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 December 31, 2022

 

OR

 

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

 

For the transition period from _______ to _______

 

Commission File Number: 001-37776

 

SHINECO, INC.

(Exact name of registrant as specified in its charter)

 

Delaware		52-2175898
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

RM 3D-1603 New World Center Apartment,

Chong Wen Men Wai Blvd

Beijing, People’s Republic of China 100062

(Address of principal executive offices) (Zip Code)

 

(+86) 10-87227366

(Registrant’s telephone number, including area code)

 

Room 3310, North Tower, Zhengda Center,

No. 20, Jinhe East Road, Chaoyang District

Beijing, People’s Republic of China 100020

(Former address of principal executive offices) (Zip Code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each Class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.001 per share		SISI		The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

As of February 14, 2023, there were 20,664,848 shares of common stock, par value $0.001 per share, outstanding.

 

 

 

TABLE OF CONTENTS

 

		Page Number
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets (unaudited)	1
	Condensed Consolidated Statements of Income and Comprehensive Income (unaudited)	2
	Condensed Consolidated Statements of Changes in Equity (unaudited)	3
	Condensed Consolidated Statements of Cash Flows (unaudited)	5
	Notes to the Condensed Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	59
Item 4.	Controls and Procedures	59
PART II. OTHER INFORMATION		60
Item 1.	Legal Proceedings	60
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	61
Item 5.	Other Information	61
Item 6.	Exhibits	61
SIGNATURES		62

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

SHINECO, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		2022				2022
		December 31,				June 30,
		2022				2022
			(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	16,442,607			$	15,165,231
Accounts receivable, net			2,191,397				1,821,554
Due from related parties, net			5,830,947				6,794,987
Inventories, net			18,184,515				18,718,524
Advances to suppliers, net			-				3,551
Prepayment for business acquisition			12,097,000				-
Other current assets, net			1,533,641				17,231,578
TOTAL CURRENT ASSETS			56,280,107				59,735,425
Property and equipment, net			1,168,891				1,375,472
Investment in unconsolidated entity			611,225				617,446
Long-term deposit and other noncurrent assets			7,192				9,525
Operating lease right-of-use assets			992,591				2,088,149
TOTAL ASSETS		$	59,060,006			$	63,826,017
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable		$	1,502			$	1,547
Advances from customers			-				6,676
Due to related parties			2,465,083				2,798,800
Other payables and accrued expenses			2,623,870				10,272,194
Operating lease liabilities - current			232,656				959,909
Convertible note payable			14,724,932				14,416,956
Taxes payable			575,231				584,220
TOTAL CURRENT LIABILITIES			20,623,274				29,040,302
Income tax payable - noncurrent portion			446,860				446,860
Operating lease liabilities - non-current			561,490				1,025,967
TOTAL LIABILITIES			21,631,624				30,513,129
Commitments and contingencies			-				-
EQUITY:
Common stock; par value $0.001, 100,000,000 shares authorized; 19,657,356 and 10,983,863 shares issued and outstanding at December 31, 2022 and June 30, 2022			19,657				10,984
Additional paid-in capital			63,985,227				52,998,924
Subscription receivable			(3,532,340	)			(3,024,000	)
Statutory reserve			4,198,107				4,198,107
Accumulated deficit			(23,581,618	)			(18,372,023	)
Accumulated other comprehensive loss			(3,268,590	)			(2,100,756	)
Total Stockholders’ equity of Shineco, Inc.			37,820,443				33,711,236
Non-controlling interest			(392,061	)			(398,348	)
TOTAL EQUITY			37,428,382				33,312,888
TOTAL LIABILITIES AND EQUITY		$	59,060,006			$	63,826,017

 

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

 

 

SHINECO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

(Unaudited)

 

		2022				2021				2022				2021
		For the Six Months Ended December 31,								For the Three Months Ended December 31,
		2022				2021				2022				2021
REVENUE		$	1,074,945			$	1,362,332			$	539,247			$	732,574
COST OF REVENUE
Cost of product and services			822,752				1,748,730				437,931				883,669
Stock written off due to natural disaster			462,936				901,581				221,182				408,594
Business and sales related tax			2				3,257				2				2,002
Total cost of revenue			1,285,690				2,653,568				659,115				1,294,265
GROSS LOSS			(210,745	)			(1,291,236	)			(119,868	)			(561,691	)
OPERATING EXPENSES
General and administrative expenses			4,203,856				10,506,466				2,317,413				1,932,810
Selling expenses			18,551				18,332				5,450				9,990
Impairment loss of distribution rights			-				1,140,551				-				-
Total operating expenses			4,222,407				11,665,349				2,322,863				1,942,800
LOSS FROM OPERATIONS			(4,433,152	)			(12,956,585	)			(2,442,731	)			(2,504,491	)
OTHER INCOME (EXPENSE)
Impairment loss on an unconsolidated entity			-				(149,790	)			-				(149,790	)
Income (loss) from equity method investments			(6,221	)			(106,988	)			83				(79,068	)
Other income, net			28,758				1,443				14,023				473
Amortization of debt issuance costs			(355,972	)			(854,318	)			(201,569	)			(395,340	)
Interest income (expenses), net			(448,244	)			67,139				(142,317	)			237,338
Total other expenses			(781,679	)			(1,042,514	)			(329,780	)			(386,387	)
LOSS BEFORE PROVISION FOR INCOME TAXES FROM CONTINUING OPERATIONS			(5,214,831	)			(13,999,099	)			(2,772,511	)			(2,890,878	)
BENEFIT FOR INCOME TAXES			-				(6,478	)			-				(6,478	)
NET LOSS FROM CONTINUING OPERATIONS			(5,214,831	)			(13,992,621	)			(2,772,511	)			(2,884,400	)
DISCONTINUED OPERATIONS:
Loss on disposal of discontinued operations			-				(3,135,237	)			-				-
Net loss from discontinued operations			-				(3,135,237	)			-				-
NET LOSS			(5,214,831	)			(17,127,858	)			(2,772,511	)			(2,884,400	)
Net loss attributable to non-controlling interest			(5,236	)			(11,815	)			(2,638	)			(6,689	)
NET LOSS ATTRIBUTABLE TO SHINECO, INC.		$	(5,209,595	)		$	(17,116,043	)		$	(2,769,873	)		$	(2,877,711	)
COMPREHENSIVE LOSS
Net loss		$	(5,214,831	)		$	(17,127,858	)		$	(2,772,511	)		$	(2,884,400	)
Other comprehensive income (loss): foreign currency translation income (loss)			(1,156,311	)			814,306				1,125,027				813,736
Total comprehensive loss			(6,371,142	)			(16,313,552	)			(1,647,484	)			(2,070,664	)
Less: comprehensive income (loss) attributable to non-controlling interest			6,287				3,511				(14,461	)			(12,568	)
COMPREHENSIVE LOSS ATTRIBUTABLE TO SHINECO, INC.		$	(6,377,429	)		$	(16,317,063	)		$	(1,633,023	)		$	(2,058,096	)
Weighted average number of shares basic and diluted			16,249,657				8,720,539				17,850,182				9,126,082
Basic and diluted loss per common share		$	(0.32	)		$	(1.96	)		$	(0.16	)		$	(0.32	)
Loss per common share
Continuing operations - Basic and Diluted			(0.32	)			(1.60	)			(0.16	)			(0.32	)
Discontinued operations - Basic and Diluted			-				(0.36	)			-				-
Net loss per common share - basic and diluted			(0.32	)			(1.96	)			(0.16	)			(0.32	)

 

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

 

 

SHINECO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

FOR THE SIX MONTHS ENDED DECEMBER 31, 2022 AND 2021

(UNAUDITED)

 

		SHARES				AMOUNT				RECEIVABLE				CAPITAL				RESERVE				DEFICIT)				LOSS				INTEREST				EQUITY
																						RETAINED				ACCUMULATED
		COMMON STOCK								SUBSCRIPTION				ADDITIONAL PAID-IN				STATUTORY				EARNINGS (ACCUMULATED				OTHER COMPREHENSIVE				NON- CONTROLLING				TOTAL
		SHARES				AMOUNT				RECEIVABLE				CAPITAL				RESERVE				DEFICIT)				LOSS				INTEREST				EQUITY
Balance at June 30, 2021			7,881,482			$	7,881			$	(8,535,203	)		$	41,105,806			$	4,198,107			$	8,661,071			$	(731,805	)		$	672,349			$	45,378,206
Stock issuance			291,775				292				5,511,203				1,969,708				-				-				-				-				7,481,203
Issuance of common shares for convertible notes redemption			1,258,450				1,259				-				5,998,741				-				-				-				-				6,000,000
Beneficial conversion feature associated with convertible notes			-				-				-				361,252				-				-				-				-				361,252
Disposal of Ankang			-				-				-				-				-				-				-				(1,072,667	)			(1,072,667	)
Net loss for the period			-				-				-				-				-				(17,116,043	)			-				(11,815	)			(17,127,858	)
Foreign currency translation gain			-				-				-				-				-				-				798,980				15,326				814,306
Balance at December 31, 2021			9,431,707			$	9,432			$	(3,024,000	)		$	49,435,507			$	4,198,107			$	(8,454,972	)		$	67,175			$	(396,807	)		$	41,834,442
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			7,536,183				7,536				(508,340	)			9,847,804				-				-				-				-				9,347,000
Issuance of common shares for convertible notes redemption			537,310				537				-				527,099				-				-				-				-				527,636
Restricted shares issued for management			600,000				600				-				611,400				-				-				-				-				612,000
Net loss for the period			-				-				-				-				-				(5,209,595	)			-				(5,236	)			(5,214,831	)
Foreign currency translation gain (loss)			-				-				-				-				-				-				(1,167,834	)			11,523				(1,156,311	)
Balance at December 31, 2022			19,657,356			$	19,657			$	(3,532,340	)		$	63,985,227			$	4,198,107			$	(23,581,618	)		$	(3,268,590	)		$	(392,061	)		$	37,428,382

 

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

 

 

SHINECO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

FOR THE THREE MONTHS ENDED DECEMBER 31, 2022 AND 2021

(UNAUDITED)

 

																										ACCUMULATED
		COMMON STOCK								SUBSCRIPTION				ADDITIONAL PAID-IN				STATUTORY				ACCUMULATED				OTHER COMPREHENSIVE				NON- CONTROLLING				TOTAL
		SHARES				AMOUNT				RECEIVABLE				CAPITAL				RESERVE				DEFICIT				LOSS				INTEREST				EQUITY
Balance at September 30, 2021			8,856,231			$	8,856			$	(6,160,203	)		$	45,316,083			$	4,198,107			$	(5,577,261	)		$	(752,440	)		$	(384,239	)		$	36,648,903
Stock issuance			291,775				292				3,136,203				1,969,708				-				-				-				-				5,106,203
Issuance of common shares for convertible notes redemption			283,701				284				-				2,149,716				-				-				-				-				2,150,000
Net loss for the period			-				-				-				-				-				(2,877,711	)			-				(6,689	)			(2,884,400	)
Foreign currency translation gain (loss)			-				-				-				-				-				-				819,615				(5,879	)			813,736
Balance at December 31, 2021			9,431,707			$	9,432			$	(3,024,000	)		$	49,435,507			$	4,198,107			$	(8,454,972	)		$	67,175			$	(396,807	)		$	41,834,442
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
Stock issuance			3,260,000				3,260				250,000				3,093,740																				3,347,000
Net loss for the period			-				-				-				-				-				(2,769,873	)			-				(2,638	)			(2,772,511	)
Foreign currency translation gain (loss)			-				-				-				-				-				-				1,136,850				(11,823	)			1,125,027
Balance at December 31, 2022			19,657,356			$	19,657			$	(3,532,340	)		$	63,985,227			$	4,198,107			$	(23,581,618	)		$	(3,268,590	)		$	(392,061	)		$	37,428,382

 

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

 

 

SHINECO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		2022				2021
		For the Six Months Ended December 31,
		2022				2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(5,214,831	)		$	(17,127,858	)
Net loss from discontinued operations, net of tax			-				(3,135,237	)
Net loss from continuing operations			(5,214,831	)			(13,992,621	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			166,703				740,533
Provision for doubtful accounts			871,799				5,815,640
Provision for (reversal of) inventory reserve			(4,350	)			128,773
Stock written off due to natural disaster			462,936				901,581
Loss from equity method investments			6,221				106,988
Amortization of right of use assets			375,369				522,866
Impairment loss on distribution rights			-				1,140,551
Impairment loss on an unconsolidated entity			-				149,790
Restricted shares issued for management			612,000				-
Amortization of debt issuance costs			355,972				854,318
Accrued interest expense for convertible notes			479,641				414,778
Accrued interest expenses due to related parties			9,320				-
Accrued interest income from related parties			(173,799	)			(411,167	)
Accrued interest income from third parties			(119,978	)			(78,422	)
Changes in operating assets and liabilities:
Accounts receivable			(398,966	)			(46,681	)
Advances to suppliers			1,161,579				1,577,386
Inventories			(468,786	)			(948,863	)
Other current assets			(42,521	)			(4,559,032	)
Accounts payable			-				(75,278	)
Advances from customers			(6,407	)			(546	)
Other payables and accrued expenses			615,173				2,559,798
Operating lease liabilities			(473,376	)			(299,428	)
Taxes payable			(655	)			(111,509	)
Net cash used in operating activities			(1,786,956	)			(5,610,545	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment			-				(308,637	)
Payment made for loans to third parties			(50,155	)			(12,200,000	)
Repayments of loans to third parties			11,240,791				-
Payment made for loans to related parties			-				(6,633,811	)
Repayments of loans to related parties			214,949				-
Investment in unconsolidated entity			-				(750,000	)
Prepayment for business acquisition			(9,000,000	)			-
Acquisition of a VIE - Guangyuan, net of cash			-				112,070
Disposal of a VIE - Ankang, net of cash			-				(12,669,913	)
Net cash provided (used in) by investing activities			2,405,585				(32,450,291	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock			1,250,000				7,481,203
Proceeds from (repayments of) advances from related parties			(170,009	)			754,308
Proceeds from issuance of convertible notes			-				17,000,000
Net cash provided by financing activities			1,079,991				25,235,511
EFFECT OF EXCHANGE RATE CHANGE ON CASH AND CASH EQUIVALENTS			(421,244	)			421,826
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			1,277,376				(12,403,499	)
CASH AND CASH EQUIVALENTS - Beginning of the period			15,165,231				29,024,394
CASH AND CASH EQUIVALENTS - End of the period		$	16,442,607			$	16,620,895
SUPPLEMENTAL NON-CASH OPERATING, INVESTING AND FINANCING ACTIVITIES:
Issuance of common shares for convertible notes redemption		$	527,636			$	7,970,876
Issuance of common shares for proceeds received in prior year		$	5,000,000			$	-
Issuance of common shares for business acquisition		$	3,097,000			$	-
Right-of-use assets obtained in exchange for operating lease obligations		$	-			$	1,275,378
Reduction of right-of-use assets and operating lease obligations due to early termination of lease agreement		$	645,711			$	-
Repayments of loans to third parties offset by other payables		$	3,156,610			$	-

 

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

 

  

NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS

 

Shineco, Inc. (“Shineco” or the “Company”) was incorporated in the State of Delaware on August 20, 1997. The Company is a holding company whose primary purpose is to develop business opportunities in the People’s Republic of China (the “PRC” or “China”).

 

On December 30, 2004, the Company acquired all of the issued and outstanding shares of Beijing Tenet-Jove Technological Development Co., Ltd. (“Tenet-Jove”), a PRC company, in exchange for restricted shares of the Company’s common stock, and the sole operating business of the Company became that of its subsidiary, Tenet-Jove. Tenet-Jove was incorporated on December 15, 2003 under the laws of China. Consequently, Tenet-Jove became a 100% owned subsidiary of Shineco and was officially granted the status of a wholly foreign-owned entity by Chinese authorities on July 14, 2006. This transaction was accounted for as a recapitalization. Tenet-Jove owns 90% interest of Tianjin Tenet Huatai Technological Development Co., Ltd. (“Tenet Huatai”).

 

On December 31, 2008, June 11, 2011, and May 24, 2012, Tenet-Jove entered into a series of contractual agreements including an Executive Business Cooperation Agreement, a Timely Reporting Agreement, an Equity Interest Pledge Agreement, and an Executive Option Agreement (collectively, the “VIE Agreements”), with each one of the following entities, Ankang Longevity Pharmaceutical (Group) Co., Ltd. (“Ankang Longevity Group”), Yantai Zhisheng International Freight Forwarding Co., Ltd. (“Zhisheng Freight”), Yantai Zhisheng International Trade Co., Ltd. (“Zhisheng Trade”), Yantai Mouping District Zhisheng Agricultural Produce Cooperative (“Zhisheng Agricultural”), and Qingdao Zhihesheng Agricultural Produce Services., Ltd. (“Qingdao Zhihesheng”). On February 24, 2014, Tenet-Jove entered into the same series of contractual agreements with Shineco Zhisheng (Beijing) Bio-Technology Co., Ltd. (“Zhisheng Bio-Tech”), which was incorporated in 2014. Zhisheng Bio-Tech, Zhisheng Freight, Zhisheng Trade, Zhisheng Agricultural, and Qingdao Zhihesheng are collectively referred to herein as the “Zhisheng VIEs”.

 

Pursuant to the VIE Agreements, Tenet-Jove has the exclusive right to provide to the Zhisheng VIEs and Ankang Longevity Group consulting services related to their business operations and management. All the above contractual agreements obligate Tenet-Jove to absorb a majority of the risk of loss from the Zhisheng VIEs and Ankang Longevity Group’s activities and entitle Tenet-Jove to receive a majority of their residual returns. In essence, Tenet-Jove has become the primary beneficiary of the operations of the Zhisheng VIEs and Ankang Longevity Group. Therefore, the Zhisheng VIEs and Ankang Longevity Group are treated as variable interest entities (“VIEs”) under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810 “Consolidation.” Accordingly, the accounts of these entities are consolidated with those of Tenet-Jove.

 

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

 

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

 

 

On December 10, 2016, Tenet-Jove entered into a purchase agreement with Tianjin Tajite E-Commerce Co., Ltd. (“Tianjin Tajite”), an online e-commerce company based in Tianjin, China, specializing in distributing Luobuma related products and branded products of Daiso 100-yen shops, pursuant to which Tenet-Jove would acquire a 51% equity interest in Tianjin Tajite for cash consideration of RMB14,000,000 (approximately US$2.1 million). On December 25, 2016, the Company paid the full amount as the deposit to secure the deal. In May, 2017, the Company amended the agreement and required Tianjin Tajite to satisfy certain preconditions related to product introductions into China. On October 26, 2017, the Company completed the acquisition for 51% of the shares in Tianjin Tajite. On May 5, 2019, two minority shareholders of Tianjin Tajite transferred their 26.4% of the equity interest to the Company. There was no consideration paid for the transfers, and after the transfers, the Company owns 77.4% equity interest of Tianjin Tajite.

 

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

 

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

 

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

 

On June 8, 2021, Tenet-Jove entered into a Restructuring Agreement with various parties. Pursuant to the terms of the Restructuring Agreement, (i) the Company transferred all of its rights and interests in Ankang Longevity to Yushe County Guangyuan Forest Development Co., Ltd. (“Guangyuan”)’s Shareholders in exchange for Guangyuan Shareholders entering into the VIE Agreements with Tenet-Jove, which composes of one group of similar identifiable assets; (ii) Tenet-Jove entered a Termination Agreement with Ankang Longevity and the Ankang Shareholders; (iii) as a consideration to the Restructuring Agreement and based on a valuation report on the equity interests of Guangyuan issued by an independent third party, Tenet-Jove relinquished all of its rights and interests in Ankang Longevity and transferred those rights and interests to the Guangyuan Shareholders; and (iv) Guangyuan and the Guangyuan Shareholders entered into a series of variable interest entity agreements with Tenet-Jove. After signing of the Restructuring Agreement, the Company and the shareholders of Ankang and Guangyuan actively carried out the transferring of rights and interests in Ankang and Guangyuan, and the transferring was completed subsequently on July 5, 2021. Afterwards, with the completion of all other follow-ups works, on August 16, 2021, the Company, through its subsidiary Tenet-Jove, completed the previously announced acquisition pursuant to the Restructuring Agreement dated June 8, 2021.

