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 gained effective control over 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 its 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 May 2, 2017, the Company entered into a
Strategic Cooperation Agreement with Beijing Zhongke Biorefinery Engineering Technology Co., Ltd. (“Biorefinery”),
a leading high-tech biomass refining company financially backed by the Chinese Academy of Sciences Institute of Process Engineering,
to establish the Institute of Chinese Apocynum Industrial Technology Research (“ICAITR”). Pursuant to the Strategic
Cooperation Agreement, the two parties agreed to establish the ICAITR, with the Company and Biorefinery owning
80% and 20% of the equity interests of ICAITR, respectively. Shineco invested RMB5.0 million (US$737,745) as the registered
capital, and Biorefinery would invest a technology patent named “Steam Explosion Degumming.”
On September 30, 2017, Tenet-Jove established
Xinjiang Shineco Taihe Agriculture Technology Ltd. (“Xinjiang Taihe”) with registered capital of RMB10.0 million
(US$1,502,650). On September 30, 2017, Tenet-Jove established Xinjiang Tianyi Runze Bioengineering Co., Ltd. (“Runze”)
with registered capital of RMB10.0 million (US$1,502,650). Xinjiang Taihe and Runze became wholly-owned subsidiaries of
Tenet-Jove.
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 October 27, 2017, the Company, through
its subsidiary Tianjin Tajite, obtained contractual rights to distribute branded products of Daiso Industries Co., Ltd.
(“Daiso”), a large franchise of 100-yen shops founded in Japan, via JD.com, one of the largest e-commerce companies
and one of the largest retailers in China. On November 3, 2017, the Company further developed the cooperation with Daiso by entering
into a supply and purchase agreement (the “Daiso Agreement”) for the purpose of establishing a continuous supply and
sale of Daiso’s products in China. Pursuant to the Daiso Agreement, the Company planned to purchase Daiso Products in the
amount of approximately RMB20 million by August 2018 and add orders as circumstance requires. The term of the Daiso Agreement
is for one year, and it renews for an additional one-year at the end of each term unless terminated by written notice by either
Tianjin Tajite or Daiso. Due to the policy of China Customs, many of the bestselling products of Daiso are not allowed to be imported
through the general form of trade model, but only through cross-border e-commence business model. As a result, the Company and
Daiso agreed to suspend the cooperation temporarily and wait for the opening of the China-Japan-South Korea Free Trade Zone.
On November 1, 2017, the Company established
an Apocynum Industrial Park in Xinjiang, China. The industrial park is focusing on planting and purchasing Bluish Dogbane and
processing and distributing Bluish Dogbane preliminary products.
On March 13, 2019, Tenet-Jove established
Beijing Tenjove Newhemp Biotechnology Co., Ltd. (“TNB”) with registered capital of RMB10.0 million (US$1,502,650).
TNB became a wholly-owned subsidiary of Tenet-Jove.
On August 22, 2019, Tenet-Jove established
Shineco Zhong Hemp Group Co., Ltd. (“Zhong Hemp”) with registered capital of RMB200.0 million (US$28,237,022)
and owns 60% interest of Zhong Hemp.
We ceased the business operation of Xinjiang
Taihe and Runze in September 2020 and October 2020, respectively.
The Company, its subsidiaries, its VIEs,
and its VIEs’ subsidiaries (collectively the “Group”) operate three main business segments: 1) Tenet-Jove
is engaged in manufacturing and selling of Bluish Dogbane and related products, also known in Chinese as “Luobuma,”
including therapeutic clothing and textile products made from Luobuma; 2) the Zhisheng VIEs are engaged in the
business of planting, processing, and distributing of green agricultural produce as well as providing domestic and international
logistic services for agricultural products (“Agricultural Products”); and, 3) Ankang Longevity Group 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 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation and Principles of Consolidation
The
accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America (“U.S. GAAP”) for interim financial information pursuant
to the rules of the SEC and have been consistently applied. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been included. Interim results are not necessarily indicative
of results for the full year. These financial statements should be read in conjunction with the audited financial statements and
notes thereto included in the Company’s Form 10-K for the fiscal year ended June 30, 2020, which was filed on September
28, 2020.
