UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For
the quarterly period ended
OR
For the transition period from _______ to _______
Commission
File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)
Room 3310, North Tower, Zhengda Center,
No. 20, Jinhe East Road, Chaoyang District
Beijing, People’s Republic of China 100020
(Former address of principal executive offices) (Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each Class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of May 12, 2023, there were shares of common stock, par value $0.001 per share, outstanding.
TABLE OF CONTENTS
| i |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHINECO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
| March 31, | June 30, | |||||||
| 2023 | 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Advances to suppliers, net | ||||||||
| Other current assets, net | ||||||||
| TOTAL CURRENT ASSETS | ||||||||
| Property and equipment, net | ||||||||
| Investment in unconsolidated entity | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Long-term deposit and other noncurrent assets | ||||||||
| Operating lease right-of-use assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Short-term loans | $ | $ | ||||||
| Accounts payable | ||||||||
| Advances from customers | ||||||||
| Other payables and accrued expenses | ||||||||
| Operating lease liabilities - current | ||||||||
| Convertible note payable | ||||||||
| Taxes payable | ||||||||
| TOTAL CURRENT LIABILITIES | ||||||||
| Income tax payable - noncurrent portion | ||||||||
| Operating lease liabilities - non-current | ||||||||
| Deferred tax liability | ||||||||
| TOTAL LIABILITIES | ||||||||
| Commitments and contingencies | ||||||||
| EQUITY: | ||||||||
| Common stock; par value $, shares authorized; and shares issued and outstanding at March 31, 2023 and June 30, 2022 | ||||||||
| Additional paid-in capital | ||||||||
| Subscription receivable | ( | ) | ( | ) | ||||
| Subscribled common stock | ||||||||
| Statutory reserve | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total Stockholders’ equity of Shineco, Inc. | ||||||||
| Non-controlling interest | ( | ) | ||||||
| TOTAL EQUITY | ||||||||
| TOTAL LIABILITIES AND EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 1 |
SHINECO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
(Unaudited)
For the Nine Months Ended March 31, | For the Three Months Ended March 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| REVENUE | $ | $ | $ | $ | ||||||||||||
| COST OF REVENUE | ||||||||||||||||
| Cost of product and services | ||||||||||||||||
| Stock written off due to natural disaster | ||||||||||||||||
| Business and sales related tax | ||||||||||||||||
| Total cost of revenue | ||||||||||||||||
| GROSS LOSS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OPERATING EXPENSES | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Selling expenses | ||||||||||||||||
| Research and development expenses | ||||||||||||||||
| Impairment loss of distribution rights | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| LOSS FROM OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||
| Impairment loss on an unconsolidated entity | ( | ) | ||||||||||||||
| Loss from equity method investments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expenses), net | ( | ) | ( | ) | ||||||||||||
| Amortization of debt issuance costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest income (expenses), net | ( | ) | ( | ) | ||||||||||||
| Total other expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| LOSS BEFORE PROVISION FOR INCOME TAXES FROM CONTINUING OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| BENEFIT FOR INCOME TAXES | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| NET LOSS FROM CONTINUING OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| DISCONTINUED OPERATIONS: | ||||||||||||||||
| Loss on disposal of discontinued operations | ( | ) | ||||||||||||||
| Net loss from discontinued operations | ( | ) | ||||||||||||||
| NET LOSS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) attributable to non-controlling interest | ( | ) | ( | ) | ||||||||||||
| NET LOSS ATTRIBUTABLE TO SHINECO, INC. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| COMPREHENSIVE LOSS | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Other comprehensive income (loss): foreign currency translation income (loss) | ( | ) | ||||||||||||||
| Total comprehensive loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Less: comprehensive income (loss) attributable to non-controlling interest | ( | ) | ( | ) | ||||||||||||
| COMPREHENSIVE LOSS ATTRIBUTABLE TO SHINECO, INC. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of shares basic and diluted | ||||||||||||||||
| Basic and diluted loss per common share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per common share | ||||||||||||||||
| Continuing operations - Basic and Diluted | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Discontinued operations - Basic and Diluted | ( | ) | ||||||||||||||
| Net loss per common share - basic and diluted | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 2 |
SHINECO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 2023 AND 2022
(UNAUDITED)
| RETAINED | ACCUMULATED | |||||||||||||||||||||||||||||||||||||||
| COMMON STOCK | SUBSCRIPTION | COMMON STOCK | ADDITIONAL PAID-IN | STATUTORY | EARNINGS (ACCUMULATED | OTHER COMPREHENSIVE |
|
NON- CONTROLLING | TOTAL | |||||||||||||||||||||||||||||||
| SHARES | AMOUNT | RECEIVABLE | SUBSCRIBLED | CAPITAL | RESERVE | DEFICIT) | LOSS | INTEREST | EQUITY | |||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | ( | ) | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||
| Stock issuance | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares for convertible notes redemption | ||||||||||||||||||||||||||||||||||||||||
| Beneficial conversion feature associated with convertible notes | - | |||||||||||||||||||||||||||||||||||||||
| Disposal of Ankang | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Net loss for the period | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Foreign currency translation gain | - | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||
| Acquisition of Biowin | - | |||||||||||||||||||||||||||||||||||||||
| Stock issuance | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Proceeds received from investors for subscription of common stock | - | |||||||||||||||||||||||||||||||||||||||
| Issuance of common shares for convertible notes redemption | ||||||||||||||||||||||||||||||||||||||||
Common stock issued for management and employees | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Common stock issued for services | ||||||||||||||||||||||||||||||||||||||||
| Net income (loss) for the period | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Foreign currency translation gain (loss) | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 3 |
SHINECO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022
(UNAUDITED)
| ACCUMULATED | ||||||||||||||||||||||||||||||||||||||||
| COMMON STOCK | SUBSCRIPTION | COMMON STOCK | ADDITIONAL PAID-IN | STATUTORY | ACCUMULATED | OTHER COMPREHENSIVE | NON- CONTROLLING | TOTAL | ||||||||||||||||||||||||||||||||
| SHARES | AMOUNT | RECEIVABLE | SUBSCRIBLED | CAPITAL | RESERVE | DEFICIT | LOSS | INTEREST | EQUITY | |||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
| Stock issuance | ||||||||||||||||||||||||||||||||||||||||
| Net loss for the period | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Foreign currency translation gain (loss) | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||
| Acquisition of Biowin | - | |||||||||||||||||||||||||||||||||||||||
| Stock issuance | - | |||||||||||||||||||||||||||||||||||||||
| Proceeds received from investors for subscription of common stock | - | |||||||||||||||||||||||||||||||||||||||
| Issuance of common shares for convertible notes redemption | ||||||||||||||||||||||||||||||||||||||||
| Common stock issued for management and employees | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Common stock issued for services | ||||||||||||||||||||||||||||||||||||||||
| Net income (loss) for the period | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Foreign currency translation gain (loss) | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 4 |
SHINECO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Net loss from discontinued operations, net of tax | ( | ) | ||||||
| Net loss from continuing operations | ( | ) | ( | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Loss from disposal of property and equipment | ||||||||
| Provision for doubtful accounts | ||||||||
| Provision for (reversal of) inventory reserve | ( | ) | ||||||
| Stock written off due to natural disaster | ||||||||
| Deferred tax benefit | ( | ) | ||||||
| Loss from equity method investments | ||||||||
| Amortization of right of use assets | ||||||||
| Impairment loss on distribution rights | ||||||||
| Impairment loss on an unconsolidated entity | ||||||||
| Common stock issued for management and employees | ||||||||
| Common stock issued for services | ||||||||
| Amortization of debt issuance costs | ||||||||
| Accrued interest expense for convertible notes | ||||||||
| Accrued interest expenses due to related parties | ||||||||
| Accrued interest income from related parties | ( | ) | ( | ) | ||||
| Accrued interest income from third parties | ( | ) | ( | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Advances to suppliers | ||||||||
| Inventories | ( | ) | ( | ) | ||||
| Other current assets | ( | ) | ||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Advances from customers | ( | ) | ( | ) | ||||
| Other payables and accrued expenses | ||||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Taxes payable | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Acquisitions of property and equipment | ( | ) | ( | ) | ||||
| Proceeds from disposal of property and equipment | ||||||||
| Payment made for loans to third parties | ( | ) | ( | ) | ||||
| Repayments of loans to third parties | ||||||||
| Payment made for loans to related parties | ( | ) | ||||||
| Repayments of loans to related parties | ||||||||
| Investment in unconsolidated entity | ( | ) | ||||||
| Payment made for business acquisition | ( | ) | ||||||
| Acquisition of subsidiaries, net of cash | ||||||||
| Disposal of a VIE - Ankang, net of cash | ( | ) | ||||||
| Net cash provided (used in) by investing activities | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from short-term bank loans | ||||||||
| Repayment of short-term bank loans | ( | ) | ||||||
| Proceeds from issuance of common stock | ||||||||
| Proceeds received from investors for subscription of common stock | ||||||||
| Proceeds from (repayments of) advances from related parties | ( | ) | ||||||
| Proceeds from issuance of convertible notes | ||||||||
| Net cash provided by financing activities | ||||||||
| EFFECT OF EXCHANGE RATE CHANGE ON CASH AND CASH EQUIVALENTS | ( | ) | ||||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | ( | ) | ||||||
| CASH AND CASH EQUIVALENTS - Beginning of the period | ||||||||
| CASH AND CASH EQUIVALENTS - End of the period | $ | $ | ||||||
| SUPPLEMENTAL NON-CASH OPERATING, INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Issuance of common shares for convertible notes redemption | $ | $ | ||||||
| Issuance of common shares for proceeds received in prior year | $ | $ | ||||||
| Issuance of common shares for business acquisition | $ | $ | ||||||
| Right-of-use assets obtained in exchange for operating lease obligations | $ | $ | ||||||
| Reduction of right-of-use assets and operating lease obligations due to early termination of lease agreement | $ | $ | ||||||
| Repayments of loans to third parties offset by other payables | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
Shineco, Inc. (“Shineco” or the “Company”) was incorporated in the State of Delaware on August 20, 1997. The Company is a holding company whose primary purpose is to develop business opportunities in the People’s Republic of China (the “PRC” or “China”).
On
December 30, 2004, the Company acquired all of the issued and outstanding shares of Beijing Tenet-Jove Technological Development Co.,
Ltd. (“Tenet-Jove”), a PRC company, in exchange for restricted shares of the Company’s common stock, and the sole operating
business of the Company became that of its subsidiary, Tenet-Jove. Tenet-Jove was incorporated on December 15, 2003 under the laws of
China. Consequently, Tenet-Jove became a
On December 31, 2008, June 11, 2011, and May 24, 2012, Tenet-Jove entered into a series of contractual agreements including an Executive Business Cooperation Agreement, a Timely Reporting Agreement, an Equity Interest Pledge Agreement, and an Executive Option Agreement (collectively, the “VIE Agreements”), with each one of the following entities, Ankang Longevity Pharmaceutical (Group) Co., Ltd. (“Ankang Longevity Group”), Yantai Zhisheng International Freight Forwarding Co., Ltd. (“Zhisheng Freight”), Yantai Zhisheng International Trade Co., Ltd. (“Zhisheng Trade”), Yantai Mouping District Zhisheng Agricultural Produce Cooperative (“Zhisheng Agricultural”), and Qingdao Zhihesheng Agricultural Produce Services., Ltd. (“Qingdao Zhihesheng”). On February 24, 2014, Tenet-Jove entered into the same series of contractual agreements with Shineco Zhisheng (Beijing) Bio-Technology Co., Ltd. (“Zhisheng Bio-Tech”), which was incorporated in 2014. Zhisheng Bio-Tech, Zhisheng Freight, Zhisheng Trade, Zhisheng Agricultural, and Qingdao Zhihesheng are collectively referred to herein as the “Zhisheng VIEs”.
Pursuant to the VIE Agreements, Tenet-Jove has the exclusive right to provide to the Zhisheng VIEs and Ankang Longevity Group consulting services related to their business operations and management. All the above contractual agreements obligate Tenet-Jove to absorb a majority of the risk of loss from the Zhisheng VIEs and Ankang Longevity Group’s activities and entitle Tenet-Jove to receive a majority of their residual returns. In essence, Tenet-Jove has become the primary beneficiary of the operations of the Zhisheng VIEs and Ankang Longevity Group. Therefore, the Zhisheng VIEs and Ankang Longevity Group are treated as variable interest entities (“VIEs”) under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810 “Consolidation.” Accordingly, the accounts of these entities are consolidated with those of Tenet-Jove.
Since
Shineco is effectively controlled by the majority shareholders of the Zhisheng VIEs and Ankang Longevity Group, Shineco owns
On
September 30, 2017, Tenet-Jove established Xinjiang Shineco Taihe Agriculture Technology Ltd. (“Xinjiang Taihe”) with registered
capital of RMB
| 6 |
On
December 10, 2016, Tenet-Jove entered into a purchase agreement with Tianjin Tajite E-Commerce Co., Ltd. (“Tianjin Tajite”),
an online e-commerce company based in Tianjin, China, specializing in distributing Luobuma related products and branded products of Daiso
100-yen shops, pursuant to which Tenet-Jove would acquire a
On
March 13, 2019, Tenet-Jove established Beijing Tenjove Newhemp Biotechnology Co., Ltd. (“TNB”) with registered capital of
RMB
On
July 23, 2020, Shanghai Jiaying International Trade Co., Ltd. (“Shanghai Jiaying”) was established with registered capital
of RMB
On
January 7, 2021, Inner Mongolia Shineco Zhonghemp Biotechnology Co., Ltd. (“SZB”) was established with registered capital
of RMB
On
December 07, 2021, the Company established Shineco Life Science Research Co., Ltd. (“Life Science”) as a wholly foreign-owned
entity with registered capital of US$
On
April 13, 2022, the Company established Shineco Life Science Group Hong Kong Co., Limited (“Life Science HK”) as a wholly
owned entity with registered capital of US$
On June 8, 2021, Tenet-Jove entered into a Restructuring Agreement with various parties. Pursuant to the terms of the Restructuring Agreement, (i) the Company transferred all of its rights and interests in Ankang Longevity to Yushe County Guangyuan Forest Development Co., Ltd. (“Guangyuan”)’s Shareholders in exchange for Guangyuan Shareholders entering into the VIE Agreements with Tenet-Jove, which composes of one group of similar identifiable assets; (ii) Tenet-Jove entered a Termination Agreement with Ankang Longevity and the Ankang Shareholders; (iii) as a consideration to the Restructuring Agreement and based on a valuation report on the equity interests of Guangyuan issued by an independent third party, Tenet-Jove relinquished all of its rights and interests in Ankang Longevity and transferred those rights and interests to the Guangyuan Shareholders; and (iv) Guangyuan and the Guangyuan Shareholders entered into a series of variable interest entity agreements with Tenet-Jove. After signing of the Restructuring Agreement, the Company and the shareholders of Ankang and Guangyuan actively carried out the transferring of rights and interests in Ankang and Guangyuan, and the transferring was completed subsequently on July 5, 2021. Afterwards, with the completion of all other follow-ups works, on August 16, 2021, the Company, through its subsidiary Tenet-Jove, completed the previously announced acquisition pursuant to the Restructuring Agreement dated June 8, 2021.
| 7 |
On
December 30, 2022, Life Science closed the acquisition of
On
January 13, 2023, the Company entered into a non-binding framework agreement (the “LOI”) with certain shareholders of Dream
Partner Limited (“Dream Ltd.”) to acquire
The Company, its subsidiaries, its VIEs, and its VIEs’ subsidiaries (collectively the “Group”) currently operate four main business segments: 1) Tenet-Jove is engaged in manufacturing and selling Bluish Dogbane and related products, also known in Chinese as “Luobuma,” including therapeutic clothing and textile products made from Luobuma; 2) Qingdao Zhihesheng and Guanyuan are engaged in planting, processing, and distributing green agricultural produce; (“Agricultural Products”); 3) Zhisheng Freight is providing domestic and international logistic services (“Freight Services”); and 4) Biowin is specializing in development, production and distribution of innovative rapid diagnostic products and related medical devices for the most common diseases (“Rapid Diagnostic Products”). These different business activities and products can potentially be integrated and benefit from one another.
NOTE 2. GOING CONCERN UNCERTAINTIES
As
disclosed in the Company’s unaudited condensed consolidated financial statements, the Company had recurring net losses of US$
Despite those negative financial trends, as of March 31, 2023, the Company had positive working capital due to the following measurements the management has taken to enhance the Company’s liquidity:
| 1) | On
August 11, 2022, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with certain non-US
investors (the “Investors”). Under the Purchase Agreement, the Company will sell to the Investors, up to shares
of its common stock at a per share purchase price of $ for gross proceeds of up to US$ |
| 8 |
| 2) | On January 12, 2023, the Board of the Company approved the sales of shares of the Company’s common stock to the Company’s employees for gross proceeds of up to US$, and the balance of the proceeds is expected to be fully collected by September 30, 2023. |
| 3) | The
Company financed from commercial banks. As of March 31, 2023, the Company had US$ |
| 4) | As
of March 31, 2023, the Company had cash and cash equivalents in the amount of approximately US$ |
Management believes that the foregoing measures collectively will provide sufficient liquidity for the Company to meet its future liquidity needs 12 months from the date of this filing.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information pursuant to the rules of the SEC and have been consistently applied. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended June 30, 2022, which was filed on September 28, 2022.
The unaudited condensed consolidated financial statements of the Company reflect the principal activities of the Company, its subsidiaries, its VIEs and its VIEs’ subsidiaries. The non-controlling interest represents the minority shareholders’ interest in the Company’s majority owned subsidiaries and VIEs. All intercompany accounts and transactions have been eliminated in consolidation. Operating results for the nine months ended March 31, 2023 and 2022 are not necessarily indicative of the results that may be expected for the full year.
Consolidation of Variable Interest Entities
VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision-making ability. All VIEs and their subsidiaries with which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.
