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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2023

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to _______

 

Commission File Number: 001-37776

 

SHINECO, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   52-2175898

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

RM 3D-1603 New World Center Apartment,

Chong Wen Men Wai Blvd

Beijing, People’s Republic of China 100062

(Address of principal executive offices) (Zip Code)

 

(+86) 10-87227366

(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
Common Stock, par value $0.001 per share   SISI   The Nasdaq Stock Market LLC

 

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. Yes ☒ No ☐

 

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). Yes ☒ No ☐

 

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
Non-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 ☐ No

 

As of May 12, 2023, there were 21,088,433 shares of common stock, par value $0.001 per share, outstanding.

 

 

 

 
 

 

TABLE OF CONTENTS

    Page Number
     
PART I. FINANCIAL INFORMATION 1
     
Item 1. Financial Statements 1
     
  Condensed Consolidated Balance Sheets (unaudited) 1
     
  Condensed Consolidated Statements of Income and Comprehensive Income (unaudited) 2
     
  Condensed Consolidated Statements of Changes in Equity (unaudited) 3
     
  Condensed Consolidated Statements of Cash Flows (unaudited) 5
     
  Notes to the Condensed Consolidated Financial Statements (unaudited) 6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 40
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 62
     
Item 4. Controls and Procedures 62
     
PART II. OTHER INFORMATION 63
     
Item 1. Legal Proceedings 63
     
Item 1A. Risk Factors 64
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 64
     
Item 3. Defaults Upon Senior Securities 64
     
Item 4. Mine Safety Disclosures 64
     
Item 5. Other Information 64
     
Item 6. Exhibits 64
     
SIGNATURES 65

 

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  $15,395,175   $15,165,231 
Accounts receivable, net   3,056,788    1,821,554 
Due from related parties, net   5,929,255    6,794,987 
Inventories, net   18,993,652    18,718,524 
Advances to suppliers, net   20,828    3,551 
Other current assets, net   2,455,515    17,231,578 
TOTAL CURRENT ASSETS   45,851,213    59,735,425 
           
Property and equipment, net   1,311,862    1,375,472 
Investment in unconsolidated entity   596,514    617,446 
Intangible assets, net   12,366,564    - 
Goodwill   6,574,743    - 
Long-term deposit and other noncurrent assets   6,192    9,525 
Operating lease right-of-use assets   1,022,097    2,088,149 
TOTAL ASSETS  $67,729,185   $63,826,017 
           
LIABILITIES AND EQUITY          
           
CURRENT LIABILITIES:          
Short-term loans  $1,310,418   $- 
Accounts payable   327,760    1,547 
Advances from customers   180,275    6,676 
Due to related parties   2,622,798    2,798,800 
Other payables and accrued expenses   2,297,982    10,272,194 
Operating lease liabilities - current   369,870    959,909 
Convertible note payable   14,873,579    14,416,956 
Taxes payable   569,000    584,220 
TOTAL CURRENT LIABILITIES   22,551,682    29,040,302 
           
Income tax payable - noncurrent portion   446,860    446,860 
Operating lease liabilities - non-current   605,420    1,025,967 
Deferred tax liability   1,557,032    - 
TOTAL LIABILITIES   25,160,994    30,513,129 
           
Commitments and contingencies   -    - 
           
EQUITY:          
Common stock; par value $0.001, 100,000,000 shares authorized; 20,664,848 and 10,983,863 shares issued and outstanding at March 31, 2023 and June 30, 2022   20,665    10,984 
Additional paid-in capital   65,368,664    52,998,924 
Subscription receivable   (3,822,362)   (3,024,000)
Subscribled common stock   1,194,029    - 
Statutory reserve   4,198,107    4,198,107 
Accumulated deficit   (26,250,151)   (18,372,023)
Accumulated other comprehensive loss   (3,342,816)   (2,100,756)
Total Stockholders’ equity of Shineco, Inc.   37,366,136    33,711,236 
Non-controlling interest   5,202,055    (398,348)
TOTAL EQUITY   42,568,191    33,312,888 
           
TOTAL LIABILITIES AND EQUITY  $67,729,185   $63,826,017 

 

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)

 

   2023   2022   2023   2022 
  

For the Nine Months Ended

March 31,

  