 

On December 30, 2022, Shineco Life Science Research Co., Ltd. (“Subsidiary”), a company established under the laws of China and indirect wholly owned subsidiary of the Company closed the acquisition of 51% of the issued equity interests of Changzhou Biowin Pharmaceutical Co., Ltd., a company established under the laws of China (“Biowin”) 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 Subsidiary (the “Agreement”). As the consideration for the acquisition, the Company paid to Seller US $9 million in cash and the Company issued 3,260,000 shares (the “Shares”) of the Company’s common stock, par value $0.001 per share (the “Common Stock”) to the equity holders of Biowin or any persons designated by Biowin. According to the Supplementary Agreement, dated as of December 30, 2022, by and among the Subsidiary, the Seller and Biowin, the Seller enjoys 51% of the issued equity interests of Biowin before January 1, 2023, and will transfer the 51% of the issued equity interests of Biowin together with its controlling rights of production and operation of Biowin to the Subsidiary from January 1, 2023.

 

On January 13, 2023, the Company entered into a non-binding framework agreement (the “LOI”) with certain shareholders of Dream Partner Limited (“Dream Ltd.”) to acquire 80% equity interests of Dream Ltd., which indirectly owns 100% equity interests of Chongqing Wintus Group (“Wintus”), which is a private company based in China that produces specialized antiviral silk fabric materials that can be widely used in the medical, hygiene, pharmaceutical and personal health fields. According to the LOI, the total purchase price of the acquisition is estimated to be approximately $40 million which is expected to consist of cash and the Company’s common stock. The LOI represents terms for a proposed transaction and will be subject to legal and financial due diligence, which includes a third-party audit and evaluation, Shineco’s shareholder’s approval and definitive documentation.

 

 

The Company, its subsidiaries, its VIEs, and its VIEs’ subsidiaries (collectively the “Group”) operate four main business segments: 1) Tenet-Jove is engaged in manufacturing and selling Bluish Dogbane and related products, also known in Chinese as “Luobuma,” including therapeutic clothing and textile products made from Luobuma; 2) Qingdao Zhihesheng and Guanyuan are engaged in planting, processing, and distributing green agricultural produce; (“Agricultural Products”); 3) Zhisheng Freight is providing domestic and international logistic services (“Freight Services”); and, 4) Ankang Longevity Group, which is reclassified as discontinued operations, manufactures traditional Chinese medicinal herbal products as well as other retail pharmaceutical products. These different business activities and products can potentially be integrated and benefit from one another.

 

NOTE 2. GOING CONCERN UNCERTAINTIES

 

As disclosed in the Company’s unaudited condensed consolidated financial statements, the Company had recurring net losses of US$5,214,831 and US$17,127,858, and continuing cash outflow of US$1,786,956 and US$5,610,545 from operating activities for the six months ended December 31, 2022 and 2021. 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 December 31, 2022, the Company had positive working capital due to the following measurements the management has taken to enhance the Company’s liquidity:

 

1)	On August 11, 2022, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with certain non-US investors (the “Investors”). Under the Purchase Agreement, the Company will sell to the Investors, up to 1,921,683 shares of its common stock at a per share purchase price of $0.915 for gross proceeds of up to US$1,758,340. As the date of this report, proceeds amounted to US$1.25 million has been received by the Company, and the remaining balance of the proceeds is expected to be fully collected by March 31, 2023.
2)	As of December 31, 2022, the Company had cash and cash equivalents in the amount of approximately US$16.4 million for the next operating cycle in next twelve months.

 

Management believes that the foregoing measures collectively will provide sufficient liquidity for the Company to meet its future liquidity needs 12 months from the issuance date of this report.

 

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, 2022, which was filed on September 28, 2022.

 

The unaudited condensed consolidated financial statements of the Company reflect the principal activities of the Company, its subsidiaries, its VIEs and its VIEs’ subsidiaries. The non-controlling interest represents the minority shareholders’ interest in the Company’s majority owned subsidiaries and VIEs. All intercompany accounts and transactions have been eliminated in consolidation.

 

 

Consolidation of Variable Interest Entities

 

VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision-making ability. All VIEs and their subsidiaries with which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.

 

The total carrying amount of the VIEs and their subsidiaries’ unaudited condensed consolidated assets and liabilities and income information were as follows:

SCHEDULE OF CONSOLIDATED ASSETS AND LIABILITIES AND INCOME INFORMATION

 

		December 31, 2022				June 30, 2022
Current assets		$	34,482,773			$	34,723,255
Plant and equipment, net			1,242				1,446
Other non-current assets			929,024				1,211,293
Total assets			35,413,039				35,935,994
Total liabilities			(4,513,447	)			(5,719,289	)
Net assets		$	30,899,592			$	30,216,705

 

		2022				2021				2022				2021
		For the six months ended December 31,								For the three months ended December 31,
		2022				2021				2022				2021
Net sales		$	1,055,723			$	1,327,564			$	525,599			$	711,314
Gross loss		$	(221,023	)		$	(1,175,699	)		$	(124,778	)		$	(574,484	)
Income (loss) from operations		$	807,083			$	(7,364,854	)		$	419,178			$	386,809
Net income (loss)		$	830,047			$	(10,640,891	)		$	430,315			$	237,610

 

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

 

		2022				2021				2022				2021
		For the six months ended December 31,								For the three months ended December 31,
		2022				2021				2022				2021
Net loss		$	-			$	(3,135,237	)		$	-			$	-

 

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

 

		December 31, 2022				June 30, 2022
Current assets		$	34,482,773			$	34,723,255
Plant and equipment, net			1,242				1,446
Other non-current assets			929,024				1,211,293
Total assets			35,413,039				35,935,994
Total liabilities			(4,513,447	)			(5,719,289	)
Net assets		$	30,899,592			$	30,216,705

 

 

		2022				2021				2022				2021
		For the six months ended December 31,								For the three months ended December 31,
		2022				2021				2022				2021
Net sales		$	1,055,723			$	1,327,564			$	525,599			$	711,314
Gross loss		$	(221,023	)		$	(1,175,699	)		$	(124,778	)		$	(574,484	)
Income (loss) from operations		$	807,083			$	(7,364,854	)		$	419,178			$	386,809
Net income (loss)		$	830,047			$	(7,505,654	)		$	430,315			$	237,610

 

Non-controlling Interests

 

U.S. GAAP requires that non-controlling interests in subsidiaries and affiliates be reported in the equity section of a company’s balance sheet. In addition, the amounts attributable to the non-controlling interests in the net income of these entities are reported separately in the unaudited condensed consolidated statements of loss and comprehensive 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, and the valuation of accounts receivable, advances to suppliers, deferred taxes, and inventory reserves. Actual results could differ from those estimates.

 

 

Revenue Recognition

 

We previously recognized revenue from sales of Luobuma products, Chinese medicinal herbal products, and agricultural products, as well as providing logistic services and other processing services to external customers. We recognized revenue when all of the following have occurred: (i) there was persuasive evidence of an arrangement with a customer; (ii) delivery had occurred or services had been rendered; (iii) the sales price was fixed or determinable; and (iv) our collection of such fees was reasonably assured. These criteria, as related to our revenue, were considered to have been met as follows:

 

Sales of products: The Company recognized revenue from the sale of products when the goods were delivered and title to the goods passed to the customer, provided that there were no uncertainties regarding customer acceptance; persuasive evidence of an arrangement existed; the sales price was fixed or determinable; and collectability was deemed probable.

 

Revenue from the provision of services: The Company merely acts as an agent in this type of services transactions. Revenue from domestic air and overland freight forwarding services was recognized upon the performance of services as stipulated in the underlying contract or when commodities were being released from the customer’s warehouse; the service price was fixed or determinable; and collectability was deemed probable.

 

With the adoption of ASC 606, “Revenue from Contracts with Customers,” revenue is recognized when all of the following five steps are met: (i) identify the contract(s) with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations; (v) recognize revenue when (or as) each performance obligation is satisfied. The Company adopted the new revenue standard beginning July 1, 2018, and adopted a modified retrospective approach upon adoption. The Company has assessed the impact of the guidance by reviewing its existing customer contracts to identify differences that will result from applying the new requirements, including the evaluation of its performance obligations, transaction price, customer payments, transfer of control, and principal versus agent considerations. In accordance with ASC 606, the Company evaluates whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions. When the Company is a principal, that the Company obtains control of the specified goods or services before they are transferred to the customers, the revenues should be recognized in the gross amount of consideration to which it expects to be entitled in exchange for the specified goods or services transferred. When the Company is an agent and its obligation is to facilitate third parties in fulfilling their performance obligation for specified goods or services, the revenues should be recognized in the net amount for the amount of commission which the Company earns in exchange for arranging for the specified goods or services to be provided by other parties. Based on the assessment, the Company concluded that there was no change to the timing and pattern of revenue recognition for its current revenue streams in scope of Topic 606 and therefore there was no material changes to the Company’s consolidated financial statements upon adoption of ASC 606.

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist of cash on hand, cash on deposit, and other highly liquid investments which are unrestricted as to withdrawal or use, and which have original maturities of three months or less when purchased. The Company maintains cash with various financial institutions mainly in the PRC. As of December 31, 2022 and June 30, 2022, the Company had no cash equivalents.

 

Under PRC law, it is generally required that a commercial bank in the PRC that holds third-party cash deposits protect the depositors’ rights over and interests in their deposited money. PRC banks are subject to a series of risk control regulatory standards, and PRC bank regulatory authorities are empowered to take over the operation and management of any PRC bank that faces a material credit crisis. The Company monitors the banks utilized and has not experienced any problems.

 

 

Accounts Receivable, Net

 

Accounts receivable are recorded at net realizable value, consisting of the carrying amount less an allowance for uncollectible accounts, as necessary. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, the customers’ historical payment history, their current credit-worthiness, and current economic trends. The fair value of long-term receivables is determined using a present value technique by discounting the future expected contractual cash flows using current rates at which similar instruments would be issued at the measurement date. As of December 31, 2022 and June 30, 2022, the allowance for doubtful accounts was US$7,085,240 and US$7,317,236, respectively. Accounts are written off against the allowance after efforts at collection prove unsuccessful.

 

Inventories, Net

 

Inventories, which are stated at the lower of cost or net realizable value, consist of raw materials, work-in-progress, and finished goods related to the Company’s products. Cost is determined using the first in first out (“FIFO”) method. Agricultural products that the Company farms are recorded at cost, which includes direct costs such as seed selection, fertilizer, labor cost and contract fees that are spent in growing agricultural products on the leased farmland, and indirect costs which include amortization of prepayments of farmland leases and farmland development costs. All the costs are accumulated until the time of harvest and then allocated to the harvested crops costs when they are sold. The Company periodically evaluates its inventory and records an inventory reserve for certain inventories that may not be saleable or whose cost exceeds net realizable value. As of December 31, 2022 and June 30, 2022, the inventory reserve was US$1,208,807 and US$1,249,543, respectively.

 

Advances to Suppliers, Net

 

Advances to suppliers consist of payments to suppliers for materials that have not been received. Advances to suppliers are reviewed periodically to determine whether their carrying value has become impaired. As of December 31, 2022 and June 30, 2022, the Company had an allowance for uncollectible advances to suppliers of US$11,979,135 and US$13,544,627, respectively.

 

Business Acquisitions

 

Business acquisitions are accounted for under the acquisition method. The acquisition method requires the reporting entity to identify the acquirer, determine the acquisition date, recognize and measure the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquired entity, and recognize and measure goodwill or a bargain gain from the purchase. The acquiree’s results are included in the Company’s consolidated financial statements from the date of acquisition. Assets acquired and liabilities assumed are recorded at their fair values on the date acquired and the excess of the purchase price over the amounts assigned is recorded as goodwill, or if the fair value of the net assets acquired exceeds the purchase price consideration, a bargain purchase gain is recorded. Adjustments to fair value assessments are generally recorded to goodwill over the measurement period (not longer than 12 months). The acquisition method also requires that acquisition-related transaction and post-acquisition restructuring costs be charged to expense as committed, and requires the Company to recognize and measure certain assets and liabilities, including those arising from contingencies and contingent consideration in a business combination.

 

 

Goodwill

 

Goodwill represents the excess of the purchase price over the fair value of assets acquired. The goodwill impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, goodwill of the reporting unit would be considered impaired. To measure the amount of the impairment loss, the implied fair value of a reporting unit’s goodwill is compared to the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. If the carrying amount of a reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. For each of these tests, the fair value of each of the Company’s reporting units is determined using a combination of valuation techniques, including a discounted cash flow methodology. To corroborate the discounted cash flow analysis performed at each reporting unit, a market approach is utilized using observable market data such as comparable companies in similar lines of business that are publicly traded or which are part of a public or private transaction (to the extent available).

 

Leases

 

The Company follows FASB ASC No. 842, Leases (“Topic 842”). The Company leases office spaces, warehouse, and farmland which are classified as operating leases in accordance with Topic 842. Under Topic 842, lessees are required to recognize the following for all leases (with the exception of short-term leases, usually with initial term of 12 months or less) on the commencement date: (i) lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) right-of-use (“ROU”) asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

 

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and includes initial direct costs incurred. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expenses for minimum lease payments are recognized on a straight-line basis over the lease term. All operating lease ROU assets are reviewed for impairment annually. For the six and three months ended December 31, 2022 and 2021, 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:

SCHEDULE OF ESTIMATED USEFUL LIVES OF PROPERTY AND EQUIPMENT

 

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

 

 

Long-lived Assets

 

Finite-lived assets and intangibles are reviewed for impairment testing when circumstances require. For purposes of evaluating the recoverability of long-lived assets, when undiscounted future cash flows will not be sufficient to recover an asset’s carrying amount, the asset is written down to its fair value. The long-lived assets of the Company that are subject to evaluation consist primarily of property and equipment, land use rights, distribution right, ROU assets and investments. For the six and three months ended December 31, 2022 and 2021, the Company did not recognize any impairment of its long-lived assets.

 

Fair Value of Financial Instruments

 

The Company follows the provisions of ASC 820, “Fair Value Measurements and Disclosures.” ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

 

Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

 

Level 2 applies to assets or liabilities for which there are inputs, other than quoted prices in level, that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

 

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the asset or liability.

 

The carrying value of financial instruments included in current assets and liabilities approximate their fair values because of the short-term nature of these instruments.

 

Income Taxes

 

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the unaudited condensed consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

 

The provisions of ASC 740-10-25, “Accounting for Uncertainty in Income Taxes,” prescribe a more-likely-than-not threshold for consolidated financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. This ASC also provides guidance on the recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and related disclosures. The Company did not have any uncertain tax positions at December 31, 2022 and June 30, 2022. The Company had not provided deferred taxes for undistributed earnings of non-U.S. subsidiaries at December 31, 2022, 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 December 31, 2022, the tax years ended December 31, 2018 through December 31, 2022 for the Company’s PRC subsidiaries remained open for statutory examination by PRC tax authorities.

 

 

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

 

Value-Added Tax

 

Sales revenue represents the invoiced value of goods, net of a value-added tax (“VAT”). Before May 1, 2018, all of the Company’s products that were sold in the PRC were subject to a Chinese value-added tax at a rate of 17% of the gross sales price. After May 1, 2018, the Company was subject a tax rate of 16%, and after April 1, 2019, the tax rate was further reduced to 13% based on the new Chinese tax law. 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 December 31, 2022 and June 30, 2022 were translated at 1 RMB to 0.1450 USD and at 1 RMB to 0.1493 USD, respectively. The average translation rates applied to the income and cash flow statement amounts for the six months ended December 31, 2022 and 2021 were 1 RMB to 0.1433 USD and 1 RMB to 0.1555 USD, respectively. The average translation rates applied to income and cash flow statement amounts for the three months ended December 31, 2022 and 2021 were 1 RMB to 0.1406 USD and 1 RMB to 0.1564 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.

 

 

Comprehensive Loss

 

Comprehensive loss consists of two components, net loss and other comprehensive income (loss). The foreign currency translation gain or loss resulting from translation of the financial statements expressed in RMB to USD is reported in other comprehensive income (loss) in the unaudited condensed consolidated statements of loss and comprehensive loss.

 

Equity Investment

 

An investment in which the Company has the ability to exercise significant influence, but does not have a controlling interest, is accounted for using the equity method. Significant influence is generally considered to exist when the Company has an ownership interest in the voting stock between 20% and 50%, and other factors, such as representation on the board of directors, voting rights, and the impact of commercial arrangements, are considered in determining whether the equity method of accounting is appropriate.

 

Loss per Share

 

The Company computes loss per share (“EPS”) in accordance with ASC 260, “Earnings per Share” (“ASC 260”). ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net loss divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., outstanding convertible securities, options, and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. There is no anti-dilutive effect for the six and three months ended December 31, 2022 and 2021.

 

The following table presents a reconciliation of basic and diluted loss per share for the six and three months ended December 31, 2022 and 2021:

SCHEDULE OF RECONCILIATION OF BASIC AND DILUTED EARNINGS (LOSS) PER SHARE

 

		2022				2021				2022				2021
		For the six months ended December 31,								For the three months ended December 31,
		2022				2021				2022				2021
Net loss from continuing operations attributable to Shineco		$	(5,209,595	)		$	(13,980,806	)		$	(2,769,873	)		$	(2,877,711	)
Net loss from discontinued operations attributable to Shineco			-				(3,135,237	)			-				-
Net loss attributable to Shineco			(5,209,595	)			(17,116,043	)			(2,769,873	)			(2,877,711	)
Weighted average shares outstanding - basic and diluted			16,249,657				8,720,539				17,850,182				9,126,082
Net loss from continuing operations per share of common share Basic and diluted		$	(0.32	)		$	(1.60	)		$	(0.16	)		$	(0.32	)
Net loss from discontinued operations per share of common share Basic and diluted		$	-			$	(0.36	)		$	-			$	-
Net loss per share of common share Basic and diluted		$	(0.32	)		$	(1.96	)		$	(0.16	)		$	(0.32	)

 

 

New Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. ASU 2016-13 was subsequently amended by Accounting Standards Update 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Accounting Standards Update 2019-04 Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, and Accounting Standards Update 2019-05, Targeted Transition Relief. For public entities, ASU 2016-13 and its amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For all other entities, this guidance and its amendments will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. In November 2019, the FASB issued ASU 2019-10, “Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)” (“ASU 2019-10”). ASU 2019-10 (i) provides a framework to stagger effective dates for future major accounting standards and (ii) amends the effective dates for certain major new accounting standards to give implementation relief to certain types of entities. Specifically, ASU 2019-10 changes some effective dates for certain new standards on the following topics in the FASB Accounting Standards Codification (ASC): (a) Derivatives and Hedging (ASC 815) – now effective for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021; (b) Leases (ASC 842) - now effective for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021; (c) Financial Instruments — Credit Losses (ASC 326) - now effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years; and (d) Intangibles — Goodwill and Other (ASC 350) - now effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company plans to adopt this guidance effective July 1, 2023 and the adoption of this ASU is not expected to have a material impact on its financial statements.

 

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. The FASB is issuing this Update as part of its initiative to reduce complexity in accounting standards (the “Simplification Initiative”). The objective of the Simplification Initiative is to identify, evaluate, and improve areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The specific areas of potential simplification in this ASU were submitted by stakeholders as part of the Simplification Initiative. For public business entities, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company adopted this ASU on July 1, 2021 and the adoption of this ASU did not 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.

