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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 September 30, 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)

 

 

(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 November 14, 2023, there were 50,929,020 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) 4
     
  Notes to the Condensed Consolidated Financial Statements (unaudited) 5
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 42
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 58
   
Item 4. Controls and Procedures 58
     
PART II. OTHER INFORMATION 59
     
Item 1. Legal Proceedings 59
     
Item 1A. Risk Factors 60
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 60
     
Item 3. Defaults Upon Senior Securities 60
     
Item 4. Mine Safety Disclosures 60
     
Item 5. Other Information 60
     
Item 6. Exhibits 60
     
SIGNATURES 61

 

i

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

SHINECO, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

 

   September 30,   June 30, 
   2023   2023 
   (Unaudited)     
ASSETS          
CURRENT ASSETS:          
Cash and cash equivalents  $875,026   $625,966 
Accounts receivable, net   8,363,785    34,586 
Due from related parties   851,718    - 
Inventories, net   2,118,233    324,406 
Advances to suppliers, net   2,675,223    2,697 
Derivative financial assets   6,356    - 
Other current assets, net   1,125,815    2,827,042 
Current assets held for discontinued operations   -    37,109,046 
TOTAL CURRENT ASSETS   16,016,156    40,923,743 
           
Property and equipment, net   6,414,759    1,213,116 
Land use right, net   624,101    - 
Intangible assets, net   46,628,199    12,049,473 
Goodwill   28,015,104    6,574,743 
Operating lease right-of-use assets   148,598    132,366 
Non-current assets held for discontinued operations   -    2,575,698 
TOTAL ASSETS  $97,846,917   $63,469,139 
           
LIABILITIES AND EQUITY          
           
CURRENT LIABILITIES:          
Short-term loans  $13,377,590   $1,240,431 
Long-term loans - current portion   931,097    - 
Accounts payable   1,716,030    191,148 
Advances from customers   327,807    89,490 
Due to related parties   1,529,220    48,046 
Other payables and accrued expenses   1,717,330    669,147 
Operating lease liabilities - current   99,254    86,978 
Convertible note payable   14,196,302    15,126,198 
Deferred income   135,706    - 
Taxes payable   1,072,150    500,869 
Current liabilities held for discontinued operations   -    5,393,844 
TOTAL CURRENT LIABILITIES   35,102,486    23,346,151 
           
Income tax payable - noncurrent portion   335,145    335,145 
Operating lease liabilities - non-current   66,378    44,469 
Long-term loans   1,082,904    - 
Deferred tax liability   10,360,817    1,416,592 
Other long-term payable   33,584    68,913 
Non-current liabilities held for discontinued operations   -    1,404,823 
TOTAL LIABILITIES   46,981,314    26,616,093 
           
Commitments and contingencies   -    - 
           
EQUITY:          
Common stock; par value $0.001, 100,000,000 shares authorized; 49,235,909 and 26,393,381 shares issued and outstanding at September 30, 2023 and June 30, 2023   49,236    26,393 
Additional paid-in capital   64,090,329    68,847,563 
Subscription receivable   (3,442,352)   (3,782,362)
Statutory reserve   4,198,107    4,198,107 
Accumulated deficit   (26,369,227)   (31,735,422)
Accumulated other comprehensive loss   (108,567)   (4,992,381)
Total Stockholders’ equity of Shineco, Inc.   38,417,526    32,561,898 
Non-controlling interest   12,448,077    4,291,148 
TOTAL EQUITY   50,865,603    36,853,046 
           
TOTAL LIABILITIES AND EQUITY  $97,846,917   $63,469,139 

 

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 
  

For the Three Months Ended

September 30,

 
   2023   2022 
         
REVENUE  $1,645,857   $- 
           
COST OF REVENUE          
Cost of products   1,545,925    - 
Business and sales related tax   977    - 
Total cost of revenue   1,546,902    - 
           
GROSS INCOME   98,955    - 
           
OPERATING EXPENSES          
General and administrative expenses   3,259,465    1,811,885 
Selling expenses   47,833    - 
Research and development expenses   23,698    - 
Total operating expenses   3,330,996    1,811,885 
           
LOSS FROM OPERATIONS   (3,232,041)   (1,811,885)
           
OTHER INCOME (EXPENSE)          
Loss from equity method investment   -    (6,304)
Investment income from derivative financial assets   2,768    - 
Other income (expenses), net   818    - 
Amortization of debt issuance and other costs   (166,823)   (154,403)
Interest expenses, net   (369,211)   (50,104)
Total other expenses   (532,448)   (210,811)
           
LOSS BEFORE PROVISION FOR INCOME TAXES FROM CONTINUING OPERATIONS   (3,764,489)   (2,022,696)
           
BENEFIT FOR INCOME TAXES   (251,366)   - 
           
NET LOSS FROM CONTINUING OPERATIONS   (3,513,123)   (2,022,696)
           
DISCONTINUED OPERATIONS:          
Loss from discontinued operations, net of taxes   (49,455)   (419,624)
Income from disposal of discontinued operations   8,904,702    - 
Net income from discontinued operations   8,855,247    (419,624)
           
NET INCOME (LOSS)   5,342,124    (2,442,320)
           
Net loss attributable to non-controlling interest   (24,071)   (2,598)
           
NET INCOME (LOSS) ATTRIBUTABLE TO SHINECO, INC.  $5,366,195   $(2,439,722)
           
COMPREHENSIVE INCOME (LOSS)          
Net income (loss)  $5,342,124   $(2,442,320)
Other comprehensive income (loss): foreign currency translation income (loss)   97,965    (2,281,338)
Total comprehensive income (loss)   5,440,089    (4,723,658)
Less: comprehensive income (loss) attributable to non-controlling interest   (40,544)   20,748 
           