For the Three Months Ended

March 31,

 
   2023   2022   2023   2022 
                 
REVENUE  $1,767,977   $1,980,426   $693,032   $618,094 
                     
COST OF REVENUE                    
Cost of product and services   1,399,056    2,456,263    576,304    707,533 
Stock written off due to natural disaster   668,088    1,303,312    205,152    401,731 
Business and sales related tax   1,444    4,829    1,442    1,572 
Total cost of revenue   2,068,588    3,764,404    782,898    1,110,836 
                     
GROSS LOSS   (300,611)   (1,783,978)   (89,866)   (492,742)
                     
OPERATING EXPENSES                    
General and administrative expenses   6,553,373    12,724,864    2,349,517    2,218,398 
Selling expenses   100,376    34,376    81,825    16,044 
Research and development expenses   58,384    -    58,384    - 
Impairment loss of distribution rights   -    1,140,551    -    - 
Total operating expenses   6,712,133    13,899,791    2,489,726    2,234,442 
                     
LOSS FROM OPERATIONS   (7,012,744)   (15,683,769)   (2,579,592)   (2,727,184)
                     
OTHER INCOME (EXPENSE)                    
Impairment loss on an unconsolidated entity   -    (149,790)   -    - 
Loss from equity method investments   (20,932)   (156,235)   (14,711)   (49,247)
Other income (expenses), net   303,003    (5,731)   274,245    (7,174)
Amortization of debt issuance costs   (579,664)   (1,142,215)   (223,692)   (287,897)
Interest income (expenses), net   (547,568)   232,644    (99,324)   165,505 
Total other expenses   (845,161)   (1,221,327)   (63,482)   (178,813)
                     
LOSS BEFORE PROVISION FOR INCOME TAXES FROM CONTINUING OPERATIONS   (7,857,905)   (16,905,096)   (2,643,074)   (2,905,997)
                     
BENEFIT FOR INCOME TAXES   (33,089)   (6,507)   (33,089)   (29)
                     
NET LOSS FROM CONTINUING OPERATIONS   (7,824,816)   (16,898,589)   (2,609,985)   (2,905,968)
                     
DISCONTINUED OPERATIONS:                    
Loss on disposal of discontinued operations   -    (3,135,237)   -    - 
Net loss from discontinued operations   -    (3,135,237)   -    - 
                     
NET LOSS   (7,824,816)   (20,033,826)   (2,609,985)   (2,905,968)
                     
Net income (loss) attributable to non-controlling interest   53,312    (25,199)   58,548    (13,384)
                     
NET LOSS ATTRIBUTABLE TO SHINECO, INC.  $(7,878,128)  $(20,008,627)  $(2,668,533)  $(2,892,584)
                     
COMPREHENSIVE LOSS                    
Net loss  $(7,824,816)  $(20,033,826)  $(2,609,985)  $(2,905,968)
Other comprehensive income (loss): foreign currency translation income (loss)   (996,755)   962,349    159,556    148,043 
Total comprehensive loss   (8,821,571)   (19,071,477)   (2,450,429)   (2,757,925)
Less: comprehensive income (loss) attributable to non-controlling interest   298,617    (11,180)   292,330    (14,691)
                     
COMPREHENSIVE LOSS ATTRIBUTABLE TO SHINECO, INC.  $(9,120,188)  $(19,060,297)  $(2,742,759)  $(2,743,234)
                     
Weighted average number of shares basic and diluted   17,653,428    9,026,568    20,523,358    9,652,228 
                     
Basic and diluted loss per common share  $(0.45)  $(2.22)  $(0.13)  $(0.30)
                     
Loss per common share                    
Continuing operations - Basic and Diluted   (0.45)   (1.87)   (0.13)   (0.30)
Discontinued operations - Basic and Diluted   -    (0.35)   -    - 
Net loss per common share - basic and diluted   (0.45)   (2.22)   (0.13)   (0.30)

 

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)

 

   SHARES   AMOUNT   RECEIVABLE   SUBSCRIBLED   CAPITAL   RESERVE   DEFICIT)   LOSS   INTEREST   EQUITY 
                           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   7,881,482   $7,881   $(8,535,203)  $-   $41,105,806   $4,198,107   $8,661,071   $(731,805)  $672,349   $45,378,206 
                                                   