 

NOTE 4 – ACCOUNTS RECEIVABLE, NET

 

The accounts receivable, net consisted of the following:

SCHEDULE OF ACCOUNTS RECEIVABLE 

		December 31, 2022				June 30, 2022
Accounts receivable		$	9,276,637			$	9,138,790
Less: allowance for doubtful accounts			(7,085,240	)			(7,317,236	)
Accounts receivable, net		$	2,191,397			$	1,821,554

 

 

Movement of allowance for doubtful accounts is as follows:

SCHEDULE OF MOVEMENT OF ALLOWANCE FOR DOUBTFUL ACCOUNTS 

		December 31, 2022				June 30, 2022
Beginning balance		$	7,317,236			$	13,481,021
Charge to (reversal of) expense			(18,994	)			1,632,670
Less: cessation of subsidiaries and disposal of VIE			-				(7,524,110	)
Foreign currency translation adjustments			(213,002	)			(272,345	)
Ending balance		$	7,085,240			$	7,317,236

 

NOTE 5 – INVENTORIES, NET

 

The inventories, net consisted of the following:

SCHEDULE OF INVENTORIES, NET 

		December 31, 2022				June 30, 2022
Raw materials		$	62,438			$	67,467
Work-in-process			18,183,738				18,709,325
Finished goods			1,147,146				1,191,275
Less: inventory reserve			(1,208,807	)			(1,249,543	)
Total inventories, net		$	18,184,515			$	18,718,524

 

Work-in-process includes direct costs such as seed selection, fertilizer, labor cost, and subcontractor fees that are spent in growing agricultural products on the leased farmland, and indirect costs which include amortization of the prepayment of the farmland lease fees and farmland development costs. All the costs are accumulated until the time of harvest and then allocated to harvested crop costs when they are sold.

 

The Company wrote off inventory amounted to US$462,936 and US$901,581 during the six months ended December 31, 2022 and 2021, respectively. The Company wrote off inventory amounted to US$221,182 and US$408,594 during the three months ended December 31, 2022 and 2021, 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.

 

NOTE 6 – ADVANCES TO SUPPLIERS, NET

 

The advances to suppliers, net consisted of the following:

SCHEDULE OF ADVANCES TO SUPPLIERS 

		December 31, 2022				June 30, 2022
Advances to suppliers		$	11,979,135			$	13,548,178
Less: allowance for doubtful accounts			(11,979,135	)			(13,544,627	)
Advance to suppliers, net		$	-			$	3,551

 

Advances to suppliers consist of mainly payments to suppliers for yew trees that have not been received.

 

 

Movement of allowance for doubtful accounts is as follows:

SCHEDULE OF MOVEMENT OF ALLOWANCE OF DOUBTFUL ACCOUNTS ON ADVANCES TO SUPPLIERS 

		December 31, 2022				June 30, 2022
Beginning balance		$	13,544,627			$	13,320,307
Charge to (reversal of) expense			(1,158,171	)			4,938,064
Less: cessation of subsidiaries and disposal of VIE			-				(4,210,407	)
Foreign currency translation adjustments			(407,321	)			(503,337	)
Ending balance		$	11,979,135			$	13,544,627

 

NOTE 7 – OTHER CURRENT ASSETS, NET

 

Other current assets, net consisted of the following:

SCHEDULE OF OTHER CURRENT ASSETS  

		December 31, 2022				June 30, 2022
Loans to third parties (1)		$	2,072,174			$	16,345,717
Other receivables (2)			2,170,418				3,246,293
Short-term deposit			954,858				164,261
Prepaid expenses			15,123				20,872
Subtotal			5,212,573				19,777,143
Less: allowance for doubtful accounts			(3,678,932	)			(2,545,565	)
Total other current assets, net		$	1,533,641			$	17,231,578

 

(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 December 31, 2022 and June 30, 2022, the allowance for doubtful accounts was US$1,608,256 and US$384,915, respectively. Management will continue putting effort in collection of overdue loans to third parties.
(2)	Other receivable are mainly business advances to officers and staffs represent advances for business travel and sundry expenses.

 

Movement of allowance for doubtful accounts is as follows:

SCHEDULE OF ALLOWANCE FOR DOUBTFUL ACCOUNTS 

		December 31, 2022				June 30, 2022
Beginning balance		$	2,545,565			$	995,760
Charge to expense			1,332,467				2,117,316
Less: cessation of subsidiaries and disposal of VIE			-				(326,491	)
Foreign currency translation adjustments			(199,100	)			(241,020	)
Ending balance		$	3,678,932			$	2,545,565

 

 

NOTE 8 - PROPERTY AND EQUIPMENT, NET

 

Property and equipment, net consisted of the following:

SCHEDULE OF PROPERTY AND EQUIPMENT 

		December 31, 2022				June 30, 2022
Buildings		$	1,755,591			$	1,808,172
Machinery and equipment			26,556				27,351
Motor vehicles			135,033				139,077
Office equipment			165,859				178,271
Leasehold improvement			180,896				186,314
Farmland leasehold improvements			3,048,427				3,139,729
Subtotal			5,312,362				5,478,914
Less: accumulated depreciation and amortization			(3,449,455	)			(3,388,640	)
Less: impairment for property and equipment			(694,016	)			(714,802	)
Total property and equipment, net		$	1,168,891			$	1,375,472

 

Depreciation and amortization expense was US$164,671 and US$214,731 for the six months ended December 31, 2022 and 2021, respectively. Depreciation and amortization expense was US$133,705 and US$133,258 for the three months ended December 31, 2022 and 2021, respectively.

 

During the year ended June 30, 2022, the management performed evaluation on the impairment of property and equipment. Due to the continuous impact from the COVID-19 pandemic, the Company’s Zhisheng VIEs, has not been able to grow and cultivate green agricultural produce on its leased farmland, 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 leased farmland (Note 11). Therefore, farmland leasehold improvements relating to these farmlands were also fully impaired as of June 30, 2022. The impairment for property and equipment of US$694,016 and US$714,802 was recorded as of December 31, 2022 and June 30, 2022, respectively.

 

Farmland leasehold improvements, net consisted of following:

SCHEDULE OF LEASEHOLD IMPROVEMENTS 

		December 31, 2022				June 30, 2022
Blueberry farmland leasehold improvements		$	2,341,937			$	2,412,079
Yew tree planting base reconstruction			262,383				270,242
Greenhouse renovation			444,107				457,408
Subtotal			3,048,427				3,139,729
Less: accumulated amortization			(2,354,411	)			(2,424,927	)
Less: impairment for farmland leasehold improvements			(694,016	)			(714,802	)
Total farmland leasehold improvements, net		$	-			$	-

 

NOTE 9 - DISTRIBUTION RIGHTS

 

The Company acquired distribution rights to distribute branded products of Daiso 100-yen shops through the acquisition of Tianjin Tajite. As this distribution right is difficult to acquire and will contribute significant revenue to Tianjin Tajite, such distribution rights were identified and valued as an intangible asset in the acquisition of Tianjin Tajite. The distribution rights, which have no expiration date, have been determined to have an indefinite life. Since the distribution rights have an indefinite life, the Company will evaluate them for impairment at least annually or earlier if determined necessary. During the year ended June 30, 2022, the management performed evaluation on the impairment of distribution rights. As the Company is unable to generate any revenue and profit from the distribution right due to the unfavorable policy of China Customs and current business environment caused by the continuous impact from the COVID-19, the management fully recorded an impairment loss on distribution rights of Tianjin Tajite.

 

 

NOTE 10 - INVESTMENTS

 

Guangyuan entered into an equity investment agreement with Shanxi Pharmaceutical Group Yushe Pharmaceutical Development Co., Ltd. (“Yushe Pharmaceutical”), a Chinese pharmaceutical enterprise to invest a total of RMB 2.0 million (approximately US$0.3 million) for a 20% equity interest in Yushe Pharmaceutical. The investment is accounted for using the equity method because Guangyuan has significant influence, but no control of the entity. The Company recorded a loss of US$ nil and US$16,153 for the six months ended December 31, 2022 and 2021, respectively, and a loss of US$ nil and US$11,967 for the three months ended December 31, 2022 and 2021, respectively, from the investment, which was included in “Income (loss) from equity method investments” in the unaudited condensed consolidated statements of loss and comprehensive loss. 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, 2022.

 

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 recorded a loss of US$6,221 and US$90,835 for the six months ended December 31, 2022 and 2021, respectively, and an income of US$83 and a loss of US$67,101 for the three months ended December 31, 2022 and 2021, respectively, from the investment, which was included in “Income (loss) from equity method investments” in the unaudited condensed consolidated statements of loss and comprehensive loss.

 

On January 18, 2022, the Company entered into three share transfer agreements (the “Purchase Agreements”), respectively with Beijing Qing Chuang Technology Incubator Co., Ltd., Hangzhou Sheng Dou Shi Bio Technology Co., Ltd. and Peng He (collectively, the “Selling Shareholders”), each a shareholder of Xiang Peng You Kang (Beijing) Technology Co., Ltd. (“XPYK”), pursuant to which the Company shall acquire a total of 51% issued and outstanding equity interest of XPYK from the Selling Shareholders (the “XPYK Shares”). Under the Purchase Agreements, the Company will issue an aggregate of 700,551 shares (“Company Shares”) of its common stock valued at a per share price of $8 (subject to the terms and conditions of the Purchase Agreements) as the consideration for the XPYK Shares. As the date of this report, no share has been issued and no equity interest of XPYK has been acquired by the Company.

 

On January 30, 2022, the Company entered into a cooperation agreement (the “Cooperation Agreement”) with Weifang Jianyi Medical Devices Co., Ltd. (“WJM”), a leading Chinese medical device company based in Shandong Province, China, pursuant to which the Company and WJM shall jointly manufacture and sell nuclear medical imaging devices (the “Joint Project”), including PET, PET-CT, and PET-MRI. Under the Cooperation Agreement, the Company will provide working capital and manufacturing facilities while WJM shall contribute patented and unpatented technologies and know-how, medical device manufacturing permits, skilled engineers and project managers to produce such nuclear medical imaging devices. The term of the Cooperation Agreement shall be three (3) years commencing from January 30, 2022. In accordance with the Cooperation Agreement, WJM shall be entitled to 30% of the net income generated by the Joint Project while the Company shall be entitled to 70% of the net income thereof and bear 100% of the net losses of the Joint Project. In addition, the Company and WJM shall manage the Joint Project jointly with WJM making the budgets and the Company approving such budgets. Furthermore, the Cooperation Agreement provides that the Company shall receive any and all of the intellectual property rights to be developed as a result of the Joint Project. As the date of this report, the Joint Project has not started, and no working capital and manufacturing facilities have been provided by the Company.

 

 

The Company’s investment in unconsolidated entity consists of the following:

SCHEDULE OF INVESTMENT IN UNCONSOLIDATED ENTITIES 

		December 31, 2022				June 30, 2022
Gaojing Private Fund		$	611,225			$	617,446
Total investment		$	611,225			$	617,446

 

Summarized financial information of unconsolidated entities is as follows:

SCHEDULE OF FINANCIAL INFORMATION OF UNCONSOLIDATED ENTITIES FROM CONTINUED OPERATIONS 

		December 31, 2022				June 30, 2022
Current assets		$	566,530			$	558,962
Noncurrent assets			144,818				-
Current liabilities			189,742				1,478

 

		For the six months ended December 31,
		2022				2021
Net sales		$	-			$	314,121
Gross loss			-				(596	)
Loss from operations			(19,278	)			(339,024	)
Net loss			(19,441	)			(364,624	)

 

NOTE 11 - LEASES

 

The Company leases offices space and warehouse under non-cancelable operating leases, with terms ranging from one to six 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.

 

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

SCHEDULE OF OPERATING LEASE RELATED ASSETS AND LIABILITIES 

		December 31, 2022				June 30, 2022
ROU lease assets		$	992,591			$	2,088,149
Operating lease liabilities – current			232,656				959,909
Operating lease liabilities – non-current			561,490				1,025,967
Total operating lease liabilities		$	794,146			$	1,985,876

 

 

The weighted average remaining lease terms and discount rates for all of operating leases were as follows as of December 31, 2022 and June 30, 2022:

SCHEDULE OF WEIGHTED AVERAGE REMAINING LEASE TERMS AND DISCOUNT RATES FOR OPERATING LEASES 

		December 31, 2022				June 30, 2022
Remaining lease term and discount rate:
Weighted average remaining lease term (years)			9.13				6.88
Weighted average discount rate			5.37	%			5.30	%

 

Rent expenses totaled US$386,145 and US$464,207 for the six months ended December 31, 2022 and 2021, respectively. Rent expenses totaled US$171,705 and US$233,659 for the three months ended December 31, 2022 and 2021, respectively.

 

During the year ended June 30, 2022, the management performed evaluation on the impairment of ROU lease assets, and impairment loss for the ROU lease assets of US$2,268,344 was recorded for the year ended June 30, 2022. Due to the continuous impact from the COVID-19 pandemic, the Company’s Zhisheng VIEs, has not been able to grow and cultivate green agricultural produce on its leased farmland, and based on the management estimation, these farmlands are unlikely to generate enough future profit and cashflow. Therefore, the Company decided to record full impairment of leased farmland during the year ended June 30, 2022.

 

The following is a schedule, by years, of maturities of lease liabilities as of December 31, 2022:

SCHEDULE OF MATURITIES OF LEASE LIABILITIES 

Remainder of 2023		$	228,908
2024			174,184
2025			148,043
2026			21,744
2027			21,744
Thereafter			442,139
Total lease payments			1,036,762
Less: imputed interest			(242,616	)
Present value of lease liabilities		$	794,146

 

NOTE 12 - ACQUISITION

 

Acquisition of Tianjin Taijite

 

On December 12, 2016, the Company entered into a merger and acquisition agreement with Tianjin Tajite, a professional e-commerce company distributing Luobuma fabric commodities and branded products of Daiso 100-yen shops, based in Tianjin, China, to acquire 51% equity interests in Tianjin Tajite. Pursuant to the agreement, the Company made a payment of RMB14,000,000 (approximately US$2.1 million) at the end of December 2016 as the total consideration for the acquisition of Tianjin Tajite. On October 26, 2017, the Company completed the acquisition of Tianjin Tajite. The acquisition provides a unique opportunity for the Company to enter the market of Luobuma fabric commodities and branded products of Daiso 100-yen shops.

 

The transaction was accounted for in accordance with the provisions of ASC 805-10, Business Combinations. The Company retained independent appraisers to advise management in the determination of the fair value of the various assets acquired and liabilities assumed. The values assigned in these financial statements represents management’s best estimate of fair values as of the acquisition date.

 

 

As required by ASC 805-20, Business Combinations—Identifiable Assets and Liabilities, and Any Non-controlling Interest, management conducted a review to reassess whether they identified all the assets acquired and all the liabilities assumed, and followed ASC 805-20’s measurement procedures for recognition of the fair value of net assets acquired.

 

The excess of the purchase price over the aggregate fair value of assets acquired was allocated to goodwill which amounted to RMB14,010,195 (approximately US$2.1 million). The results of operations of Tianjin Tajite have been included in the consolidated statements of operations from the date of acquisition.

 

In June 2018, the management performed evaluation on the impairment of goodwill. Due to the lower than expected revenue and profit, and unfavorable business environment, the management fully recorded an impairment loss on goodwill of Tianjin Tajite.

 

On May 5, 2019, two minority shareholders of Tianjin Tajite transferred 26.4% of the equity interest hold 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.

 

During the year ended June 30, 2022, the management performed evaluation on the impairment of distribution rights. As the Company is unable to generate any revenue and profit from the distribution right due to the unfavorable policy of China Customs and current business environment caused by the continuous impact from the COVID-19, the management fully recorded an impairment loss on distribution rights of Tianjin Tajite. (Note 9)

 

Under ASC 805-10, acquisition-related costs (i.e., advisory, legal, valuation, and other professional fees) are not included as a component of consideration transferred, but are expensed in the periods in which the costs are incurred.

 

Acquisition of Guangyuan

 

On June 8, 2021, Tenet-Jove entered into a Restructuring Agreement with various parties. Pursuant to the terms of the Restructuring Agreement, (i) the Company transferred all of its rights and interests in Ankang Longevity to Yushe County Guangyuan Forest Development Co., Ltd. (“Guangyuan”)’s Shareholders in exchange for Guangyuan Shareholders entering into the VIE agreements with Tenet-Jove, which composes of one group of similar identifiable assets; (ii) Tenet-Jove entered a Termination Agreement with Ankang Longevity and the Ankang Shareholders; (iii) as a consideration to the Restructuring Agreement and based on a valuation report on the equity interests of Guangyuan issued by an independent third party, Tenet-Jove relinquished all of its rights and interests in Ankang Longevity and transferred those rights and interests to the Guangyuan Shareholders; and (iv) Guangyuan and the Guangyuan Shareholders entered into a series of variable interest entity agreements with Tenet-Jove. After signing of the Restructuring Agreement, the Company and the shareholders of Ankang and Guangyuan actively carried out the transferring of rights and interests in Ankang and Guangyuan, and the transferring was completed subsequently on July 5, 2021. Afterwards, with the completion of all other follow-ups works, on August 16, 2021, the Company, through its subsidiary Tenet-Jove, completed the previously announced acquisition pursuant to the Restructuring Agreement dated June 8, 2021.

 

 

The management determined that July 5, 2021 was the acquisition date of Guangyuan. The acquisition provides a unique opportunity for the Company to enter the market of planting fast-growing bamboo willows and scenic greening trees.

 

The transaction was accounted for in accordance with the provisions of ASC 805-10, Business Combinations. The Company retained independent appraisers to advise management in the determination of the fair value of the various assets acquired and liabilities assumed. The values assigned in these financial statements represent management’s best estimate of fair values as of the Acquisition Date.

 

As required by ASC 805-20, Business Combinations—Identifiable Assets and Liabilities, and Any Non-controlling Interest, management conducted a review to reassess whether they identified all the assets acquired and all the liabilities assumed, and followed ASC 805-20’s measurement procedures for recognition of the fair value of net assets acquired.

 

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

SUMMARIZES THE ALLOCATION OF ESTIMATED FAIR VALUES 

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

 

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 six and three months ended December 31, 2022 and 2021.

 

The Company has included the operating results of Guangyuan in its consolidated financial statements since the Acquisition Date. US$ nil in net sales and US$75,134 in net loss of Guangyuan were included in the unaudited condensed consolidated financial statements for the six months ended December 31, 2022. US$ nil in net sales and US$622,801 in net loss of Guangyuan were included in the unaudited condensed consolidated financial statements for the six months ended December 31, 2021. US$ nil in net sales and US$46,718 in net loss of Guangyuan were included in the unaudited condensed consolidated financial statements for the three months ended December 31, 2022. US$ nil in net sales and US$302,896 in net loss of Guangyuan were included in the unaudited condensed consolidated financial statements for the three months ended December 31, 2021.

 

Acquisition of Changzhou Biowin Pharmaceutical Co., Ltd. (“Biowin”)

 

On October 21, 2022, the Company, through its wholly-owned subsidiary, Life Science, entered into a stock purchase agreement with Beijing Kanghuayuan Medicine Information Consulting Co., Ltd., a company established under the laws of China (“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 $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 the Life Science, the Seller and Biowin, the Seller will transferred its controlling rights of production and operation of Biowin to Life Science from January 1, 2023. The total consideration of the acquisition was US$12,097,000, which was recorded in “Prepayment for business acquisition” in the unaudited condensed consolidated balance sheets as of December 31, 2022.

 

 

NOTE 13 - RELATED PARTY TRANSACTIONS

 

Due from Related Parties, Net

 

The Company has made temporary advances to certain stockholders of the Company and to other entities that are either owned by family members of those stockholders or to other entities that the Company has investments in.