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO SHINECO, INC.  $5,480,633   $(4,744,406)
           
Weighted average number of shares basic and diluted   31,602,758    14,649,132 
           
Basic and diluted earnings (loss) per common share  $0.17   $(0.17)
           
Earnings (loss) per common share          
Continuing operations - Basic and Diluted   (0.11)   (0.14)
Discontinued operations - Basic and Diluted   0.28    (0.03)
Net earnings (loss) per common share - basic and diluted   0.17    (0.17)

 

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 THREE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

(UNAUDITED)

 

   SHARES   AMOUNT   RECEIVABLE   CAPITAL   RESERVE   DEFICIT   LOSS   INTEREST   EQUITY 
                           ACCUMULATED         
               ADDITIONAL           OTHER   NON-     
   COMMON STOCK   SUBSCRIPTION   PAID-IN   STATUTORY   ACCUMULATED   COMPREHENSIVE   CONTROLLING   TOTAL 
   SHARES   AMOUNT   RECEIVABLE   CAPITAL   RESERVE   DEFICIT   LOSS   INTEREST   EQUITY 
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 
                                              
Stock issuance   4,276,183    4,276    (758,340)   6,754,064    -    -    -    -    6,000,000 
Issuance of common shares for convertible notes redemption   537,310    537    -    527,099    -    -    -    -    527,636 
Common stock issued for management and employees   600,000    600    -    611,400    -    -    -    -    612,000 
Net loss from continuing operations for the period   -    -    -    -    -    (2,022,696)   -    -    (2,022,696)
Net loss from discontinued operation for the period   -    -    -    -    -    (417,026)   -    (2,598)   (419,624)
Foreign currency translation gain (loss)   -    -    -    -    -    -    (2,304,684)   23,346    (2,281,338)
Balance at September 30, 2022   16,397,356   $16,397   $(3,782,340)  $60,891,487   $4,198,107   $(20,811,745)  $(4,405,440)  $(377,600)  $35,728,866 
                                              
Balance at June 30, 2023   26,393,381   $26,393   $(3,782,362)  $68,847,563   $4,198,107   $(31,735,422)  $(4,992,381)  $4,291,148   $36,853,046 
                                              
Acquisition of Wintus   10,000,000    10,000    -    2,290,000    -    -    (110,788)   8,197,473    10,386,685 
Disposal of Tenet-Jove   -    -    -    (8,904,702)   -    -    4,880,164    -    (4,024,538)
Issuance of common shares for convertible notes redemption   9,037,528    9,038    -    1,320,962    -    -    -    -    1,330,000 
Common stock issued for management and employees   3,805,000    3,805    340,010    536,506    -    -    -    -    880,321 
Net loss from continuing operations for the period   -    -    -    -    -    (3,489,847)   -    (23,276)   (3,513,123)
Net income (loss) from discontinued operation for the period   -    -    -    -    -    8,856,042         (795)   8,855,247 
Foreign currency translation gain (loss)   -    -    -    -    -    -    114,438    (16,473)   97,965 
Balance at September 30, 2023   49,235,909   $49,236   $(3,442,352)  $64,090,329   $4,198,107   $(26,369,227)  $(108,567)  $12,448,077   $50,865,603 

 

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

 

3
 

 

SHINECO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   2023   2022 
  

For the Three Months Ended

September 30,

 
   2023   2022 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income (loss)  $5,342,124   $(2,442,320)
Net income (loss) from discontinued operations, net of tax   8,855,247    (419,624)
Net loss from continuing operations   (3,513,123)   (2,022,696)
           
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   1,044,646    142 
Allowance for (net recovery of) credit losses   29,670    (43,077)
Provision for (reversal of) inventory reserve   (26,232)   - 
Deferred tax benefit   (251,366)   - 
Loss from equity method investment   -    6,304 
Amortization of right of use assets   17,550    - 
Common stock issued for management and employees   540,310    612,000 
Amortization of debt issuance and other costs   166,823    154,403 
Accrued interest expense for convertible notes   233,281    239,517 
Accrued interest income from third parties   -    (119,978)
           
Changes in operating assets and liabilities:          
Accounts receivable   3,989,078    - 
Advances to suppliers   736,974    - 
Inventories   (24,869)   - 
Other current assets   221,111    (221,119)
Accounts payable   (5,061,341)   - 
Advances from customers   87,085    - 
Deferred income   136,808      
Other payables and accrued expenses   383,923    28,985 
Other long-term payable   (35,238)   - 
Operating lease liabilities   694    - 
Taxes payable   (16,908)   1,104 
Net cash used in operating activities from continuing operations   (1,341,124)   (1,364,415)
Net cash used in operating activities from discontinued operations   (162,009)   (744,730)
Net cash used in operating activities   (1,503,133)   (2,109,145)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Acquisitions of property and equipment   (4,106)   - 
Payment made for loans to third parties   (103,642)   - 
Repayments of loans to third parties   -    10,915,129 
Payment made for loans to related parties   96,888    - 
Payment for derivative financial assets   (9,121)   - 
Redemption of derivative financial assets   8,844    - 
Acquisition of subsidiaries, net of cash   1,003,678    - 
Disposal of VIEs - Tenet-Jove, net of cash   (13,889,752)   - 
Net cash provided by (used in) investing activities from continuing operations   (12,897,211)   10,915,129 
Net cash provided by investing activities from discontinued operations   -    167,991 
Net cash provided by (used in) investing activities   (12,897,211)   11,083,120 
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from short-term loans   4,002,118    - 
Repayment of short-term loans   (3,631,568)   - 
Repayment of long-term loans   (13,772)     
Proceeds from issuance of common stock   -    1,000,000 
Proceeds received from investors for subscription of common stock   340,010    - 
Proceeds from (repayments of) advances from related parties   (83,233)   24,000 
Net cash provided by financing activities from continuing operations   613,555    1,024,000 
Net cash provided by (used in) financing activities from discontinued operations   292,548    (102,953)
Net cash provided by financing activities   906,103    921,047 
           