Stock issuance   291,775    292    5,511,203    -    1,969,708    -    -    -    -    7,481,203 
Issuance of common shares for convertible notes redemption   1,695,877    1,696    -    -    7,248,304    -    -    -    -    7,250,000 
Beneficial conversion feature associated with convertible notes   -    -    -    -    361,252    -    -    -    -    361,252 
Disposal of Ankang   -    -    -    -    -    -    -    -    (1,072,667)   (1,072,667)
Net loss for the period   -    -    -    -    -    -    (20,008,627)   -    (25,199)   (20,033,826)
Foreign currency translation gain   -    -    -    -    -    -    -    948,330    14,019    962,349 
Balance at March 31, 2022   9,869,134   $9,869   $(3,024,000)  $-   $50,685,070   $4,198,107   $(11,347,556)  $216,525   $(411,498)  $40,326,517 
                                                   
Balance at June 30, 2022   10,983,863   $10,984   $(3,024,000)  $-   $52,998,924   $4,198,107   $(18,372,023)  $(2,100,756)  $(398,348)  $33,312,888 
                                                   
Acquisition of Biowin   -    -         -    -    -    -    -    5,301,786    5,301,786 
Stock issuance   7,536,183    7,536    (148,362)   -    9,847,804    -    -    -    -    9,706,978 
Proceeds received from investors for subscription of common stock   -    -    -    1,194,029    -    -    -    -    -    1,194,029 
Issuance of common shares for convertible notes redemption   812,580    813    -    -    826,824    -    -    -    -    827,637 

Common stock issued for management and employees

   1,322,222    1,322    (650,000)   -    1,665,122    -    -    -    -    1,016,444 
Common stock issued for services   10,000    10    -    -    29,990    -    -    -    -    30,000 
Net income (loss) for the period   -    -    -    -    -    -    (7,878,128)   -    53,312    (7,824,816)
Foreign currency translation gain (loss)   -    -    -    -    -    -    -    (1,242,060)   245,305    (996,755)
Balance at March 31, 2023   20,664,848   $20,665   $(3,822,362)  $1,194,029   $65,368,664   $4,198,107   $(26,250,151)  $(3,342,816)  $5,202,055   $42,568,191 

 

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)

 

   SHARES   AMOUNT   RECEIVABLE   SUBSCRIBLED   CAPITAL   RESERVE   DEFICIT   LOSS   INTEREST   EQUITY 
                               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   9,431,707   $9,432   $(3,024,000)  $-   $49,435,507   $4,198,107   $(8,454,972)  $67,175   $(396,807)  $41,834,442 
                                                   
Stock issuance   437,427    437    -    -    1,249,563    -    -    -    -    1,250,000 
Net loss for the period   -    -    -    -    -    -    (2,892,584)   -    (13,384)   (2,905,968)
Foreign currency translation gain (loss)   -    -    -    -    -    -    -    149,350    (1,307)   148,043 
Balance at March 31, 2022   9,869,134   $9,869   $(3,024,000)  $-   $50,685,070   $4,198,107   $(11,347,556)  $216,525   $(411,498)  $40,326,517 
                                                   
Balance at December 31, 2022   19,657,356   $19,657   $(3,532,340)  $-   $63,985,227   $4,198,107   $(23,581,618)  $(3,268,590)  $(392,061)  $37,428,382 
                                                   
Acquisition of Biowin   -    -    -    -         -    -    -    5,301,786    5,301,786 
Stock issuance   -    -    359,978    -    -    -    -    -    -    359,978 
Proceeds received from investors for subscription of common stock   -    -    -    1,194,029         -    -    -    -    1,194,029 
Issuance of common shares for convertible notes redemption   275,270    276    -    -    299,725    -    -    -    -    300,001 
Common stock issued for management and employees   722,222    722    (650,000)        1,053,722                        404,444 
Common stock issued for services   10,000    10    -    -    29,990    -    -    -    -    30,000 
Net income (loss) for the period   -    -    -    -    -    -    (2,668,533)   -    58,548    (2,609,985)
Foreign currency translation gain (loss)   -    -    -    -    -    -    -    (74,226)   233,782    159,556 
Balance at March 31, 2023   20,664,848   $20,665   $(3,822,362)  $1,194,029   $65,368,664   $4,198,107   $(26,250,151)  $(3,342,816)  $5,202,055   $42,568,191 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

4
 

 