 

As of December 31, 2022 and June 30, 2022, the outstanding amounts due from related parties consisted of the following:

SCHEDULE OF DUE FROM RELATED PARTIES 

		December 31, 2022				June 30, 2022
		December 31, 2022				June 30, 2022
Zhao Min		$	1,369			$	1,410
Shanghai Gaojing Private Fund Management (a.)			417,494				429,998
Zhongjian Yijia Health Technology (Qingdao) Co., Ltd. (b.)			1,496,835				1,719,568
Zhongjian (Qingdao) International Logistics Development Co., Ltd. (c.)			4,640,065				4,644,011
Subtotal			6,555,763				6,794,987
Less: allowance for doubtful accounts			(724,816	)			-
Total due from related parties, net		$	5,830,947			$	6,794,987

 

a.	The Company owns 32% equity interest in this company. Those advances are due on demand and non-interest bearing. (Note 10)
b.	On September 17, 2021, the Company entered into a loan agreement with Zhongjian Yijia Health Technology (Qingdao) Co., Ltd. to with an amount of US$1,642,355 (RMB 11.0 million) for its working capital for one year, with a maturity date of September 16, 2022. The loans bore a fixed annual interest rate of 6.0% per annum. The Company recorded interest receivable amounted to US$77,213 as of June 30, 2022. Upon maturity date, the Company signed a loan extension agreement with this related party to extend the loan repayment by installments, among which, US$217,445 (RMB 1.5 million) will be paid by September 30, 2022, US$724,816 (RMB 5.0 million) will be paid by December 31, 2022, and the remaining loan and unpaid interest will be paid by June 30, 2023. During the six months ended December 31, 2022, the Company received payment of US$217,445 (RMB 1.5 million) from this related party. The total outstanding balance including the principal and interest was amounted to US$1,496,835 as of December 31, 2022. Interest income were US$44,203 and US$29,846 for the six months ended December 31, 2022 and 2021, respectively. Interest income were US$19,902 and US$29,846 for the three months ended December 31, 2022 and 2021, respectively. Due to the impact from COVID-19, the Company did not receive the second installment repayment of US$724,816 (RMB 5.0 million) according to the loan agreements, hence, the Company recorded allowance according to the Company’s accounting policy based on its best estimates. As of December 31, 2022, the allowance for doubtful accounts was US$724,816. Management will continue putting effort in collection of overdue loans to this related party.
c.	On October 28, 2021, the Company entered into a loan agreement with Zhongjian (Qingdao) International Logistics Development Co., Ltd. to with an amount of US$4,334,401 (RMB 29.9 million) for its working capital for one year, with a maturity date of October 27, 2022. The loans bore a fixed annual interest rate of 6.0% per annum. Upon maturity date, the Company signed a loan extension agreement with this related party to extend the loan for another year with the new maturity date of October 27, 2023. The total outstanding balance including the principal and interest were amounted to US$4,640,065 and US$4,644,011 as of December 31, 2022 and June 30, 2022, respectively. Interest income were US$129,596 and US$49,449 for the six months ended December 31, 2022 and 2021, respectively. Interest income were US$63,541 and US$49,449 for the three months ended December 31, 2022 and 2021, respectively.

 

 

Due to Related Parties

 

As of December 31, 2022 and June 30, 2022, the Company had related party payables of US$2,465,083 and US$2,798,800, respectively, mainly due to the principal stockholders or certain relatives of the stockholders of the Company who lend funds for the Company’s operations. The payables are unsecured, non-interest bearing, and due on demand.

SCHEDULE OF DUE TO RELATED PARTIES 

		December 31, 2022				June 30, 2022
Wu Yang		$	-			$	95,630
Wang Sai			71,857				96,081
Zhou Guocong			2,090				-
Lin Baolin			2,029				-
Zhao Min (a.)			409,546				562,528
Zhou Shunfang (b.)			1,979,561				2,044,561
Total due to related parties		$	2,465,083			$	2,798,800

 

a.	During the year ended June 30, 2022, the Company entered into a series of loan agreements with Zhao Min to borrow an aggregated amount of US$365,797 (RMB 2.45 million) for the Company’s working capital needs for three months, with a maturity date range between July 2022 to September 2022. The loans bore a fixed annual interest rate of 5.0% per annum. Upon maturity date, the Company signed loan extension agreements with Zhao Min to extend the loan period for another nine months, with the same interest rate of 5.0% per annum. During the six months ended December 31, 2022, the Company borrowed additional loan of US$28,993 (RMB 0.2 million), resulted a total outstanding balance including principal and the interest of US$387,788 as of December 31, 2022.
b.	During the year ended June 30, 2022, the Company entered into a series of loan agreements with Zhou Shunfang to borrow an aggregated amount of US$1,269,092 (RMB 8.5 million) for the Company’s working capital needs for less than one year, with a maturity date range on March 31, 2022. The loans bore a fixed annual interest rate of 20.0% per annum. All loans were fully repaid by the Company upon their maturity.

 

Interest expenses on loans due to related parties were US$9,320 and US$ nil for the six months ended December 31, 2022 and 2021, respectively. Interest expenses on loans due to related parties were US$4,518 and US$ nil for the three months ended December 31, 2022 and 2021, respectively.

 

NOTE 14 - CONVERTIBLE NOTES PAYABLE

 

On June 16, 2021, the Company entered into a Securities Purchase Agreement pursuant to which the Company issued an unsecured convertible promissory note with a one-year maturity (“the Note”) to an institutional accredited investor Streeterville Capital, LLC (“Investor”). The Note has the original principal amount of US$3,170,000 and Investor gave consideration of US$3.0 million, reflecting original issue discount of US$150,000 and Investor’s legal fee of US$20,000. On September 7, 2022, the Company signed an extension amendment with the Investor to extend the maturity date to June 15, 2023. On October 21, 2022, the Company signed a standstill agreement with the Investor, pursuant to which the Investor would not seek to redeem any portion of the Note during the period from October 21, 2022 to January 20, 2023. On or around January 20, 2023, the Investor re-started the redemption of the Notes.

 

On July 16, 2021, the Company entered into a Securities Purchase Agreement (the “July Agreement”) pursuant to which the Company issued two unsecured convertible promissory notes with a one-year maturity term (the “Notes”) to the same Investor. The first convertible promissory note (“Note #1”) has an original principal amount of US$3,170,000 and the Investor gave consideration of US$3.0 million, reflecting original issue discount of US$150,000 and Investor’s legal fee of US$20,000. The second convertible promissory note (“Note #2”) has an original principal amount of US$4,200,000 and Investor gave consideration of US$4.0 million, reflecting original issue discount of US$200,000.

 

 

On August 19, 2021, the Company entered into a Securities Purchase Agreement (the “Agreement”) pursuant to which the Company issued an unsecured convertible promissory note with a one-year maturity term (the “Note”) to the same Investor. The Note has an original principal amount of US$10,520,000 and Investor gave consideration of US$10.0 million, reflecting original issue discount of US$500,000 and Investor’s legal fee of US$20,000. On September 7, 2022, the Company signed an extension amendment with the Investor to extend the maturity date to August 18, 2023. On October 21, 2022, the Company signed a standstill agreement with the Investor, pursuant to which the Investor will not seek to redeem any portion of the Note during the period from October 21, 2022 to January 20, 2023.

 

For the above-mentioned convertible promissory notes issued, interest accrues on the outstanding balance of these notes at 6% per annum. The Investor may redeem all or any part of the outstanding balance of the note, at any time after six months from the issue date upon three trading days’ notice, in cash or converting into shares of the Company’s common stock at a price equal to 80% multiplied by the lowest daily volume weighted average price (“VWAP”) during the fifteen trading days immediately preceding the applicable redemption conversion, subject to certain adjustments and ownership limitations specified in the note. Following the receipt of a redemption notice, the Company may either ratify Investor’s proposed allocation in the applicable redemption notice or elect to change the allocation by written notice to Investor within twenty-four (24) hours of its receipt of such redemption notice, so long as the sum of the cash payments and the amount of redemption conversions equal the applicable redemption amount. As the date of this report, the Company received principal in full from the Investor. The Company anticipates using the proceeds for general working capital purposes.

 

As of December 31, 2022, the Company received principal in full from the Investor. For the six months ended December 31, 2022 and 2021, a total of US$355,972 and $854,318 in amortization of the debt discounts was recorded on the unaudited condensed consolidated statements of loss and comprehensive loss, respectively. For the three months ended December 31, 2022 and 2021, a total of US$201,569 and $395,340 in amortization of the debt discounts was recorded on the unaudited condensed consolidated statements of loss and comprehensive loss, respectively.

 

As of December 31, 2022, shares of the Company’s common stock totaling 2,374,465 were issued by the Company to the Investor equaling principal and interests amounted to US$7,892,638, and the Notes balance was US$14,724,932, with a carrying value of US$15,280,920, net of deferred financing costs of US$555,988 was recorded in the accompanying unaudited condensed consolidated balance sheets.

 

NOTE 15 - TAXES

 

(a) Corporate Income Taxes

 

The Company is subject to income taxes on an entity basis on income arising in or derived from the location in which each entity is domiciled.

 

Shineco is incorporated in the United States and has no operating activities. Tenet-Jove and the VIEs are governed by the Income Tax Laws of the PRC, and are currently subject to tax at a statutory rate of 25% on taxable income. Two VIEs and Xinjiang Taihe receive a full income tax exemption from the local tax authority of the PRC as agricultural enterprises as long as the favorable tax policy remains unchanged.

 

On December 22, 2017, The Act was enacted. The Act imposes a one-time transition tax on deemed repatriation of historical earnings of foreign subsidiaries, and future foreign earnings are subject to U.S. taxation. The change in rate has caused the Company to re-measure its income tax liability and record an estimated income tax expense of US$744,766 for the year ended June 30, 2018. 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).

 

 

i) The components of the income tax benefit were as follows:

 SCHEDULE OF INCOME TAX BENEFIT

			2022			2021					2022			2021
		For the six months ended December 31,								For the three months ended December 31,
		2022				2021				2022				2021
Current income tax benefit		$	-			$	(6,478	)		$	-			$	(6,478	)
Deferred income tax provision			-				-				-				-
Total income tax benefit		$	-			$	(6,478	)		$	-			$	(6,478	)

 

ii) The components of the deferred tax assets were as follows:

SCHEDULE OF FINANCIAL REPORTING BASIS AND TAX BASIS OF ASSETS AND LIABILITIES

		December 31, 2022				June 30, 2022
Deferred tax assets:
Allowance for doubtful accounts		$	1,275,887			$	1,252,245
Inventory reserve			301,278				311,439
Net operating loss carry-forwards			951,193				979,682
Total			2,528,358				2,543,366
Valuation allowance			(2,528,358	)			(2,543,366	)
Total deferred tax assets		$	-			$	-

 

Movement of the valuation allowance:

 SCHEDULE OF MOVEMENT OF VALUATION ALLOWANCE

		December 31, 2022				June 30, 2022
Beginning balance		$	2,543,366			$	1,810,023
Current year addition			58,953				798,160
Exchange difference			(73,961	)			(64,817	)
Ending balance		$	2,528,358			$	2,543,366

 

(b) Value-Added Tax

 

The Company is subject to a VAT for selling merchandise. The applicable VAT rate was 17% before May 1, 2018 for products sold in the PRC and decreased to 16% thereafter, and after April 1, 2019, the tax rate was further reduced to 13% based on the new Chinese tax law. The amount of VAT liability is determined by applying the applicable tax rate to the invoiced amount of goods sold (output VAT) less VAT paid on purchases made with the relevant supporting invoices (input VAT). Under commercial practice in the PRC, the Company pays VAT based on tax invoices issued. The tax invoices may be issued subsequent to the date on which revenue is recognized, and there may be a considerable delay between the date on which the revenue is recognized and the date on which the tax invoice is issued.

 

In the event that the PRC tax authorities dispute the date on which revenue is recognized for tax purposes, the PRC tax office has the right to assess a penalty based on the amount of the taxes which are determined to be late or deficient, and the penalty will be expensed in the period if and when a determination is made by the tax authorities. There were no assessed penalties during the six and three months ended December 31, 2022 and 2021, respectively.

 

 

(c) Taxes Payable

 

Taxes payable consisted of the following:

SCHEDULE OF TAXES PAYABLE 

		December 31, 2022				June 30, 2022
Income tax payable		$	985,568			$	992,780
Value added tax payable			33,902				34,925
Business tax and other taxes payable			2,621				3,375
Total tax payable			1,022,091				1,031,080
Less: income tax payable - current portion			575,231				584,220
Income tax payable - noncurrent portion		$	446,860			$	446,860

 

NOTE 16 - STOCKHOLDERS’ EQUITY

 

Initial Public Offering

 

On September 28, 2016, the Company completed its initial public offering of 190,354 shares of common stock at a price of US$40.50 per share for gross proceeds of US$7.7 million and net proceeds of approximately US$5.4 million. The Company’s common shares began trading on September 28, 2016 on the NASDAQ Capital Market under the symbol “TYHT.”

 

Statutory Reserve

 

The Company is required to make appropriations to reserve funds, comprising the statutory surplus reserve and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (“PRC GAAP”).

 

Appropriations to the statutory surplus reserve are required to be at least 10% of the after-tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entities’ registered capital. Appropriations to the discretionary surplus reserve are made at the discretion of the board of directors. As of December 31, 2022 and June 30, 2022, the balance of the required statutory reserves was US$4,198,107 and US$4,198,107, respectively.

 

On September 3, 2019, the Company granted 184,763 restricted shares of common stock to its employees as compensation cost for awards. The fair value of the restricted shares was US$1,022,660 based on the closing stock price US$5.54 at September 3, 2019. These restricted shares vested immediately on the grant date.

 

On September 5, 2019, the Company entered into a securities purchase agreement with select investors whereby the Company agreed to sell, and the investors agreed to purchase, up to 310,977 shares of common stock at a purchase price of US$4.68 per Share. The Company received net proceeds of US$1,500,203. The offering was made pursuant to the Company’s effective registration statement on Form S-3 (Registration Statement No. 333-221711) previously filed with the Securities and Exchange Commission and a prospectus supplement thereunder.

 

 

On July 10, 2020, the Company’s stockholders approved a 1-for-9 reverse stock split of the Company’s common stock, par value $0.001 per share, with a market effective date of August 14, 2020 (the “Reverse Stock Split”). As a result of the Reverse Stock Split, each nine pre-split shares of common stock outstanding automatically combined and converted to one issued and outstanding share of common stock without any action on the part of stockholders. No fractional shares of common stock were issued to any stockholders in connection with the Reverse Stock Split. Each stockholder was entitled to receive one share of common stock in lieu of the fractional share that would have resulted from the Reverse Stock Split. The number of the Company’s authorized common stock remained at 100,000,000 shares, and the par value of the common stock following the Reverse Stock Split remained at $0.001 per share. As of August 14, 2020 (immediately prior to the effective date), there were 27,333,428 shares of common stock outstanding, and the number of common stock outstanding after the Reverse Stock Split was 3,037,048, taking into account of the effect of rounding fractional shares into whole shares. As a result of the Reverse Stock Split, the Company’s shares and per share data as reflected in the unaudited condensed consolidated financial statements were retroactively restated as if the transaction occurred at the beginning of the periods presented.

 

On December 10, 2020, the Company entered into a securities purchase agreement with select investors whereby the Company agreed to sell, and the investors agreed to purchase, up to 604,900 shares of common stock at a purchase price of US$2.73 per share. The Company received net proceeds of US$1,643,087. The offering was made pursuant to the Company’s effective registration statement on Form S-3 (Registration Statement No. 333-221711) previously filed with the Securities and Exchange Commission and a prospectus supplement thereunder.

 

On January 27, 2021, the Company issued 364,445 shares of common stock to three investors at a price of US$3.0 per share. The Company received net proceeds of US$1,093,355.

 

On April 10, 2021, the Company issued 3,872,194 shares of common stock to selected investors at a price of US$3.2 per share. The Company received net proceeds of US$7,981,204 and US$3,024,000 was outstanding as of December 31, 2022.

 

On December 6, 2021, the Company entered into a securities purchase agreement with GHS Investments, LLC (“GHS”). Under the Purchase Agreement, the Company sold GHS 291,775 shares of its common stock at a per share purchase price of $6.8546 for gross proceeds of $2,000,000. After the deduction of issuance cost, the Company received net proceeds of US$1,970,000.

 

On April 11, 2022, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with Jing Wang (the “Investor”). Under the Purchase Agreement, the Company will sell to the Investor, up to 973,451 shares (the “Shares”) of its common stock at a per share purchase price of $2.26 (subject to the terms and conditions of the Purchase Agreement) for gross proceeds of up to $2,200,000 which were fully received, and the Shares were issued to the Investor on April 18, 2022.

 

On June 13, 2022, the Company entered into a certain stock purchase agreement (the “SPA”) with certain non-U.S. investors (the “Purchasers”), pursuant to which the Company agreed to sell, and the Purchasers agreed to purchase, severally and not jointly, an aggregate of 2,354,500 shares of common stock of the Company (the “Shares”) at a price of US$2.12 per share. In reliance on the Purchasers’ representations to the Company, the shares issued in this offering were not subject to the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Regulation S promulgated thereunder. The Company’s shareholders approved the offer and sale of the Shares at a meeting of the shareholders of the Company that was held on July 21, 2022. The closing for the offer and sale of the Shares occurred on July 26, 2022 and the Company issued the Shares in exchange for gross proceeds of $5.0 million.

 

 

On July 21, 2022, the stockholders of the Company approved the Company’s 2022 Equity Incentive Plan (the “2022 Plan”), pursuant to which 1,500,000 shares of the Company’s common stock will be made available for issuance under the 2022 Plan. Pursuant to the terms of the 2022 Plan, no shares shall be granted on or after the date which is ten years from the effective date of the 2022 Plan. On July 27, 2022, the Board of Directors of the Company approved the issuance of shares of common stock pursuant to the Company’s 2022 Plan in the aggregate amount of 600,000 shares (the “Shares”). The fair value of the Shares was US$612,000 based on the fair value of share price US$1.02 at July 21, 2022. The Shares were fully vested immediately on the issuance date.

 

On August 11, 2022, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with certain non-US investors (the “Investors”). Under the Purchase Agreement, the Company will sell to the Investors, up to 1,921,683 shares (the “Shares”) of its common stock at a per share purchase price of $0.915 (subject to the terms and conditions of the Purchase Agreement) for gross proceeds of up to US$1,758,340. In reliance on the Purchasers’ representations to the Company, the shares issued in this offering were not subject to the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Regulation S promulgated thereunder. As the date of this report, proceeds amounted to US$1.25 million has been received by the Company, and the remaining balance of the proceeds is expected to be fully collected by March 31, 2023. As of December 31, 2022, the subscription receivable was amounted to US$ 508,340 which was recorded on the unaudited condensed consolidated balance sheet.

 

On October 21, 2022, the Company, through its wholly-owned subsidiary, Life Science, entered into a stock purchase agreement with Beijing Kanghuayuan Medicine Information Consulting Co., Ltd., a company established under the laws of China (“Seller”), and Biowin, pursuant to which Life Science would acquire 51% of the issued equity interests of Biowin from Seller. 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 $0.001 per share to the equity holders of Biowin or any persons designated by Biowin. (Note 12)

 

NOTE 17 - CONCENTRATIONS AND RISKS

 

The Company maintains principally all bank accounts in the PRC. The cash balance held in the PRC bank accounts was US$14,422,994 and US$15,164,950 as of December 31, 2022 and June 30, 2022, respectively.

 

During the six months ended December 31, 2022 and 2021 almost 100% of the Company’s assets were located in the PRC and 100% of the Company’s revenues were derived from its subsidiaries and VIEs located in the PRC.

 

For the six months ended December 31, 2022, five customers accounted for approximately 87% of the Company’s total sales. For the three months ended December 31, 2022, five customers accounted for approximately 84% of the Company’s total sales. At December 31, 2022, three customers accounted for approximately 74% of the Company’s accounts receivable.

 

For the six months ended December 31, 2021, six customers accounted for approximately 85% of the Company’s total sales. For the three months ended December 31, 2021, seven customers accounted for approximately 93% of the Company’s total sales.

 

For the six months ended December 31, 2022, two vendors accounted for approximately 100% of the Company’s total purchases. For the three months ended December 31, 2022, one vendor accounted for approximately 100% of the Company’s total purchases.

 

For the six months ended December 31, 2021, one vendor accounted for approximately 93% of the Company’s total purchases. For the three months ended December 31, 2021, two vendors accounted for approximately 83% and 17% of the Company’s total purchases, respectively.