EFFECT OF EXCHANGE RATE CHANGE ON CASH AND CASH EQUIVALENTS   202,508    (822,080)
           
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS   (13,291,733)   9,072,942 
           
CASH AND CASH EQUIVALENTS - Beginning of the period   14,166,759    15,165,231 
           
CASH AND CASH EQUIVALENTS - End of the period  $875,026   $24,238,173 
           
Less: cash and cash equivalents of discontinued operations - Ended of the period   -    12,922,255 
           
Cash and cash equivalents of continuing operations - Ended of the period  $875,026   $11,315,918 
           
SUPPLEMENTAL CASH FLOW DISCLOSURES:          
Cash paid for interest  $118,851   $- 
           
SUPPLEMENTAL NON-CASH OPERATING, INVESTING AND FINANCING ACTIVITIES:          
Issuance of common shares for convertible notes redemption  $1,330,000   $527,636 
Issuance of common shares for proceeds received in prior year  $-   $5,000,000 
Issuance of common shares for business acquisition of Wintus  $2,300,000   $- 
Transferal of equity interest of Tenet Jove for business acquisition of Wintus  $37,705,951   $- 
Right-of-use assets obtained in exchange for operating lease obligations  $32,666   $- 
Repayments of loans to third parties offset by other payables  $-   $3,164,491 

 

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

 

4
 

 

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”) 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 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.

 

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.

 

5
 

 

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. The operating of TNB was ceased on May 15, 2023.

 

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 not 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 May 16, 2023, Shinkang Technology (Jiangsu) Co., Ltd (“Shinkang”) was established with registered capital of RMB10.0 million (approximately US$1.4 million). Life Science owned an equity interest of 51% of Shinkang, and the remaining 49% equity interests was owned by one shareholder. Shinkang is currently not engaging in any active business operations.

 

On May 16, 2023, Fuzhou Meida Health Management Co., Ltd (“Fuzhou Meida”), formerly known as Pangke Planet (Fuzhou) Health Management Co., Ltd, was established with registered capital of RMB1.0 million (approximately US$0.1 million). Life Science owned an equity interest of 51% of Fuzhou Meida, and the remaining 49% equity interests was owned by two shareholders. Fuzhou Meida is currently not engaging in any active business operations

 

On May 23, 2023, Life Science established Beijing Shineco Chongshi Information Consulting Co., Ltd (“Chongshi”) as a wholly owned entity with registered capital of RMB0.1 million (approximately US$0.01 million). Chongshi is currently not engaging in any active business operations

 

6
 

 

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 the Shareholders of Yushe County Guangyuan Forest Development Co., Ltd. (“Guangyuan”) in exchange for the control of 100% of equity interests and assets in Guangyuan; (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.

 

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. As the consideration for the acquisition, the Company paid to Seller US$9 million in cash and the Company issued 3,260,000 shares of the Company’s common stock, par value US$0.001 per share 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 May 29, 2023, Life Science HK entered into a stock purchase agreement (the “Agreement”) with Dream Partner Limited, a BVI corporation (“Dream Partner”), Chongqing Wintus Group, a corporation incorporated under the laws of mainland China (“Wintus”) and certain shareholders of Dream Partner (the “Sellers”), pursuant to which Shineco Life shall acquire 71.42% equity interest in Wintus (the “Acquisition”). As the consideration for the Acquisition, the Company (a) paid the Sellers an aggregate cash consideration of $2,000,000; (b) issued certain shareholders, as listed in the Agreement, an aggregate of 10,000,000 shares of the Company’s restricted Common Stock; and (c) transferred and sold to the Sellers 100% of the Company’s equity interest in Tenet-Jove.

 

The Company, its subsidiaries currently operate two main business segments: 1) Biowin is specializing in development, production and distribution of innovative rapid diagnostic products and related medical devices for the most common diseases (“Rapid Diagnostic and Other Products”); and 2) Wintus is engaged in in producing, processing and distribution of agricultural products, such as silk and silk fabrics as well as trading of fresh fruit. Due to the Acquisition mentioned above, the Company’s business segments, that were operated by Tenet-Jove and its subsidiaries, Guangyuan and Zhisheng VIEs which Tenet-Jove is the primary beneficiary of (the “Tenet-Jove Disposal Group”), are classified as discontinued operations on the Company unaudited condensed consolidated financial statements. These business segments are: 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 Guangyuan are engaged in planting, processing, and distributing green agricultural produce; (“Agricultural Products”); and 3) Zhisheng Freight is providing domestic and international logistic services (“Freight Services”).

 

7
 

 

NOTE 2. GOING CONCERN UNCERTAINTIES

 

As disclosed in the Company’s unaudited condensed consolidated financial statements, the Company had recurring net losses of US$3,513,123 and US$2,022,696, and continuing cash outflow of US$1,341,124 and US$1,364,415 from operating activities from continuing operations for the three months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, the Company had negative working capital of US$19,086,330. 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 September 30, 2023, the Company had the following measurements which the management has taken to enhance the Company’s liquidity:

 

1) 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. As the date of this report, proceeds amounted to US$0.2 million has been received by the Company, and the remaining balance of the proceeds is expected to be fully collected by December 31, 2023.
   