SHINECO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   2023   2022 
  

For the Nine Months Ended

March 31,

 
   2023   2022 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(7,824,816)  $(20,033,826)
Net loss from discontinued operations, net of tax   -    (3,135,237)
Net loss from continuing operations   (7,824,816)   (16,898,589)
           
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   505,498    853,287 
Loss from disposal of property and equipment   -    8,044 
Provision for doubtful accounts   1,209,571    6,399,667 
Provision for (reversal of) inventory reserve   (15,067)   126,685 
Stock written off due to natural disaster   668,088    1,303,312 
Deferred tax benefit   (33,089)   - 
Loss from equity method investments   20,932    156,235 
Amortization of right of use assets   591,665    817,395 
Impairment loss on distribution rights   -    1,140,551 
Impairment loss on an unconsolidated entity   -    149,790 
Common stock issued for management and employees   1,016,444    - 
Common stock issued for services   30,000    - 
Amortization of debt issuance costs   579,664    1,142,215 
Accrued interest expense for convertible notes   704,596    628,760 
Accrued interest expenses due to related parties   14,332    - 
Accrued interest income from related parties   (248,205)   (173,263)
Accrued interest income from third parties   (119,978)   

(200,063

)
           
Changes in operating assets and liabilities:          
Accounts receivable   (404,988)   (560,583)
Advances to suppliers   1,855,394    2,255,904 
Inventories   (604,596)   (1,333,129)
Other current assets   1,015    (4,365,846)
Accounts payable   (25,039)   (75,613)
Advances from customers   (233,231)   (549)
Other payables and accrued expenses   93,023    2,378,307 
Operating lease liabilities   (595,964)   (397,850)
Taxes payable   (38,636)   (110,129)
Net cash used in operating activities   (2,853,387)   (6,755,462)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Acquisitions of property and equipment   (18,488)   (310,121)
Proceeds from disposal of property and equipment   -    1,562 
Payment made for loans to third parties   (2,050,477)   (12,200,000)
Repayments of loans to third parties   11,242,881    - 
Payment made for loans to related parties   -    (6,703,954)
Repayments of loans to related parties   217,691    - 
Investment in unconsolidated entity   -    (750,000)
Payment made for business acquisition   (9,000,000)   - 
Acquisition of subsidiaries, net of cash   621,979    112,070 
Disposal of a VIE - Ankang, net of cash   -    (12,669,913)
Net cash provided (used in) by investing activities   1,013,586    (32,520,356)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from short-term bank loans   432,657    - 
Repayment of short-term bank loans   (721,095)   - 
Proceeds from issuance of common stock   1,609,978    7,481,203 
Proceeds received from investors for subscription of common stock   1,164,815    - 
Proceeds from (repayments of) advances from related parties   (65,350)   748,515 
Proceeds from issuance of convertible notes   -    17,000,000 
Net cash provided by financing activities   2,421,005    25,229,718 
           
EFFECT OF EXCHANGE RATE CHANGE 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 
           
SUPPLEMENTAL NON-CASH OPERATING, INVESTING AND FINANCING ACTIVITIES:          
Issuance of common shares for convertible notes redemption  $827,637   $7,250,000 
Issuance of common shares for proceeds received in prior year  $5,000,000   $- 
Issuance of common shares for business acquisition  $3,097,000   $- 
Right-of-use assets obtained in exchange for operating lease obligations  $65,843   $1,952,449 
Reduction of right-of-use assets and operating lease obligations due to early termination of lease agreement  $651,745   $1,057,311 
Repayments of loans to third parties offset by other payables  $3,159,217   $- 

 

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 100% owned subsidiary of Shineco and was officially granted the status of a wholly foreign-owned entity by Chinese authorities on July 14, 2006. This transaction was accounted for as a recapitalization. Tenet-Jove owns 90% interest of Tianjin Tenet Huatai Technological Development Co., Ltd. (“Tenet Huatai”).

 

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 100% of Tenet-Jove. Accordingly, Shineco, Tenet-Jove, and the VIEs, the Zhisheng VIEs and Ankang Longevity Group are effectively controlled by the same majority shareholders. Therefore, Shineco, Tenet-Jove, and the VIEs of Tenet-Jove are considered under common control. The consolidation of Tenet-Jove and its VIEs into Shineco was accounted for at historical cost and prepared on the basis as if the aforementioned exclusive contractual agreements between Tenet-Jove and its VIEs had become effective as of the beginning of the first period presented in the accompanying consolidated financial statements.