 

 

NOTE 18 - COMMITMENTS AND CONTINGENCIES

 

Legal Contingencies

 

On May 16, 2017, Mrs. Guiqin Li (the “Plaintiff”) commenced a lawsuit against the Company in the People’s Court of Chongqing Pilot Free Trade Zone of China. Plaintiff alleged that due to the misguidance given by the Company’s security trading department, the Plaintiff did not manage to complete the sales of the Company’s common stock on the day of the Company’s initial public offering in the United States. As the price of the Company’s common stock continued falling after initial public offering, the Plaintiff incurred losses and hence seek money damages against the Company. Based on the judgment of the first trail, the Company was required to pay the Plaintiff a settlement payment, including the money compensation, interests and other legal fees. In January 2023, the Company entered into a Settlement Agreement and Release (the “Agreement”) with the Plaintiff, pursuant to which the Company paid the Plaintiff a total sum of US$700,645 (approximately RMB 4.8 million) as settlement payment, and upon acceptance of the settlement payment from the Company, the Plaintiff waived, released, and forever discharged the Company from all past and future claims. As the date of this report, the Company has paid the Plaintiff a total sum of US$110,000 according to the Agreement.

 

On November 26, 2021, the Company filed a complaint in the Supreme Court of the State of New York, New York County against Lei Zhang and Yan Li, as defendants, and Transhare Corporation, as a nominal defendant, asserting that defendants had not paid for restricted shares of the Company stock pursuant to stock purchase agreements they executed with the Company. The Company is seeking money damages of $9,088,125.00 plus interest, punitive damages, and reimbursement of all costs, expenses, and attorneys’ fees. In December, defendants filed an answer and counterclaims against the Company, which they amended on January 27, 2022 after the Company moved to dismiss their counterclaims. They claimed that the Company made false and materially misleading statements, specifically regarding the sale of the shares and the removal of their restrictive legends. Defendants seek a declaratory judgment, indemnification, and monetary damages of at least $9 million, punitive damages of $10 million, plus interest, costs, and fees. In April 2022, the Court granted the Company’s motion for a preliminary injunction to restrain the Company’s transfer agent from removing the restrictive legends on the shares, provided that the Company posts a bond in the amount of US$1.5 million by May 20, 2022, which the Company declined to do. On June 13, 2022, the restriction imposed on the shares were lifted.

 

The Company moved to dismiss the counterclaims, and its motion was fully submitted in April 2022. On September 9, 2022, the Court granted the Company’s motion to dismiss defendants’ counterclaims on all but three counterclaims. Defendants’ outstanding counterclaims are for breach of contract, conversion, and wrongful refusal to remove restrictions pursuant to 6 Del. C. § 8-401.

 

Nominal defendant Transhare Corporation moved to dismiss the defendants’ counterclaim against it for wrongful refusal to remove restrictions pursuant to 6 Del. C. § 8-401, and its motion was fully submitted in April 2022. On September 9, 2022, the Court granted Transhare Corporation’s motion to dismiss defendants’ counterclaim for wrongful refusal to remove restrictions. Defendants have appealed the Court’s September 9, 2022 order dismissing defendants’ counterclaim for wrongful refusal to remove restrictions. On October 3, 2022 the parties submitted a stipulation dismissing defendants’ outstanding counterclaim against Transhare Corporation seeking declaratory judgment.

 

Trial is currently scheduled for September 18, 2023. The outcome of this legal proceeding is uncertain at this point. The Company intends to recover on its claims, and vigorously defend itself in this litigation.  As of December 31, 2022, the total unpaid shares issued to Lei Zhang and Yan Li by the Company was 982,500 shares, and the subscription receivable was amounted to US$3,024,000 which was recorded on the unaudited condensed consolidated balance sheet.

 

 

NOTE 19 - SEGMENT REPORTING

 

ASC 280, “Segment Reporting,” establishes standards for reporting information about operating segments on a basis consistent with the Group’s internal organizational management structure as well as information about geographical areas, business segments, and major customers in for details on the Group’s business segments.

 

The Company’s chief operating decision maker has been identified as the Chief Executive Officer who reviews the financial information of separate operating segments when making decisions about allocating resources and assessing performance of the Group. Based on management’s assessment, the Company has determined that it has four operating segments according to its major products and locations as follows:

 

●	Developing, manufacturing, and distributing of specialized fabrics, textile products, and other by-products derived from an indigenous Chinese plant called Apocynum Venetum, commonly known as “Bluish Dogbane” or known in Chinese as “Luobuma” (referred to herein as Luobuma):
	The operating companies of this segment, namely Tenet-Jove and Tenet Huatai, specialize in Luobuma growing, development and manufacturing of relevant products, as well as purchasing Luobuma raw materials processing.
	This segment’s operations are focused in the north region of Mainland China, mostly carried out in Beijing, Tianjin, and Xinjiang.
●	Processing and distributing of traditional Chinese medicinal herbal products as well as other pharmaceutical products (“Herbal products”):
	The operating companies of this segment, namely AnKang Longevity Group and its subsidiaries, which are reclassified as discontinued operations, process more than 600 kinds of Chinese medicinal herbal products with an established domestic sales and distribution network.
	Ankang Longevity Group is also engaged in the retail pharmacy business and the operating revenue, which is not material, is also included in this segment.
●	Planting, processing, and distributing of green and organic agricultural produce as well as growing and cultivating of Chinese Yew trees (“Other agricultural products”):

 

The operating company of this segment, Qingdao Zhihesheng, is engaged in the business of growing and distributing green and organic vegetables and fruits. This segment has been focusing its efforts on the growing and cultivating of Chinese yew trees (formally known as “taxus media”), a small evergreen tree whose branches can be used for the production of medications believed to be anti-cancer and the tree itself can be used as an ornamental indoor bonsai tree, which are known to have the effect of purifying air quality. The operations of this segment are located in the East and North regions of Mainland China, mostly carried out in Shandong Province and in Beijing, where Zhihesheng have newly developed over 100 acres of modern greenhouses for cultivating yew trees and other plants.

 

The other operating companies of this segment, Guangyuan, is engaged in the business of landscaping, afforestation, road greening, scenic greening, garden engineering, landscaping construction, and green afforestation, especially in planting fast-growing bamboo willows and scenic greening trees. The operations of this segment are located in the North regions of Mainland China, mostly carried out in Shanxi Province, where Guangyuan has developed over 350 acres of farmland for cultivating bamboo willows and other plants.

 

 

●	Providing domestic air and overland freight forwarding services (“Freight services”):

 

The operating company of this segment, Zhisheng Freight, is engaged in the business of providing domestic air and overland freight forwarding services by outsourcing these services to a third party. During the year ended June 30, 2022, there was a change in the Company’s business strategies, from being the service providers, Zhisheng Freight outsourced the freight services to third-party logistic companies and the Company merely serves as an agent and its obligation is to facilitate third-party logistic companies in fulfilling its performance obligation for specified freight services.

 

The following table presents summarized information by segment for the six months ended December 31, 2022:

 SCHEDULE OF INFORMATION BY SEGMENT

		For the six months ended December 31, 2022
		Luobuma				Other agricultural				Freight
		products				products				services				Total
Segment revenue		$	19,222			$	823,685			$	232,038			$	1,074,945
Cost of revenue and related business and sales tax			8,944				1,115,447				161,299				1,285,690
Gross profit (loss)			10,278				(291,762	)			70,739				(210,745	)
Gross profit (loss) %			53.5	%			(35.4	)%			30.5	%			(19.6	)%

 

The following table presents summarized information by segment for the six months ended December 31, 2021:

 

		For the six months ended December 31, 2021
		Luobuma				Other agricultural				Freight
		products				products				services				Total
Segment revenue		$	34,768			$	875,191			$	452,373			$	1,362,332
Cost of revenue and related business and sales tax			150,305				2,084,782				418,481				2,653,568
Gross profit (loss)			(115,537	)			(1,209,591	)			33,892				(1,291,236	)
Gross profit (loss) %			(332.3	)%			(138.2	)%			7.5	%			(94.8	)%

 

The following table presents summarized information by segment for the three months ended December 31, 2022:

 

		For the three months ended December 31, 2022
		Luobuma				Other agricultural				Freight
		products				products				services				Total
Segment revenue		$	13,648			$	395,089			$	130,510			$	539,247
Cost of revenue and related business and sales tax			8,738				566,505				83,872				659,115
Gross profit (loss)			4,910				(171,416	)			46,638				(119,868	)
Gross profit (loss) %			36.0	%			(43.4	)%			35.7	%			(22.2	)%

 

 

The following table presents summarized information by segment for the three months ended December 31, 2021:

 

		For the three months ended December 31, 2021
		Luobuma				Other agricultural				Freight
		products				products				services				Total
Segment revenue		$	21,260			$	422,804			$	288,510			$	732,574
Cost of revenue and related business and sales tax			8,467				1,016,528				269,270				1,294,265
Gross profit (loss)			12,793				(593,724	)			19,240				(561,691	)
Gross profit (loss) %			60.2	%			(140.4	)%			6.7	%			(76.7	)%

 

Total assets as of December 31, 2022 and June 30, 2022 were as follows:

 

		December 31, 2022				June 30, 2022
Luobuma products		$	7,850,331			$	10,982,562
Other agricultural products			44,705,088				46,488,334
Freight services			6,504,587				6,355,121
Total assets		$	59,060,006			$	63,826,017

 

NOTE 20 - DISCONTINUED OPERATIONS

 

On June 8, 2021, Tenet-Jove entered into a Restructuring Agreement (the “Restructuring Agreement”) with the following parties:

 

	●	Ankang Longevity, a company incorporated under the laws of the People’s Republic of China (the “PRC”);
	●	Mr. Jiping Chen, who is a minority shareholder of the Company and holds 68.7% of the equity interests in Ankang Longevity, and Ms. Xiaoyan Chen, who holds 31.3% of the equity interests in Ankang Longevity (collectively, the “Ankang Shareholders”);
	●	Yushe County Guangyuan Forest Development Co., Ltd., a company incorporated under the laws of the PRC (“Guangyuan”); and
	●	Mr. Baolin Li, who is a minority shareholder of the Company and holds 90% of the equity interests in Guangyuan, and Ms. Yufeng Zhang, who holds 10% of the equity interests in Guangyuan (collectively, the “Guangyuan Shareholders”).

 

Pursuant to the terms of the Restructuring Agreement, (i) the Company transferred all of its rights and interests in Ankang Longevity to the Guangyuan Shareholders in exchange for the Guangyuan Shareholders entering into the VIE agreements with Tenet-Jove, which composes of one group of similar identifiable assets; (ii) Tenet-Jove entered a Termination Agreement with Ankang Longevity and the Ankang Shareholders; (iii) as a consideration to the Restructuring Agreement and based on a valuation report on the equity interests of Guangyuan issued by an independent third party, Tenet-Jove relinquished all of its rights and interests in Ankang Longevity and transferred those rights and interests to the Guangyuan Shareholders; and (iv) Guangyuan and the Guangyuan Shareholders entered into a series of variable interest entity agreements with Tenet-Jove.

 

 

After signing of the Restructuring Agreement, the Company and the shareholders of Ankang and Guangyuan actively carried out the transferring of rights and interests in Ankang and Guangyuan, and the transferring was completed subsequently on July 5, 2021. Afterwards, with the completion of all other follow-ups works, on August 16, 2021, the Company, through its subsidiary Tenet-Jove, completed the previously announced acquisition pursuant to the Restructuring Agreement dated June 8, 2021. The management determined that July 5, 2021 was the disposal date of Ankang.

 

In accordance with ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, a disposal of a component of an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the components of an entity meets the criteria in paragraph 205-20-45-1E to be classified as held for sale. When all of the criteria to be classified as held for sale are met, including management, having the authority to approve the action, commits to a plan to sell the entity, the major current assets, other assets, current liabilities, and noncurrent liabilities shall be reported as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations, less applicable income taxes benefit, shall be reported as a component of net loss separate from the net loss of continuing operations in accordance with ASC 205-20-45. The results of operations of Ankang Longevity have been reclassified to “net loss from discontinued operations” in the unaudited condensed consolidated statements of loss and comprehensive loss for the six and three months ended December 31, 2022 and 2021. The Company recorded a loss on disposal of discontinued operations of $3,135,237 and nil during the six and three months ended December 31, 2021, respectively.

 

NOTE 21 - SUBSEQUENT EVENTS

 

On January 17, 2023, the Company issued a press release announcing that the Company entered into a non-binding framework agreement (the “LOI”) with certain shareholders of Dream Partner Limited (“Dream Ltd.”) to acquire 80% equity interests of Dream Ltd., which indirectly owns 100% equity interests of Chongqing Wintus Group (“Wintus”), a company established under the laws of China. According to the LOI, the total purchase price of the acquisition is estimated to be approximately $40 million which is expected to consist of cash and the Company’s common stock. If the parties enter into a definitive Agreement on the terms contemplated, the Company will seek approval of its stockholders to issue the Common Stock portion of the Consideration in accordance with NASDAQ Rule 5635.

 

These unaudited condensed consolidated financial statements were approved by management and available for issuance on February 14, 2023, and the Company has evaluated subsequent events through this date. No subsequent events required adjustments to or disclosure in these unaudited condensed consolidated financial statements.

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is subject to the safe harbor created by those sections. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws. Forward-looking statements involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “should,” “will,” “could,” and similar expressions denoting uncertainty or an action that may, will or is expected to occur in the future. These statements involve estimates, assumptions, known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements.

 

Examples of forward-looking statements include:

 

	●	the timing of the development of future products;
	●	projections of revenue, earnings, capital structure, and other financial items;
	●	local, regional, national, and global Luobuma and herbal medicines price fluctuations;
	●	statements of our plans and objectives, including those that relate to our proposed expansions and the effect such expansions may have on our revenue;
	●	statements regarding the capabilities of our business operations;
	●	statements of expected future economic performance;
	●	the impact of the COVID-19 outbreak;
	●	statements regarding competition in our market; and
	●	assumptions underlying statements regarding us or our business.

 

The ultimate correctness of these forward-looking statements depends upon a number of known and unknown risks and events. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that impact our business. In particular, we encourage you to review the risks and uncertainties described in “Risk Factors” in our annual report on Form 10-K for the fiscal year ended June 30, 2022 filed with the SEC on September 28, 2022 (the “Annual Report”) and other SEC filings. These risks and uncertainties could cause actual results to differ materially from those projected or implied by our forward-looking statements contained in this report. In addition, many factors could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Consequently, you should not place undue reliance on these forward-looking statements.

 

The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Nonetheless, we reserve the right to make such updates from time to time by press release, periodic report, or other method of public disclosure without the need for specific reference to this Quarterly Report. No such update shall be deemed to indicate that other statements not addressed by such update is incorrect or create an obligation to provide any other updates.

 

 

The information included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes included in this Quarterly Report, and the audited consolidated financial statements and notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report. All monetary figures are presented in U.S. dollars, unless otherwise indicated.

 

General Overview

 

Shineco, Inc. is a holding company incorporated in Delaware. As a holding company with no material operations of our own, we conduct a substantial majority of our operations through the operating entities established in the People’s Republic of China, or the PRC, primarily the variable interest entities (the “VIEs”). We do not have any equity ownership of the VIEs, instead we are entitled to receive the economic benefits of the VIEs’ business operations through certain contractual arrangements. Our common stock that currently listed on the Nasdaq Capital Markets are shares of our Delaware holding company that maintains service agreements with the associated operating companies. The Chinese regulatory authorities could disallow our structure, which could result in a material change in our operations and the value of our securities could decline or become worthless.

 

We use our subsidiaries and the VIEs’ vertically and horizontally integrated production, distribution, and sales channels to provide health and well-being focused plant-based products. Our products are only sold domestically in China. We utilize modern engineering technologies and biotechnologies to produce, among other products, Chinese herbal medicines, organic agricultural produce, and specialized textiles. Our health and well-being focused plant-based products business is divided into three major segments:

 

Processing and distributing traditional Chinese herbal medicine products as well as other pharmaceutical products - This segment is conducted through Ankang Longevity Pharmaceutical (Group) Co., Ltd. (“Ankang Longevity Group”), a Chinese company formerly under contractual arrangement with the Company which operates 66 cooperative retail pharmacies throughout Ankang, a city in southern Shaanxi province, China, through which we sell directly to individual customers traditional Chinese medicinal products produced by us as well as by third parties. Ankang Longevity Group also owns a factory specializing in decoction, which is the process by which solid materials are heated or boiled in order to extract liquids, and distributes decoction products to wholesalers and pharmaceutical companies around China.

 

On June 8, 2021, Tenet-Jove entered into a Restructuring Agreement with various parties. Pursuant to the terms of the Restructuring Agreement, (i) the Company transferred all of its rights and interests in Ankang Longevity Group to Yushe County Guangyuan Forest Development Co., Ltd. (“Guangyuan”)’s Shareholders in exchange for the Guangyuan Shareholders entering into VIE agreements with Tenet-Jove, which composes of one group of similar identifiable assets; (ii) Tenet-Jove entered a Termination Agreement with Ankang Longevity Group and the Ankang Longevity Group Shareholders; (iii) as a consideration to the Restructuring Agreement and based on a valuation report on the equity interests of Guangyuan issued by an independent third party, Tenet-Jove relinquished all of its rights and interests in Ankang Longevity Group and transferred those rights and interests to the Guangyuan Shareholders; and (iv) Guangyuan and the Guangyuan Shareholders entered into a series of variable interest entity agreements with Tenet-Jove. After signing of the Restructuring Agreement, the Company and the shareholders of Ankang Longevity Group and Guangyuan actively carried out the transferring of rights and interests in Ankang Longevity Group and Guangyuan, and the transferring was completed subsequently on July 5, 2021. Afterwards, with the completion of all other follow-ups works, on August 16, 2021, the Company, through its subsidiary Tenet-Jove, completed the previously announced acquisition pursuant to the Restructuring Agreement dated June 8, 2021. The management determined that July 5, 2021 was the disposal date of Ankang Longevity Group. The results of operations of Ankang Longevity Group have been reclassified to “net loss from discontinued operations” in the unaudited condensed consolidated statements of loss and comprehensive loss for the six and three months ended December 31, 2022 and 2021.

 

 

Processing and distributing green and organic agricultural produce as well as growing and cultivating yew trees (taxus media) - We currently cultivate and sell yew mainly to group and corporate customers, but do not currently process yew into Chinese or Western medicines. This segment is conducted through the VIEs: Qingdao Zhihesheng Agricultural Produce Services, Ltd (“Qingdao Zhihesheng”). Meanwhile, we entered the market of planting fast-growing bamboo willows and scenic greening trees through the newly acquired VIE, Yushe County Guangyuan Forest Development Co., Ltd. (“Guangyuan”). The operations of this segment are located in the North regions of Mainland China, mostly carried out in Shanxi Province.

 

Providing domestic air and overland freight forwarding services - We currently provide domestic air and overland freight forwarding services by outsourcing these services to a third party. This segment is conducted through our VIE, Yantai Zhisheng International Freight Forwarding Co., Ltd (“Zhisheng Freight”).

 

Developing and distributing specialized fabrics, textiles, and other byproducts derived from an indigenous Chinese plant Apocynum Venetum, grown in the Xinjiang region of China, and known in Chinese as “Luobuma” or “bluish dogbane” - Our Luobuma products are specialized textile and health supplement products designed to incorporate traditional Eastern medicines with modern scientific methods. These products are predicated on centuries-old traditions of Eastern herbal remedies derived from the Luobuma raw material. This segment is channeled through our directly-owned subsidiary, Beijing Tenet-Jove Technological Development Co., Ltd. (“Tenet-Jove”), and its 90% subsidiary Tianjin Tenet Huatai Technological Development Co., Ltd. (“Tenet Huatai”).