2) The Company financed from commercial banks and third parties. As of September 30, 2023, the Company had US$13.4 million in short-term loans outstanding and US$2.0 million in long-term 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.

 

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 (“US 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, 2023, which was filed on September 28, 2023.

 

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.

 

8
 

 

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.

 

There are no consolidated assets of the VIEs and the VIEs’ subsidiaries that are collateral for the obligations of the VIEs and the VIEs’ subsidiaries and can only be used to settle the obligations of the VIEs and the VIEs’ subsidiaries.

 

As the VIEs are incorporated as limited liability companies under the PRC Company Law, creditors or beneficial interest holders of the VIEs do not have recourse to the general credit of the Company for any of the liabilities of the VIEs in normal course of business.

 

There are no terms in any arrangements, considering both explicit arrangements and implicit variable interests that require the Company or its subsidiaries to provide financial support to the VIEs and the VIEs’ subsidiaries. However, if the VIEs and the VIEs’ subsidiaries ever need financial support, the Company or its subsidiaries may, at its option and subject to statutory limits and restrictions, provide financial support to the VIEs and the VIEs’ subsidiaries through loans to the shareholder of the VIEs and the VIEs’ subsidiaries or entrustment loans to the VIEs and the VIEs’ subsidiaries.

 

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

 

  

September 30, 2023

  

June 30, 2023

 
         
Current assets  $          -   $32,532,618 
Non-current assets   -    2,493,883 
Total assets   -    35,026,501 
Total liabilities   -    (5,952,438)
Net assets  $-   $29,074,063 

 

   2023   2022 
  

For the three months ended

September 30,

 
   2023   2022 
Net sales  $4,439   $535,698 
Gross profit (loss)  $256   $(90,877)
Loss from operations  $(69,724)  $(178,536)
Net income (loss) attributable to Shineco, Inc.  $8,856,042   $(417,026)

 

9
 

 

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 loss of these entities are reported separately in the consolidated statements of income (loss) and comprehensive income (loss).

 

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, assessment of expected credit losses for accounts receivable, advances to suppliers and other current asset, the valuation allowance of deferred taxes, and inventory reserves. Actual results could differ from those estimates.

 

Revenue Recognition

 

The Company generates its revenues primarily through sales of Luobuma products, agricultural products and rapid diagnostic and other products, as well as providing logistic services and other processing services to external customers in accordance with ASC 606. ASC 606 establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

 

10
 

 

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 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 financial statements upon adoption of ASC 606.

 

More specifically, revenue related to the Company’s products and services is generally recognized 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 types 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.

 

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 September 30, 2023 and June 30, 2023, 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 credit losses, as necessary. As of September 30, 2023 and June 30, 2023, the allowance for credit losses from the continuing operations was US$1,062,703 and US$946,892, respectively. As of September 30, 2023 and June 30, 2023, the allowance for credit losses from the discontinued operations was US$ nil and US$7,206,958, respectively. Accounts are written off against the allowance after efforts at collection prove unsuccessful.

 

Advances to Suppliers, Net

 

Advances to suppliers consist of payments to suppliers for materials that have not been received. As of September 30, 2023 and June 30, 2023, the allowance for credit losses from the continuing operations was US$45,928 and US$3,502, respectively. As of September 30, 2023 and June 30, 2023, the allowance for credit losses from the discontinued operations was US$ nil and US$10,163,946, respectively.

 

11
 

 

Credit Losses

 

On July 1, 2023, the Company adopted Accounting Standards Update 2016-13 “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments”, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The adoption of the credit loss accounting standard has no material impact on the Company’s unaudited condensed consolidated financial statements as of July 1, 2023.

 

The Company’s account receivables and other receivables included in other current assets are within the scope of ASC Topic 326. The Company makes estimates of expected credit and collectability trends for the allowance for credit losses based upon assessment of various factors, including historical experience, the age of the accounts receivable and other receivables balances, credit-worthiness of the customers and other debtors, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect its ability to collect from the customers and other debtors. The Company also provides specific provisions for allowance when facts and circumstances indicate that the receivable is unlikely to be collected.

 

ASC Topic 326 is also applicable to loans to third parties that included in the other current assets on the unaudited condensed consolidated balance sheets. Management estimates the allowance for credit losses on loans not sharing similar risk characteristics on an individual basis. The key factors considered when determining the above allowances for credit losses include estimated loan collection schedule, discount rate, and assets and financial performance of the borrowers.

 

Expected credit losses are recorded as general and administrative expenses on the unaudited condensed consolidated statements of income (loss) and comprehensive income (loss). After all attempts to collect a receivable have failed, the receivable is written off against the allowance. In the event the Company recovers amounts previously reserved for, the Company will reduce the specific allowance for credit losses.

 

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. 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 September 30, 2023 and June 30, 2023, the inventory reserve from the continuing operations was US$30,327 and US$56,655, respectively. As of September 30, 2023 and June 30, 2023, the inventory reserve from the discontinued operations was US$ nil and US$1,106,649, 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 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.

 

12
 

 

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 three months ended September 30, 2023 and 2022, the Company did not recognize any impairment of its ROU assets.

 

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  5-50 years
Machinery equipment  3-10 years
Motor vehicles  5-15 years
Office equipment  3-10 years
Farmland leasehold improvements  12-18 years
Fixture and furniture  3 years

 

Construction in progress includes property and equipment in the course of construction for production or for its own use purposes. Construction in progress is carried at cost less any recognized impairment loss. Construction in progress is classified to the appropriate category of property and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use.