 

On September 30, 2017, Tenet-Jove established Xinjiang Shineco Taihe Agriculture Technology Ltd. (“Xinjiang Taihe”) with registered capital of RMB10.0 million (approximately US$1.5 million). On September 30, 2017, Tenet-Jove established Xinjiang Tianyi Runze Bioengineering Co., Ltd. (“Runze”) with registered capital of RMB10.0 million (approximately US$1.5 million). Xinjiang Taihe and Runze became wholly-owned subsidiaries of Tenet-Jove. The Company ceased the business operation of Xinjiang Taihe and Runze in September 2020 and October 2020, respectively.

 

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 51% equity interest in Tianjin Tajite for cash consideration of RMB14,000,000 (approximately US$2.1 million). On December 25, 2016, the Company paid the full amount as the deposit to secure the deal. In May, 2017, the Company amended the agreement and required Tianjin Tajite to satisfy certain preconditions related to product introductions into China. On October 26, 2017, the Company completed the acquisition for 51% of the shares in Tianjin Tajite. On May 5, 2019, two minority shareholders of Tianjin Tajite transferred their 26.4% of the equity interest to the Company. There was no consideration paid for the transfers, and after the transfers, the Company owns 77.4% equity interest of Tianjin Tajite.

 

On March 13, 2019, Tenet-Jove established Beijing Tenjove Newhemp Biotechnology Co., Ltd. (“TNB”) with registered capital of RMB10.0 million (approximately US$1.5 million). TNB became a wholly-owned subsidiary of Tenet-Jove.

 

On July 23, 2020, Shanghai Jiaying International Trade Co., Ltd. (“Shanghai Jiaying”) was established with registered capital of RMB200 million (approximately US$29.9 million). Tenet-Jove owned an equity interest of 90% of Shanghai Jiaying, and the remaining 10% equity interests was owned by an individual shareholder. Jiaying Trade did engage in any active business operations, and the operating of Shanghai Jiaying was ceased on December 21, 2021.

 

On January 7, 2021, Inner Mongolia Shineco Zhonghemp Biotechnology Co., Ltd. (“SZB”) was established with registered capital of RMB50 million (approximately US$7.5 million). Tenet-Jove owned an equity interest of 55% of SZB, and the remaining 45% equity interests was owned by an individual shareholder. SZB is currently not engaging in any active business operations.

 

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$10.0 million.

 

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$10.0 million. On April 24, 2022, the Company entered into a Share Transfer Agreement (“Agreement”) with Life Science HK. Pursuant to the Agreement, the Company transferred its 100% of the equity interest of Life Science to Life Science HK. There was no consideration paid for the transfer, and after the transfer, Life Science became a wholly-owned subsidiary of Life Science HK.

 

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 51% of the issued equity interests of Changzhou Biowin Pharmaceutical Co., Ltd. (“Biowin”), a company established under the laws of China, pursuant to the previously announced stock purchase agreement, dated as of October 21, 2022, among Beijing Kanghuayuan Medicine Information Consulting Co., Ltd., a company established under the laws of China (“Seller”), Biowin, the Company and Life Science (the “Agreement”). As the consideration for the acquisition, the Company paid to Seller US$9 million in cash and the Company issued 3,260,000 shares (the “Shares”) of the Company’s common stock, par value US$0.001 per share (the “Common Stock”) to the equity holders of Biowin or any persons designated by Biowin. According to the Supplementary Agreement, dated as of December 30, 2022, by and among Life Science, the Seller and Biowin, the Seller enjoyed 51% of the issued equity interests of Biowin before January 1, 2023, and transferred the 51% of the issued equity interests of Biowin together with its controlling rights of production and operation of Biowin to Life Science from January 1, 2023.

 

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 80% equity interests of Dream Ltd., which indirectly owns 100% equity interests of Chongqing Wintus Group (“Wintus”), which is a private company based in China that produces specialized antiviral silk fabric materials that can be widely used in the medical, hygiene, pharmaceutical and personal health fields. According to the LOI, the total purchase price of the acquisition is estimated to be approximately US$40 million which is expected to consist of cash and the Company’s common stock. The LOI represents terms for a proposed transaction and will be subject to legal and financial due diligence, which includes a third-party audit and evaluation, Shineco’s shareholder’s approval and definitive documentation.