 

Financing Activities

 

On June 16, 2021, the Company entered into a securities purchase agreement pursuant to which the Company issued an unsecured convertible promissory note with a one-year maturity term to an institutional accredited investor, Streeterville Capital, LLC (“Investor”). The note had an original principal amount of US$3,170,000 and Investor gave consideration of US$3.0 million, reflecting original issue discount of US$150,000 and Investor’s legal fee of US$20,000. Interest accrues on the outstanding balance of the note at 6% per annum. The Company has received the principal in full from the Investor and used the proceeds for general working capital purposes. On September 7, 2022, the Company signed an extension amendment with the Investor to extend the maturity date to June 15, 2023. On October 21, 2022, the Company signed a standstill agreement with the Investor, pursuant to which the Investor would not seek to redeem any portion of the Note during the period from October 21, 2022 to January 20, 2023. On or around January 20, 2023, the Investor re-started the redemption of the Notes. As of December 31, 2022, no share of the Company’s common stock under this agreement was issued by the Company to the Investor, and the Notes balance was US$3,555,888, with a carrying value of US$3,677,455, net of deferred financing costs of US$121,567 was recorded in the accompanying unaudited condensed consolidated balance sheets.

 

On July 16, 2021, the Company entered into another securities purchase agreement with the Investor, pursuant to which the Company issued the Investor two unsecured convertible promissory notes each with a one-year maturity term. The first convertible promissory note had an original principal amount of US$3,170,000 and the Investor gave consideration of US$3.0 million, reflecting original issue discount of US$150,000 and Investor’s legal fee of US$20,000. The second convertible promissory note has the original principal amount of US$4,200,000 and Investor gave consideration of US$4.0 million, reflecting original issue discount of US$200,000. Interest accrues on the outstanding balance of the Notes at 6% per annum. The Company has received the principal in full from the Investor and used the proceeds for general working capital purposes. As of December 31, 2022, the Notes was fully converted and shares of the Company’s common stock totaling 1,946,766 were issued by the Company to the Investor equaling principal and interests amounted to US$7,472,638.

 

 

On August 19, 2021, the Company entered into another securities purchase agreement with the Investor, pursuant to which the Company issued the Investor an unsecured convertible promissory note with a one-year maturity term. The note has an original principal amount of US$10,520,000 and Investor gave consideration of US$10.0 million, reflecting original issue discount of US$500,000 and Investor’s legal fee of US$20,000. Interest accrues on the outstanding balance of the note at 6% per annum. The Company has received the principal in full from the Investor and used the proceeds for general working capital purposes. On September 7, 2022, the Company signed an extension amendment with the Investor to extend the maturity date to August 18, 2023. On October 21, 2022, the Company signed a standstill agreement with the Investor, pursuant to which the Investor will not seek to redeem any portion of the Note during the period from October 21, 2022 to January 20, 2023. As of December 31, 2022, shares of the Company’s common stock totaling 427,699 were issued by the Company to the Investor equaling principal and interests amounted to US$420,000, and the Notes balance was US$11,169,044, with a carrying value of US$11,603,465, net of deferred financing costs of US$434,421 was recorded in the accompanying unaudited condensed consolidated balance sheets.

 

On June 13, 2022, the Company entered into a certain stock purchase agreement (the “SPA”) with certain non-U.S. investors (the “Purchasers”), pursuant to which the Company agreed to sell, and the Purchasers agreed to purchase, severally and not jointly, an aggregate of 2,354,500 shares of common stock of the Company (the “Shares”) at a price of US$2.12 per share. The Company’s shareholders approved the offer and sale of the Shares at a meeting of the shareholders of the Company that was held on July 21, 2022. The closing for the offer and sale of the Shares occurred on July 26, 2022 and the Company issued the Shares in exchange for gross proceeds of $5.0 million.

 

On August 11, 2022, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with certain non-US investors (the “Investors”). Under the Purchase Agreement, the Company will sell to the Investors, up to 1,921,683 shares (the “Shares”) of its common stock at a per share purchase price of $0.915 (subject to the terms and conditions of the Purchase Agreement) for gross proceeds of up to US$1,758,340. As the date of this report, proceeds amounted to US$1.25 million has been received by the Company, and the remaining balance of the proceeds is expected to be fully collected by March 31, 2023.

 

Factors Affecting Financial Performance

 

We believe that the following factors will affect our financial performance:

 

Increasing demand for our products – We believe that the increasing demand for our agricultural products will have a positive impact on our financial position. We plan to develop new products and expand our distribution network as well as to grow our business through possible mergers and acquisitions of similar or synergetic businesses, all aimed at increasing awareness of our brand, developing customer loyalty, meeting customer demands in various markets and providing solid foundations for our growth. As of the date of this Quarterly Report, however, we do not have any agreements, undertakings or understandings to acquire any such entities and there can be no guarantee that we ever will.

 

Maintaining effective control of our costs and expenses - Successful cost control depends upon our ability to obtain and maintain adequate material supplies as required by our operations at competitive prices. We will focus on improving our long-term cost control strategies including establishing long-term alliances with certain suppliers to ensure adequate supply is maintained. We will carry forward the economies of scale and advantages from our nationwide distribution network and diversified offerings. Moreover, we will step up our efforts in higher value-added products of Luobuma by using an exclusive and patented technology, to optimize quality management, procurement processes and cost control, and give full play to the strong production capacity and trustworthy sales teams to maximize our profit and bring better long-term return for our stockholders.

 

 

Economic and Political Risks

 

Our operations are conducted primarily in the PRC and subject to special considerations and significant risks not typically associated with companies operating in North America and/or Western Europe. These include risks with, among others, the political, economic and legal environment and foreign currency exchange. Our results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversions, remittances abroad, and rates and methods of taxation, among other things.

 

COVID-19 Impact

 

The COVID-19 outbreak has resulted in the implementation of significant governmental measures, including lockdowns, closures, quarantines, and travel bans, intended to control the spread of the virus. In accordance with the epidemic control measures imposed by the local governments related to COVID-19, our offices and retail stores remained closed or had limited business operations after the Chinese New Year holiday until early April 2020. In addition, COVID-19 had caused severe disruptions in transportation, limited access to our facilities and limited support from workforce employed in our operations, and as a result, we experienced delays or the inability to delivery our products to customers on a timely basis. Further, some of our customers or suppliers experienced financial distress, delayed or defaults on payment, sharp diminishing of business, or suffer disruptions in their business due to the outbreak. Any decreased collectability of accounts receivable, delayed raw materials supply, bankruptcy of small and medium businesses, or early termination of agreements due to deterioration in economic conditions could negatively impact our results of operations. Wider-spread COVID-19 in China and globally could prolong the deterioration in economic conditions and could cause decreases in or delays in spending and reduce and/or negatively impact our short-term ability to grow our revenue.

 

Due to the resurgence of COVID-19 cases in China, our headquarter in Beijing was closed down on April 25, 2022 and only resumed our business in mid-June 2022. Meanwhile, the business of our subsidiaries and VIEs was also negatively affected during this period, including but not limited to the execution of our sales contract and fulfillment of customer orders and the collection of the payments from customers in a timely manner. The resurgence of COVID-19 impact on our operating results and financial performance seems to be temporary, we will continue to monitor and modify the operating strategies in response to the COVID-19. In early December 2022, China announced a nationwide loosening of its zero-covid policy, and the country faced a wave in infections after the lifting of these restrictions. The extent of the future impact of COVID-19 is still highly uncertain and cannot be predicted as of the date our unaudited condensed consolidated financial statements are released.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements as well as the reported amounts of revenue and expenses during the reporting period. Critical accounting policies are those accounting policies that may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and that have a material impact on financial condition or operating performance. While we base our estimates and judgments on our experience and on various other factors that we believe to be reasonable under the circumstances, actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies used in the preparation of our unaudited condensed consolidated financial statements require significant judgments and estimates. For additional information relating to these and other accounting policies, see Note 3 to our unaudited condensed consolidated financial statements included elsewhere in this Report.

 

 

Consolidation of Variable Interest Entities

 

VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision-making ability. All VIEs and their subsidiaries with which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.

 

Use of Estimates

 

Significant estimates required to be made by management include, but are not limited to, useful lives of property and equipment, and intangible assets, the recoverability of long-lived assets and the valuation of accounts receivable, advances to suppliers, deferred taxes and inventory reserves. Actual results could differ from those estimates.

 

Accounts Receivable, Net

 

Accounts receivable are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts, as necessary. We review the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, we consider many factors, including the age of the balance, the customers’ historical payment history, their current credit-worthiness and current economic trends. The fair value of long-term receivables is determined using a present value technique by discounting the future expected contractual cash flows using current rates at which similar instruments would be issued at the measurement date. As of December 31, 2022 and June 30, 2022, the allowance for doubtful accounts was US$7,085,240 and US$7,317,236, respectively. Accounts are written off against the allowance after efforts at collection prove unsuccessful.

 

Inventories, Net

 

Inventories, which are stated at the lower of cost or net realizable value, consist of raw materials, work-in-progress, and finished goods related to our products. Cost is determined using the first in first out method. Agricultural products that we farm are recorded at cost, which includes direct costs such as seed selection, fertilizer, labor cost, and contract fees that are spent in growing agricultural products on the leased farmland, and indirect costs such as amortization of prepayments of farmland leases and farmland development costs. All the costs are accumulated until the time of harvest and then allocated to the harvested crops costs when they are sold. We periodically evaluate our inventory and records an inventory reserve for certain inventories that may not be saleable or whose cost exceeds net realizable value. As of December 31, 2022 and June 30, 2022, the inventory reserve was US$1,208,807 and US$1,249,543, respectively.

 

Revenue Recognition

 

We previously recognized revenue from sales of Luobuma products, Chinese medicinal herbal products, and agricultural products, as well as providing logistic services and other processing services to external customers. We recognized revenue when all of the following have occurred: (i) there was persuasive evidence of an arrangement with a customer; (ii) delivery had occurred or services had been rendered; (iii) the sales price was fixed or determinable; and (iv) our collection of such fees was reasonably assured. These criteria, as related to our revenue, were considered to have been met as follows:

 

Sales of products: We recognized revenue from the sale of products when the goods were delivered and title to the goods passed to the customer provided that there were no uncertainties regarding customer acceptance; persuasive evidence of an arrangement existed; the sales price was fixed or determinable; and collectability was deemed probable.

 

 

Revenue from provision of services: The Company merely acts as an agent in this type of services transactions. Revenue from domestic air and overland freight forwarding services was recognized upon the performance of services as stipulated in the underlying contract or when commodities were being released from the customer’s warehouse; the service price was fixed or determinable; and collectability was deemed probable.

 

With the adoption of ASC 606, “Revenue from Contracts with Customers,” revenue is recognized when all of the following five steps are met: (i) identify the contract(s) with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations; (v) recognize revenue when (or as) each performance obligation is satisfied. The Company adopted the new revenue standard beginning July 1, 2018, and adopted a modified retrospective approach upon adoption. The Company has assessed the impact of the guidance by reviewing its existing customer contracts to identify differences that will result from applying the new requirements, including the evaluation of its performance obligations, transaction price, customer payments, transfer of control, and principal versus agent considerations. In accordance with ASC 606, the Company evaluates whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions. When the Company is a principal, that the Company obtains control of the specified goods or services before they are transferred to the customers, the revenues should be recognized in the gross amount of consideration to which it expects to be entitled in exchange for the specified goods or services transferred. When the Company is an agent and its obligation is to facilitate third parties in fulfilling their performance obligation for specified goods or services, the revenues should be recognized in the net amount for the amount of commission which the Company earns in exchange for arranging for the specified goods or services to be provided by other parties. Based on the assessment, the Company concluded that there was no change to the timing and pattern of revenue recognition for its current revenue streams in scope of Topic 606 and therefore there was no material changes to the Company’s unaudited condensed consolidated financial statements upon adoption of ASC 606.

 

Fair Value of Financial Instruments

 

We follow the provisions of ASC 820, “Fair Value Measurements and Disclosures.” ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

 

Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

 

Level 2 applies to assets or liabilities for which there are inputs, other than quoted prices in level, that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

 

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the asset or liability.

 

The carrying value of financial instruments included in current assets and liabilities approximate their fair values because of the short-term nature of these instruments.

 

 

Results of Operations for the Six Months Ended December 31, 2022 and 2021

 

Overview

 

The following table summarizes our results of operations for the six months ended December 31, 2022 and 2021:

 

		Six Months Ended December 31,								Variance
		2022				2021				Amount				%
Revenue		$	1,074,945			$	1,362,332			$	(287,387	)			(21.10	)%
Cost of revenue			1,285,690				2,653,568				(1,367,878	)			(51.55	)%
Gross loss			(210,745	)			(1,291,236	)			1,080,491				(83.68	)%
General and administrative expenses			4,203,856				10,506,466				(6,302,610	)			(59.99	)%
Selling expenses			18,551				18,332				219				1.19	%
Impairment loss of distribution rights			-				1,140,551				(1,140,551	)			(100.00	)%
Loss from operations			(4,433,152	)			(12,956,585	)			8,523,433				(65.78	)%
Impairment loss on an unconsolidated entity			-				(149,790	)			149,790				(100.00	)%
Loss from equity method investments			(6,221	)			(106,988	)			100,767				(94.19	)%
Other income, net			28,758				1,443				27,315				1,892.93	%
Amortization of debt issuance costs			(355,972	)			(854,318	)			498,346				(58.33	)%
Interest income (expenses), net			(448,244	)			67,139				(515,383	)			(767.64	)%
Loss before income tax provision from continuing operations			(5,214,831	)			(13,999,099	)			8,784,268				(62.75	)%
Benefit for income taxes			-				(6,478	)			6,478				(100.00	)%
Net loss from continuing operations			(5,214,831	)			(13,992,621	)			8,777,790				(62.73	)%
Net loss from discontinued operations			-				(3,135,237	)			3,135,237				(100.00	)%
Net loss		$	(5,214,831	)		$	(17,127,858	)		$	11,913,027				(69.55	)%
Comprehensive loss attributable to Shineco Inc.		$	(6,377,429	)		$	(16,317,063	)		$	9,939,634				(60.92	)%

 

Revenue

 

Currently, we, through our PRC subsidiaries and the VIEs, have three revenue streams derived from our three major business segments from continuing operations. First, developing, manufacturing, and distributing specialized fabrics, textiles, and other by-products derived from an indigenous Chinese plant Apocynum Venetum, known in Chinese as “Luobuma” or “Bluish Dogbane,” as well as Luoboma raw materials processing; this segment is channeled through our wholly owned subsidiary, Tenet-Jove. Second, planting, processing and distributing green and organic agricultural produce, growing and cultivation of yew trees, as well as planting fast-growing bamboo willows and scenic greening trees; this segment is conducted through Qingdao Zhihesheng and Guangyuan. Third, providing domestic air and overland freight forwarding services by outsourcing these services to a third party; this segment is conducted through Zhisheng Freight. For the business segment, that processing and distributing traditional Chinese medicinal herbal products as well as other pharmaceutical products; this segment is conducted via the VIE, Ankang Longevity Group and its subsidiaries, which was disposed and did not generate any sales during the six months ended December 31, 2021.

 

 

The following table sets forth the breakdown of our revenue for each of the three segments for the six months ended December 31, 2022 and 2021, respectively:

 

		Six Months Ended December 31,																Variance
		2022				%				2021				%				Amount				%
Luobuma products		$	19,222				1.78	%		$	34,768				2.55	%		$	(15,546	)			(44.71	)%
Other agricultural products			823,685				76.63	%			875,191				64.24	%			(51,506	)			(5.89	)%
Freight services			232,038				21.59	%			452,373				33.21	%			(220,335	)			(48.71	)%
Total Amount		$	1,074,945				100.00	%		$	1,362,332				100.00	%		$	(287,387	)			(21.10	)%

 

For the six months ended December 31, 2022 and 2021, revenue from sales of Luobuma products was US$19,222 and US$34,768, respectively, which represented a decrease of US$15,546, or 44.71%. The decrease of revenue from this segment was mainly due to the decrease in revenue from Tenet-Jove and Tenet Huatai. The low revenue from sales of Luobuma products is because we did not launch any new products and reduced our resources and investments in our E-commerce distribution channel, and currently, we mainly focused on clearing off our remaining old stocks. Hence, revenue from this segment continued falling during the six months ended December 31, 2022 as compared to the same period in 2021.

 

For the six months ended December 31, 2022 and 2021, revenue from sales of other agricultural products was US$823,685 and US$875,191, respectively, representing a decrease of US$51,506, or 5.89%. Since our sales of yew trees were adversely affected by the COVID-19 outbreak, we modified our operating strategies in response to the pandemic. Instead of selling more unmatured yew trees, we are now cultivating more matured yew trees, which can be used to extract Taxol, a more valuable chemical substance which is used experimentally as a drug in the treatment of cancer.

 

For the six months ended December 31, 2022 and 2021, revenue from provision of freight services was US$232,038 and US$452,373, respectively, representing a decrease of US$220,335, or 48.71%. The decrease was mainly due to we outsourced our domestic and international logistic services to third-party logistic companies due to the change in our business strategies. Since we merely served as an agent in this type of transactions, our revenue from domestic and international logistic services was recognized in the net amount during the six months ended December 31, 2022.

 

Cost of Revenue and Related Tax

 

The following table sets forth the breakdown of the cost of revenue for each of our three segments for the six months ended December 31, 2022 and 2021:

 

		Six Months Ended December 31,																Variance
		2022				%				2021				%				Amount				%
Luobuma products		$	8,942				0.69	%		$	150,305				5.67	%		$	(141,363	)			(94.05	)%
Other agricultural products			1,115,447				86.76	%			2,084,782				78.56	%			(969,335	)			(46.50	)%
Freight services			161,299				12.55	%			415,224				15.65	%			(253,925	)			(61.15	)%
Business and sales related tax			2				0.00	%			3,257				0.12	%			(3,255	)			(99.94	)%
Total Amount		$	1,285,690				100.00	%		$	2,653,568				100.00	%		$	(1,367,878	)			(51.55	)%

 

For the six months ended December 31, 2022 and 2021, cost of revenue from sales of our Luobuma products was US$8,942 and US$150,305, respectively, representing a decrease of US$141,363, or 94.05%. The decrease was mainly due to the decreased allowance we accrued for our slow-moving inventories amounted to US$133,123 on our remaining old stocks during the six months ended December 31, 2022.

 

 

For the six months ended December 31, 2022 and 2021, cost of revenue from sales of other agricultural products was US$1,115,447 and US$2,084,782, respectively, representing a decrease of US$969,335, or 46.50%. The decrease was mainly due to less stock written off during the six months ended December 31, 2022. Due to the continuous impact of Covid-19 in China, which resulted in the damage and death of a large number of yew trees, we continued writing off a large amount of our inventory during the six months ended December 31, 2022.

 

For the six months ended December 31, 2022 and 2021, cost of revenue from provision of freight services was US$161,299 and US$415,224, respectively, representing a decrease of US$253,925, or 61.15%. The decrease was due to decreased cost of revenue from domestic and international logistic services, as we now only acted as an agent in this type of this transactions as mentioned above.

 

Gross Profit (Loss)

 

The following table sets forth the breakdown of the gross profit (loss) for each of our three segments for the six months ended December 31, 2022 and 2021:

 

		Six Months Ended December 31,																Variance
		2022				%				2021				%				Amount				%
Luobuma products		$	10,278				(4.87	)%		$	(115,537	)			8.95	%		$	125,815				(108.90	)%
Other agricultural products			(291,762	)			138.44	%			(1,209,591	)			93.67	%			917,829				(75.88	)%
Freight services			70,739				(33.57	)%			33,892				(2.62	)%			36,847				108.72	%
Total Amount		$	(210,745	)			100.00	%		$	(1,291,236	)			100.00	%		$	1,080,491				(83.68	)%

 

Gross loss from Luobuma product sales decreased by US$125,815 or 108.90%, for the six months ended December 31, 2022 as compared to the same period in 2021. The decrease was mainly due to decrease in allowance we accrued for our slow-moving inventories during the six months ended December 31, 2022.

 

Gross loss from sales of other agricultural products decreased by US$917,829, or 75.88%, for the six months ended December 31, 2022 as compared to the same period in 2021. The decrease in gross loss was mainly due to less stock written off as mentioned above, as well as less price discounts we offered to our customers during the six months ended December 31, 2022.