 

13
 

 

Land Use Rights, Net

 

According to Chinese laws and regulations regarding land use rights, land in urban districts is owned by the State, while land in the rural areas and suburban areas, except otherwise provided for by the State, is collectively owned by individuals designated as resident farmers by the State. In accordance with the legal principle that land ownership is separate from the right to the use of the land, the government grants individuals and companies the rights to use parcels of land for a specified period of time. Land use rights, which are usually prepaid, are stated at cost less accumulated amortization. Amortization is provided over the life of the land use rights, using the straight-line method. The useful life is 30 years, based on the term of the land use rights.

 

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, ROU assets and investments. For the three months ended September 30, 2023 and 2022, the Company did not recognize any impairment of its long-lived assets.

 

Derivative Financial Assets

 

Derivative financial assets are measured at fair value and recognized as either assets or liabilities on the unaudited condensed consolidated balance sheets in either other current or non-current assets or other current liabilities or non-current liabilities depending upon maturity and commitment. Changes in the fair value of derivatives are either recognized periodically in the unaudited condensed consolidated statements of comprehensive income (loss) or in other comprehensive income (loss) depending on the use of the derivatives and whether they qualify for hedge accounting.

 

The Company selectively uses financial instruments to manage market risk associated with exposure to fluctuations in prices of raw material for silk products. These financial exposures are monitored and managed by the Company as an integral part of its risk management program. The Company does not engage in derivative instruments for speculative or trading purposes. The Company’s derivative financial assets are not qualified for hedge accounting, thus changes in fair value are recognized in “Investment income from derivative financial assets” in the unaudited condensed consolidated statements of income (loss) and comprehensive income (loss). The cash flows of derivative financial assets are classified in the same category as the cash flows from the items subject to the economic hedging relationships. The estimated fair value of the derivatives is determined based on relevant market information.

 

Derivative financial assets are presented as net if rights of setoff exist, with all of the following conditions met: (a) each of two parties owes the other determinable amounts; (b) the reporting party has the right to set off the amount owed with the amount owed by the other party; (c) the reporting party intends to set off; and (d) the right of setoff is enforceable at law.

 

The outstanding derivative financial assets as of September 30, 2023 and June 30, 2023 was US$6,356 and US$ nil, respectively. Investment income from derivative financial assets was $2,768 for the three months ended September 30, 2023 and the change in fair value of derivative financial assets was immaterial for the three months ended September 30, 2023.

 

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.

 

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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.

 

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 from the continuing operations and the discontinued operations at September 30, 2023 and June 30, 2023. The Company had not provided deferred taxes for undistributed earnings of non-U.S. subsidiaries from the continuing operations and the discontinued operations at September 30, 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 September 30, 2023, the tax years ended December 31, 2018 through December 31, 2022 for the Company’s PRC subsidiaries from the continuing operations and the discontinued operations 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. The Company elects to pay the transition tax over an eight-year period using specified percentages (eight percent per year for the first five years, 15 percent in year six, 20 percent in year seven, and 25 percent in year eight).

 

15
 

 

Value-Added Tax

 

Sales revenue represents the invoiced value of goods, net of a value-added tax (“VAT”). All of the Company’s products that were sold in the PRC were subject to a Chinese value-added tax at rates ranging from 3% to 13%, depending on the type of products sold. For overseas sales, VAT is exempted on the exported goods. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing finished products or acquiring finished products. The Company records a VAT payable or VAT receivable in the accompanying unaudited condensed consolidated financial statements.

 

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.

 

The balance sheet amounts, with the exception of equity, at September 30, 2023 and June 30, 2023 were translated at 1 RMB to 0.1371 USD and at 1 RMB to 0.1378 USD, respectively. The average translation rates applied to the income and cash flow statement amounts for the three months ended September 30, 2023 and 2022 were 1 RMB to 0.1382 USD and 1 RMB to 0.1461 USD, respectively.

 

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 three months ended September 30, 2023 and 2022, total research and development expense from continuing operations were approximately US$23,698 and US$ nil, respectively. No research and development expense were from discontinued operations for the three months ended September 30, 2023 and 2022.

 

Comprehensive Income (Loss)

 

Comprehensive income (loss) consists of two components, net income (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 (loss) in the unaudited condensed consolidated statements of income (loss) and comprehensive income (loss).

 

16
 

 

Earnings (Loss) per Share

 

The Company computes earnings (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 income (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 three months ended September 30, 2023 and 2022.

 

The following table presents a reconciliation of basic and diluted earnings (loss) per share for the three months ended September 30, 2023 and 2022:

 

   2023   2022 
  

For the three months ended

September 30,

 
   2023   2022 
Net loss from continuing operations attributable to Shineco  $(3,489,847)  $(2,022,696)
Net income (loss) from discontinued operations attributable to Shineco   8,856,042    (417,026)
Net income (loss) attributable to Shineco  $5,366,195   $(2,439,722)
                  
Weighted average shares outstanding - basic and diluted   31,602,758    14,649,132 
                  
Net loss from continuing operations per share of common share              
Basic and diluted  $(0.11)  $(0.14)
              
Net earnings (loss) from discontinued operations per share of common share              
Basic and diluted  $0.28   $(0.03)
             
Net earnings (loss) per share of common share            
Basic and diluted   $ 0.17    $(0.17)

 

Reclassifications

 

Certain prior year balances were reclassified to conform to the current year’s presentation with consideration of reflecting the Company’s Tenet-Jove Disposal Group as discontinued operations. None of these reclassifications had an impact on reported financial position or cash flows for any of the periods presented.

 

New Accounting Pronouncements

 

In June 2022, FASB issued ASU No. 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. ASU 2022-03 clarifies that a contractual sale restriction prohibiting the sale of an equity security is a characteristic of the reporting entity holding the equity security and is not included in the equity security’s unit of account. The amendments are effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The Company plans to adopt this guidance effective July 1, 2024 and the adoption of this ASU is not expected to have a material impact on its financial statements.