 

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$7,824,816 and US$20,033,826, and continuing cash outflow of US$2,853,387 and US$6,755,462 from operating activities for the nine months ended March 31, 2023 and 2022. Management believes these factors raise substantial doubt about the Company’s ability to continue as a going concern for the next twelve months. In assessing the Company’s going concern, management monitors and analyzes the Company’s cash on-hand and its ability to generate sufficient revenue sources in the future to support its operating and capital expenditure commitments. The Company’s liquidity needs are to meet its working capital requirements, operating expenses and capital expenditure obligations. Direct offering and debt financing have been utilized to finance the working capital requirements of the Company. In addition, the Company’s shareholders made pledges to provide continuous financial support to the Company whenever the Company has liquidity difficulty for at least next 12 months from the date of this filing.

 

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 1,921,683 shares of its common stock at a per share purchase price of $0.915 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.

 

8
 

 

2) On January 12, 2023, the Board of the Company approved the sales of 722,222 shares of the Company’s common stock to the Company’s employees for gross proceeds of up to US$650,000, 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$1.3 million in bank loans outstanding. The management expects that the Company will be able to renew its existing bank loans upon their maturity based on past experience and its good credit history.
   
4) As of March 31, 2023, the Company had cash and cash equivalents in the amount of approximately US$15.4 million for the next operating cycle in next twelve months.

 

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  $35,323,904   $34,723,255 
Non-current assets   810,221    1,212,739 
Total assets   36,134,125    35,935,994 
Total liabilities   (4,581,768)   (5,719,289)
Net assets  $31,552,357   $30,216,705 

 

   2023   2022   2023   2022 
  

For the nine months ended

March 31,

  

For the three months ended

March 31,

 
   2023   2022   2023   2022 
Net sales  $1,514,166   $1,937,137   $984,042   $609,573 
Gross loss  $(331,212)  $(1,673,759)  $(234,967)  $(498,060)
Income (loss) from operations  $1,311,850   $(8,392,455)  $923,945   $(1,027,601)
Net income (loss)  $1,347,099   $(11,655,014)  $947,367   $(1,014,123)

 

9
 

 

The carrying amount of the VIEs and their subsidiaries’ unaudited condensed consolidated income information held for discontinued operations were as follows:

 

   2023   2022   2023   2022 
  

For the nine months ended

March 31,

  

For the three months ended

March 31,

 
   2023   2022   2023   2022 
Net loss  $   -   $(3,135,237)  $   -   $   - 

 

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  $35,323,904   $34,723,255 
Non-current assets   810,221    1,212,739 
Total assets   36,134,125    35,935,994 
Total liabilities   (4,581,768)   (5,719,289)
Net assets  $31,552,357   $30,216,705 

 

   2023   2022   2023   2022 
  

For the nine months ended

March 31,

  

For the three months ended

March 31,

 
   2023   2022   2023   2022 
Net sales  $1,514,166   $1,937,137   $984,042   $609,573 
Gross loss  $(331,212)  $(1,673,759)  $(234,967)  $(498,060)
Income (loss) from operations  $1,311,850   $(8,392,455)  $923,945   $(1,027,601)
Net income (loss)  $1,347,099   $(8,519,777)  $947,367   $(1,014,123)

 

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 no cash equivalents.

 

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$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 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$1,431,963 and US$1,249,543, respectively.

 

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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$11,256,031 and US$13,544,627, respectively.

 

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.

 

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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  20-50 years
Machinery equipment  3-10 years
Motor vehicles  5-10 years
Office equipment  3-10 years
Farmland leasehold improvements  12-18 years
Leasehold improvement  Lesser of useful life and lease term

 

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$ nil and US$1,140,551, respectively. For the three months ended March 31, 2023 and 2022, the Company did not recognize any impairment of its long-lived assets.

 

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.

 

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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 35% to 21%. As the Company has a June 30 fiscal year end, the lower corporate income tax rate was phased in, resulting in a U.S. statutory federal rate of approximately 28% for our fiscal year ended June 30, 2018, and 21% for subsequent fiscal years. Additionally, 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 caused the Company to re-measure its income tax liability and record an estimated income tax expense of US$744,766 for the year ended June 30, 2018. On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of The Act. In accordance with SAB 118, additional work is necessary to do a more detailed analysis of The Act as well as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to current tax expense in fiscal 2019 when the analysis is complete.