The total carrying amount of the VIEs and their subsidiaries’ unaudited condensed consolidated assets and liabilities and income information were as follows:
March 31, 2023 | June 30, 2022 | |||||||
| Current assets | $ | $ | ||||||
| Non-current assets | ||||||||
| Total assets | ||||||||
| Total liabilities | ( | ) | ( | ) | ||||
| Net assets | $ | $ | ||||||
For the nine months ended March 31, | For the three months ended March 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Gross loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Income (loss) from operations | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Net income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| 9 |
The carrying amount of the VIEs and their subsidiaries’ unaudited condensed consolidated income information held for discontinued operations were as follows:
For the nine months ended March 31, | For the three months ended March 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net loss | $ | $ | ( | ) | $ | $ | ||||||||||
The carrying amount of the VIEs and their subsidiaries’ unaudited condensed consolidated assets and liabilities and income information held for continued operations were as follows:
March 31, 2023 | June 30, 2022 | |||||||
| Current assets | $ | $ | ||||||
| Non-current assets | ||||||||
| Total assets | ||||||||
| Total liabilities | ( | ) | ( | ) | ||||
| Net assets | $ | $ | ||||||
For the nine months ended March 31, | For the three months ended March 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Gross loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Income (loss) from operations | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Net income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
Non-controlling Interests
U.S. GAAP requires that non-controlling interests in subsidiaries and affiliates be reported in the equity section of a company’s balance sheet. In addition, the amounts attributable to the non-controlling interests in the net income (loss) of these entities are reported separately in the unaudited condensed consolidated statements of loss and comprehensive loss.
| 10 |
Risks and Uncertainties
The operations of the Company are located in the PRC and are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic, and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political, regulatory, and social conditions in the PRC, and by changes in governmental policies or interpretations with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things. Although the Company has not experienced losses from these factors and believes that it is in compliance with existing laws and regulations, there is no guarantee that the Company will continue to do so in the future.
Members of the current management team own controlling interests in the Company and are also the owners of the VIEs in the PRC. The Company only has contractual arrangements with the VIEs, which obligate it to absorb the risk of loss and to receive the residual expected returns. As such, the controlling shareholders of the Company and the VIEs could cancel these agreements or permit them to expire at the end of the agreement terms, as a result of which the Company would not retain the economic benefits from the VIEs. In addition, should these agreements be challenged or litigated, they would also be subject to the laws and courts of the PRC legal system, which could make enforcing the Company’s rights difficult.
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements as well as the reported amounts of revenue and expenses during the reporting periods. Significant estimates required to be made by management include, but are not limited to, useful lives of property and equipment, and intangible assets, the recoverability of long-lived assets, and the valuation of accounts receivable, advances to suppliers, deferred taxes, and inventory reserves. Actual results could differ from those estimates.
Revenue Recognition
We previously recognized revenue from sales of Luobuma products, Chinese medicinal herbal products, agricultural products and rapid diagnostic products, as well as providing logistic services and other processing services to external customers. We recognized revenue when all of the following have occurred: (i) there was persuasive evidence of an arrangement with a customer; (ii) delivery had occurred or services had been rendered; (iii) the sales price was fixed or determinable; and (iv) our collection of such fees was reasonably assured. These criteria, as related to our revenue, were considered to have been met as follows:
Sales of products: The Company recognized revenue from the sale of products when the goods were delivered and title to the goods passed to the customer, provided that there were no uncertainties regarding customer acceptance; persuasive evidence of an arrangement existed; the sales price was fixed or determinable; and collectability was deemed probable.
Revenue from the provision of services: The Company merely acts as an agent in these type of services transactions. Revenue from domestic air and overland freight forwarding services was recognized upon the performance of services as stipulated in the underlying contract or when commodities were being released from the customer’s warehouse; the service price was fixed or determinable; and collectability was deemed probable.
| 11 |
With the adoption of ASC 606, “Revenue from Contracts with Customers,” revenue is recognized when all of the following five steps are met: (i) identify the contract(s) with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations; (v) recognize revenue when (or as) each performance obligation is satisfied. The Company adopted the new revenue standard beginning July 1, 2018, and adopted a modified retrospective approach upon adoption. The Company has assessed the impact of the guidance by reviewing its existing customer contracts to identify differences that will result from applying the new requirements, including the evaluation of its performance obligations, transaction price, customer payments, transfer of control, and principal versus agent considerations. In accordance with ASC 606, the Company evaluates whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions. When the Company is a principal, that the Company obtains control of the specified goods or services before they are transferred to the customers, the revenues should be recognized in the gross amount of consideration to which it expects to be entitled in exchange for the specified goods or services transferred. When the Company is an agent and its obligation is to facilitate third parties in fulfilling their performance obligation for specified goods or services, the revenues should be recognized in the net amount for the amount of commission which the Company earns in exchange for arranging for the specified goods or services to be provided by other parties. Based on the assessment, the Company concluded that there was no change to the timing and pattern of revenue recognition for its current revenue streams in scope of Topic 606 and therefore there was no material changes to the Company’s consolidated financial statements upon adoption of ASC 606.
Cash and Cash Equivalents
Cash
and cash equivalents consist of cash on hand, cash on deposit, and other highly liquid investments which are unrestricted as to withdrawal
or use, and which have original maturities of three months or less when purchased. The Company maintains cash with various financial
institutions mainly in the PRC. As of March 31, 2023 and June 30, 2022, the Company had
Under PRC law, it is generally required that a commercial bank in the PRC that holds third-party cash deposits protect the depositors’ rights over and interests in their deposited money. PRC banks are subject to a series of risk control regulatory standards, and PRC bank regulatory authorities are empowered to take over the operation and management of any PRC bank that faces a material credit crisis. The Company monitors the banks utilized and has not experienced any problems.
Accounts Receivable, Net
Accounts
receivable are recorded at net realizable value, consisting of the carrying amount less an allowance for uncollectible accounts, as necessary.
The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the
collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many
factors, including the age of the balance, the customers’ historical payment history, their current credit-worthiness, and current
economic trends. The fair value of long-term receivables is determined using a present value technique by discounting the future expected
contractual cash flows using current rates at which similar instruments would be issued at the measurement date. As of March 31, 2023
and June 30, 2022, the allowance for doubtful accounts was US$
Inventories, Net
Inventories,
which are stated at the lower of cost or net realizable value, consist of raw materials, work-in-progress, and finished goods
related to the Company’s products. Net realizable value is the estimated selling price in the normal course of business less
any costs to complete and sell products. Cost is determined using the first in first out (“FIFO”) method. Agricultural
products that the Company farms are recorded at cost, which includes direct costs such as seed selection, fertilizer, labor cost and
contract fees that are spent in growing agricultural products on the leased farmland, and indirect costs which include amortization
of prepayments of farmland leases and farmland development costs. All the costs are accumulated until the time of harvest and then
allocated to the harvested crops costs when they are sold. The Company periodically evaluates its inventory and records an inventory
reserve for certain inventories that may not be saleable or whose cost exceeds net realizable value. As of March 31, 2023 and June
30, 2022, the inventory reserve was US$
| 12 |
Advances to Suppliers, Net
Advances
to suppliers consist of payments to suppliers for materials that have not been received. Advances to suppliers are reviewed periodically
to determine whether their carrying value has become impaired. As of March 31, 2023 and June 30, 2022, the Company had an allowance for
uncollectible advances to suppliers of US$
Business Acquisitions
Business acquisitions are accounted for under the acquisition method. The acquisition method requires the reporting entity to identify the acquirer, determine the acquisition date, recognize and measure the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquired entity, and recognize and measure goodwill or a bargain gain from the purchase. The acquiree’s results are included in the Company’s unaudited condensed consolidated financial statements from the date of acquisition. Assets acquired and liabilities assumed are recorded at their fair values on the date acquired and the excess of the purchase price over the amounts assigned is recorded as goodwill, or if the fair value of the net assets acquired exceeds the purchase price consideration, a bargain purchase gain is recorded. Adjustments to fair value assessments are generally recorded to goodwill over the measurement period (not longer than 12 months). The acquisition method also requires that acquisition-related transaction and post-acquisition restructuring costs be charged to expense as committed, and requires the Company to recognize and measure certain assets and liabilities, including those arising from contingencies and contingent consideration in a business combination.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of assets acquired. The goodwill impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, goodwill of the reporting unit would be considered impaired. To measure the amount of the impairment loss, the implied fair value of a reporting unit’s goodwill is compared to the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. If the carrying amount of a reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. For each of these tests, the fair value of each of the Company’s reporting units is determined using a combination of valuation techniques, including a discounted cash flow methodology. To corroborate the discounted cash flow analysis performed at each reporting unit, a market approach is utilized using observable market data such as comparable companies in similar lines of business that are publicly traded or which are part of a public or private transaction (to the extent available).
Leases
The Company follows FASB ASC No. 842, Leases (“Topic 842”). The Company leases office spaces, warehouse, and farmland which are classified as operating leases in accordance with Topic 842. Under Topic 842, lessees are required to recognize the following for all leases (with the exception of short-term leases, usually with initial term of 12 months or less) on the commencement date: (i) lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) right-of-use (“ROU”) asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and includes initial direct costs incurred. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expenses for minimum lease payments are recognized on a straight-line basis over the lease term. All operating lease ROU assets are reviewed for impairment annually. For the nine and three months ended March 31, 2023 and 2022, the Company did not recognize any impairment of its ROU assets.
| 13 |
Property and Equipment, Net
Property and equipment are stated at cost, less accumulated depreciation and amortization. Expenditures for additions, major renewals, and betterments are capitalized, and expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is provided on a straight-line basis, less estimated residual value, if any, over an asset’s estimated useful life. Farmland leasehold improvements are amortized over the shorter of lease term or estimated useful lives of the underlying assets. The estimated useful lives of the Company’s property and equipment are as follows:
| Estimated useful lives | ||
| Buildings | ||
| Machinery equipment | ||
| Motor vehicles | ||
| Office equipment | ||
| Farmland leasehold improvements | ||
| Leasehold improvement |
Long-lived Assets
Finite-lived
assets and intangibles are reviewed for impairment testing when circumstances require. For purposes of evaluating the recoverability
of long-lived assets, when undiscounted future cash flows will not be sufficient to recover an asset’s carrying amount, the
asset is written down to its fair value. The long-lived assets of the Company that are subject to evaluation consist primarily of
property and equipment, land use rights, distribution right, ROU assets and investments. For the nine months ended March 31, 2023
and 2022, the Company recognized an impairment of its distribution right of US$ and US$
Fair Value of Financial Instruments
The Company follows the provisions of ASC 820, “Fair Value Measurements and Disclosures.” ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 applies to assets or liabilities for which there are inputs, other than quoted prices in level, that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the asset or liability.
The carrying value of financial instruments included in current assets and liabilities approximate their fair values because of the short-term nature of these instruments.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the unaudited condensed consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
| 14 |
The provisions of ASC 740-10-25, “Accounting for Uncertainty in Income Taxes,” prescribe a more-likely-than-not threshold for consolidated financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. This ASC also provides guidance on the recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and related disclosures. The Company did not have any uncertain tax positions at March 31, 2023 and June 30, 2022. The Company had not provided deferred taxes for undistributed earnings of non-U.S. subsidiaries at March 31, 2023, as it is the Company’s policy to indefinitely reinvest these earnings in non-U.S. operations. Quantification of the deferred tax liability, if any, associated with indefinitely reinvested earnings is not practicable.
The statute of limitations for the Company’s U.S. federal income tax returns and certain state income tax returns remains open for tax year 2019 and thereafter. As of March 31, 2023, the tax years ended December 31, 2018 through December 31, 2022 for the Company’s PRC subsidiaries remained open for statutory examination by PRC tax authorities.
On
December 22, 2017, the “Tax Cuts and Jobs Act” (“The Act”) was enacted. Under the provisions of The Act, the
U.S. corporate tax rate decreased from
Value-Added Tax
Sales
revenue represents the invoiced value of goods, net of a value-added tax (“VAT”).
Foreign Currency Translation
The Company uses the United States dollar (“U.S. dollars,” “USD,” or “US$”) for financial reporting purposes. The Company’s subsidiaries and VIEs maintain their books and records in their functional currency of Renminbi (“RMB”), the currency of the PRC.
In general, for consolidation purposes, the Company translates the assets and liabilities of its subsidiaries and VIEs into U.S. dollars using the applicable exchange rates prevailing at the balance sheet date, and the statements of income and cash flows are translated at average exchange rates during the reporting periods. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet. Equity accounts are translated at historical rates. Adjustments resulting from the translation of the financial statements of the subsidiaries and VIEs are recorded as accumulated other comprehensive loss.
| 15 |
The
balance sheet amounts, with the exception of equity, at March 31, 2023 and June 30, 2022 were translated at
Convertible Notes Payable
In accordance with ASC 470 Debt with conversion and other option, an embedded beneficial conversion feature present in a convertible instrument shall be recognized separately at issuance by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. Issuance costs should be allocated proportionally to the debt host and conversion feature. Deferred financing costs will be discounted and amortized subsequently, and the convertible notes are subsequently carried at amortized cost.
Research and Development Expenses
Research
and development costs relating to the development of new processes and significant improvements and refinements to existing
processes are expensed when incurred in accordance with the FASB ASC 730, “Research and Development.” The research and
development costs primarily comprise employee costs, consultant fees, materials and testing costs, and depreciation to property and
equipment used in the research and development activities and other miscellaneous expenses. For the nine and three months ended
March 31, 2023 and 2022, total research and development expense were approximately US$
Comprehensive Loss
Comprehensive loss consists of two components, net loss and other comprehensive income (loss). The foreign currency translation gain or loss resulting from translation of the financial statements expressed in RMB to USD is reported in other comprehensive income (loss) in the unaudited condensed consolidated statements of loss and comprehensive loss.
Equity Investment
An
investment in which the Company has the ability to exercise significant influence, but does not have a controlling interest, is accounted
for using the equity method. Significant influence is generally considered to exist when the Company has an ownership interest in the
voting stock between
The Company computes loss per share (“EPS”) in accordance with ASC 260, “Earnings per Share” (“ASC 260”). ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net loss divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., outstanding convertible securities, options, and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. There is no anti-dilutive effect for the nine and three months ended March 31, 2023 and 2022.
| 16 |
For the nine months ended March 31, | For the three months ended March 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net loss from continuing operations attributable to Shineco | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss from discontinued operations attributable to Shineco | ( | ) | ||||||||||||||
| Net loss attributable to Shineco | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Weighted average shares outstanding - basic and diluted | ||||||||||||||||
| Net loss from continuing operations per share of common share Basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss from discontinued operations per share of common share Basic and diluted | $ | $ | ( | ) | $ | $ | ||||||||||
| Net loss per share of common share Basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
New Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. ASU 2016-13 was subsequently amended by Accounting Standards Update 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Accounting Standards Update 2019-04 Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, and Accounting Standards Update 2019-05, Targeted Transition Relief. For public entities, ASU 2016-13 and its amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For all other entities, this guidance and its amendments will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. In November 2019, the FASB issued ASU 2019-10, “Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)” (“ASU 2019-10”). ASU 2019-10 (i) provides a framework to stagger effective dates for future major accounting standards and (ii) amends the effective dates for certain major new accounting standards to give implementation relief to certain types of entities. Specifically, ASU 2019-10 changes some effective dates for certain new standards on the following topics in the FASB Accounting Standards Codification (ASC): (a) Derivatives and Hedging (ASC 815) – now effective for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021; (b) Leases (ASC 842) - now effective for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021; (c) Financial Instruments — Credit Losses (ASC 326) - now effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years; and (d) Intangibles — Goodwill and Other (ASC 350) - now effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company plans to adopt this guidance effective July 1, 2023 and the adoption of this ASU is not expected to have a material impact on its financial statements.
The Company believes that other recent accounting pronouncement updates will not have a material effect on the Company’s unaudited condensed consolidated financial statements.
| 17 |
NOTE 4 – ACCOUNTS RECEIVABLE, NET
The accounts receivable, net consisted of the following:
March 31, 2023 | June 30, 2022 | |||||||
| Accounts receivable | $ | $ | ||||||
| Less: allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Accounts receivable, net | $ | $ | ||||||
Movement of allowance for doubtful accounts is as follows:
March 31, 2023 | June 30, 2022 | |||||||
| Beginning balance | $ | $ | ||||||
| Acquisition of Biowin | ||||||||
| Charge to (reversal of) expense | ( | ) | ||||||
| Less: cessation of subsidiaries and disposal of VIE | ( | ) | ||||||
| Foreign currency translation adjustments | ( | ) | ( | ) | ||||
| Ending balance | $ | $ | ||||||
NOTE 5 – INVENTORIES, NET
The inventories, net consisted of the following:
March 31, 2023 | June 30, 2022 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| Less: inventory reserve | ( | ) | ( | ) | ||||
| Total inventories, net | $ | $ | ||||||
Work-in-process includes direct costs such as seed selection, fertilizer, labor cost, and subcontractor fees that are spent in growing agricultural products on the leased farmland, and indirect costs which include amortization of the prepayment of the farmland lease fees and farmland development costs. All the costs are accumulated until the time of harvest and then allocated to harvested crop costs when they are sold.
The
Company wrote off inventory amounted to US$
| 18 |
NOTE 6 – ADVANCES TO SUPPLIERS, NET
The advances to suppliers, net consisted of the following:
March 31, 2023 | June 30, 2022 | |||||||
| Advances to suppliers | $ | $ | ||||||
| Less: allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Advance to suppliers, net | $ | $ | ||||||
Advances to suppliers consist of mainly payments to suppliers for yew trees, as well as raw materials or products that have not been received.