 

Gross profit from provision of freight services increased by US$36,847, or 108.72%, for the six months ended December 31, 2022 as compared to the same period in 2021. As mentioned above, we outsourced our domestic and international logistic services to third-party logistic companies due to the change in our business strategies, which improved our operating efficiency and profitability during the six months ended December 31, 2022.

 

Expenses

 

The following table sets forth the breakdown of our operating expenses for the six months ended December 31, 2022 and 2021, respectively:

 

		Six Months Ended December 31,																Variance
		2022				%				2021				%				Amount				%
General and administrative expenses		$	4,203,856				99.56	%		$	10,506,466				90.06	%		$	(6,302,610	)			(59.99	)%
Selling expenses			18,551				0.44	%			18,332				0.16	%			219				1.19	%
Impairment loss of distribution rights			-				-				1,140,551				9.78	%			(1,140,551	)			(100.00	)%
Total Amount		$	4,222,407				100.00	%		$	11,665,349				100.00	%		$	(7,442,942	)			(63.80	)%

 

 

General and Administrative Expenses

 

For the six months ended December 31, 2022, our general and administrative expenses were US$4,203,856, representing a decrease of US$6,302,610, or 59.99%, as compared to the same period in 2021. The decrease was mainly due to the deceased bad debt expense during the six months ended December 31, 2022, as we recorded a significant amount of bad debt expense as a result of the impact from COVID-19 during the same period last year. We recorded allowance according to our accounting policy based on our best estimates. Management will continue putting effort in collection of overdue receivables and utilize our advances to our vendors. The decrease was also due to decreased professional service fees in relation to the Company’s issuance of common stock and convertible notes and decreased compensation expenses in relation to the Company’s lawsuit. The decrease was partially offset by the increased intermediary fee paid to a third party as commission for the Company intended acquisition as well as the increased stock compensation expenses incurred during the six months ended December 31, 2022.

 

Impairment Loss of Distribution Rights

 

For the six months ended December 31, 2022 and 2021, our impairment loss of distribution right was US$ nil and US$1,140,551, respectively. We acquired distribution rights to distribute branded products of Daiso 100-yen shops through the acquisition of Tianjin Tajite. During the six months ended December 31, 2021, the management performed evaluation on the impairment of distribution rights. As the Company is unable to generate any revenue and profit from the distribution right due to the unfavorable policy of China Customs and current business environment caused by the continuous impact from the COVID-19, the management fully recorded an impairment loss on distribution rights of Tianjin Tajite.

 

Impairment Loss on An Unconsolidated Entity

 

For the six months ended December 31, 2021, our impairment loss on an unconsolidated entity was US$149,790. The management performed evaluation on the impairment of the investment make on Shanxi Pharmaceutical Group Yushe Pharmaceutical Development Co., Ltd., (“Yushe Pharmaceutical”) and considered it is unlikely to obtain any investment income in the future, hence, the management fully recorded impairment loss on this investment.

 

Loss from Equity Method Investments

 

Our VIE, Guangyuan has a 20% equity interest in Shanxi Pharmaceutical Group Yushe Pharmaceutical Development Co., Ltd. (“Yushe Pharmaceutical”). We recorded a loss of US$16,153 for the six months ended December 31, 2021 from this investment. As we fully impaired the investment subsequently, no income or loss was recorded for the six months ended December 31, 2022 from this investment.

 

On August 31, 2021, we entered into a capital injection agreement with the other shareholders of Shanghai Gaojing Private Fund Management (“Gaojing Private Fund”), a Chinese private fund management company, to complete the injection of a total RMB 4.8 million (approximately US$0.70 million) for its 32% equity interest in Gaojing Private Fund. We recorded a loss of US$6,221 and US$90,835 for the six months ended December 31, 2022 and 2021 from this investment, respectively. The decrease in net loss was primarily due to lower net loss generated by the equity investment company in the current period.

 

Amortization of Debt Issuance Costs

 

For the six months ended December 31, 2022, our amortization of debt issuance costs expenses was US$355,972, representing a decrease of US$498,346, or 58.33%, as compared to amortization of debt issuance costs expenses of US$854,318, in the same period in 2021. We entered into four convertible note agreements and two of them was fully converted, hence, resulted in a decrease in amortization of debt issuance costs expenses for the six months ended December 31, 2022 as compared to the same period last year.

 

 

Interest Income (Expenses), Net

 

For the six months ended December 31, 2022, our net interest expenses were US$448,244, representing an increase of US$515,383, or 767.64%, as compared to net interest income was US$67,139 in the same period in 2021. The increase in net interest expenses was attributable to the increased interest expenses on loans borrowed from third parties. The increase was also due to less interest income generated from loans to third parties and related parties during the six months ended December 31, 2022 as some of the loans have been fully collected.

 

Net Loss from Continuing Operations

 

Our net loss from continuing operations was US$5,214,831 for the six months ended December 31, 2022, a decrease of US$8,777,790, or 62.73%, from net loss from continuing operations of US$13,992,621 for the six months ended December 31, 2021. The decrease in net loss was primarily a result of the decrease in general and administrative expenses, impairment loss of distribution rights and amortization of debt issuance costs.

 

Net Loss from Discontinued Operations

 

As mentioned above, after signing of the Restructuring Agreement on June 8, 2021, we and the shareholders of Ankang Longevity Group and Guangyuan actively carried out the transferring of rights and interests in Ankang Longevity Group and Guangyuan, and the transferring was completed subsequently on July 5, 2021, and the management determined that July 5, 2021 was the disposal date of Ankang Longevity Group. We had a total net loss from discontinued operations of US$3,135,237 for the six months ended December 31, 2021.

 

Net Loss

 

Our net loss was US$5,214,831 for the six months ended December 31, 2022, a decrease of US$11,913,027 or 69.55%, from a net loss of US$17,127,858 for the same period in 2021. The decrease in net loss was primarily a result of the decreased net loss from continuing operations, as well as the decreased net loss from discontinued operations as mentioned above.

 

Comprehensive Loss

 

The comprehensive loss was US$6,371,142 for the six months ended December 31, 2022, a decrease of US$9,942,410 from a comprehensive loss of US$16,313,552 for the same period in 2021. After deduction of non-controlling interest, the comprehensive loss attributable to us was US$6,377,429 for the six months ended December 31, 2022, compared to a comprehensive loss attributable to us in the amount of US$16,317,063 for the six months ended December 31, 2021. The decrease of comprehensive loss was due to the decrease in net loss as mentioned above, which was partially offset by the decrease in the recorded income of foreign currency translation where the financial statements denominated in RMB were translated to the USD denomination.

 

 

Results of Operations for the Three Months Ended December 31, 2022 and 2021

 

Overview

 

The following table summarizes our results of operations for the three months ended December 31, 2022 and 2021:

 

		Three Months Ended December 31,								Variance
		2022				2021				Amount				%
Revenue		$	539,247			$	732,574			$	(193,327	)			(26.39	)%
Cost of revenue			659,115				1,294,265				(635,150	)			(49.07	)%
Gross loss			(119,868	)			(561,691	)			441,823				(78.66	)%
General and administrative expenses			2,317,413				1,932,810				384,603				19.90	%
Selling expenses			5,450				9,990				(4,540	)			(45.45	)%
Loss from operations			(2,442,731	)			(2,504,491	)			61,760				(2.47	)%
Impairment loss on an unconsolidated entity			-				(149,790	)			149,790				(100.00	)%
Income (loss) from equity method investments			83				(79,068	)			79,151				(100.10	)%
Other income, net			14,023				473				13,550				2,864.69	%
Amortization of debt issuance costs			(201,569	)			(395,340	)			193,771				(49.01	)%
Interest income (expenses), net			(142,317	)			237,338				(379,655	)			(159.96	)%
Loss before income tax provision from continuing operations			(2,772,511	)			(2,890,878	)			118,367				(4.09	)%
Benefit for income taxes			-				(6,478	)			6,478				(100.00	)%
Net loss from continuing operations			(2,772,511	)			(2,884,400	)			111,889				(3.88	)%
Net loss from discontinued operations			-				-				-				-
Net loss		$	(2,772,511	)		$	(2,884,400	)		$	111,889				(3.88	)%
Comprehensive loss attributable to Shineco Inc.		$	(1,633,023	)		$	(2,058,096	)		$	425,073				(20.65	)%

 

Revenue

 

Currently, we, through our PRC subsidiaries and the VIEs, have three revenue streams derived from our three major business segments from continuing operations. First, developing, manufacturing, and distributing specialized fabrics, textiles, and other by-products derived from an indigenous Chinese plant Apocynum Venetum, known in Chinese as “Luobuma” or “Bluish Dogbane,” as well as Luoboma raw materials processing; this segment is channeled through our wholly owned subsidiary, Tenet-Jove. Second, planting, processing and distributing green and organic agricultural produce, growing and cultivation of yew trees, as well as planting fast-growing bamboo willows and scenic greening trees; this segment is conducted through Qingdao Zhihesheng and Guangyuan. Third, providing domestic air and overland freight forwarding services by outsourcing these services to a third party; this segment is conducted through Zhisheng Freight. For the business segment that processing and distributing traditional Chinese medicinal herbal products as well as other pharmaceutical products; this segment is conducted via the VIE, Ankang Longevity Group and its subsidiaries, which was disposed and did not generate any sales during the three months ended December 31, 2021.

 

 

The following table sets forth the breakdown of our revenue for each of the three segments for the three months ended December 31, 2022 and 2021, respectively:

 

		Three Months Ended December 31,																Variance
		2022				%				2021				%				Amount				%
Luobuma products		$	13,648				2.53	%		$	21,260				2.90	%		$	(7,612	)			(35.80	)%
Other agricultural products			395,089				73.27	%			422,804				57.72	%			(27,715	)			(6.56	)%
Freight services			130,510				24.20	%			288,510				39.38	%			(158,000	)			(54.76	)%
Total Amount		$	539,247				100.00	%		$	732,574				100.00	%		$	(193,327	)			(26.39	)%

 

For the three months ended December 31, 2022 and 2021, revenue from sales of Luobuma products was US$13,648 and US$21,260, respectively, which represented a slight decrease of US$7,612, or 35.80%. The decrease of revenue from this segment was mainly due to the decrease in revenue from Tenet-Jove and Tenet Huatai. The low revenue from sales of Luobuma products is because we did not launch any new products and reduced our resources and investments in our E-commerce distribution channel, and currently, we mainly focused on clearing off our remaining old stocks. Hence, revenue from this segment continued falling during the three months ended December 31, 2022 as compared to the same period in 2021.

 

For the three months ended December 31, 2022 and 2021, revenue from sales of other agricultural products was US$395,089 and US$422,804, respectively, representing a slight decrease of US$27,715, or 6.56%. Since our sales of yew trees were adversely affected by the COVID-19 outbreak, we modified our operating strategies in response to the pandemic. Instead of selling more unmatured yew trees, we are now cultivating more matured yew trees, which can be used to extract Taxol, a more valuable chemical substance which is used experimentally as a drug in the treatment of cancer.

 

For the three months ended December 31, 2022 and 2021, revenue from provision of freight services was US$130,510 and US$288,510, respectively, representing a decrease of US$158,000, or 54.76%. The decrease was mainly due to we outsourced our domestic and international logistic services to third-party logistic companies due to the change in our business strategies. Since we merely served as an agent in this type of transactions, our revenue from domestic and international logistic services was recognized in the net amount during the three months ended December 31, 2022.

 

Cost of Revenue and Related Tax

 

The following table sets forth the breakdown of the cost of revenue for each of our three segments for the three months ended December 31, 2022 and 2021:

 

		Three Months Ended December 31,																Variance
		2022				%				2021				%				Amount				%
Luobuma products		$	8,736				1.33	%		$	8,467				0.66	%		$	269				3.18	%
Other agricultural products			566,505				85.95	%			1,016,528				78.54	%			(450,023	)			(44.27	)%
Freight services			83,872				12.72	%			267,268				20.65	%			(183,396	)			(68.62	)%
Business and sales related tax			2				0.00	%			2,002				0.15	%			(2,000	)			(99.90	)%
Total Amount		$	659,115				100.00	%		$	1,294,265				100.00	%		$	(635,150	)			(49.07	)%

 

For the three months ended December 31, 2022 and 2021, cost of revenue from sales of our Luobuma products was US$8,736 and US$8,467, respectively, representing an increase of US$269, or 3.18%. The increase was mainly due to a slight increased allowance we accrued for our slow-moving inventories amounted to US$4,121 on our remaining old stocks during the three months ended December 31, 2022.

 

 

For the three months ended December 31, 2022 and 2021, cost of revenue from sales of other agricultural products was US$566,505 and US$1,016,528, respectively, representing a decrease of US$450,023, or 44.27%. The decrease was mainly due to less stock written off during the three months ended December 31, 2022. Due to the continuous impact of Covid-19 in China, which resulted in the damage and death of a large number of yew trees, we continued writing off a large amount of our inventory during the three months ended December 31, 2022.

 

For the three months ended December 31, 2022 and 2021, cost of revenue from provision of freight services was US$83,872 and US$267,268, respectively, representing a decrease of US$183,396, or 68.62%. The decrease was due to decreased cost of revenue from domestic and international logistic services, as we now only acted as an agent in this type of this transactions as mentioned above.

 

Gross Profit (Loss)

 

The following table sets forth the breakdown of the gross profit (loss) for each of our three segments for the three months ended December 31, 2022 and 2021:

 

		Three Months Ended December 31,																Variance
		2022				%				2021				%				Amount				%
Luobuma products		$	4,910				(4.09	)%		$	12,793				(2.28	)%		$	(7,883	)			(61.62	)%
Other agricultural products			(171,416	)			143.00	%			(593,724	)			105.71	%			422,308				(71.13	)%
Freight services			46,638				(38.91	)%			19,240				(3.43	)%			27,398				142.40	%
Total Amount		$	(119,868	)			100.00	%		$	(561,691	)			100.00	%		$	441,823				(78.66	)%

 

Gross profit from Luobuma product sales decreased by US$7,883 or 61.62%, for the three months ended December 31, 2022 as compared to the same period in 2021. The decrease was mainly due to an increase in allowance we accrued for our slow-moving inventories during the three months ended December 31, 2022.

 

Gross loss from sales of other agricultural products decreased by US$422,308, or 71.13%, for the three months ended December 31, 2022 as compared to the same period in 2021. The decrease in gross loss was mainly due to less stock written off as mentioned above, as well as less price discounts we offered to our customers during the three months ended December 31, 2022.

 

Gross profit from provision of freight services increased by US$27,398, or 142.40%, for the three months ended December 31, 2022 as compared to the same period in 2021. As mentioned above, we outsourced our domestic and international logistic services to third-party logistic companies due to the change in our business strategies, which improved our operating efficiency and profitability during the three months ended December 31, 2022.

 

Expenses

 

The following table sets forth the breakdown of our operating expenses for the three months ended December 31, 2022 and 2021, respectively:

 

		Three Months Ended December 31,																Variance
		2022				%				2021				%				Amount				%
General and administrative expenses		$	2,317,413				99.77	%		$	1,932,810				99.49	%		$	384,603				19.90	%
Selling expenses			5,450				0.23	%			9,990				0.51	%			(4,540	)			(45.45	)%
Total Amount		$	2,322,863				100.00	%		$	1,942,800				100.00	%		$	380,063				19.56	%

 

 

General and Administrative Expenses

 

For the three months ended December 31, 2022, our general and administrative expenses were US$2,317,413, representing an increase of US$384,603, or 19.90%, as compared to the same period in 2021. The increase was mainly due to the increased bad debt expense during the three months ended December 31, 2022, as we recorded a significant amount of bad debt expense as a result of the impact from COVID-19 during the last quarter of year 2022. We recorded allowance according to our accounting policy based on our best estimates. Management will continue putting effort in collection of overdue receivables and utilize our advances to our vendors. The increase was partially offset by the decreased professional service fees in relation to the Company’s issuance of common stock and decreased compensation expenses in relation to the Company’s lawsuit during the three months ended December 31, 2022.

 

Impairment Loss on An Unconsolidated Entity

 

For the three months ended December 31, 2021, our impairment loss on an unconsolidated entity was US$149,790. The management performed evaluation on the impairment of the investment make on Shanxi Pharmaceutical Group Yushe Pharmaceutical Development Co., Ltd., (“Yushe Pharmaceutical”) and considered it’s unlikely to obtain any investment income in the future, hence, the management fully recorded impairment loss on this investment.

 

Income (Loss) from Equity Method Investments

 

Our VIE, Guangyuan has a 20% equity interest in Shanxi Pharmaceutical Group Yushe Pharmaceutical Development Co., Ltd. (“Yushe Pharmaceutical”). We recorded a loss of US$11,967 for the three months ended December 31, 2021 from this investment. As we fully impaired the investment subsequently, no income or loss was recorded for the three months ended December 31, 2022 from this investment.

 

On August 31, 2021, we entered into a capital injection agreement with the other shareholders of Shanghai Gaojing Private Fund Management (“Gaojing Private Fund”), a Chinese private fund management company, to complete the injection of a total RMB 4.8 million (approximately US$0.70 million) for its 32% equity interest in Gaojing Private Fund. We recorded an income of US$83 and a loss of US$67,101 for the three months ended December 31, 2022 and 2021 from this investment, respectively. The decrease in net loss was primarily due to lower net loss generated by the equity investment company in the current period.

 

Amortization of Debt Issuance Costs

 

For the three months ended December 31, 2022, our amortization of debt issuance costs expenses was US$201,569, representing a decrease of US$193,771, or 49.01%, as compared to amortization of debt issuance costs expenses of US$395,340, in the same period in 2021. We entered into four convertible note agreements and two of them was fully converted, hence, resulted in a decrease in amortization of debt issuance costs expenses for the three months ended December 31, 2022 as compared to the same period last year.

 

Interest Income (Expenses), Net

 

For the three months ended December 31, 2022, our net interest expenses were US$142,317, representing an increase of US$379,655, or 159.96%, as compared to net interest income was US$237,338 in the same period in 2021. The increase in net interest expenses mainly due to less interest income generated from loans to third parties and related parties during the three months ended December 31, 2022 as some of the loans have been fully collected.

 

 

Net Loss

 

Our net loss was US$2,772,511 for the three months ended December 31, 2022, a decrease of US$118,367, or 3.88%, from net loss of US$2,884,400 for the three months ended December 31, 2021. The decrease in net loss was primarily a result of the decrease in gross loss and amortization of debt issuance costs, which was partially offset by the increased general and administrative expenses and interest expenses.

 

Comprehensive Loss

 

The comprehensive loss was US$1,647,484 for the three months ended December 31, 2022, a decrease of US$423,180 from a comprehensive loss of US$2,070,664 for the same period in 2021. After deduction of non-controlling interest, the comprehensive loss attributable to us was US$1,633,023 for the three months ended December 31, 2022, compared to a comprehensive loss attributable to us in the amount of US$2,058,096 for the three months ended December 31, 2021. The decrease of comprehensive loss was due to the decrease in net loss as mentioned above, as well as an increase in the recorded income of foreign currency translation where the financial statements denominated in RMB were translated to the USD denomination.

 

Treasury Policies

 

We have established treasury policies with the objectives of achieving effective control of treasury operations and of lowering cost of funds. Therefore, funding for all operations and foreign exchange exposure have been centrally reviewed and monitored from the top level. To manage our exposure to fluctuations in exchange rates and interest rates on specific transactions and foreign currency borrowings, currency structured instruments and other appropriate financial instruments will be used to hedge material exposure, if any.

 

Our policy precludes us from entering into any derivative contracts purely for speculative activities. Through our treasury policies, we aim to:

 

(a) Minimize interest risk

 

This is accomplished by loan re-financing and negotiation. We will continue to closely monitor the total loan portfolio and compare the loan margin spread under our existing agreements against the current borrowing interest rates under different currencies and new offers from banks.