 

In March 2023, FASB issued ASU No. 2023-01, Leases (Topic 842): Common Control Arrangements. The amendments in ASU 2023-01 improve current GAAP by clarifying the accounting for leasehold improvements associated with common control leases, thereby reducing diversity in practice. Additionally, the amendments provide investors and other allocators of capital with financial information that better reflects the economics of those transactions. The amendments are effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The Company plans to adopt this guidance effective July 1, 2024 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:

 

   September 30, 2023  

June 30, 2023

 
         
Accounts receivable  $9,426,488   $10,467,260 
Less: allowance for credit losses   (1,062,703)   (8,153,850)
Accounts receivable, net   8,363,785    2,313,410 
Less: accounts receivable, net held for discontinued operations   -    (2,278,824)
Accounts receivable, net held for continuing operations  $8,363,785   $34,586 

 

Movement of allowance for credit losses is as follows:

 

   September 30, 2023  

June 30, 2023

 
         
Beginning balance  $8,153,850   $7,317,236 
Acquisition of subsidiaries   169,471    451,863 
Charge to (reversal of) allowance   (173,279)   1,050,753 
Less: disposal of VIEs   (7,101,640)   - 
Less: write-off   -    (62,125)
Foreign currency translation adjustments   14,301    (603,877)
Ending balance  $1,062,703   $8,153,850 

 

NOTE 5 – INVENTORIES, NET

 

The inventories, net consisted of the following:

 

  

September 30, 2023

  

June 30, 2023

 
         
Raw materials  $505,781   $315,129 
Work-in-process   333,615    16,713,913 
Finished goods   1,309,164    1,179,243 
Less: inventory reserve   (30,327)   (1,163,304)
Total inventories, net   2,118,233    17,044,981 
Less: inventories, net, held for discontinued operations   -    (16,720,575)
Inventories, net, held for continuing operations  $2,118,233   $324,406 

 

Work-in-process mainly 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 held for discontinued operations amounted to US$ nil and US$241,754 during the three months ended September 30, 2023 and 2022, respectively. It was due to the continuous impact from the COVID-19 pandemic which resulted in the damage and death of a large number of yew trees.

 

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NOTE 6 – ADVANCES TO SUPPLIERS, NET

 

The advances to suppliers, net consisted of the following:

 

   September 30, 2023  

June 30,

2023

 
         
Advances to suppliers  $2,721,151   $10,170,145 
Less: allowance for credit losses   (45,928)   (10,167,448)
Advance to suppliers, net   2,675,223    2,697 
Less: advance to supplier, net, held for discontinued operations   -    - 
Advance to supplier, net, held for continuing operations  $2,675,223   $2,697 

 

Advances to suppliers consist of mainly payments to suppliers for raw materials or products that have not been received.

 

Movement of allowance for credit losses is as follows:

 

   September 30, 2023  

June 30, 2023

 
         
Beginning balance  $10,167,448   $13,544,627 
Acquisition of subsidiaries   6,251    56,831 
Charge to (reversal of) allowance   36,489    (2,349,716)
Less: disposal of VIEs   (10,190,816)   - 
Less: write-off   -    (147,172)
Foreign currency translation adjustments   26,556    (937,122)
Ending balance  $45,928   $10,167,448 

 

NOTE 7 – OTHER CURRENT ASSETS, NET

 

Other current assets, net consisted of the following:

 

   September 30, 2023  

June 30, 2023

 
         
Loans to third parties (1)  $1,171,528   $1,481,101 
Other receivables (2)   2,373,819    2,629,733 
Prepayment for business acquisition (3)   -    2,000,000 
Short-term deposit   42,180    37,015 
Prepaid expenses   2,057    1,629 
Subtotal   3,589,584    6,149,478 
Less: allowance for credit losses   (2,463,769)   (3,287,793)
Total other current assets, net   1,125,815    2,861,685 
Less: other current assets, net, held for discontinued operations   -    (34,643)
Other current assets, net, held for continuing operations  $1,125,815   $2,827,042 

 

1) Loans to third-parties are mainly used for short-term funding to support the Company’s external business partners or employees of the Company. These loans bear interest or no interest and have terms of no more than one year. The Company periodically reviewed the loans to third parties as to whether their carrying values remain realizable. Due to the impact from COVID-19, the Company did not receive repayments of loans to third parties according to the loan agreements, hence, the Company recorded allowance according to the Company’s accounting policy based on its best estimates. As of September 30, 2023 and June 30, 2023, the allowance for credit losses was US$1,068,722 and US$1,481,101, respectively. Management will continue putting effort in collection of overdue loans to third parties.

 

19
 

 

2) Other receivable are mainly business advances to officers and staffs represent advances for business travel and sundry expenses.
   
3) The amount pertains to prepaid purchase consideration made for acquisition of Wintus.