Movement of allowance for doubtful accounts is as follows:
March 31, 2023 | June 30, 2022 | |||||||
| Beginning balance | $ | $ | ||||||
| Acquisition of Biowin | ||||||||
| Charge to (reversal of) expense | ( | ) | ||||||
| Less: cessation of subsidiaries and disposal of VIE | ( | ) | ||||||
| Foreign currency translation adjustments | ( | ) | ( | ) | ||||
| Ending balance | $ | $ | ||||||
NOTE 7 – OTHER CURRENT ASSETS, NET
Other current assets, net consisted of the following:
March 31, 2023 | June 30, 2022 | |||||||
| Loans to third parties (1) | $ | $ | ||||||
| Other receivables (2) | ||||||||
| Short-term deposit | ||||||||
| Prepaid expenses | ||||||||
| Subtotal | ||||||||
| Less: allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Total other current assets, net | $ | $ | ||||||
| 1) | |
| 2) |
| 19 |
Movement of allowance for doubtful accounts is as follows:
March 31, 2023 | June 30, 2022 | |||||||
| Beginning balance | $ | $ | ||||||
| Acquisition of Biowin | ||||||||
| Charge to expense | ||||||||
| Less: cessation of subsidiaries and disposal of VIE | ( | ) | ||||||
| Foreign currency translation adjustments | ( | ) | ( | ) | ||||
| Ending balance | $ | $ | ||||||
NOTE 8 - PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following:
March 31, 2023 | June 30, 2022 | |||||||
| Buildings | $ | $ | ||||||
| Machinery and equipment | ||||||||
| Motor vehicles | ||||||||
| Office equipment | ||||||||
| Leasehold improvement | ||||||||
| Farmland leasehold improvements | ||||||||
| Subtotal | ||||||||
| Less: accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Less: impairment for property and equipment | ( | ) | ( | ) | ||||
| Total property and equipment, net | $ | $ | ||||||
Depreciation
and amortization expense was US$
During
the year ended June 30, 2022, the management performed evaluation on the impairment of property and equipment. Due to the continuous
impact from the COVID-19 pandemic, the Company’s Zhisheng VIEs, have not been able to grow and cultivate green agricultural
produce on the leased farmlands, and based on the management estimation, these farmlands are unlikely to generate enough future
profit and cashflow, hence, the Company decided to record full impairment of such leased farmland (Note 11). Therefore, farmland
leasehold improvements relating to these farmlands were also fully impaired as of June 30, 2022. The impairment for property and
equipment of US$
| 20 |
Farmland leasehold improvements, net consisted of following:
March 31, 2023 | June 30, 2022 | |||||||
| Blueberry farmland leasehold improvements | $ | $ | ||||||
| Yew tree planting base reconstruction | ||||||||
| Greenhouse renovation | ||||||||
| Subtotal | ||||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||
| Less: impairment for farmland leasehold improvements | ( | ) | ( | ) | ||||
| Total farmland leasehold improvements, net | $ | $ | ||||||
NOTE 9 - DISTRIBUTION RIGHTS
The Company acquired distribution rights to distribute branded products of Daiso 100-yen shops through the acquisition of Tianjin Tajite. As this distribution right is difficult to acquire and will contribute significant revenue to Tianjin Tajite, such distribution rights were identified and valued as an intangible asset in the acquisition of Tianjin Tajite. The distribution rights, which have no expiration date, have been determined to have an indefinite life. Since the distribution rights have an indefinite life, the Company will evaluate them for impairment at least annually or earlier if determined necessary. During the year ended June 30, 2022, the management performed evaluation on the impairment of distribution rights. As the Company is unable to generate any revenue and profit from the distribution right due to the unfavorable policy of China Customs and current business environment caused by the continuous impact from the COVID-19, the management fully recorded an impairment loss on distribution rights of Tianjin Tajite.
NOTE 10 - INVESTMENTS
Guangyuan
entered into an equity investment agreement with Shanxi Pharmaceutical Group Yushe Pharmaceutical Development Co., Ltd. (“Yushe
Pharmaceutical”), a Chinese pharmaceutical enterprise to invest a total of RMB
On
August 31, 2021, the Company entered into a capital injection agreement with the other shareholders of Shanghai Gaojing Private Fund
Management (“Gaojing Private Fund”), a Chinese private fund management company, to complete the injection of a total RMB
| 21 |
On January 18, 2022, the Company entered into three share transfer agreements (the “Purchase Agreements”), respectively with Beijing Qing Chuang Technology Incubator Co., Ltd., Hangzhou Sheng Dou Shi Bio Technology Co., Ltd. and Peng He (collectively, the “Selling Shareholders”), each a shareholder of Xiang Peng You Kang (Beijing) Technology Co., Ltd. (“XPYK”), pursuant to which the Company shall acquire a total of % issued and outstanding equity interest of XPYK from the Selling Shareholders (the “XPYK Shares”). Under the Purchase Agreements, the Company will issue an aggregate of shares (“Company Shares”) of its common stock valued at a per share price of $ (subject to the terms and conditions of the Purchase Agreements) as the consideration for the XPYK Shares. As the date of this report, no share has been issued and no equity interest of XPYK has been acquired by the Company.
On
January 30, 2022, the Company entered into a cooperation agreement (the “Cooperation Agreement”) with Weifang Jianyi Medical
Devices Co., Ltd. (“WJM”), a leading Chinese medical device company based in Shandong Province, China, pursuant to which
the Company and WJM shall jointly manufacture and sell nuclear medical imaging devices (the “Joint Project”), including PET,
PET-CT, and PET-MRI. Under the Cooperation Agreement, the Company will provide working capital and manufacturing facilities while WJM
shall contribute patented and unpatented technologies and know-how, medical device manufacturing permits, skilled engineers and project
managers to produce such nuclear medical imaging devices.
The Company’s investment in unconsolidated entities consists of the following:
March 31, 2023 | June 30, 2022 | |||||||
| Gaojing Private Fund | $ | $ | ||||||
| Total investment | $ | $ | ||||||
Summarized financial information of unconsolidated entities is as follows:
March 31, 2023 | June 30, 2022 | |||||||
| Current assets | $ | $ | ||||||
| Non-current assets | ||||||||
| Current liabilities | ||||||||
For the nine months ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Net sales | $ | $ | ||||||
| Gross loss | ( | ) | ||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Net loss | ( | ) | ( | ) | ||||
| 22 |
NOTE 11 - LEASES
The
Company leases offices space and warehouse under non-cancelable operating leases, with terms ranging from one to seven and a half
years. In addition, the Zhisheng VIEs and Guangyuan entered into several farmland lease contracts with farmer cooperatives to lease
farmland in order to plant and grow organic vegetables, fruit, and Chinese yew trees, fast-growing bamboo willows and scenic
greening trees. The lease terms vary from
When available, the Company uses the rate implicit in the lease to discount lease payments to present value; however, most of the Company’s leases do not provide a readily determinable implicit rate. Therefore, the Company discounts lease payments based on an estimate of its incremental borrowing rate. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The table below presents the operating lease related assets and liabilities recorded on the balance sheets.
March 31, 2023 | June 30, 2022 | |||||||
| ROU lease assets | $ | $ | ||||||
| Operating lease liabilities – current | ||||||||
| Operating lease liabilities – non-current | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
The weighted average remaining lease terms and discount rates for all of operating leases were as follows as of March 31, 2023 and June 30, 2022:
March 31, 2023 | June 30, 2022 | |||||||
| Remaining lease term and discount rate: | ||||||||
| Weighted average remaining lease term (years) | ||||||||
| Weighted average discount rate | % | % | ||||||
Rent
expenses totaled US$
During
the year ended June 30, 2022, the management performed evaluation on the impairment of ROU lease assets, and impairment loss for the
ROU lease assets of US$
| 23 |
The following is a schedule, by years, of maturities of lease liabilities as of March 31, 2023:
| Remainder of 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total lease payments | ||||
| Less: imputed interest | ( | ) | ||
| Present value of lease liabilities | $ |
NOTE 12 - ACQUISITION
Acquisition of Tianjin Taijite
On
December 12, 2016, the Company entered into a merger and acquisition agreement with Tianjin Tajite, a professional e-commerce company
distributing Luobuma fabric commodities and branded products of Daiso 100-yen shops, based in Tianjin, China, to acquire
The transaction was accounted for in accordance with the provisions of ASC 805-10, Business Combinations. The Company retained independent appraisers to advise management in the determination of the fair value of the various assets acquired and liabilities assumed. The values assigned in these financial statements represents management’s best estimate of fair values as of the acquisition date.
As required by ASC 805-20, Business Combinations—Identifiable Assets and Liabilities, and Any Non-controlling Interest, management conducted a review to reassess whether they identified all the assets acquired and all the liabilities assumed, and followed ASC 805-20’s measurement procedures for recognition of the fair value of net assets acquired.
The
excess of the purchase price over the aggregate fair value of assets acquired was allocated to goodwill which amounted to RMB
In June 2018, the management performed evaluation on the impairment of goodwill. Due to the lower than expected revenue and profit, and unfavorable business environment, the management fully recorded an impairment loss on goodwill of Tianjin Tajite.
On
May 5, 2019, two minority shareholders of Tianjin Tajite transferred
During the year ended June 30, 2022, the management performed evaluation on the impairment of distribution rights. As the Company is unable to generate any revenue and profit from the distribution right due to the unfavorable policy of China Customs and current business environment caused by the continuous impact from the COVID-19, the management fully recorded an impairment loss on distribution rights of Tianjin Tajite (Note 9).
Under ASC 805-10, acquisition-related costs (i.e., advisory, legal, valuation, and other professional fees) are not included as a component of consideration transferred, but are expensed in the periods in which the costs are incurred.
| 24 |
Acquisition of Guangyuan
On June 8, 2021, Tenet-Jove entered into a Restructuring Agreement with various parties. Pursuant to the terms of the Restructuring Agreement, (i) the Company transferred all of its rights and interests in Ankang Longevity to Yushe County Guangyuan Forest Development Co., Ltd. (“Guangyuan”)’s Shareholders in exchange for Guangyuan Shareholders entering into the VIE agreements with Tenet-Jove, which composes of one group of similar identifiable assets; (ii) Tenet-Jove entered a Termination Agreement with Ankang Longevity and the Ankang Shareholders; (iii) as a consideration to the Restructuring Agreement and based on a valuation report on the equity interests of Guangyuan issued by an independent third party, Tenet-Jove relinquished all of its rights and interests in Ankang Longevity and transferred those rights and interests to the Guangyuan Shareholders; and (iv) Guangyuan and the Guangyuan Shareholders entered into a series of variable interest entity agreements with Tenet-Jove. After signing of the Restructuring Agreement, the Company and the shareholders of Ankang and Guangyuan actively carried out the transferring of rights and interests in Ankang and Guangyuan, and the transferring was completed subsequently on July 5, 2021. Afterwards, with the completion of all other follow-ups works, on August 16, 2021, the Company, through its subsidiary Tenet-Jove, completed the previously announced acquisition pursuant to the Restructuring Agreement dated June 8, 2021.
The management determined that July 5, 2021 was the acquisition date of Guangyuan. The acquisition provides a unique opportunity for the Company to enter the market of planting fast-growing bamboo willows and scenic greening trees.
The transaction was accounted for in accordance with the provisions of ASC 805-10, Business Combinations. The Company retained independent appraisers to advise management in the determination of the fair value of the various assets acquired and liabilities assumed. The values assigned in these financial statements represent management’s best estimate of fair values as of the Acquisition Date.
As required by ASC 805-20, Business Combinations—Identifiable Assets and Liabilities, and Any Non-controlling Interest, management conducted a review to reassess whether they identified all the assets acquired and all the liabilities assumed, and followed ASC 805-20’s measurement procedures for recognition of the fair value of net assets acquired.
The following table summarizes the allocation of estimated fair values of net assets acquired and liabilities assumed:
| Due from related party | $ | |||
| Inventory | ||||
| Other current assets | ||||
| Right of use assets | ||||
| Long-term investments and other non-current assets | ||||
| Other payables and other current liabilities | ( | ) | ||
| Operating lease liabilities | ( | ) | ||
| Total purchase price for acquisition, net of US$ | $ |
Under ASC 805-10, acquisition-related costs (i.e., advisory, legal, valuation and other professional fees) are not included as a component of consideration transferred, but are expensed in the periods in which the costs are incurred. Acquisition-related costs were US$ for the nine and three months ended March 31, 2023 and 2022.
The
Company has included the operating results of Guangyuan in its unaudited condensed consolidated financial statements since the Acquisition
Date. US$ in net sales and US$
| 25 |
Acquisition of Changzhou Biowin Pharmaceutical Co., Ltd. (“Biowin”)
On
October 21, 2022, the Company, through its wholly-owned subsidiary, Life Science, entered into a stock purchase agreement with the Seller
and Biowin, pursuant to which Life Science would acquire
The transaction was accounted for in accordance with the provisions of ASC 805-10, Business Combinations. The Company retained independent appraisers to advise management in the determination of the fair value of the various assets acquired and liabilities assumed. The values assigned in these financial statements represent management’s best estimate of fair values as of the Acquisition Date.
As required by ASC 805-20, Business Combinations—Identifiable Assets and Liabilities, and Any Non-controlling Interest, management conducted a review to reassess whether they identified all the assets acquired and all the liabilities assumed, and followed ASC 805-20’s measurement procedures for recognition of the fair value of net assets acquired.
The
excess of the purchase price over the aggregate fair value of assets acquired was allocated to goodwill which amounted to US$
The following table summarizes the allocation of estimated fair values of net assets acquired and liabilities assumed:
| Accounts receivable, net | $ | |||
| Inventories, net | ||||
| Other current assets, net | ||||
| Property and equipment, net | ||||
| Intangible assets | ||||
| Operating lease right-of-use assets | ||||
| Goodwill | ||||
| Deferred tax assets, net | ||||
| Short-term bank loans | ( | ) | ||
| Accounts payable | ( | ) | ||
| Deferred revenue | ( | ) | ||
| Other current liabilities | ( | ) | ||
| Operating lease liabilities - non-current | ( | ) | ||
| Deferred tax liabilities | ( | ) | ||
| Non-controlling interest | ( | ) | ||
| Total purchase price for acquisition, net of US$ | $ |
| 26 |
The fair value of identified intangible assets, which are trademarks and patents, and its estimated useful lives as of March 31, 2023 is as follows:
| Average | ||||||
| U.S. Dollars | Useful Life | |||||
| (Unaudited) | (in Years) | |||||
| Intangible assets | $ | |||||
| Less: accumulated amortization | ( | ) | ||||
| Total intangible assets, net as of March 31, 2023 | $ | |||||
The
amortization expense of intangible assets was US$
Under ASC 805-10, acquisition-related costs (i.e., advisory, legal, valuation and other professional fees) are not included as a component of consideration transferred, but are expensed in the periods in which the costs are incurred. Acquisition-related costs were US$ nil for the nine and three months ended March 31, 2023 and 2022.
The
Company has included the operating results of Biowin in its unaudited condensed consolidated financial statements since the Acquisition
Date. US$
NOTE 13 - RELATED PARTY TRANSACTIONS
Due from Related Parties, Net
The Company has made temporary advances to certain stockholders and senior management of the Company and to other entities that are either owned by family members of those stockholders or to other entities that the Company has investments in.
As of March 31, 2023 and June 30, 2022, the outstanding amounts due from related parties consisted of the following:
March 31, 2023 | June 30, 2022 | |||||||
| Zhao Min | $ | $ | ||||||
| Shanghai Gaojing Private Fund Management (a.) | ||||||||
| Zhongjian Yijia Health Technology (Qingdao) Co., Ltd. (“Zhongjian Yijia”) (b.) | ||||||||
| Zhongjian (Qingdao) International Logistics Development Co., Ltd. (“Zhongjian International”) (c.) | ||||||||
| Subtotal | ||||||||
| Less: allowance for doubtful accounts | ( | ) | ||||||
| Total due from related parties, net | $ | $ | ||||||
| a. | |
| b. |
Interest
income was US$ |
| c. |
Interest
income was US$ |
| 27 |
Due to Related Parties
As of March 31, 2023 and June 30, 2022, the Company had related party payables of US$ and US$, respectively, mainly due to the principal stockholders or certain relatives of the stockholders, and senior management of the Company who lend funds for the Company’s operations. The payables are unsecured, non-interest bearing, and due on demand.
March 31, 2023 | June 30, 2022 | |||||||
| Wu Yang | $ | $ | ||||||
| Wang Sai | ||||||||
| Zhou Guocong | ||||||||
| Li Baolin | ||||||||
| Zhao Min (a.) | ||||||||
| Zhou Shunfang (b.) | ||||||||
| Liu Fengming | ||||||||
| Yan Lixia | ||||||||
| Zhang Yuying | ||||||||
| Huang Shanchun | ||||||||
| Total due to related parties | $ | $ | ||||||
| a. | |
| b. |
Interest
expenses on loans due to related parties were US$
Loan guarantee provided by related parties
The Company’s related parties provide guarantee for the Company’s short-term bank loans (see Note 14).
NOTE 14 - SHORT-TERM BANK LOANS
Short-term bank loans consisted of the following:
| Lender | March 31, 2023 | Maturity Date | Int. Rate/Year | |||||||
| Jiangnan Rural Commercial Bank-a | $ | % | ||||||||
| Bank of Jiangsu-b | % | |||||||||
| Bank of China-c | % | |||||||||
| Total short-term bank loans | $ | |||||||||
The loans outstanding were guaranteed by the following properties, entities or individuals:
| a. | |
| b. | |
| c. |
The
Company recorded interest expenses of US$
| 28 |
NOTE 15 - CONVERTIBLE NOTES PAYABLE
On
June 16, 2021, the Company entered into a Securities Purchase Agreement pursuant to which the Company issued an unsecured convertible
promissory note with a one-year maturity (“the Note”) to an institutional accredited investor Streeterville Capital, LLC
(“Investor”). The Note has the original principal amount of US$
On
July 16, 2021, the Company entered into a Securities Purchase Agreement (the “July Agreement”) pursuant to which the Company
issued two unsecured convertible promissory notes with a maturity term (the “Notes”) to the same Investor. The first
convertible promissory note (“Note #1”) has an original principal amount of US$
On
August 19, 2021, the Company entered into a Securities Purchase Agreement (the “Agreement”) pursuant to which the Company
issued an unsecured convertible promissory note with a maturity term (the “Note”) to the same Investor. The Note
has an original principal amount of US$
For
the above-mentioned convertible promissory notes issued, interest accrues on the outstanding balance of these notes at
As
of March 31, 2023, the Company received principal in full from the Investor. For the nine months ended March 31, 2023 and 2022, a total
of US$
As
of March 31, 2023, shares of the Company’s common stock totaling were issued by the Company to the Investor equaling
principal and interests amounted to US$
| 29 |
NOTE 16 - TAXES
(a) Corporate Income Taxes
The Company is subject to income taxes on an entity basis on income arising in or derived from the location in which each entity is domiciled.
Shineco
is incorporated in the United States and has no operating activities. Tenet-Jove and the VIEs are governed by the Income Tax Laws of
the PRC, and are currently subject to tax at a statutory rate of
On
December 22, 2017, The Act was enacted. The Act imposes a one-time transition tax on deemed repatriation of historical earnings of foreign
subsidiaries, and future foreign earnings are subject to U.S. taxation. The change in rate has caused the Company to re-measure its income
tax liability and record an estimated income tax expense of US$
i) The components of the income tax benefit were as follows:
For the nine months ended March 31, | For the three months ended March 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Current income tax benefit | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Deferred income tax benefit | ( | ) | ( | ) | ||||||||||||
| Total income tax benefit | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
ii) The components of the deferred tax liability were as follows:
March 31, 2023 |
June 30, 2022 |
|||||||
| Deferred tax assets: | ||||||||
| Allowance for doubtful accounts | $ | $ | ||||||
| Inventory reserve | ||||||||
| Net operating loss carry-forwards | ||||||||
| Total | ||||||||
| Valuation allowance | ( |
) | ( |
) | ||||
| Total deferred tax assets | ||||||||
| Deferred tax liability: | ||||||||
| Intangible assets | ( |
) | ||||||
| Total deferred tax liability | ( |
) | ||||||
| Deferred tax liability, net | $ | ( |
) | $ | ||||
| 30 |
Movement of the valuation allowance:
March 31, 2023 | June 30, 2022 | |||||||
| Beginning balance | $ | $ | ||||||
| Acquisition of Biowin | ||||||||
| Current year addition (reduction) | ( | ) | ||||||
| Exchange difference | ( | ) | ( | ) | ||||
| Ending balance | $ | $ | ||||||
(b) Value-Added Tax
The
Company is subject to a VAT for selling goods.