 

(b) Minimize currency risk

 

In view of the current volatile currency market, we will closely monitor the foreign currency borrowings at the company level. As of December 31, 2022 and June 30, 2022, except the above-mentioned convertible note, we did not engage in any foreign currency borrowings or loan contracts.

 

Liquidity and Capital Resources

 

We currently finance our business operations primarily through advances from our related parties, convertible notes and the sale of our common stock. Our current cash primarily consists of cash on hand and cash in bank, which is unrestricted as to withdrawal and use and is deposited with banks in China.

 

On April 10, 2021, we issued 3,872,194 shares of common stock to selected investors at a price of US $3.2 per share. We received net proceeds of US$7,981,204 and US$3,024,000 was outstanding as of December 31, 2022.

 

 

On June 16, 2021, we entered into a securities purchase agreement pursuant to which we issued an unsecured convertible promissory note with a one-year maturity term to an institutional accredited investor Streeterville Capital, LLC (“Investor”). The convertible promissory note has the original principal amount of US$3,170,000 and Investor gave consideration of US$3.0 million, reflecting original issue discount of US$150,000 and Investor’s legal fee of US$20,000. We received principal in full from the Investor. On September 7, 2022, we signed an extension amendment with the Investor to extend the maturity date to June 15, 2023. On October 21, 2022, the Company signed a standstill agreement with the Investor, pursuant to which the Investor would not seek to redeem any portion of the Note during the period from October 21, 2022 to January 20, 2023. On or around January 20, 2023, the Investor re-started the redemption of the Notes.

 

On July 16, 2021, we entered into a securities purchase agreement pursuant to which we issued two unsecured convertible promissory notes with a one-year maturity term to the same investor. The first convertible promissory note has an original principal amount of US$3,170,000 and the Investor gave consideration of US$3.0 million, reflecting original issue discount of US$150,000 and Investor’s legal fee of US$20,000. The second convertible promissory note has an original principal amount of US$4,200,000 and the Investor gave consideration of US$4.0 million, reflecting original issue discount of US$200,000.

 

On August 19, 2021, we entered into a securities purchase agreement pursuant to which we issued an unsecured convertible promissory note with a one-year maturity term to the same investor. The Note has the original principal amount of US$10,520,000 and Investor gave consideration of US$10.0 million, reflecting original issue discount of US$500,000 and Investor’s legal fee of US$20,000. We received principal in full from the Investor and we anticipate using the proceeds for general working capital purposes. On September 7, 2022, the Company signed an extension amendment with the Investor to extend the maturity date to August 18, 2023. On October 21, 2022, the Company signed a standstill agreement with the Investor, pursuant to which the Investor will not seek to redeem any portion of the Note during the period from October 21, 2022 to January 20, 2023.

 

For the above-mentioned convertible promissory notes issued, as of December 31, 2022, shares of the Company’s common stock totaling 2,374,465 were issued by the Company to the Investor equaling principal and interests amounted to US$7,892,638, and the Notes balance was US$14,724,932, with a carrying value of US$15,280,920, net of deferred financing costs of US$555,988.

 

On December 6, 2021, we entered into a securities purchase agreement with GHS Investments, LLC (“GHS”). Under the Purchase Agreement, we sold GHS 291,775 shares of its common stock at a per share purchase price of $6.8546 for gross proceeds of $2,000,000. After the deduction of issuance cost, we received net proceeds of US$1,970,000.

 

On April 11, 2022, we entered into a securities purchase agreement (the “Purchase Agreement”) with Jing Wang (the “Investor”). Under the Purchase Agreement, we will sell to the Investor, up to 973,451 shares (the “Shares”) of its common stock at a per share purchase price of $2.26 (subject to the terms and conditions of the Purchase Agreement) for gross proceeds of up to $2,200,000 which were fully received, and the Shares were issued to the Investor on April 18, 2022.

 

On June 13, 2022, we entered into a certain stock purchase agreement (the “SPA”) with certain non-U.S. investors (the “Purchasers”), pursuant to which we agreed to sell, and the Purchasers agreed to purchase, severally and not jointly, an aggregate of 2,354,500 shares of common stock of the Company (the “Shares”) at a price of US$2.12 per share. our shareholders approved the offer and sale of the Shares at a meeting of the shareholders of the Company that was held on July 21, 2022. The closing for the offer and sale of the Shares occurred on July 26, 2022 and we issued the Shares in exchange for gross proceeds of $5.0 million.

 

 

On August 11, 2022, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with certain non-US investors (the “Investors”). Under the Purchase Agreement, the Company will sell to the Investors, up to 1,921,683 shares (the “Shares”) of its common stock at a per share purchase price of $0.915 (subject to the terms and conditions of the Purchase Agreement) for gross proceeds of up to US$1,758,340. As the date of this report, proceeds amounted to US$1.25 million has been received by the Company, and the remaining balance of the proceeds is expected to be fully collected by March 31, 2023.

 

Management believes that our current cash, cash flows from future operations, and access to loans will be sufficient to meet our working capital needs for at least the next 12 months. We intend to continue to carefully execute our growth plans and manage market risk.

 

Working Capital

 

The following table provides the information about our working capital at December 31, 2022 and June 30, 2022:

 

		December 31, 2022				June 30, 2022
Current Assets		$	56,280,107			$	59,735,425
Current Liabilities			20,623,274				29,040,302
Working Capital		$	35,656,833			$	30,695,123

 

The working capital increased by US$4,961,710, or 16.2%, as of December 31, 2022 from June 30, 2022, primarily as a result of an increase in prepayment for business acquisition and a decrease in other payables and accrued expenses, partially offset by the decrease in other current assets as of December 31, 2022.

 

Capital Commitments and Contingencies

 

Capital commitments refer to the allocation of funds for the possible purchase in the near future for fixed assets or investment. Contingency refers to a condition that arises from past transactions or events, the outcome of which will be confirmed only by the occurrence or non-occurrence of uncertain futures events.

 

On May 16, 2017, Mrs. Guiqin Li (the “Plaintiff”) commenced a lawsuit against us in the People’s Court of Chongqing Pilot Free Trade Zone of China. Plaintiff alleged that due to the misguidance given by our security trading department, the Plaintiff did not manage to complete the sales of our common stock on the day of our initial public offering in the United States. As the price of our common stock continued falling after initial public offering, the Plaintiff incurred losses and hence seek money damages against us. Based on the judgment of the first trail, we required to pay the Plaintiff a settlement payment, including the money compensation, interests and other legal fees. In January 2023, the Company entered into a Settlement Agreement and Release (the “Agreement”) with the Plaintiff, pursuant to which the Company paid the Plaintiff a total sum of US$700,645 (approximately RMB 4.8 million) as settlement payment, and upon acceptance of the settlement payment from the Company, the Plaintiff waived, released, and forever discharged the Company from all past and future claims. As the date of this report, the Company has paid the Plaintiff a total sum of US$110,000 according to the Agreement.

 

 

On November 26, 2021, the Company filed a complaint in the Supreme Court of the State of New York, New York County against Lei Zhang and Yan Li, as defendants, and Transhare Corporation, as a nominal defendant, asserting that defendants had not paid for restricted shares of the Company stock pursuant to stock purchase agreements they executed with the Company. The Company is seeking money damages of $9,088,125.00 plus interest, punitive damages, and reimbursement of all costs, expenses, and attorneys’ fees. In December, defendants filed an answer and counterclaims against the Company, which they amended on January 27, 2022 after the Company moved to dismiss their counterclaims. They claimed that the Company made false and materially misleading statements, specifically regarding the sale of the shares and the removal of their restrictive legends. Defendants seek a declaratory judgment, indemnification, and monetary damages of at least $9 million, punitive damages of $10 million, plus interest, costs, and fees. In April 2022, the Court granted the Company’s motion for a preliminary injunction to restrain the Company’s transfer agent from removing the restrictive legends on the shares, provided that the Company posts a bond in the amount of US$1.5 million by May 20, 2022, which the Company declined to do. On June 13, 2022, the restriction imposed on the shares were lifted.

 

The Company moved to dismiss the counterclaims, and its motion was fully submitted in April 2022. On September 9, 2022, the Court granted the Company’s motion to dismiss defendants’ counterclaims on all but three counterclaims. Defendants’ outstanding counterclaims are for breach of contract, conversion, and wrongful refusal to remove restrictions pursuant to 6 Del. C. § 8-401.

 

Nominal defendant Transhare Corporation moved to dismiss the defendants’ counterclaim against it for wrongful refusal to remove restrictions pursuant to 6 Del. C. § 8-401, and its motion was fully submitted in April 2022. On September 9, 2022, the Court granted Transhare Corporation’s motion to dismiss defendants’ counterclaim for wrongful refusal to remove restrictions. Defendants have appealed the Court’s September 9, 2022 order dismissing defendants’ counterclaim for wrongful refusal to remove restrictions. On October 3, 2022 the parties submitted a stipulation dismissing defendants’ outstanding counterclaim against Transhare Corporation seeking declaratory judgment.

 

Trial is currently scheduled for September 18, 2023. The outcome of this legal proceeding is uncertain at this point. The Company intends to recover on its claims, and vigorously defend itself in this litigation. As of December 31, 2022, the total unpaid shares issued to Lei Zhang and Yan Li by the Company was 982,500 shares, and the subscription receivable was amounted to US$3,024,000 which was recorded on the unaudited condensed consolidated balance sheet. 

 

As of December 31, 2022 and June 30, 2022, we had no other material capital commitments or contingent liabilities.

 

Off-Balance Sheet Commitments and Arrangements

 

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our own common stock and classified as stockholders’ equity, or that are not reflected in our unaudited condensed consolidated financial statements.

 

 

Cash Flows

 

The following table provides detailed information about our net cash flows for the six months ended December 31, 2022 and 2021:

 

		Six Months Ended December 31,
		2022				2021
Net cash used in operating activities		$	(1,786,956	)		$	(5,610,545	)
Net cash provided by (used in) investing activities			2,405,585				(32,450,291	)
Net cash provided by financing activities			1,079,991				25,235,511
Effect of exchange rate changes on cash and cash equivalents			(421,244	)			421,826
Net increase (decrease) in cash and cash equivalents			1,277,376				(12,403,499	)
Cash and cash equivalents, beginning of the period			15,165,231				29,024,394
Cash and cash equivalents, end of the period		$	16,442,607			$	16,620,895

 

Operating Activities

 

Net cash used in operating activities during the six months ended December 31, 2022 was approximately US$1.8 million, consisting of net loss from continuing operations of US$5.2 million, provision for bad debt expenses of US$0.9 million, restricted shares issued for management of US$0.6 million, and net changes in our operating assets and liabilities, which mainly included a decrease in advances to suppliers of US$1.2 million and an increase in other payables and accrued expenses of US$0.6 million.

 

Net cash used in operating activities during the six months ended December 31, 2021 was approximately US$ 5.6 million, consisting of net loss from continuing operations of US$ 14.0 million, bad debt expenses of US$ 5.8 million, impairment loss on distribution rights of US$ 1.1 million, and net changes in our operating assets and liabilities, which mainly included an increase in other current assets of US$ 4.6 million, partially offset by the decreased in advances to suppliers and increased in other payable.

 

Investing Activities

 

For the six months ended December 31, 2022, net cash provided by investing activities was US$2.4 million, primarily due to repayments of loans to third parties of US$11.0 million, partially offset by prepayment for business acquisition of US$9.0 million.

 

For the six months ended December 31, 2021, net cash used in investing activities was US$ 32.5 million, primarily due to the disposal of Ankang of US$ 12.7 million, payment made for loans to third parties of US$ 12.2 million and repayments of loans from related parties of US$ 6.6 million.

 

Financing Activities

 

For the six months ended December 31, 2022, net cash provided by financing activities amounted to approximately US$1.1 million, due to proceeds from issuance of common stock of US$1.3 million, partially offset by the repayment of advances from related parties of US$0.2 million.

 

For the six months ended December 31, 2021, net cash provided financing activities amounted to approximately US$ 25.2 million, primarily due to the proceeds from issuance of common stock of US$ 7.5 million, proceeds from issuance of convertible note of US$ 17.0 million.

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a small reporting company, we are not required to provide the information required by this item.

 

ITEM 4. CONTROLS AND PROCEDURES

 

(a) Evaluation of Controls and Procedures

 

We maintain disclosure controls and procedures designed to provide reasonable assurance that material information required to be disclosed by us in the reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that the information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Based on our review, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of the end of the period covered by this Quarterly Report due to following material weaknesses:

 

●	a lack of full-time U.S. GAAP personnel in the accounting department to monitor the recording of the transactions; and
●	a lack of segregation of duties for accounting personnel who prepared and reviewed the journal entries.

 

In order to address the above material weaknesses, our management has taken the following steps:

 

●	recruiting sufficient qualified professionals with appropriate levels of knowledge and experience to assist in reviewing and resolving accounting issues in routine or complex transactions. To mitigate the reporting risks, we engaged an outside professional consulting firm to supplement our efforts to improve our internal control over financial reporting;
●	improving the communication between management, board of directors, and the Chief Financial Officer; and
●	obtaining proper approval for other significant and non-routine transactions from the board of directors.

 

We are committed to monitoring the effectiveness of these measures and making any changes that are necessary and appropriate.

 

(b) Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the fiscal quarter ended December 31, 2022. Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time. Our system contains self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.

 

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

Other than the legal actions listed below and ordinary routine litigation (of which we are not currently involved), we know of no material, existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending litigation, and there are no proceedings in which any of our directors, officers, or affiliates, or any registered or beneficial stockholder, is an adverse party or has a material interest adverse to our company.

 

On May 16, 2017, Mrs. Guiqin Li (the “Plaintiff”) commenced a lawsuit against the Company in the People’s Court of Chongqing Pilot Free Trade Zone of China. Plaintiff alleged that due to the misguidance given by the Company’s securities trading department, the Plaintiff did not manage to complete the sales of the Company’s common stock on the day of the Company’s initial public offering in the United States. As the price of the Company’s common stock continued falling after initial public offering, the Plaintiff incurred losses and hence is seeking monetary damages against the Company. Based on the judgment of the initial trial, the Company was required to pay the Plaintiff a settlement payment, including the monetary compensation, interests and other legal fees. In January 2023, the Company entered into a Settlement Agreement and Release (the “Agreement”) with the Plaintiff, pursuant to which the Company paid the Plaintiff a total sum of US$700,645 (approximately RMB 4.8 million) as settlement payment, and upon acceptance of the settlement payment from the Company, the Plaintiff waived, released, and forever discharged the Company from all past and future claims. As the date of this report, the Company has paid the Plaintiff a total sum of US$110,000 according to the Agreement.

 

On November 26, 2021, the Company filed a complaint in the Supreme Court of the State of New York, New York County against Lei Zhang and Yan Li, as defendants, and Transhare Corporation, as a nominal defendant, asserting that defendants had not paid for restricted shares of the Company stock pursuant to stock purchase agreements they executed with the Company. The Company is seeking money damages of $9,088,125.00 plus interest, punitive damages, and reimbursement of all costs, expenses, and attorneys’ fees. In December, defendants filed an answer and counterclaims against the Company, which they amended on January 27, 2022 after the Company moved to dismiss their counterclaims. They claimed that the Company made false and materially misleading statements, specifically regarding the sale of the shares and the removal of their restrictive legends. Defendants seek a declaratory judgment, indemnification, and monetary damages of at least $9 million, punitive damages of $10 million, plus interest, costs, and fees. In April 2022, the Court granted the Company’s motion for a preliminary injunction to restrain the Company’s transfer agent from removing the restrictive legends on the shares, provided that the Company posts a bond in the amount of US$1.5 million by May 20, 2022, which the Company declined to do. On June 13, 2022, the restriction imposed on the shares were lifted.

 

The Company moved to dismiss the counterclaims, and its motion was fully submitted in April 2022. On September 9, 2022, the Court granted the Company’s motion to dismiss defendants’ counterclaims on all but three counterclaims. Defendants’ outstanding counterclaims are for breach of contract, conversion, and wrongful refusal to remove restrictions pursuant to 6 Del. C. § 8-401.

 

Nominal defendant Transhare Corporation moved to dismiss the defendants’ counterclaim against it for wrongful refusal to remove restrictions pursuant to 6 Del. C. § 8-401, and its motion was fully submitted in April 2022. On September 9, 2022, the Court granted Transhare Corporation’s motion to dismiss defendants’ counterclaim for wrongful refusal to remove restrictions. Defendants have appealed the Court’s September 9, 2022 order dismissing defendants’ counterclaim for wrongful refusal to remove restrictions. On October 3, 2022 the parties submitted a stipulation dismissing defendants’ outstanding counterclaim against Transhare Corporation seeking declaratory judgment.

 

Trial is currently scheduled for September 18, 2023. The outcome of this legal proceeding is uncertain at this point. The Company intends to recover on its claims, and vigorously defend itself in this litigation. As of December 31, 2022, the total unpaid shares issued to Lei Zhang and Yan Li by the Company was 982,500 shares, and the subscription receivable was amounted to US$3,024,000 which was recorded on the unaudited condensed consolidated balance sheet.

 

ITEM 1A. RISK FACTORS.

 

As a smaller reporting company, we are not required to provide the information otherwise required by this Item.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

On December 30, 2022, the Company closed the acquisition of 51% of the issued equity interests of Changzhou Biowin Pharmaceutical Co., Ltd., a company established under the laws of China (“Biowin”). As the consideration for the acquisition, the Company paid to Seller US $9 million in cash and the Company issued an aggregate of 3,260,000 shares of the Company’s common stock to the equity holders of Biowin or any persons designated by Biowin. Such issuance was conducted pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act, which exempts transactions by an issuer not involving any public offering pursuant to Regulation S under the Securities Act to non-United States residents who are not a “U.S. person” as defined in Rule 902(k) of Regulation S and are not acquiring the Shares for the account or benefit of any U.S. person.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

ITEM 6. EXHIBITS

 

Exhibit Number		Description
3.1		Certificate of Incorporation of Shineco, Inc. (incorporated by reference to the Company’s Registration Statement on Form S-1 filed with the SEC on July 1, 2015 (Registration No. 333-202803))
3.2		Amended and Restated Bylaws of Shineco, Inc.(incorporated by reference to the Company’s Registration Statement on Form S-1 filed with the SEC on July 1, 2015 (Registration No. 333-202803))
4.1		Specimen Common Stock Share Certificate (incorporated by reference to the Company’s Registration Statement on Form S-1 filed with the SEC on January 27, 2016 (Registration No. 333-202803))
4.2		2016 Share Incentive Plan (incorporated by reference to the Company’s Annual Report on Form 10-K filed with the SEC September 28, 2016)
4.3		2022 Equity Incentive Plan (incorporated by reference herein to Exhibit 4.1 filed with Form S-8 filed with the SEC on July 29, 2022)
10.1		Stock Purchase Agreement, dated as of October 21, 2022, by and among Shineco, Inc., Shineco Life Science Research Co., Ltd., Beijing Kanghuayuan Medicine Information Consulting Co., Ltd. and Changzhou Biowin Pharmaceutical Co., Ltd. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on January 4, 2023)
10.2		Supplementary Agreement to the Stock Purchase Agreement, dated as of December 30, 2022, by and among Beijing Kanghuayuan Medicine Information Consulting Co., Ltd., Shineco Life Science Research Co., Ltd. and Changzhou Biowin Pharmaceutical Co., Ltd. (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the SEC on January 4, 2023)
31.1		Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934
31.2		Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934
32.1*		Certification of Principal Executive Officer pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 2002
32.2*		Certification of Principal Financial Officer pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 2002
101.INS		Inline XBRL Instance Document.
101.SCH		Inline XBRL Taxonomy Extension Schema Document.
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

* This certification is deemed furnished, and not filed, for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act. 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	SHINECO, INC.
Dated: February 14, 2023	By:	/s/ Jennifer Zhan
		Jennifer Zhan
		Chief Executive Officer
		(Principal Executive Officer)
Dated: February 14, 2023	By:	/s/ Sai (Sam) Wang
		Sai (Sam) Wang
		Chief Financial Officer
		(Principal Financial and Accounting Officer)