, agreements, incentive plans, and certifications - The exhibits include the Certificate of Incorporation, Amended and Restated Bylaws, Specimen Common Stock Certificate, Employment Agreements, Securities Purchase Agreements, 2024 Equity Incentive Plan, and various certifications[377] SIGNATURES SIGNATURES The report is duly signed by the Chief Executive Officer and Chief Financial Officer on behalf of the company as of May 15, 2024 - The report is signed by Jennifer Zhan, Chief Executive Officer, and Sai (Sam) Wang, Chief Financial Officer, on May 15, 2024[380]