In
the event that the PRC tax authorities dispute the date on which revenue is recognized for tax purposes, the PRC tax office has the right
to assess a penalty based on the amount of the taxes which are determined to be late or deficient, and the penalty will be expensed in
the period if and when a determination is made by the tax authorities. There were
(c) Taxes Payable
Taxes payable consisted of the following:
March 31, 2023 | June 30, 2022 | |||||||
| Income tax payable | $ | $ | ||||||
| Value added tax payable | ||||||||
| Business tax and other taxes payable | ||||||||
| Total tax payable | ||||||||
| Less: income tax payable - current portion | ||||||||
| Income tax payable – non-current portion | $ | $ | ||||||
| 31 |
NOTE 17 - STOCKHOLDERS’ EQUITY
Initial Public Offering
On
September 28, 2016, the Company completed its initial public offering of shares of common stock at a price of US$per share for gross proceeds of US$
Statutory Reserve
The Company is required to make appropriations to reserve funds, comprising the statutory surplus reserve and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (“PRC GAAP”).
Appropriations
to the statutory surplus reserve are required to be at least
On
July 10, 2020, the Company’s stockholders approved a
On
April 10, 2021, the Company issued shares of common stock to selected investors at a price of US$ per share. The Company
received net proceeds of US$
On
December 6, 2021, the Company entered into a securities purchase agreement with GHS Investments, LLC (“GHS”). Under the Purchase
Agreement, the Company sold GHS shares of its common stock at a per share purchase price of $ for gross proceeds of $
On
April 11, 2022, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with Jing Wang (the “Investor”).
Under the Purchase Agreement, the Company will sell to the Investor, up to shares (the “Shares”) of its common stock
at a per share purchase price of $ (subject to the terms and conditions of the Purchase Agreement) for gross proceeds of up to $
| 32 |
On
June 13, 2022, the Company entered into a certain stock purchase agreement with certain non-U.S. investors (the “Purchasers”),
pursuant to which the Company agreed to sell, and the Purchasers agreed to purchase, severally and not jointly, an aggregate of
shares of common stock of the Company (the “Shares”) at a price of US$ per share. In reliance on the Purchasers’
representations to the Company, the shares issued in this offering were not subject to the registration requirements of the Securities
Act of 1933, as amended (the “Securities Act”), pursuant to Regulation S promulgated thereunder. The Company’s shareholders
approved the offer and sale of the Shares at a meeting of the shareholders of the Company that was held on July 21, 2022. The closing
for the offer and sale of the Shares occurred on July 26, 2022 and the Company issued the Shares in exchange for gross proceeds of $
On
July 21, 2022, the stockholders of the Company approved the Company’s 2022 Equity Incentive Plan (the “2022 Plan”),
pursuant to which shares of the Company’s common stock will be made available for issuance under the 2022 Plan. Pursuant
to the terms of the 2022 Plan, no shares shall be granted on or after the date which is ten years from the effective date of the 2022
Plan. On July 27, 2022, the Board of Directors of the Company approved the issuance of shares of common stock pursuant to the Company’s
2022 Plan in the aggregate amount of shares (the “Shares”). The fair value of the Shares was US$
On
August 11, 2022, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with certain non-US
investors (the “Investors”). Under the Purchase Agreement, the Company will sell to the Investors, up to shares
(the “Shares”) of its common stock at a per share purchase price of $ (subject to the terms and conditions of the Purchase
Agreement) for gross proceeds of up to US$
On
October 21, 2022, the Company, through its wholly-owned subsidiary, Life Science, entered into a stock purchase agreement with the Seller
and Biowin, pursuant to which Life Science would acquire
On
January 12, 2023, the Board of the Company approved the sales of shares of the Company’s common stock to the Company’s
employees for gross proceeds of up to US$
On
January 12, 2023, the Board of the Company approved the issuance of shares of the Company’s common stock to the Company’s
service provider as the compensation for service provided, with a value of US$
On
March 14, 2023, the Company entered into a securities purchase agreement with certain non-U.S. investors (the “Purchasers”),
pursuant to which the Company agreed to sell, and the Purchasers agreed to purchase, severally and not jointly, an aggregate of
shares of common stock of the Company (the “Shares”) at a price of US$ per share. The Company’s board of director
approved the offer and sale of the Shares at a meeting of the Board of the Company that was held on March 14, 2023. The Company has received
gross proceeds of $
| 33 |
NOTE 18 - CONCENTRATIONS AND RISKS
The
Company maintains principally all bank accounts in the PRC. The cash balance held in the PRC bank accounts was US$
During
the nine and three months ended March 31, 2023 and 2022, almost
For
the nine months ended March 31, 2023, four customers accounted for approximately
For
the nine months ended March 31, 2022, five customers accounted for approximately
For the nine months ended March 31, 2023, two vendors accounted for approximately of the Company’s total purchases. For the three months ended March 31, 2023, two vendors accounted for approximately of the Company’s total purchases.
For the nine months ended March 31, 2022, one vendor accounted for approximately of the Company’s total purchases. For the three months ended March 31, 2022, two vendors accounted for approximately of the Company’s total purchases, respectively.
NOTE 19 - COMMITMENTS AND CONTINGENCIES
Legal Contingencies
On
May 16, 2017, Mrs. Guiqin Li (the “Plaintiff”) commenced a lawsuit against the Company in the People’s Court of
Chongqing Pilot Free Trade Zone of China. Plaintiff alleged that due to the misguidance given by the Company’s security
trading department, the Plaintiff did not manage to complete the sales of the Company’s common stock on the day of the
Company’s initial public offering in the United States. As the price of the Company’s common stock continued falling
after the initial public offering, the Plaintiff incurred losses and hence seek money damages against the Company. Based on the
judgment of the first trial, the Company was required to pay the Plaintiff a settlement payment, including the money compensation,
interests and other legal fees. In January 2023, the Company entered into a Settlement Agreement and Release (the
“Agreement”) with the Plaintiff, pursuant to which the Company paid the Plaintiff a total sum of approximately US$
On
November 26, 2021, the Company filed a complaint in the Supreme Court of the State of New York, New York County against Lei Zhang and
Yan Li, as defendants, and Transhare Corporation, as a nominal defendant, asserting that defendants had not paid for restricted shares
of the Company stock pursuant to stock purchase agreements they executed with the Company. The Company sought money damages of $
| 34 |
The Company moved to dismiss the counterclaims, and its motion was fully submitted in April 2022. On September 9, 2022, the Court granted the Company’s motion to dismiss defendants’ counterclaims on all but three counterclaims. Defendants’ outstanding counterclaims are for breach of contract, conversion, and wrongful refusal to remove restrictions pursuant to 6 Del. C. § 8-401.
Nominal defendant Transhare Corporation moved to dismiss the defendants’ counterclaim against it for wrongful refusal to remove restrictions pursuant to 6 Del. C. § 8-401, and its motion was fully submitted in April 2022. On September 9, 2022, the Court granted Transhare Corporation’s motion to dismiss defendants’ counterclaim for wrongful refusal to remove restrictions. Defendants have appealed the Court’s September 9, 2022 order dismissing defendants’ counterclaim for wrongful refusal to remove restrictions. On October 3, 2022 the parties submitted a stipulation dismissing defendants’ outstanding counterclaim against Transhare Corporation seeking declaratory judgment.
A date for trial will be set at a status conference on September 27, 2023. The outcome of this legal proceeding is uncertain at this point. The Company intends to recover on its claims, and vigorously defend itself in this litigation. As of March 31, 2023, the total unpaid shares issued to Lei Zhang and Yan Li by the Company was shares, and the subscription receivable was US$ which was recorded on the unaudited condensed consolidated balance sheet.
NOTE 20 - SEGMENT REPORTING
ASC 280, “Segment Reporting,” establishes standards for reporting information about operating segments on a basis consistent with the Group’s internal organizational management structure as well as information about geographical areas, business segments, and major customers in for details on the Group’s business segments.
| 35 |
The
Company’s chief operating decision maker has been identified as the Chief Executive Officer who reviews the financial information
of separate operating segments when making decisions about allocating resources and assessing performance of the Group. Based on management’s
assessment, the Company has determined that it has
| ● | Developing, manufacturing, and distributing of specialized fabrics, textile products, and other by-products derived from an indigenous Chinese plant called Apocynum Venetum, commonly known as “Bluish Dogbane” or known in Chinese as “Luobuma” (referred to herein as Luobuma): |
| The operating companies of this segment, namely Tenet-Jove and Tenet Huatai, specialize in Luobuma growing, development and manufacturing of relevant products, as well as purchasing Luobuma raw materials processing. | |
| This segment’s operations are focused in the north region of Mainland China, mostly carried out in Beijing, Tianjin, and Xinjiang. | |
| ● | Planting, processing, and distributing of green and organic agricultural produce as well as growing and cultivating of Chinese Yew trees (“Other agricultural products”): |
| The operating company of this segment, Qingdao Zhihesheng, is engaged in the business of growing and distributing green and organic vegetables and fruits. This segment has been focusing its efforts on the growing and cultivating of Chinese yew trees (formally known as “taxus media”), a small evergreen tree whose branches can be used for the production of medications believed to be anti-cancer and the tree itself can be used as an ornamental indoor bonsai tree, which are known to have the effect of purifying air quality. The operations of Zhihesheng are located in the East and North regions of Mainland China, mostly carried out in Shandong Province and in Beijing, where Zhihesheng have newly developed over 100 acres of modern greenhouses for cultivating yew trees and other plants. |
| The other operating company of this segment, Guangyuan, is engaged in the business of landscaping, afforestation, road greening, scenic greening, garden engineering, landscaping construction, and green afforestation, especially in planting fast-growing bamboo willows and scenic greening trees. The operations of Guangyuan are located in the North regions of Mainland China, mostly carried out in Shanxi Province, where Guangyuan has developed over 350 acres of farmland for cultivating bamboo willows and other plants. | |
| ● | Providing domestic air and overland freight forwarding services (“Freight services”): |
| The operating company of this segment, Zhisheng Freight, is engaged in the business of providing domestic air and overland freight forwarding services by outsourcing these services to a third party. During the year ended June 30, 2022, there was a change in the Company’s business strategies, from being the service providers, Zhisheng Freight outsourced the freight services to third-party logistic companies and the Company merely serves as an agent and its obligation is to facilitate third-party logistic companies in fulfilling its performance obligation for specified freight services. | |
| ● | Developing, producing and distributing innovative rapid diagnostic products and related medical devices for the most common diseases (“Rapid Diagnostic Products”): |
| The operating company of this segment, Biowin, is specializing in development, production and distribution of innovative rapid diagnostic products and related medical devices for the most common diseases. The operations of this segment are located in Jiangsu Province. Its products are sold not only in China, but also overseas countries such as Germany, Spain, Italy, Thailand, Japan and other countries. |
| 36 |
The following table presents summarized information by segment for the nine months ended March 31, 2023:
| For the nine months ended March 31, 2023 | ||||||||||||||||||||
| Luobuma | Other agricultural | Freight | Rapid diagnostic | |||||||||||||||||
| products | products | services | products | Total | ||||||||||||||||
| Segment revenue | $ | $ | $ | $ | $ | |||||||||||||||
| Cost of revenue and related business and sales tax | ||||||||||||||||||||
| Gross profit (loss) | ( | ) | ( | ) | ||||||||||||||||
| Gross profit (loss) % | % | ( | )% | % | % | ( | )% | |||||||||||||
The following table presents summarized information by segment for the nine months ended March 31, 2022:
| For the nine months ended March 31, 2022 | ||||||||||||||||||||
| Luobuma | Other agricultural | Freight | Rapid diagnostic | |||||||||||||||||
| products | products | services | products | Total | ||||||||||||||||
| Segment revenue | $ | $ | $ | $ | $ | |||||||||||||||
| Cost of revenue and related business and sales tax | ||||||||||||||||||||
| Gross profit (loss) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Gross profit (loss) % | ( | )% | ( | )% | % | ( | )% | |||||||||||||
The following table presents summarized information by segment for the three months ended March 31, 2023:
| For the three months ended March 31, 2023 | ||||||||||||||||||||
| Luobuma | Other agricultural | Freight | Rapid diagnostic | |||||||||||||||||
| products | products | services | products | Total | ||||||||||||||||
| Segment revenue | $ | $ | $ | $ | $ | |||||||||||||||
| Cost of revenue and related business and sales tax | ( | ) | ||||||||||||||||||
| Gross profit (loss) | ( | ) | ( | ) | ||||||||||||||||
| Gross profit (loss) % | % | ( | )% | % | % | ( | )% | |||||||||||||
The following table presents summarized information by segment for the three months ended March 31, 2022:
| For the three months ended March 31, 2022 | ||||||||||||||||||||
| Luobuma | Other agricultural | Freight | Rapid diagnostic | |||||||||||||||||
| products | products | services | products | Total | ||||||||||||||||
| Segment revenue | $ | $ | $ | $ | $ | |||||||||||||||
| Cost of revenue and related business and sales tax | ||||||||||||||||||||
| Gross profit (loss) | ( | ) | ( | ) | ||||||||||||||||
| Gross profit (loss) % | % | ( | )% | % | ( | )% | ||||||||||||||
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Total assets as of March 31, 2023 and June 30, 2022 were as follows:
March 31, 2023 | June 30, 2022 | |||||||
| Luobuma products | $ | $ | ||||||
| Other agricultural products | ||||||||
| Freight services | ||||||||
| Rapid diagnostic products | ||||||||
| Total assets | $ | $ | ||||||
NOTE 21 - DISCONTINUED OPERATIONS
On June 8, 2021, Tenet-Jove entered into a Restructuring Agreement (the “Restructuring Agreement”) with the following parties:
| ● | Ankang Longevity, a company incorporated under the laws of the People’s Republic of China (the “PRC”); | |
| ● | Mr.
Jiping Chen, who is a minority shareholder of the Company and holds | |
| ● | Yushe County Guangyuan Forest Development Co., Ltd., a company incorporated under the laws of the PRC (“Guangyuan”); and | |
| ● | Mr.
Baolin Li, who is a minority shareholder of the Company and holds |
Pursuant to the terms of the Restructuring Agreement, (i) the Company transferred all of its rights and interests in Ankang Longevity to the Guangyuan Shareholders in exchange for the Guangyuan Shareholders entering into the VIE agreements with Tenet-Jove, which composes of one group of similar identifiable assets; (ii) Tenet-Jove entered a Termination Agreement with Ankang Longevity and the Ankang Shareholders; (iii) as a consideration to the Restructuring Agreement and based on a valuation report on the equity interests of Guangyuan issued by an independent third party, Tenet-Jove relinquished all of its rights and interests in Ankang Longevity and transferred those rights and interests to the Guangyuan Shareholders; and (iv) Guangyuan and the Guangyuan Shareholders entered into a series of variable interest entity agreements with Tenet-Jove.
After signing of the Restructuring Agreement, the Company and the shareholders of Ankang and Guangyuan actively carried out the transferring of rights and interests in Ankang and Guangyuan, and the transferring was completed subsequently on July 5, 2021. Afterwards, with the completion of all other follow-ups works, on August 16, 2021, the Company, through its subsidiary Tenet-Jove, completed the previously announced acquisition pursuant to the Restructuring Agreement dated June 8, 2021. The management determined that July 5, 2021 was the disposal date of Ankang.
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In
accordance with ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, a disposal
of a component of an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal
represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the components
of an entity meets the criteria in paragraph 205-20-45-1E to be classified as held for sale. When all of the criteria to be classified
as held for sale are met, including management, having the authority to approve the action, commits to a plan to sell the entity, the
major current assets, other assets, current liabilities, and non-current liabilities shall be reported as components of total assets
and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations,
less applicable income taxes benefit, shall be reported as a component of net loss separate from the net loss of continuing operations
in accordance with ASC 205-20-45. The results of operations of Ankang Longevity have been reclassified to “net loss from discontinued
operations” in the unaudited condensed consolidated statements of loss and comprehensive loss for the nine and three months ended
March 31, 2023 and 2022. The Company recorded a loss on disposal of discontinued operations of US$
NOTE 22 - SUBSEQUENT EVENTS
These unaudited condensed consolidated financial statements were approved by management and available for issuance on May 15, 2023, and the Company has evaluated subsequent events through this date. No subsequent events required adjustments to or disclosure in these unaudited condensed consolidated financial statements.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is subject to the safe harbor created by those sections. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws. Forward-looking statements involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “should,” “will,” “could,” and similar expressions denoting uncertainty or an action that may, will or is expected to occur in the future. These statements involve estimates, assumptions, known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements.
Examples of forward-looking statements include:
| ● | the timing of the development of future products; | |
| ● | projections of revenue, earnings, capital structure, and other financial items; | |
| ● | local, regional, national, and global Luobuma price fluctuations; | |
| ● | statements of our plans and objectives, including those that relate to our proposed expansions and the effect such expansions may have on our revenue; | |
| ● | statements regarding the capabilities of our business operations; | |
| ● | statements of expected future economic performance; | |
| ● | the impact of the COVID-19 outbreak; | |
| ● | statements regarding competition in our market; and | |
| ● | assumptions underlying statements regarding us or our business. |
The ultimate correctness of these forward-looking statements depends upon a number of known and unknown risks and events. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that impact our business. In particular, we encourage you to review the risks and uncertainties described in “Risk Factors” in our annual report on Form 10-K for the fiscal year ended June 30, 2022 filed with the SEC on September 28, 2022 (the “Annual Report”) and other SEC filings. These risks and uncertainties could cause actual results to differ materially from those projected or implied by our forward-looking statements contained in this report. In addition, many factors could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Consequently, you should not place undue reliance on these forward-looking statements.
The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Nonetheless, we reserve the right to make such updates from time to time by press release, periodic report, or other method of public disclosure without the need for specific reference to this Quarterly Report. No such update shall be deemed to indicate that other statements not addressed by such update is incorrect or create an obligation to provide any other updates.
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The information included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes included in this Quarterly Report, and the audited consolidated financial statements and notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report. All monetary figures are presented in U.S. dollars, unless otherwise indicated.