 

Movement of allowance for credit losses is as follows:

 

   September 30, 2023  

June 30, 2023

 
         
Beginning balance  $3,287,793   $2,545,565 
Acquisition of subsidiaries   35,630    14,504 
Charge to (reversal of) allowance   (5,235)   1,867,474 
Less: disposal of VIEs   (602,801)   - 
Less: write-off   -    (964,509)
Foreign currency translation adjustments   (251,618)   (175,241)
Ending balance  $2,463,769   $3,287,793 

 

NOTE 8 - PROPERTY AND EQUIPMENT, NET

 

Property and equipment, net consisted of the following:

 

   September 30, 2023  

June 30, 2023

 
         
Buildings  $5,788,770   $1,064,656 
Machinery and equipment   3,010,056    1,132,064 
Motor vehicles   180,743    195,183 
Office equipment   137,455    142,288 
Fixture and furniture   101,549    - 
Construction in progress   563,096    - 
Farmland leasehold improvements   -    2,898,328 
Subtotal   9,781,669    5,432,519 
Less: accumulated depreciation and amortization   (3,277,942)   (3,437,327)
Less: accumulated impairment for property and equipment   (88,968)   (749,299)
Total property and equipment, net   6,414,759    1,245,893 
Less: property and equipment, net, held for discontinued operations   -    (32,777)
Property and equipment, net held for continuing operations  $6,414,759   $1,213,116 

 

Depreciation and amortization expense charged to the continuing operations was US$133,257 and US$142 for the three months ended September 30, 2023 and 2022, respectively. Depreciation and amortization expense charged to the discontinued operations was US$2,403 and US$30,824 for the three months ended September 30, 2023 and 2022, respectively.

 

The management performed evaluation on the impairment of property and equipment periodically. 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. Therefore, farmland leasehold improvements relating to these farmlands were also fully impaired. No impairment loss on property and equipment from the continuing operations and discontinued operations for the three months ended September 30, 2023 and 2022, respectively.

 

The Company pledged certain property and equipment for the Company’s bank loans and its related party’s personal loan (see Note 12 and Note 13).

 

20
 

 

Farmland leasehold improvements, net consisted of following:

 

  

September 30, 2023

  

June 30, 2023

 
         
Blueberry farmland leasehold improvements  $          -   $2,226,624 
Yew tree planting base reconstruction   -    249,464 
Greenhouse renovation   -    422,240 
Subtotal   -    2,898,328 
Less: accumulated amortization   -    (2,238,484)
Less: impairment for farmland leasehold improvements   -    (659,844)
Total farmland leasehold improvements, net  $-   $- 

 

NOTE 9 - INVESTMENTS

 

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 4.8 million (approximately US$0.70 million) for its 32% equity interest in Gaojing Private Fund. The investment is accounted for using the equity method because the Company has significant influence, but no control of the entity. As of December 31, 2022, a total of US$0.70 million was fully injected by the Company. The Company considered it unlikely to obtain any investment income in the future, and decided the make a full impairment on this investment during the year ended June 30, 2023. The Company recorded a loss of US$ nil and US$6,304 for the three months ended September 30, 2023 and 2022, respectively, from the investment held for continuing operations, which was included in “Loss from equity method investments” in the unaudited condensed consolidated statements of income (loss) and comprehensive income (loss).

 

Summarized financial information of unconsolidated entities from continuing operations is as follows:

 

   2023   2022 
  

For the three months ended

September 30,

 
   2023   2022 
         
Net sales  $       -   $- 
Gross loss   -    - 
Loss from operations   -    (19,533)
Net loss   -    (19,700)

 

NOTE 10 - 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 3 years to 24 years. The Company considers those renewal or termination options that are reasonably certain to be exercised in the determination of the lease term and initial measurement of ROU assets and lease liabilities. Lease expenses for lease payment are recognized on a straight-line basis over the lease term. Leases with initial terms of 12 months or less are not recorded on the balance sheet.

 

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.

 

21
 

 

The table below presents the operating lease related assets and liabilities held for continuing operations recorded on the balance sheets.

 

   September 30, 2023  

June 30, 2023

 
         
ROU lease assets  $148,598   $132,366 
           
Operating lease liabilities – current   99,254    86,978 
Operating lease liabilities – non-current   66,378    44,469 
Total operating lease liabilities  $165,632   $131,447 

 

The weighted average remaining lease terms and discount rates for all of operating leases held for continuing operations were as follows as of September 30, 2023 and June 30, 2023:

 

   September 30, 2023  

June 30, 2023

 
         
Remaining lease term and discount rate:          
Weighted average remaining lease term (years)   1.93    1.92 
Weighted average discount rate   4.52%   4.61%

 

The table below presents the operating lease related assets and liabilities held for discontinued operations recorded on the balance sheets.

 

  

September 30, 2023

  

June 30, 2023

 
         
ROU lease assets  $          -   $2,538,037 
           
Operating lease liabilities – current   -    551,502 
Operating lease liabilities – non-current   -    1,404,823 
Total operating lease liabilities  $-   $1,956,325 

 

The weighted average remaining lease terms and discount rates for all of operating leases held for discontinued operations were as follows as of September 30, 2023 and June 30, 2023:

 

  

September 30, 2023

  

June 30, 2023

 
         
Remaining lease term and discount rate:                          
Weighted average remaining lease term (years)   -    5.85 
Weighted average discount rate   -    4.36%

 

Rent expenses totaled US$40,551 and US$67,489 from the continuing operations for the three months ended September 30, 2023 and 2022, respectively. Rent expenses totaled US$51,778 and US$146,952 from the discontinued operations for the three months ended September 30, 2023 and 2022, respectively.

 

22
 

 

The following is a schedule, by years, of maturities of lease liabilities as of September 30, 2023:

 

   Continuing operations 
2024  $100,559 
2025   56,667 
2026   11,926 
2027   2,001 
Total lease payments   171,153 
Less: imputed interest   (5,521)
Present value of lease liabilities  $165,632 

 

NOTE 11 - ACQUISITION

 

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 the Shareholders of Yushe County Guangyuan Forest Development Co., Ltd. (“Guangyuan”) in exchange for the control of 100% of equity interests and assets in Guangyuan; (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  $108,296 
Inventory   18,115,423 
Other current assets   224,522 
Right of use assets   1,127,130 
Long-term investments and other non-current assets   166,107 
Other payables and other current liabilities   (2,503,607)
Operating lease liabilities   (1,013,492)
Total purchase price for acquisition, net of US$112,070 of cash  $16,224,379 

 

23
 

 

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 three months ended September 30, 2023 and 2022.