General Overview
Shineco, Inc. is a holding company incorporated in Delaware. As a holding company with no material operations of our own, we conduct a substantial majority of our operations through the operating entities established in the People’s Republic of China, or the PRC, primarily the variable interest entities (the “VIEs”). We do not have any equity ownership of the VIEs, instead we are entitled to receive the economic benefits of the VIEs’ business operations through certain contractual arrangements. Our common stock that currently listed on the Nasdaq Capital Markets are shares of our Delaware holding company that maintains service agreements with the associated operating companies. The Chinese regulatory authorities could disallow our structure, which could result in a material change in our operations and the value of our securities could decline or become worthless.
We use our subsidiaries and the VIEs’ vertically and horizontally integrated production, distribution, and sales channels to provide health and well-being focused plant-based products. Our products are only sold domestically in China. We utilize modern engineering technologies and biotechnologies to produce, among other products, Chinese herbal medicines, organic agricultural produce, and specialized textiles. Through our newly acquired subsidiary, Biowin, which is specializing in development, production and distribution of innovative rapid diagnostic products and related medical devices for the most common diseases (“Rapid Diagnostic Products”), we also stepped into the Point-of-Care Testing industry. The Company, its subsidiaries, its VIEs, and its VIEs’ subsidiaries (collectively the “Group”) currently operate the following main business segments:
Processing and distributing traditional Chinese herbal medicine products as well as other pharmaceutical products - This segment is conducted through Ankang Longevity Pharmaceutical (Group) Co., Ltd. (“Ankang Longevity Group”), a Chinese company formerly under contractual arrangement with the Company which operates 66 cooperative retail pharmacies throughout Ankang, a city in southern Shaanxi province, China, through which we sell directly to individual customers traditional Chinese medicinal products produced by us as well as by third parties. Ankang Longevity Group also owns a factory specializing in decoction, which is the process by which solid materials are heated or boiled in order to extract liquids, and distributes decoction products to wholesalers and pharmaceutical companies around China.
On June 8, 2021, Tenet-Jove entered into a Restructuring Agreement with various parties. Pursuant to the terms of the Restructuring Agreement, (i) the Company transferred all of its rights and interests in Ankang Longevity Group to Yushe County Guangyuan Forest Development Co., Ltd. (“Guangyuan”)’s Shareholders in exchange for the Guangyuan Shareholders entering into VIE agreements with Tenet-Jove, which composes of one group of similar identifiable assets; (ii) Tenet-Jove entered a Termination Agreement with Ankang Longevity Group and the Ankang Longevity Group Shareholders; (iii) as a consideration to the Restructuring Agreement and based on a valuation report on the equity interests of Guangyuan issued by an independent third party, Tenet-Jove relinquished all of its rights and interests in Ankang Longevity Group and transferred those rights and interests to the Guangyuan Shareholders; and (iv) Guangyuan and the Guangyuan Shareholders entered into a series of variable interest entity agreements with Tenet-Jove. After signing of the Restructuring Agreement, the Company and the shareholders of Ankang Longevity Group and Guangyuan actively carried out the transferring of rights and interests in Ankang Longevity Group and Guangyuan, and the transferring was completed subsequently on July 5, 2021. Afterwards, with the completion of all other follow-ups works, on August 16, 2021, the Company, through its subsidiary Tenet-Jove, completed the previously announced acquisition pursuant to the Restructuring Agreement dated June 8, 2021. The management determined that July 5, 2021 was the disposal date of Ankang Longevity Group. The results of operations of Ankang Longevity Group have been reclassified to “net loss from discontinued operations” in the unaudited condensed consolidated statements of loss and comprehensive loss for the nine and three months ended March 31, 2023 and 2022.
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Processing and distributing green and organic agricultural produce as well as growing and cultivating yew trees (taxus media) - We currently cultivate and sell yew mainly to group and corporate customers, but do not currently process yew into Chinese or Western medicines. This segment is conducted through the VIEs: Qingdao Zhihesheng Agricultural Produce Services, Ltd (“Qingdao Zhihesheng”). Meanwhile, we entered the market of planting fast-growing bamboo willows and scenic greening trees through the newly acquired VIE, Yushe County Guangyuan Forest Development Co., Ltd. (“Guangyuan”). The operations of this segment are located in the North regions of Mainland China, mostly carried out in Shanxi Province.
Providing domestic air and overland freight forwarding services - We currently provide domestic air and overland freight forwarding services by outsourcing these services to a third party. This segment is conducted through our VIE, Yantai Zhisheng International Freight Forwarding Co., Ltd (“Zhisheng Freight”).
Developing and distributing specialized fabrics, textiles, and other byproducts derived from an indigenous Chinese plant Apocynum Venetum, grown in the Xinjiang region of China, and known in Chinese as “Luobuma” or “bluish dogbane” - Our Luobuma products are specialized textile and health supplement products designed to incorporate traditional Eastern medicines with modern scientific methods. These products are predicated on centuries-old traditions of Eastern herbal remedies derived from the Luobuma raw material. This segment is channeled through our directly-owned subsidiary, Beijing Tenet-Jove Technological Development Co., Ltd. (“Tenet-Jove”), and its 90% subsidiary Tianjin Tenet Huatai Technological Development Co., Ltd. (“Tenet Huatai”).
Developing, producing and distributing innovative rapid diagnostic products and related medical devices for the most common diseases (“Rapid Diagnostic Products”) – This segment is conducted through Changzhou Biowin Pharmaceutical Co., Ltd. (“Biowin”), which is specializing in development, production and distribution of innovative rapid diagnostic products and related medical devices for the most common diseases. The operations of this segment are located in Jiangsu Province. Its products are sold not only in China, but also overseas countries such as Germany, Spain, Italy, Thailand, Japan and other countries.
Financing Activities
On June 16, 2021, the Company entered into a securities purchase agreement pursuant to which the Company issued an unsecured convertible promissory note with a one-year maturity term to an institutional accredited investor, Streeterville Capital, LLC (“Investor”). The note had an original principal amount of US$3,170,000 and Investor gave consideration of US$3.0 million, reflecting original issue discount of US$150,000 and Investor’s legal fee of US$20,000. Interest accrues on the outstanding balance of the note at 6% per annum. The Company has received the principal in full from the Investor and used the proceeds for general working capital purposes. On September 7, 2022, the Company signed an extension amendment with the Investor to extend the maturity date to June 15, 2023. On October 21, 2022, the Company signed a standstill agreement with the Investor, pursuant to which the Investor would not seek to redeem any portion of the Note during the period from October 21, 2022 to January 20, 2023. On or around January 20, 2023, the Investor re-started the redemption of the Notes. As of March 31, 2023, no share of the Company’s common stock under this agreement was issued by the Company to the Investor, and the Notes balance was US$3,671,143, with a carrying value of US$3,731,927, net of deferred financing costs of US$60,784 was recorded in the accompanying unaudited condensed consolidated balance sheets.
On July 16, 2021, the Company entered into another securities purchase agreement with the Investor, pursuant to which the Company issued the Investor two unsecured convertible promissory notes each with a one-year maturity term. The first convertible promissory note had an original principal amount of US$3,170,000 and the Investor gave consideration of US$3.0 million, reflecting original issue discount of US$150,000 and Investor’s legal fee of US$20,000. The second convertible promissory note has the original principal amount of US$4,200,000 and Investor gave consideration of US$4.0 million, reflecting original issue discount of US$200,000. Interest accrues on the outstanding balance of the Notes at 6% per annum. The Company has received the principal in full from the Investor and used the proceeds for general working capital purposes. As of March 31, 2023, the Notes was fully converted and shares of the Company’s common stock totaling 1,946,766 were issued by the Company to the Investor equaling principal and interests amounted to US$7,472,638.
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On August 19, 2021, the Company entered into another securities purchase agreement with the Investor, pursuant to which the Company issued the Investor an unsecured convertible promissory note with a one-year maturity term. The note has an original principal amount of US$10,520,000 and Investor gave consideration of US$10.0 million, reflecting original issue discount of US$500,000 and Investor’s legal fee of US$20,000. Interest accrues on the outstanding balance of the note at 6% per annum. The Company has received the principal in full from the Investor and used the proceeds for general working capital purposes. On September 7, 2022, the Company signed an extension amendment with the Investor to extend the maturity date to August 18, 2023. On October 21, 2022, the Company signed a standstill agreement with the Investor, pursuant to which the Investor will not seek to redeem any portion of the Note during the period from October 21, 2022 to January 20, 2023. As of March 31, 2023, shares of the Company’s common stock totaling 702,969 were issued by the Company to the Investor equaling principal and interests amounted to US$720,000, and the Notes balance was US$11,202,435, with a carrying value of US$11,473,948, net of deferred financing costs of US$271,513 was recorded in the accompanying unaudited condensed consolidated balance sheets.
On June 13, 2022, the Company entered into a certain stock purchase agreement (the “SPA”) with certain non-U.S. investors (the “Purchasers”), pursuant to which the Company agreed to sell, and the Purchasers agreed to purchase, severally and not jointly, an aggregate of 2,354,500 shares of common stock of the Company (the “Shares”) at a price of US$2.12 per share. The Company’s shareholders approved the offer and sale of the Shares at a meeting of the shareholders of the Company that was held on July 21, 2022. The closing for the offer and sale of the Shares occurred on July 26, 2022 and the Company issued the Shares in exchange for gross proceeds of $5.0 million.
On August 11, 2022, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with certain non-US investors (the “Investors”). Under the Purchase Agreement, the Company will sell to the Investors, up to 1,921,683 shares (the “Shares”) of its common stock at a per share purchase price of $0.915 (subject to the terms and conditions of the Purchase Agreement) for gross proceeds of up to US$1,758,340. As the date of this report, proceeds amounted to US$1.6 million has been received by the Company, and the remaining balance of the proceeds is expected to be fully collected by June 30, 2023.
On January 12, 2023, the Board of the Company approved the sales of 722,222 shares of the Company’s common stock to certain individuals for gross proceeds of up to US$650,000, and the proceeds are expected to be fully collected by September 30, 2023.
On March 14, 2023, the Company entered into a securities purchase agreement with certain non-U.S. investors (the “Purchasers”), pursuant to which the Company agreed to sell, and the Purchasers agreed to purchase, severally and not jointly, an aggregate of 1,137,170 shares of common stock of the Company (the “Shares”) at a price of US$1.05 per share. The Company’s board of director approved the offer and sale of the Shares at a meeting of the Board of the Company that was held on March 14, 2023. The Company has received gross proceeds of $1.2 million from the Purchasers and the Shares have not been issued as of March 31, 2023.
Factors Affecting Financial Performance
We believe that the following factors will affect our financial performance:
Increasing demand for our products – We believe that the increasing demand for our agricultural products will have a positive impact on our financial position. We plan to develop new products and expand our distribution network as well as to grow our business through possible mergers and acquisitions of similar or synergetic businesses, all aimed at increasing awareness of our brand, developing customer loyalty, meeting customer demands in various markets and providing solid foundations for our growth. As of the date of this Quarterly Report, however, we do not have any agreements, undertakings or understandings to acquire any such entities and there can be no guarantee that we ever will.
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Maintaining effective control of our costs and expenses - Successful cost control depends upon our ability to obtain and maintain adequate material supplies as required by our operations at competitive prices. We will focus on improving our long-term cost control strategies including establishing long-term alliances with certain suppliers to ensure adequate supply is maintained. We will carry forward the economies of scale and advantages from our nationwide distribution network and diversified offerings. Moreover, we will step up our efforts in higher value-added products of Luobuma by using an exclusive and patented technology, to optimize quality management, procurement processes and cost control, and give full play to the strong production capacity and trustworthy sales teams to maximize our profit and bring better long-term return for our stockholders.
Economic and Political Risks
Our operations are conducted primarily in the PRC and subject to special considerations and significant risks not typically associated with companies operating in North America and/or Western Europe. These include risks with, among others, the political, economic and legal environment and foreign currency exchange. Our results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversions, remittances abroad, and rates and methods of taxation, among other things.
COVID-19 Impact
The COVID-19 outbreak has resulted in the implementation of significant governmental measures, including lockdowns, closures, quarantines, and travel bans, intended to control the spread of the virus. In accordance with the epidemic control measures imposed by the local governments related to COVID-19, our offices and retail stores remained closed or had limited business operations after the Chinese New Year holiday until early April 2020. In addition, COVID-19 had caused severe disruptions in transportation, limited access to our facilities and limited support from workforce employed in our operations, and as a result, we experienced delays or the inability to delivery our products to customers on a timely basis. Further, some of our customers or suppliers experienced financial distress, delayed or defaults on payment, sharp diminishing of business, or suffer disruptions in their business due to the outbreak. Any decreased collectability of accounts receivable, delayed raw materials supply, bankruptcy of small and medium businesses, or early termination of agreements due to deterioration in economic conditions could negatively impact our results of operations. Wider-spread COVID-19 in China and globally could prolong the deterioration in economic conditions and could cause decreases in or delays in spending and reduce and/or negatively impact our short-term ability to grow our revenue.
Due to the resurgence of COVID-19 cases in China, our headquarters in Beijing were closed down on April 25, 2022 and only resumed our business in mid-June 2022. Meanwhile, the business of our subsidiaries and VIEs was also negatively affected during this period, including but not limited to the execution of our sales contracts and fulfillment of customer orders and the collection of the payments from customers in a timely manner. The resurgence of COVID-19 impact on our operating results and financial performance seems to be temporary, we will continue to monitor and modify the operating strategies in response to the COVID-19. In early December 2022, China announced a nationwide loosening of its zero-covid policy, and the country faced a wave in infections after the lifting of these restrictions. The extent of the future impact of COVID-19 is still highly uncertain and cannot be predicted as of the date our unaudited condensed consolidated financial statements are released.
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Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements as well as the reported amounts of revenue and expenses during the reporting period. Critical accounting policies are those accounting policies that may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and that have a material impact on financial condition or operating performance. While we base our estimates and judgments on our experience and on various other factors that we believe to be reasonable under the circumstances, actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies used in the preparation of our unaudited condensed consolidated financial statements require significant judgments and estimates. For additional information relating to these and other accounting policies, see Note 3 to our unaudited condensed consolidated financial statements included elsewhere in this Report.
Consolidation of Variable Interest Entities
VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision-making ability. All VIEs and their subsidiaries with which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.
Use of Estimates
Significant estimates required to be made by management include, but are not limited to, useful lives of property and equipment, and intangible assets, the recoverability of long-lived assets and the valuation of accounts receivable, advances to suppliers, deferred taxes and inventory reserves. Actual results could differ from those estimates.
Accounts Receivable, Net
Accounts receivable are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts, as necessary. We review the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, we consider many factors, including the age of the balance, the customers’ historical payment history, their current credit-worthiness and current economic trends. The fair value of long-term receivables is determined using a present value technique by discounting the future expected contractual cash flows using current rates at which similar instruments would be issued at the measurement date. As of March 31, 2023 and June 30, 2022, the allowance for doubtful accounts was US$7,552,901 and US$7,317,236, respectively. Accounts are written off against the allowance after efforts at collection prove unsuccessful.
Inventories, Net
Inventories, which are stated at the lower of cost or net realizable value, consist of raw materials, work-in-progress, and finished goods related to our products. Cost is determined using the first in first out method. Agricultural products that we farm are recorded at cost, which includes direct costs such as seed selection, fertilizer, labor cost, and contract fees that are spent in growing agricultural products on the leased farmland, and indirect costs such as amortization of prepayments of farmland leases and farmland development costs. All the costs are accumulated until the time of harvest and then allocated to the harvested crops costs when they are sold. We periodically evaluate our inventory and records an inventory reserve for certain inventories that may not be saleable or whose cost exceeds net realizable value. As of March 31, 2023 and June 30, 2022, the inventory reserve was US$1,431,963 and US$1,249,543, respectively.
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Revenue Recognition
We previously recognized revenue from sales of Luobuma products, Chinese medicinal herbal products, agricultural products and rapid diagnostic products, as well as providing logistic services and other processing services to external customers. We recognized revenue when all of the following have occurred: (i) there was persuasive evidence of an arrangement with a customer; (ii) delivery had occurred or services had been rendered; (iii) the sales price was fixed or determinable; and (iv) our collection of such fees was reasonably assured. These criteria, as related to our revenue, were considered to have been met as follows:
Sales of products: We recognized revenue from the sale of products when the goods were delivered and title to the goods passed to the customer provided that there were no uncertainties regarding customer acceptance; persuasive evidence of an arrangement existed; the sales price was fixed or determinable; and collectability was deemed probable.
Revenue from provision of services: The Company merely acts as an agent in this type of services transactions. Revenue from domestic air and overland freight forwarding services was recognized upon the performance of services as stipulated in the underlying contract or when commodities were being released from the customer’s warehouse; the service price was fixed or determinable; and collectability was deemed probable.
With the adoption of ASC 606, “Revenue from Contracts with Customers,” revenue is recognized when all of the following five steps are met: (i) identify the contract(s) with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations; (v) recognize revenue when (or as) each performance obligation is satisfied. The Company adopted the new revenue standard beginning July 1, 2018, and adopted a modified retrospective approach upon adoption. The Company has assessed the impact of the guidance by reviewing its existing customer contracts to identify differences that will result from applying the new requirements, including the evaluation of its performance obligations, transaction price, customer payments, transfer of control, and principal versus agent considerations. In accordance with ASC 606, the Company evaluates whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions. When the Company is a principal, that the Company obtains control of the specified goods or services before they are transferred to the customers, the revenues should be recognized in the gross amount of consideration to which it expects to be entitled in exchange for the specified goods or services transferred. When the Company is an agent and its obligation is to facilitate third parties in fulfilling their performance obligation for specified goods or services, the revenues should be recognized in the net amount for the amount of commission which the Company earns in exchange for arranging for the specified goods or services to be provided by other parties. Based on the assessment, the Company concluded that there was no change to the timing and pattern of revenue recognition for its current revenue streams in scope of Topic 606 and therefore there was no material changes to the Company’s unaudited condensed consolidated financial statements upon adoption of ASC 606.
Fair Value of Financial Instruments
We follow the provisions of ASC 820, “Fair Value Measurements and Disclosures.” ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 applies to assets or liabilities for which there are inputs, other than quoted prices in level, that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the asset or liability.
The carrying value of financial instruments included in current assets and liabilities approximate their fair values because of the short-term nature of these instruments.
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Results of Operations for the Nine Months Ended March 31, 2023 and 2022
Overview
The following table summarizes our results of operations for the nine months ended March 31, 2023 and 2022:
Nine Months Ended March 31, | Variance | |||||||||||||||
| 2023 | 2022 | Amount | % | |||||||||||||
| Revenue | $ | 1,767,977 | $ | 1,980,426 | $ | (212,449 | ) | (10.73 | )% | |||||||
| Cost of revenue | 2,068,588 | 3,764,404 | (1,695,816 | ) | (45.05 | )% | ||||||||||
| Gross loss | (300,611 | ) | (1,783,978 | ) | 1,483,367 | (83.15 | )% | |||||||||
| General and administrative expenses | 6,553,373 | 12,724,864 | (6,171,491 | ) | (48.50 | )% | ||||||||||
| Selling expenses | 100,376 | 34,376 | 66,000 | 191.99 | % | |||||||||||
| Research and development expenses | 58,384 | - | 58,384 | 100.00 | % | |||||||||||
| Impairment loss of distribution rights | - | 1,140,551 | (1,140,551 | ) | (100.00 | )% | ||||||||||
| Loss from operations | (7,012,744 | ) | (15,683,769 | ) | 8,671,025 | (55.29 | )% | |||||||||
| Impairment loss on an unconsolidated entity | - | (149,790 | ) | 149,790 | (100.00 | )% | ||||||||||
| Loss from equity method investments | (20,932 | ) | (156,235 | ) | 135,303 | (86.60 | )% | |||||||||
| Other income (expenses), net | 303,003 | (5,731 | ) | 308,734 | (5,387.09 | )% | ||||||||||
| Amortization of debt issuance costs | (579,664 | ) | (1,142,215 | ) | 562,551 | (49.25 | )% | |||||||||
| Interest income (expenses), net | (547,568 | ) | 232,644 | (780,212 | ) | (335.37 | )% | |||||||||
| Loss before income tax provision from continuing operations | (7,857,905 | ) | (16,905,096 | ) | 9,047,191 | (53.52 | )% | |||||||||
| Benefit for income taxes | (33,089 | ) | (6,507 | ) | (26,582 | ) | 408.51 | % | ||||||||
| Net loss from continuing operations | (7,824,816 | ) | (16,898,589 | ) | 9,073,773 | (53.70 | )% | |||||||||
| Net loss from discontinued operations | - | (3,135,237 | ) | 3,135,237 | (100.00 | )% | ||||||||||
| Net loss | $ | (7,824,816 | ) | $ | (20,033,826 | ) | $ | 12,209,010 | (60.94 | )% | ||||||
| Comprehensive loss attributable to Shineco Inc. | $ | (9,120,188 | ) | $ | (19,060,297 | ) | $ | 9,940,109 | (52.15 | )% | ||||||
Revenue
Currently, we, through our PRC subsidiaries and the VIEs, have four revenue streams derived from our four major business segments from continuing operations. First, developing, manufacturing, and distributing specialized fabrics, textiles, and other by-products derived from an indigenous Chinese plant Apocynum Venetum, known in Chinese as “Luobuma” or “Bluish Dogbane,” as well as Luoboma raw materials processing; this segment is conducted through our wholly owned subsidiary, Tenet-Jove. Second, planting, processing and distributing green and organic agricultural produce, growing and cultivation of yew trees, as well as planting fast-growing bamboo willows and scenic greening trees; this segment is conducted through Qingdao Zhihesheng and Guangyuan. Third, providing domestic air and overland freight forwarding services by outsourcing these services to a third party; this segment is conducted through Zhisheng Freight. Fourth, developing, producing and distributing innovative rapid diagnostic products and related medical devices for the most common diseases; this segment is conducted through Biowin.
| 47 |
The following table sets forth the breakdown of our revenue for each of the four segments for the nine months ended March 31, 2023 and 2022, respectively:
| Nine Months Ended March 31, | Variance | |||||||||||||||||||||||
| 2023 | % | 2022 | % | Amount | % | |||||||||||||||||||
| Luobuma products | $ | 22,298 | 1.27 | % | $ | 43,289 | 2.19 | % | $ | (20,991 | ) | (48.49 | )% | |||||||||||
| Other agricultural products | 1,154,156 | 65.28 | % | 1,244,221 | 62.82 | % | (90,065 | ) | (7.24 | )% | ||||||||||||||
| Freight services | 360,010 | 20.36 | % | 692,916 | 34.99 | % | (332,906 | ) | (48.04 | )% | ||||||||||||||
| Rapid diagnostic products | 231,513 | 13.09 | % | - | - | 231,513 | 100.00 | % | ||||||||||||||||
| Total Amount | $ | 1,767,977 | 100.00 | % | $ | 1,980,426 | 100.00 | % | $ | (212,449 | ) | (10.73 | )% | |||||||||||
For the nine months ended March 31, 2023 and 2022, revenue from sales of Luobuma products was US$22,298 and US$43,289, respectively, which represented a decrease of US$20,991, or 48.49%. The decrease of revenue from this segment was mainly due to the decrease in revenue from Tenet-Jove and Tenet Huatai. The low revenue from sales of Luobuma products is because we did not launch any new products and reduced our resources and investments in our E-commerce distribution channel, and currently, we mainly focused on clearing off our remaining old stocks. Hence, revenue from this segment continued falling during the nine months ended March 31, 2023 as compared to the same period in 2022.
For the nine months ended March 31, 2023 and 2022, revenue from sales of other agricultural products was US$1,154,156 and US$1,244,221, respectively, representing a decrease of US$90,065, or 7.24%. Since our sales of yew trees were adversely affected by the COVID-19 outbreak, we modified our operating strategies in response to the pandemic. Instead of selling more unmatured yew trees, we are now cultivating more matured yew trees, which can be used to extract Taxol, a more valuable chemical substance which is used experimentally as a drug in the treatment of cancer.
For the nine months ended March 31, 2023 and 2022, revenue from provision of freight services was US$360,010 and US$692,916, respectively, representing a decrease of US$332,906, or 48.04%. The decrease was mainly due to outsourcing of our domestic and international logistic services to third-party logistic companies due to the change in our business strategies. Since we merely served as an agent in this type of transactions, our revenue from domestic and international logistic services was recognized in the net amount during the nine months ended March 31, 2023.
For the nine months ended March 31, 2023 and 2022, revenue from sales of rapid diagnostic products was US$231,513 and US$ nil, respectively, representing an increase of US$231,513, or 100.00%. The increase was mainly due to revenue of US$231,513 generated by our newly acquired subsidiary Biowin during the nine months ended March 31, 2023.
Cost of Revenue and Related Tax
The following table sets forth the breakdown of the cost of revenue for each of our four segments for the nine months ended March 31, 2023 and 2022:
| Nine Months Ended March 31, | Variance | |||||||||||||||||||||||
| 2023 | % | 2022 | % | Amount | % | |||||||||||||||||||
| Luobuma products | $ | 2,851 | 0.14 | % | $ | 153,507 | 4.08 | % | $ | (150,656 | ) | (98.14 | )% | |||||||||||
| Other agricultural products | 1,600,321 | 77.36 | % | 2,983,804 | 79.26 | % | (1,383,483 | ) | (46.37 | )% | ||||||||||||||
| Freight services | 245,057 | 11.85 | % | 622,264 | 16.53 | % | (377,207 | ) | (60.62 | )% | ||||||||||||||
| Rapid diagnostic products | 218,915 | 10.58 | % | - | - | 218,915 | 100.00 | % | ||||||||||||||||
| Business and sales related tax | 1,444 | 0.07 | % | 4,829 | 0.13 | % | (3,385 | ) | (70.10 | )% | ||||||||||||||
| Total Amount | $ | 2,068,588 | 100.00 | % | $ | 3,764,404 | 100.00 | % | $ | (1,695,816 | ) | (45.05 | )% | |||||||||||
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For the nine months ended March 31, 2023 and 2022, cost of revenue from sales of our Luobuma products was US$2,851 and US$153,507, respectively, representing a decrease of US$150,656, or 98.14%. The decrease was mainly due to the decreased allowance we accrued for our slow-moving inventories amounted to US$141,752 on our remaining old stocks during the nine months ended March 31, 2023.
For the nine months ended March 31, 2023 and 2022, cost of revenue from sales of other agricultural products was US$1,600,321 and US$2,983,804, respectively, representing a decrease of US$1,383,483, or 46.37%. The decrease was mainly due to a reduction in stock written off during the nine months ended March 31, 2023. Due to the continuous impact of Covid-19 in China, which resulted in the damage and death of a large number of yew trees, we continued writing off a large amount of our inventory during the nine months ended March 31, 2023.
For the nine months ended March 31, 2023 and 2022, cost of revenue from provision of freight services was US$245,057 and US$622,264, respectively, representing a decrease of US$377,207, or 60.62%. The decrease was due to decreased cost of revenue from domestic and international logistic services, as we now only acted as an agent in this type of this transactions as mentioned above.
For the nine months ended March 31, 2023 and 2022, cost of revenue from sales of rapid diagnostic products was US$218,915 and US$ nil, respectively, representing an increase of US$218,915, or 100.00%. The increase was mainly due to cost of revenue of US$218,915 generated by our newly acquired subsidiary Biowin during the nine months ended March 31, 2023.
Gross Profit (Loss)
The following table sets forth the breakdown of the gross profit (loss) for each of our four segments for the nine months ended March 31, 2023 and 2022:
| Nine Months Ended March 31, | Variance | |||||||||||||||||||||||
| 2023 | % | 2022 | % | Amount | % | |||||||||||||||||||
| Luobuma products | $ | 19,445 | (6.47 | )% | $ | (110,219 | ) | 6.18 | % | $ | 129,664 | (117.64 | )% | |||||||||||
| Other agricultural products | (446,165 | ) | 148.42 | % | (1,739,583 | ) | 97.51 | % | 1,293,418 | (74.35 | )% | |||||||||||||
| Freight services | 114,953 | (38.24 | )% | 65,824 | (3.69 | )% | 49,129 | 74.64 | % | |||||||||||||||
| Rapid diagnostic products | 11,156 | (3.71 | )% | - | - | 11,156 | 100.00 | % | ||||||||||||||||
| Total Amount | $ | (300,611 | ) | 100.00 | % | $ | (1,783,978 | ) | 100.00 | % | $ | 1,483,367 | (83.15 | )% | ||||||||||
Gross loss from Luobuma product sales decreased by US$129,664 or 117.64%, for the nine months ended March 31, 2023 as compared to the same period in 2022. The decrease was mainly due to decrease in allowance we accrued for our slow-moving inventories during the nine months ended March 31, 2023.
Gross loss from sales of other agricultural products decreased by US$1,293,418, or 74.35%, for the nine months ended March 31, 2023 as compared to the same period in 2022. The decrease in gross loss was mainly due to a reduction in stock written off as mentioned above, as well as less price discounts we offered to our customers during the nine months ended March 31, 2023.
Gross profit from provision of freight services increased by US$49,129, or 74.64%, for the nine months ended March 31, 2023 as compared to the same period in 2022. As mentioned above, we outsourced our domestic and international logistic services to third-party logistic companies due to the change in our business strategies, which improved our operating efficiency and profitability during the nine months ended March 31, 2023.
Gross profit from sales of rapid diagnostic products increased by US$11,156, or 100.00%, for the nine months ended March 31, 2023 as compared to the same period in 2022. The increase was mainly due to gross profit of US$11,156 contributed by our newly acquired subsidiary Biowin during the nine months ended March 31, 2023.
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Expenses
The following table sets forth the breakdown of our operating expenses for the nine months ended March 31, 2023 and 2022, respectively:
| Nine Months Ended March 31, | Variance | |||||||||||||||||||||||
| 2023 | % | 2022 | % | Amount | % | |||||||||||||||||||
| General and administrative expenses | $ | 6,553,373 | 97.63 | % | $ | 12,724,864 | 91.54 | % | $ | (6,171,491 | ) | (48.50 | )% | |||||||||||
| Selling expenses | 100,376 | 1.50 | % | 34,376 | 0.25 | % | 66,000 | 191.99 | % | |||||||||||||||
| Research and development expenses | 58,384 | 0.87 | % | - | - | 58,384 | 100.00 | % | ||||||||||||||||
| Impairment loss of distribution rights | - | - | 1,140,551 | 8.21 | % | (1,140,551 | ) | (100.00 | )% | |||||||||||||||
| Total Amount | $ | 6,712,133 | 100.00 | % | $ | 13,899,791 | 100.00 | % | $ | (7,187,658 | ) | (51.71 | )% | |||||||||||
General and Administrative Expenses
For the nine months ended March 31, 2023, our general and administrative expenses were US$6,553,373, representing a decrease of US$6,171,491, or 48.50%, as compared to the same period in 2022. The decrease was mainly due to a reduction in bad debt expense during the nine months ended March 31, 2023, as we recorded a significant amount of bad debt expense as a result of the impact from COVID-19 during the same period last year. We recorded allowance according to our accounting policy based on our best estimates. Management will continue putting effort in collection of overdue receivables and utilize our advances to our vendors. The decrease was also due to decreased professional service fees in relation to the Company’s issuance of common stock and convertible notes and decreased compensation expenses in relation to the Company’s lawsuit. The decrease was partially offset by the increased intermediary fee paid to a third party as commission for the Company acquisition, the increased stock compensation expenses as well as the general and administrative expenses incurred by our newly acquired subsidiary Biowin during the nine months ended March 31, 2023.
Selling Expenses
For the nine months ended March 31, 2023, our selling expenses were US$100,376, representing an increase of US$66,000, or 191.99%, as compared to the same period in 2022. The increase was mainly due to selling expenses incurred by our newly acquired subsidiary Biowin during the nine months ended March 31, 2023.
Research and Development Expenses
For the nine months ended March 31, 2023, our research and development expenses were US$58,384, representing an increase of US$58,384, or 100.00%, as compared to the same period in 2022. The increase was mainly due to research and development expenses incurred by our newly acquired subsidiary Biowin during the nine months ended March 31, 2023.
Impairment Loss of Distribution Rights
For the nine months ended March 31, 2023 and 2022, our impairment loss of distribution right was US$ nil and US$1,140,551, respectively. We acquired distribution rights to distribute branded products of Daiso 100-yen shops through the acquisition of Tianjin Tajite. During the nine months ended March 31, 2022, the management performed evaluation on the impairment of distribution rights. As the Company is unable to generate any revenue and profit from the distribution right due to the unfavorable policy of China Customs and current business environment caused by the continuous impact from the COVID-19, the management fully recorded an impairment loss on distribution rights of Tianjin Tajite.
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Impairment Loss on An Unconsolidated Entity
For the nine months ended March 31, 2022, our impairment loss on an unconsolidated entity was US$149,790. The management performed evaluation on the impairment of the investment make on Shanxi Pharmaceutical Group Yushe Pharmaceutical Development Co., Ltd., (“Yushe Pharmaceutical”) and considered it is unlikely to obtain any investment income in the future, hence, the management fully recorded impairment loss on this investment.
Loss from Equity Method Investments
Our VIE, Guangyuan has a 20% equity interest in Shanxi Pharmaceutical Group Yushe Pharmaceutical Development Co., Ltd. (“Yushe Pharmaceutical”). We recorded a loss of US$16,153 for the nine months ended March 31, 2022 from this investment. As we fully impaired the investment subsequently, no income or loss was recorded for the nine months ended March 31, 2023 from this investment.
On August 31, 2021, we entered into a capital injection agreement with the other shareholders of Shanghai Gaojing Private Fund Management (“Gaojing Private Fund”), a Chinese private fund management company, to complete the injection of a total RMB 4.8 million (approximately US$0.70 million) for its 32% equity interest in Gaojing Private Fund. We recorded a loss of US$20,932 and US$140,082 for the nine months ended March 31, 2023 and 2022 from this investment, respectively. The decrease in net loss was primarily due to lower net loss generated by the equity investment company in the current period.
Other Income (Expenses)
For the nine months ended March 31, 2023, our net other income was US$303,003, representing an increase of US$308,734, or 5,387.09%, as compared to net other expenses of US$5,731 in the same period in 2022. The increase was mainly due to other income recognized on advance received from customers that were no longer required to be repaid or settled by the Company during the nine months ended March 31, 2023.
Amortization of Debt Issuance Costs
For the nine months ended March 31, 2023, our amortization of debt issuance costs expenses was US$579,664, representing a decrease of US$562,551, or 49.25%, as compared to amortization of debt issuance costs expenses of US$1,142,215, in the same period in 2022. We entered into four convertible note agreements and two of them were fully converted, hence, resulted in a decrease in amortization of debt issuance costs expenses for the nine months ended March 31, 2023 as compared to the same period last year.
Interest Income (Expenses), Net
For the nine months ended March 31, 2023, our net interest expenses were US$547,568, representing an increase of US$780,212, or 335.37%, as compared to net interest income of US$232,644 in the same period in 2022. The increase in net interest expenses was mainly attributable to the increased interest expenses on loans borrowed from third parties. The increase was also due to less interest income generated from loans to third parties and related parties during the nine months ended March 31, 2023 as some of the loans have been fully collected.
Net Loss from Continuing Operations
Our net loss from continuing operations was US$7,824,816 for the nine months ended March 31, 2023, a decrease of US$9,073,773, or 53.70%, from net loss from continuing operations of US$16,898,589 for the nine months ended March 31, 2022. The decrease in net loss was primarily a result of the decrease in general and administrative expenses, impairment loss of distribution rights and amortization of debt issuance costs.
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Net Loss from Discontinued Operations
As mentioned above, after signing of the Restructuring Agreement on June 8, 2021, we and the shareholders of Ankang Longevity Group and Guangyuan actively carried out the transferring of rights and interests in Ankang Longevity Group and Guangyuan, and the transferring was completed subsequently on July 5, 2021, and the management determined that July 5, 2021 was the disposal date of Ankang Longevity Group. We had a total net loss from discontinued operations of US$3,135,237 for the nine months ended March 31, 2022.
Net Loss
Our net loss was US$7,824,816 for the nine months ended March 31, 2023, a decrease of US$12,209,010, or 60.94%, from a net loss of US$20,033,826 for the same period in 2022. The decrease in net loss was primarily a result of the decreased net loss from continuing operations, as well as the decreased net loss from discontinued operations as mentioned above.
Comprehensive Loss
The comprehensive loss was US$8,821,571 for the nine months ended March 31, 2023, a decrease of US$10,249,906 from a comprehensive loss of US$19,071,477 for the same period in 2022. After deduction of non-controlling interest, the comprehensive loss attributable to us was US$9,120,188 for the nine months ended March 31, 2023, compared to a comprehensive loss attributable to us in the amount of US$19,060,297 for the nine months ended March 31, 2022. The decrease of comprehensive loss was due to the decrease in net loss as mentioned above, which was partially offset by the decrease in the recorded income of foreign currency translation where the financial statements denominated in RMB were translated to the USD denomination.