 

The Company has included the operating results of Guangyuan in the unaudited condensed consolidated financial statements since the Acquisition Date. US$ nil in net sales and US$12,060 in net loss of Guangyuan were included in discontinued operations in the unaudited condensed consolidated financial statements for the three months ended September 30, 2023. US$ nil in net sales and US$28,416 in net loss of Guangyuan were included in discontinued operations in the unaudited condensed consolidated financial statements for the three months ended September 30, 2022.

 

Acquisition of 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 51% of the issued equity interests of Biowin from Seller. On December 30, 2022, Life Science closed the acquisition of 51% of the issued equity interests of Biowin. As the consideration for the acquisition, the Company paid to Seller US$9.0 million in cash and the Company issued 3,260,000 shares of the Company’s common stock, par value US$0.001 per share to the equity holders of Biowin or any persons designated by Biowin, the total consideration of the acquisition was US$12,097,000. According to the Supplementary Agreement, dated as of December 30, 2022, by and among the Life Science, the Seller and Biowin, the Seller transferred its controlling rights of production and operation of Biowin to Life Science from January 1, 2023. The management determined that January 1, 2023 was the acquisition date of Biowin. The acquisition provides a unique opportunity for the Company to step into the Point-of-Care Testing (“POCT”) industry.

 

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$6,574,743. The results of operations of Biowin have been included in the consolidated statements of operations from the date of acquisition.

 

The following table summarizes the allocation of estimated fair values of net assets acquired and liabilities assumed:

 

      
Accounts receivable, net  $807,771 
Inventories, net   784,336 
Other current assets, net   49,979 
Property and equipment, net   138,252 
Intangible assets   12,683,656 
Operating lease right-of-use assets   173,831 
Goodwill   6,574,743 
Deferred tax assets, net   346,523 
Short-term bank loans   (1,594,596)
Accounts payable   (349,989)
Advances from customers   (407,437)
Other current liabilities   (446,729)
Operating lease liabilities - non-current   (45,730)
Deferred tax liabilities   (1,937,804)
Non-controlling interest   (5,301,785)
Total purchase price for acquisition, net of US$621,979 of cash  $11,475,021 

 

24
 

 


The fair value of identified intangible assets, which are trademarks and patents, and its estimated useful lives as of September 30, 2023 is as follows:

 

       Average
       Useful Life
       (in Years)
        
Intangible assets  $12,683,656   10
Less: accumulated amortization   (951,274)   
Total intangible assets, net   11,732,382    
Less: intangible assets, net held for discontinued operations   -    
Total intangible assets, net held for continuing operations  $11,732,382    

 

The amortization expense of intangible assets was US$$317,091 and US$ nil from the continuing operations for the three months ended September 30, 2023 and 2022, respectively.

 

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 and US$31,739 for the three months ended September 30, 2023 and 2022, respectively.

 

The Company has included the operating results of Biowin in continuing operations in its unaudited condensed consolidated financial statements since the Acquisition Date. US$135,127 in net sales and US$296,975 in net loss of Biowin were included in the unaudited condensed consolidated financial statements for the three months ended September 30, 2023. US$ nil in net sales and net loss of Biowin were included in the unaudited condensed consolidated financial statements for the three months ended September 30, 2022.

 

Acquisition of Wintus

 

On May 29, 2023, Life Science HK entered into a stock purchase agreement with Dream Partner, Chongqing Wintus Group, a corporation incorporated under the laws of mainland China (“Wintus”) and certain shareholders of Dream Partner (the “Sellers”), pursuant to which Shineco Life shall acquire 71.42% equity interest in Wintus. As the consideration for the Acquisition, the Company (a) paid the Sellers an aggregate cash consideration of $2,000,000; (b) issued certain shareholders, as listed in the Agreement, an aggregate of 10,000,000 shares of the Company’s restricted Common Stock; and (c) transferred and sold to the Sellers 100% of the Company’s equity interest in B Tenet-Jove. The management determined that July 31, 2023 was the acquisition date of Wintus.

 

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$21,440,360. The results of operations of Wintus have been included in the unaudited condensed consolidated statements of operations from the date of acquisition.

 

25
 

 

The following table summarizes the allocation of estimated fair values of net assets acquired and liabilities assumed:

 

      
Accounts receivable, net  $12,507,353 
Advances to suppliers, net   3,513,448 
Inventories, net   1,782,180 
Derivative financial assets   6,212 
Other current assets, net   1,426,163 
Property and equipment, net   5,407,301 
Intangible assets   36,117,041 
Operating lease right-of-use assets   1,999 
Goodwill   21,440,360 
Short-term bank loans   (12,021,992)
Accounts payable   (6,686,700)
Advances from customers   (78,677)
Tax payable   (600,742)
Deferred income   (77,007)
Other current liabilities   (2,277,877)
Long-term bank loans   (2,071,093)
Operating lease liabilities - non-current   (1,847)
Deferred tax liabilities   (9,186,376)
Non-controlling interest   (8,197,473)
Total purchase price for acquisition, net of $1,003,678 of cash  $41,002,273 

 

The fair value of identified intangible assets, which are trademarks and patents, and its estimated useful lives as of September 30, 2023 is as follows:

       Average
       Useful Life
       (in Years)
        
Intangible assets  $35,487,272   10
Less: accumulated amortization   (591,455)   
Total intangible assets, net   34,895,817    
Less: intangible assets, net held for discontinued operations   -