Results of Operations for the Three Months Ended March 31, 2023 and 2022
Overview
The following table summarizes our results of operations for the three months ended March 31, 2023 and 2022:
Three Months Ended March 31, | Variance | |||||||||||||||
| 2023 | 2022 | Amount | % | |||||||||||||
| Revenue | $ | 693,032 | $ | 618,094 | $ | 74,938 | 12.12 | % | ||||||||
| Cost of revenue | 782,898 | 1,110,836 | (327,938 | ) | (29.52 | )% | ||||||||||
| Gross loss | (89,866 | ) | (492,742 | ) | 402,876 | (81.76 | )% | |||||||||
| General and administrative expenses | 2,349,517 | 2,218,398 | 131,119 | 5.91 | % | |||||||||||
| Selling expenses | 81,825 | 16,044 | 65,781 | 410.00 | % | |||||||||||
| Research and development expenses | 58,384 | - | 58,384 | 100.00 | % | |||||||||||
| Loss from operations | (2,579,592 | ) | (2,727,184 | ) | 147,592 | (5.41 | )% | |||||||||
| Loss from equity method investments | (14,711 | ) | (49,247 | ) | 34,536 | (70.13 | )% | |||||||||
| Other income (expenses), net | 274,245 | (7,174 | ) | 281,419 | (3,922.76 | )% | ||||||||||
| Amortization of debt issuance costs | (223,692 | ) | (287,897 | ) | 64,205 | (22.30 | )% | |||||||||
| Interest income (expenses), net | (99,324 | ) | 165,505 | (264,829 | ) | (160.01 | )% | |||||||||
| Loss before income tax provision from continuing operations | (2,643,074 | ) | (2,905,997 | ) | 262,923 | (9.05 | )% | |||||||||
| Benefit for income taxes | (33,089 | ) | (29 | ) | (33,060 | ) | 114,000.00 | % | ||||||||
| Net loss from continuing operations | (2,609,985 | ) | (2,905,968 | ) | 295,983 | (10.19 | )% | |||||||||
| Net loss from discontinued operations | - | - | - | - | ||||||||||||
| Net loss | $ | (2,609,985 | ) | $ | (2,905,968 | ) | $ | 295,983 | (10.19 | )% | ||||||
| Comprehensive loss attributable to Shineco Inc. | $ | (2,742,759 | ) | $ | (2,743,234 | ) | $ | 475 | (0.02 | )% | ||||||
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Revenue
Currently, we, through our PRC subsidiaries and the VIEs, have four revenue streams derived from our four major business segments from continuing operations. First, developing, manufacturing, and distributing specialized fabrics, textiles, and other by-products derived from an indigenous Chinese plant Apocynum Venetum, known in Chinese as “Luobuma” or “Bluish Dogbane,” as well as Luoboma raw materials processing; this segment is channeled through our wholly owned subsidiary, Tenet-Jove. Second, planting, processing and distributing green and organic agricultural produce, growing and cultivation of yew trees, as well as planting fast-growing bamboo willows and scenic greening trees; this segment is conducted through Qingdao Zhihesheng and Guangyuan. Third, providing domestic air and overland freight forwarding services by outsourcing these services to a third party; this segment is conducted through Zhisheng Freight. Fourth, developing, producing and distributing innovative rapid diagnostic products and related medical devices for the most common diseases; this segment is conducted through Biowin.
The following table sets forth the breakdown of our revenue for each of the four segments for the three months ended March 31, 2023 and 2022, respectively:
| Three Months Ended March 31, | Variance | |||||||||||||||||||||||
| 2023 | % | 2022 | % | Amount | % | |||||||||||||||||||
| Luobuma products | $ | 3,076 | 0.44 | % | $ | 8,521 | 1.38 | % | $ | (5,445 | ) | (63.90 | )% | |||||||||||
| Other agricultural products | 330,471 | 47.68 | % | 369,030 | 59.70 | % | (38,559 | ) | (10.45 | )% | ||||||||||||||
| Freight services | 127,972 | 18.47 | % | 240,543 | 38.92 | % | (112,571 | ) | (46.80 | )% | ||||||||||||||
| Rapid diagnostic products | 231,513 | 33.41 | % | - | - | 231,513 | 100.00 | % | ||||||||||||||||
| Total Amount | $ | 693,032 | 100.00 | % | $ | 618,094 | 100.00 | % | $ | 74,938 | 12.12 | % | ||||||||||||
For the three months ended March 31, 2023 and 2022, revenue from sales of Luobuma products was US$3,076 and US$8,521, respectively, which represented a decrease of US$5,445, or 63.90%. The decrease of revenue from this segment was mainly due to the decrease in revenue from Tenet-Jove and Tenet Huatai. The low revenue from sales of Luobuma products is because we did not launch any new products and reduced our resources and investments in our E-commerce distribution channel, and currently, we are mainly focused on clearing off our remaining old stocks. Hence, revenue from this segment continued falling during the three months ended March 31, 2023 as compared to the same period in 2022.
For the three months ended March 31, 2023 and 2022, revenue from sales of other agricultural products was US$330,471 and US$369,030, respectively, representing a decrease of US$38,559, or 10.45%. Since our sales of yew trees were adversely affected by the COVID-19 outbreak, we modified our operating strategies in response to the pandemic. Instead of selling more unmatured yew trees, we are now cultivating more matured yew trees, which can be used to extract Taxol, a more valuable chemical substance which is used experimentally as a drug in the treatment of cancer.
For the three months ended March 31, 2023 and 2022, revenue from provision of freight services was US$127,972 and US$240,543, respectively, representing a decrease of US$112,571, or 46.80%. The decrease was mainly due to outsourcing our domestic and international logistic services to third-party logistic companies due to the change in our business strategies. Since we merely served as an agent in this type of transactions, our revenue from domestic and international logistic services was recognized in the net amount during the three months ended March 31, 2023.
For the three months ended March 31, 2023 and 2022, revenue from sales of rapid diagnostic products was US$231,513 and US$ nil, respectively, representing an increase of US$231,513, or 100.00%. The increase was mainly due to revenue of US$231,513 generated by our newly acquired subsidiary Biowin during the three months ended March 31, 2023.
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Cost of Revenue and Related Tax
The following table sets forth the breakdown of the cost of revenue for each of our four segments for the three months ended March 31, 2023 and 2022:
| Three Months Ended March 31, | Variance | |||||||||||||||||||||||
| 2023 | % | 2022 | % | Amount | % | |||||||||||||||||||
| Luobuma products | $ | (6,091 | ) | (0.77 | )% | $ | 3,202 | 0.29 | % | $ | (9,293 | ) | (290.22 | )% | ||||||||||
| Other agricultural products | 484,874 | 61.93 | % | 899,022 | 80.93 | % | (414,148 | ) | (46.07 | )% | ||||||||||||||
| Freight services | 83,758 | 10.70 | % | 207,040 | 18.64 | % | (123,282 | ) | (59.55 | )% | ||||||||||||||
| Rapid diagnostic products | 218,915 | 27.96 | % | - | - | 218,915 | 100.00 | % | ||||||||||||||||
| Business and sales related tax | 1,442 | 0.18 | % | 1,572 | 0.14 | % | (130 | ) | (8.27 | )% | ||||||||||||||
| Total Amount | $ | 782,898 | 100.00 | % | $ | 1,110,836 | 100.00 | % | $ | (327,938 | ) | (29.52 | )% | |||||||||||
For the three months ended March 31, 2023 and 2022, cost of revenue from sales of our Luobuma products was US$(6,091) and US$3,202, respectively, representing a decrease of US$9,293, or 290.22%. The decrease was mainly due to the decreased allowance we accrued for our slow-moving inventories on our remaining old stocks during the three months ended March 31, 2023.
For the three months ended March 31, 2023 and 2022, cost of revenue from sales of other agricultural products was US$484,874 and US$899,022, respectively, representing a decrease of US$414,148, or 46.07%. The decrease was mainly due to less stock written off during the three months ended March 31, 2023. Due to the continuous impact of Covid-19 in China, which resulted in the damage and death of a large number of yew trees, we continued writing off a large amount of our inventory during the three months ended March 31, 2023.
For the three months ended March 31, 2023 and 2022, cost of revenue from provision of freight services was US$83,758 and US$207,040, respectively, representing a decrease of US$123,282, or 59.55%. The decrease was due to decreased cost of revenue from domestic and international logistic services, as we now only act as an agent in this type of this transactions as mentioned above.
For the three months ended March 31, 2023 and 2022, cost of revenue from sales of rapid diagnostic products was US$218,915 and US$ nil, respectively, representing an increase of US$218,915, or 100.00%. The increase was mainly due to cost of revenue of US$218,915 generated by our newly acquired subsidiary Biowin during the three months ended March 31, 2023.
Gross Profit (Loss)
The following table sets forth the breakdown of the gross profit (loss) for each of our four segments for the three months ended March 31, 2023 and 2022:
| Three Months Ended March 31, | Variance | |||||||||||||||||||||||
| 2023 | % | 2022 | % | Amount | % | |||||||||||||||||||
| Luobuma products | $ | 9,167 | (10.20 | )% | $ | 5,318 | (1.08 | )% | $ | 3,849 | 72.38 | % | ||||||||||||
| Other agricultural products | (154,403 | ) | 171.81 | % | (529,992 | ) | 107.56 | % | 375,589 | (70.87 | )% | |||||||||||||
| Freight services | 44,214 | (49.20 | )% | 31,932 | (6.48 | )% | 12,282 | 38.46 | % | |||||||||||||||
| Rapid diagnostic products | 11,156 | (12.41 | )% | - | - | 11,156 | 100.00 | % | ||||||||||||||||
| Total Amount | $ | (89,866 | ) | 100.00 | % | $ | (492,742 | ) | 100.00 | % | $ | 402,876 | (81.76 | )% | ||||||||||
Gross profit from Luobuma product sales increased by US$3,849 or 72.38%, for the three months ended March 31, 2023 as compared to the same period in 2022. The increase was mainly due to decrease in allowance we accrued for our slow-moving inventories during the three months ended March 31, 2023.
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Gross loss from sales of other agricultural products decreased by US$375,589, or 70.87%, for the three months ended March 31, 2023 as compared to the same period in 2022. The decrease in gross loss was mainly due to a reduction in stock written off as mentioned above, as well as fewer price discounts offered to our customers during the three months ended March 31, 2023.
Gross profit from provision of freight services increased by US$12,282, or 38.46%, for the three months ended March 31, 2023 as compared to the same period in 2022. As mentioned above, we outsourced our domestic and international logistic services to third-party logistic companies due to the change in our business strategies, which improved our operating efficiency and profitability during the three months ended March 31, 2023.
Gross profit from sales of rapid diagnostic products increased by US$11,156, or 100.00%, for the three months ended March 31, 2023 as compared to the same period in 2022. The increase was mainly due to gross profit of US$11,156 contributed by our newly acquired subsidiary Biowin during the three months ended March 31, 2023.
Expenses
The following table sets forth the breakdown of our operating expenses for the three months ended March 31, 2023 and 2022, respectively:
| Three Months Ended March 31, | Variance | |||||||||||||||||||||||
| 2023 | % | 2022 | % | Amount | % | |||||||||||||||||||
| General and administrative expenses | $ | 2,349,517 | 94.37 | % | $ | 2,218,398 | 99.28 | % | $ | 131,119 | 5.91 | % | ||||||||||||
| Selling expenses | 81,825 | 3.29 | % | 16,044 | 0.72 | % | 65,781 | 410.00 | % | |||||||||||||||
| Research and development expenses | 58,384 | 2.34 | % | - | - | 58,384 | 100.00 | % | ||||||||||||||||
| Total Amount | $ | 2,489,726 | 100.00 | % | $ | 2,234,442 | 100.00 | % | $ | 255,284 | 11.42 | % | ||||||||||||
General and Administrative Expenses
For the three months ended March 31, 2023, our general and administrative expenses were US$2,349,517, representing an increase of US$131,119, or 5.91%, as compared to the same period in 2022. The increase was mainly due to the increased stock compensation expenses as well as the general and administrative expenses incurred by newly acquired Biowin. The increase was partially offset by the decreased bad debt expense during the three months ended March 31, 2023. Management will continue putting effort in collection of overdue receivables and utilize our advances to our vendors.
Selling Expenses
For the three months ended March 31, 2023, our selling expenses were US$81,825, representing an increase of US$65,781, or 410.00%, as compared to the same period in 2022. The increase was mainly due to selling expenses incurred by newly acquired Biowin during the three months ended March 31, 2023.
Research and development expenses
For the three months ended March 31, 2023, our research and development expenses were US$58,384, representing an increase of US$58,384, or 100.00%, as compared to the same period in 2022. The increase was mainly due to research and development expenses incurred by newly acquired Biowin during the three months ended March 31, 2023.
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Loss from Equity Method Investments
On August 31, 2021, we entered into a capital injection agreement with the other shareholders of Shanghai Gaojing Private Fund Management (“Gaojing Private Fund”), a Chinese private fund management company, to complete the injection of a total RMB 4.8 million (approximately US$0.70 million) for its 32% equity interest in Gaojing Private Fund. We recorded a loss of US$14,711 and US$49,247 for the three months ended March 31, 2023 and 2022 from this investment, respectively. The decrease in net loss was primarily due to lower net loss generated by the equity investment company in the current period.
Other Income (Expenses)
For the three months ended March 31, 2023, our net other income was US$274,245, representing an increase of US$281,419, or 3,922.76%, as compared to net other expenses of US$7,174 in the same period in 2022. The increase was mainly due to other income recognized on advance received from customers that were no longer required to be repaid or settled by the Company during the three months ended March 31, 2023.
Amortization of Debt Issuance Costs
For the three months ended March 31, 2023, our amortization of debt issuance costs expenses was US$223,692, representing a decrease of US$64,205, or 22.30%, as compared to amortization of debt issuance costs expenses of US$287,897, in the same period in 2022. We entered into four convertible note agreements and two of them were fully converted, hence, resulted in a decrease in amortization of debt issuance costs expenses for the three months ended March 31, 2023 as compared to the same period last year.
Interest Income (Expenses), Net
For the three months ended March 31, 2023, our net interest expenses were US$99,324, representing an increase of US$264,829, or 160.01%, as compared to net interest income of US$165,505 in the same period in 2022. The increase in net interest expenses mainly due to less interest income generated from loans to third parties and related parties during the three months ended March 31, 2023 as some of the loans have been fully collected.
Net Loss
Our net loss was US$2,609,985 for the three months ended March 31, 2023, a decrease of US$295,983, or 10.19%, from net loss of US$2,905,968 for the three months ended March 31, 2022. The decrease in net loss was primarily a result of the decrease in gross loss as well as increase in other income, which was partially offset by the increased general and administrative expenses and interest expenses.
Comprehensive Loss
The comprehensive loss was US$2,450,429 for the three months ended March 31, 2023, a decrease of US$307,496 from a comprehensive loss of US$2,757,925 for the same period in 2022. After deduction of non-controlling interest, the comprehensive loss attributable to us was US$2,742,759 for the three months ended March 31, 2023, compared to a comprehensive loss attributable to us in the amount of US$2,743,234 for the three months ended March 31, 2022. The decrease of comprehensive loss was due to the decrease in net loss as mentioned above.
Treasury Policies
We have established treasury policies with the objectives of achieving effective control of treasury operations and of lowering cost of funds. Therefore, funding for all operations and foreign exchange exposure have been centrally reviewed and monitored from the top level. To manage our exposure to fluctuations in exchange rates and interest rates on specific transactions and foreign currency borrowings, currency structured instruments and other appropriate financial instruments will be used to hedge material exposure, if any.
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Our policy precludes us from entering into any derivative contracts purely for speculative activities. Through our treasury policies, we aim to:
(a) Minimize interest risk
This is accomplished by loan re-financing and negotiation. We will continue to closely monitor the total loan portfolio and compare the loan margin spread under our existing agreements against the current borrowing interest rates under different currencies and new offers from banks.
(b) Minimize currency risk
In view of the current volatile currency market, we will closely monitor the foreign currency borrowings at the company level. As of March 31, 2023 and June 30, 2022, except the above-mentioned convertible note, we did not engage in any foreign currency borrowings or loan contracts.
Liquidity and Capital Resources
We currently finance our business operations primarily through advances from our related parties, short-term loans, convertible notes and the sale of our common stock. Our current cash primarily consists of cash on hand and cash in bank, which is unrestricted as to withdrawal and use and is deposited with banks in China.
On April 10, 2021, we issued 3,872,194 shares of common stock to selected investors at a price of US $3.2 per share. We received net proceeds of US$7,981,204 and US$3,024,000 was outstanding as of March 31, 2023.
On June 16, 2021, we entered into a securities purchase agreement pursuant to which we issued an unsecured convertible promissory note with a one-year maturity term to an institutional accredited investor Streeterville Capital, LLC (“Investor”). The convertible promissory note has the original principal amount of US$3,170,000 and Investor gave consideration of US$3.0 million, reflecting original issue discount of US$150,000 and Investor’s legal fee of US$20,000. We received principal in full from the Investor. On September 7, 2022, we signed an extension amendment with the Investor to extend the maturity date to June 15, 2023. On October 21, 2022, the Company signed a standstill agreement with the Investor, pursuant to which the Investor would not seek to redeem any portion of the Note during the period from October 21, 2022 to January 20, 2023. On or around January 20, 2023, the Investor re-started the redemption of the Notes.
On July 16, 2021, we entered into a securities purchase agreement pursuant to which we issued two unsecured convertible promissory notes with a one-year maturity term to the same investor. The first convertible promissory note has an original principal amount of US$3,170,000 and the Investor gave consideration of US$3.0 million, reflecting original issue discount of US$150,000 and Investor’s legal fee of US$20,000. The second convertible promissory note has an original principal amount of US$4,200,000 and the Investor gave consideration of US$4.0 million, reflecting original issue discount of US$200,000.
On August 19, 2021, we entered into a securities purchase agreement pursuant to which we issued an unsecured convertible promissory note with a one-year maturity term to the same investor. The Note has the original principal amount of US$10,520,000 and Investor gave consideration of US$10.0 million, reflecting original issue discount of US$500,000 and Investor’s legal fee of US$20,000. We received principal in full from the Investor and we anticipate using the proceeds for general working capital purposes. On September 7, 2022, the Company signed an extension amendment with the Investor to extend the maturity date to August 18, 2023. On October 21, 2022, the Company signed a standstill agreement with the Investor, pursuant to which the Investor will not seek to redeem any portion of the Note during the period from October 21, 2022 to January 20, 2023.
For the above-mentioned convertible promissory notes issued, as of March 31, 2023, shares of the Company’s common stock totaling 2,649,735 were issued by the Company to the Investor equaling principal and interests amounted to US$8,192,639, and the Notes balance was US$14,873,579, with a carrying value of US$15,205,875, net of deferred financing costs of US$332,296.
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On December 6, 2021, we entered into a securities purchase agreement with GHS Investments, LLC (“GHS”). Under the Purchase Agreement, we sold GHS 291,775 shares of its common stock at a per share purchase price of $6.8546 for gross proceeds of $2,000,000. After the deduction of issuance cost, we received net proceeds of US$1,970,000.
On April 11, 2022, we entered into a securities purchase agreement (the “Purchase Agreement”) with Jing Wang (the “Investor”). Under the Purchase Agreement, we will sell to the Investor, up to 973,451 shares (the “Shares”) of its common stock at a per share purchase price of $2.26 (subject to the terms and conditions of the Purchase Agreement) for gross proceeds of up to $2,200,000 which were fully received, and the Shares were issued to the Investor on April 18, 2022.
On June 13, 2022, we entered into a certain stock purchase agreement (the “SPA”) with certain non-U.S. investors (the “Purchasers”), pursuant to which we agreed to sell, and the Purchasers agreed to purchase, severally and not jointly, an aggregate of 2,354,500 shares of common stock of the Company (the “Shares”) at a price of US$2.12 per share. our shareholders approved the offer and sale of the Shares at a meeting of the shareholders of the Company that was held on July 21, 2022. The closing for the offer and sale of the Shares occurred on July 26, 2022 and we issued the Shares in exchange for gross proceeds of $5.0 million.
On August 11, 2022, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with certain non-US investors (the “Investors”). Under the Purchase Agreement, the Company will sell to the Investors, up to 1,921,683 shares (the “Shares”) of its common stock at a per share purchase price of $0.915 (subject to the terms and conditions of the Purchase Agreement) for gross proceeds of up to US$1,758,340. As the date of this report, proceeds amounted to US$1.6 million has been received by the Company, and the remaining balance of the proceeds is expected to be fully collected by June 30, 2023.
On January 12, 2023, the Board of the Company approved the sales of 722,222 shares of the Company’s common stock to certain individuals for gross proceeds of up to US$650,000, the balance of the proceeds is expected to be fully collected by September 30, 2023.
On March 14, 2023, the Company entered into a securities purchase agreement (the “SPA”) with certain non-U.S. investors (the “Purchasers”), pursuant to which the Company agreed to sell, and the Purchasers agreed to purchase, severally and not jointly, an aggregate of 1,137,170 shares of common stock of the Company (the “Shares”) at a price of US$1.05 per share. The Company’s board of director approved the offer and sale of the Shares at a meeting of the Board of the Company that was held on March 14, 2023. The Company has received gross proceeds of $1.2 million from the Purchasers and the Shares have not been issued as of March 31, 2023.
Management believes that our current cash, cash flows from future operations, and access to loans will be sufficient to meet our working capital needs for at least the next 12 months. We intend to continue to carefully execute our growth plans and manage market risk. If we fail to satisfy Nasdaq’s continued listing requirements, such as the corporate governance requirements or the minimum closing bid price requirement, The Nasdaq Stock Market LLC (“Nasdaq”) may take steps to delist our common stock. Any continuing failure to remain in compliance with Nasdaq’s continued listing standards, and any subsequent failure to timely resume compliance with Nasdaq’s continued listing standards within the applicable cure period could have adverse consequences, and among other things, substantially impair our ability to raise additional funds and could result in a loss of institutional investor interest and fewer development opportunities for us.
Working Capital
The following table provides the information about our working capital at March 31, 2023 and June 30, 2022:
March 31, 2023 | June 30, 2022 | |||||||
| Current Assets | $ | 45,851,213 | $ | 59,735,425 | ||||
| Current Liabilities | 22,551,682 | 29,040,302 | ||||||
| Working Capital | $ | 23,299,531 | $ | 30,695,123 | ||||
The working capital decreased by US$7,395,592, or 24.1%, as of March 31, 2023 from June 30, 2022, primarily as a result of decreases in other current assets, partially offset by an increase in accounts receivables and decrease in other payables and accrued expenses.
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Capital Commitments and Contingencies
Capital commitments refer to the allocation of funds for the possible purchase in the near future for fixed assets or investment. Contingency refers to a condition that arises from past transactions or events, the outcome of which will be confirmed only by the occurrence or non-occurrence of uncertain futures events.
On May 16, 2017, Mrs. Guiqin Li (the “Plaintiff”) commenced a lawsuit against us in the People’s Court of Chongqing Pilot Free Trade Zone of China. Plaintiff alleged that due to the misguidance given by our security trading department, the Plaintiff did not manage to complete the sales of our common stock on the day of our initial public offering in the United States. As the price of our common stock continued falling after the initial public offering, the Plaintiff incurred losses and hence seek money damages against us. Based on the judgment of the first trial, we were required to pay the Plaintiff a settlement payment, including the money compensation, interests and other legal fees. In January 2023, the Company entered into a Settlement Agreement and Release (the “Agreement”) with the Plaintiff, pursuant to which the Company paid the Plaintiff a total sum of US$700,645 (approximately RMB 4.8 million) as settlement payment, and upon acceptance of the settlement payment from the Company, the Plaintiff waived, released, and forever discharged the Company from all past and future claims. As of March 31, 2023, the Company has made the payments in full to the Plaintiff according to the Agreement.
On November 26, 2021, the Company filed a complaint in the Supreme Court of the State of New York, New York County against Lei Zhang and Yan Li, as defendants, and Transhare Corporation, as a nominal defendant, asserting that defendants had not paid for restricted shares of the Company stock pursuant to stock purchase agreements they executed with the Company. The Company sought money damages of $9,088,125 plus interest, punitive damages, and reimbursement of all costs, expenses, and attorneys’ fees. In December, defendants filed an answer and counterclaims against the Company, which they amended on January 27, 2022 after the Company moved to dismiss their counterclaims. They claimed that the Company made false and materially misleading statements, specifically regarding the sale of the shares and the removal of their restrictive legends. Defendants seek a declaratory judgment, indemnification, and monetary damages of at least $9 million, punitive damages of $10 million, plus interest, costs, and fees. In April 2022, the Court granted the Company’s motion for a preliminary injunction to restrain the Company’s transfer agent from removing the restrictive legends on the shares, provided that the Company posts a bond in the amount of US$1.5 million by May 20, 2022, which the Company declined to do. On June 13, 2022, the restrictions imposed on the shares were lifted.
The Company moved to dismiss the counterclaims, and its motion was fully submitted in April 2022. On September 9, 2022, the Court granted the Company’s motion to dismiss defendants’ counterclaims on all but three counterclaims. Defendants’ outstanding counterclaims are for breach of contract, conversion, and wrongful refusal to remove restrictions pursuant to 6 Del. C. § 8-401.
Nominal defendant Transhare Corporation moved to dismiss the defendants’ counterclaim against it for wrongful refusal to remove restrictions pursuant to 6 Del. C. § 8-401, and its motion was fully submitted in April 2022. On September 9, 2022, the Court granted Transhare Corporation’s motion to dismiss defendants’ counterclaim for wrongful refusal to remove restrictions. Defendants have appealed the Court’s September 9, 2022 order dismissing defendants’ counterclaim for wrongful refusal to remove restrictions. On October 3, 2022 the parties submitted a stipulation dismissing defendants’ outstanding counterclaim against Transhare Corporation seeking declaratory judgment.
A date for trial will be set at a status conference on September 27, 2023. The outcome of this legal proceeding is uncertain at this point. The Company intends to recover on its claims, and vigorously defend itself in this litigation. As of March 31, 2023, the total unpaid shares issued to Lei Zhang and Yan Li by the Company was 982,500 shares, and the subscription receivable was US$3,024,000 which was recorded on the unaudited condensed consolidated balance sheet.
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As of March 31, 2023 and June 30, 2022, we had no other material capital commitments or contingent liabilities.
Off-Balance Sheet Commitments and Arrangements
We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our own common stock and classified as stockholders’ equity, or that are not reflected in our unaudited condensed consolidated financial statements.
Cash Flows
The following table provides detailed information about our net cash flows for the nine months ended March 31, 2023 and 2022:
| Nine Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Net cash used in operating activities | $ | (2,853,387 | ) | $ | (6,755,462 | ) | ||
| Net cash provided by (used in) investing activities | 1,013,586 | (32,520,356 | ) | |||||
| Net cash provided by financing activities | 2,421,005 | 25,229,718 | ||||||
| Effect of exchange rate changes on cash and cash equivalents | (351,260 | ) | 499,127 | |||||
| Net increase (decrease) in cash and cash equivalents | 229,944 | (13,546,973 | ) | |||||
| Cash and cash equivalents, beginning of the period | 15,165,231 | 29,024,394 | ||||||
| Cash and cash equivalents, end of the period | $ | 15,395,175 | $ | 15,477,421 | ||||
Operating Activities
Net cash used in operating activities during the nine months ended March 31, 2023 was approximately US$2.9 million, consisting of net loss of US$7.8 million, provision for doubtful accounts of US$1.2 million, common stock issued for management and employees of US$1.0 million, amortization of debt issuance costs of US$0.6 million, accrued interest expense for convertible notes of US$0.7 million, and net changes in our operating assets and liabilities, which mainly included a decrease in advances to suppliers of US$1.9 million.
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Net cash used in operating activities during the nine months ended March 31, 2022 was approximately US$6.8 million, consisting of net loss from continuing operations of US$16.9 million, bad debt expenses of US$6.4 million, stock written off due to natural disaster of US$1.3 million, impairment loss on distribution rights of US$1.1 million, and net changes in our operating assets and liabilities, which mainly included an increase in other current assets of US$4.4 million, partially offset by the decrease in advances to suppliers and increase in other payable.
Investing Activities
For the nine months ended March 31, 2023, net cash provided by investing activities was US$1.0 million, primarily due to repayments of loans to third parties of US$11.2 million, partially offset by payment for business acquisition of US$9.0 million.
For the nine months ended March 31, 2022, net cash used in investing activities was US$32.5 million, primarily due to the disposal of Ankang of US$12.7 million, payment made for loans to third parties of US$12.2 million and payment made for loans to related parties of US$6.7 million.
Financing Activities
For the nine months ended March 31, 2023, net cash provided by financing activities amounted to approximately US$2.4 million, due to proceeds from issuance of common stock of US$1.6 million, proceeds received from investors for subscription of common stock of US$1.2 million, and proceeds from short-term bank loans of US$0.4 million, partially offset by the repayment of short-term bank loans of US$0.7 million.
For the nine months ended March 31, 2022, net cash provided by financing activities amounted to approximately US$25.2 million, primarily due to proceeds from issuance of convertible note of US$17.0 million and proceeds from issuance of common stock of US$7.5 million.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a small reporting company, we are not required to provide the information required by this item.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Controls and Procedures
We maintain disclosure controls and procedures designed to provide reasonable assurance that material information required to be disclosed by us in the reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that the information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Based on our review, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of the end of the period covered by this Quarterly Report due to following material weaknesses:
| ● | a lack of full-time U.S. GAAP personnel in the accounting department to monitor the recording of the transactions; and |
| ● | a lack of segregation of duties for accounting personnel who prepared and reviewed the journal entries. |
In order to address the above material weaknesses, our management has taken the following steps:
| ● | recruiting sufficient qualified professionals with appropriate levels of knowledge and experience to assist in reviewing and resolving accounting issues in routine or complex transactions. To mitigate the reporting risks, we engaged an outside professional consulting firm to supplement our efforts to improve our internal control over financial reporting; |
| ● | improving the communication between management, board of directors, and the Chief Financial Officer; and |
| ● | obtaining proper approval for other significant and non-routine transactions from the board of directors. |
We are committed to monitoring the effectiveness of these measures and making any changes that are necessary and appropriate.
(b) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the fiscal quarter ended March 31, 2023. Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time. Our system contains self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Other than the legal actions listed below and ordinary routine litigation (of which we are not currently involved), we know of no material, existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending litigation, and there are no proceedings in which any of our directors, officers, or affiliates, or any registered or beneficial stockholder, is an adverse party or has a material interest adverse to our company.
On May 16, 2017, Mrs. Guiqin Li (the “Plaintiff”) commenced a lawsuit against us in the People’s Court of Chongqing Pilot Free Trade Zone of China. Plaintiff alleged that due to the misguidance given by our security trading department, the Plaintiff did not manage to complete the sales of our common stock on the day of our initial public offering in the United States. As the price of our common stock continued falling after the initial public offering, the Plaintiff incurred losses and hence seek money damages against us. Based on the judgment of the first trial, we were required to pay the Plaintiff a settlement payment, including the money compensation, interests and other legal fees. In January 2023, the Company entered into a Settlement Agreement and Release (the “Agreement”) with the Plaintiff, pursuant to which the Company paid the Plaintiff a total sum of US$700,645 (approximately RMB 4.8 million) as settlement payment, and upon acceptance of the settlement payment from the Company, the Plaintiff waived, released, and forever discharged the Company from all past and future claims. As of March 31, 2023, the Company has made the payments in full to the Plaintiff according to the Agreement.
On November 26, 2021, the Company filed a complaint in the Supreme Court of the State of New York, New York County against Lei Zhang and Yan Li, as defendants, and Transhare Corporation, as a nominal defendant, asserting that defendants had not paid for restricted shares of the Company stock pursuant to stock purchase agreements they executed with the Company. The Company sought money damages of $9,088,125.00 plus interest, punitive damages, and reimbursement of all costs, expenses, and attorneys’ fees. In December, defendants filed an answer and counterclaims against the Company, which they amended on January 27, 2022 after the Company moved to dismiss their counterclaims. They claimed that the Company made false and materially misleading statements, specifically regarding the sale of the shares and the removal of their restrictive legends. Defendants seek a declaratory judgment, indemnification, and monetary damages of at least $9 million, punitive damages of $10 million, plus interest, costs, and fees. In April 2022, the Court granted the Company’s motion for a preliminary injunction to restrain the Company’s transfer agent from removing the restrictive legends on the shares, provided that the Company posts a bond in the amount of US$1.5 million by May 20, 2022, which the Company declined to do. On June 13, 2022, the restrictions imposed on the shares were lifted.
The Company moved to dismiss the counterclaims, and its motion was fully submitted in April 2022. On September 9, 2022, the Court granted the Company’s motion to dismiss defendants’ counterclaims on all but three counterclaims. Defendants’ outstanding counterclaims are for breach of contract, conversion, and wrongful refusal to remove restrictions pursuant to 6 Del. C. § 8-401.
Nominal defendant Transhare Corporation moved to dismiss the defendants’ counterclaim against it for wrongful refusal to remove restrictions pursuant to 6 Del. C. § 8-401, and its motion was fully submitted in April 2022. On September 9, 2022, the Court granted Transhare Corporation’s motion to dismiss defendants’ counterclaim for wrongful refusal to remove restrictions. Defendants have appealed the Court’s September 9, 2022 order dismissing defendants’ counterclaim for wrongful refusal to remove restrictions. On October 3, 2022 the parties submitted a stipulation dismissing defendants’ outstanding counterclaim against Transhare Corporation seeking declaratory judgment.
A date for trial will be set at a status conference on September 27, 2023. The outcome of this legal proceeding is uncertain at this point. The Company intends to recover on its claims, and vigorously defend itself in this litigation. As of March 31, 2023, the total unpaid shares issued to Lei Zhang and Yan Li by the Company was 982,500 shares, and the subscription receivable was US$3,024,000 which was recorded on the unaudited condensed consolidated balance sheet.
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ITEM 1A. RISK FACTORS.
We have been notified by The Nasdaq Stock Market LLC of our failure to comply with certain continued listing requirements and, if we are unable to regain compliance with all applicable continued listing requirements and standards of Nasdaq, our common stock could be delisted from Nasdaq, which would have an adverse impact on the trading, liquidity, and market price of our common stock.
On March 20, 2023, we received a written notice from The Nasdaq Stock Market LLC (“Nasdaq”) notifying us that, because the bid price for our common stock has fallen below $1.00 per share for 30 consecutive business days, we no longer comply with the $1.00 Minimum Bid Price requirement set forth in Nasdaq Listing Rule 5550(a)(2) for continued listing on The Nasdaq Capital Market (the “Minimum Bid Price Requirement”). The Company has a period of 180 calendar days, or until September 18, 2023, to regain compliance with the Minimum Bid Price Requirement. To regain compliance, the closing bid price of the Company’s Common Stock must be at least $1.00 per share for a minimum of 10 consecutive business days during the 180-day period prior to September 18, 2023.
If the Company does not regain compliance by September 18, 2023, the Company may be eligible for an additional 180-calendar day compliance period.
We intend to continue to monitor the bid price levels for our Common Stock and will consider appropriate alternatives to achieve compliance with the Minimum Bid Price Requirement within the compliance period, including, among other things, a potential reverse stock split. However, we cannot assure you that the price of our Common Stock will subsequently remain in compliance with the required listing standard or that we will remain in compliance with any of the other applicable continued listing standards of Nasdaq. Any continuing failure to remain in compliance with Nasdaq’s continued listing standards, and any subsequent failure to timely resume compliance with Nasdaq’s continued listing standards within the applicable cure period could have adverse consequences, and among other things, substantially impair our ability to raise additional funds and could result in a loss of institutional investor interest and fewer development opportunities for us. Furthermore, a delisting would likely have a negative effect on the price of our Common Stock and would impair the ability of stockholders to sell or purchase our Common Stock when they wish to do so. In the event of a delisting, we would expect to take actions to restore our compliance with Nasdaq’s listing requirements, but we can provide no assurance that any such action taken by us would allow our Common Stock to become listed again, lead to stability in the market price of our Common Stock, improve the liquidity of our Common Stock, prevent our Common Stock from dropping below the Nasdaq minimum bid price requirement, or prevent future non-compliance with Nasdaq’s listing requirements. As a result of these factors, a delisting of our Common Stock from Nasdaq would have an adverse impact on the trading, liquidity, and market price of our Common Stock.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS
* This certification is deemed furnished, and not filed, for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| SHINECO, INC. | ||
| Dated: May 12, 2023 | By: | /s/ Jennifer Zhan |
| Jennifer Zhan | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Dated: May 12, 2023 | By: | /s/ Sai (Sam) Wang |
| Sai (Sam) Wang | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
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