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
carrying amount of the VIEs and their subsidiaries’ consolidated assets and liabilities and income information were
as follows:
|
|
December 31,
2020
|
|
|
June 30,
2020
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
56,029,627
|
|
|
$
|
58,350,565
|
|
Plant and equipment, net
|
|
|
4,815,657
|
|
|
|
8,168,594
|
|
Other non-current assets
|
|
|
7,381,416
|
|
|
|
11,054,954
|
|
Total assets
|
|
|
68,226,700
|
|
|
|
77,574,113
|
|
Total liabilities
|
|
|
(6,980,675
|
)
|
|
|
(6,189,172
|
)
|
Net assets
|
|
$
|
61,246,025
|
|
|
$
|
71,384,941
|
|
|
|
For the six months ended December 31,
|
|
|
For the three months ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Net sales
|
|
$
|
7,143,989
|
|
|
$
|
14,833,330
|
|
|
$
|
3,021,298
|
|
|
$
|
7,821,453
|
|
Gross profit (loss)
|
|
$
|
(1,688,871
|
)
|
|
$
|
4,135,280
|
|
|
$
|
(2,601,299
|
)
|
|
$
|
2,329,402
|
|
Income (loss) from operations
|
|
$
|
(9,115,036
|
)
|
|
$
|
1,750,589
|
|
|
$
|
(8,820,472
|
)
|
|
$
|
1,228,235
|
|
Net income (loss)
|
|
$
|
(12,852,247
|
)
|
|
$
|
1,706,646
|
|
|
$
|
(12,452,170
|
)
|
|
$
|
1,137,156
|
|
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 income (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 controls the VIEs through contractual arrangements, 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 control of 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, plant, and equipment, and intangible assets, the recoverability of long-lived assets, and
the valuation of accounts receivable, deferred taxes, and inventory reserves. Actual results could differ from those estimates.
Revenue
Recognition
The
Company 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. The Company 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) the Company’s collection
of such fees was reasonably assured. These criteria, as related to the Company’s 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: Revenue from international freight forwarding, 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 believes that its previous revenue recognition policies are
generally consistent with the new revenue recognition standards set forth in ASC 606. Potential adjustments to input measures
are not expected to be pervasive to the majority of the Company’s contracts. There is no significant impact upon adoption
of the new guidance.
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, 2020 and June 30, 2020, 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, 2020 and June 30, 2020, the allowance for doubtful accounts
was US$ 9,298,867 and US$ 5,235,436, 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, 2020 and June 30, 2020, the inventory reserve was US$ 1,307,076 and US$ 1,121,408, 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, 2020 and June 30, 2020, the Company had an allowance
for uncollectible advances to suppliers of US$ 5,923,262 and US$ 3,342,590, 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 adopted ASU 2016-02, “Leases” on July 1, 2019 and used the alternative transition approach, which permits
the effects of adoption to be applied at the effective date. The new standard provides a number of optional practical expedients
in transition. The Company elected the “package of practical expedients,” which permits it not
to reassess under the new standard its prior conclusions about lease identification, lease classification, and initial
direct costs. The Company also elected the short-term lease exemption and combining the lease and non-lease components practical
expedients. The most significant impact upon adoption relates to the recognition of new Right-of-use (“ROU”) assets
and lease liabilities on the Company’s balance sheet for office space operating leases. Upon adoption, the Company recognized
additional operating liabilities of approximately US$ 0.5 million, with corresponding ROU assets of US$ 3.6 million based on the
present value of the remaining rental payments under current leasing standards for existing operating leases. There was no cumulative
effect of adopting the standard.
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:
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|
|
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
|
|
Land
Use Rights, Net
According
to Chinese laws and regulations regarding land use rights, land in urban districts is owned by the state, while land in
the rural areas and suburban areas, except otherwise provided for by the state, is collectively owned by individuals designated
as resident farmers by the state. In accordance with the legal principle that land ownership is separate from the right
to the use of the land, the government grants individuals and companies the rights to use parcels of land for a specified period
of time. Land use rights, which are usually prepaid, are stated at cost less accumulated amortization. Amortization is provided
over the life of the land use rights, using the straight-line method. The useful life is 50 years, based on the term of the land
use rights.
Long-lived
Assets
Finite-lived
assets and intangibles are reviewed for impairment testing when circumstances require. For purposes of evaluating the recoverability
of long-lived assets, when undiscounted future cash flows will not be sufficient to recover an asset’s carrying amount,
the asset is written down to its fair value. The long-lived assets of the Company that are subject to evaluation consist primarily
of property, plant and equipment, land use rights, investments, and long-term prepaid leases. For the six and three months
ended December 31, 2020 and 2019, 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 unaudited condensed 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, 2020 and June 30, 2020. The
Company had not provided deferred taxes for undistributed earnings of non-U.S. subsidiaries at December 31, 2020, 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 2017 and thereafter. As of December
31, 2020, the tax years ended December 31, 2016 through December 31, 2020 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, 2020 and June 30, 2020 were translated at 1 RMB to 0.1531 USD and at 1 RMB to 0.1414 USD, respectively.
The average translation rates applied to the income and cash flow statement amounts for the six months ended December 31, 2020
and 2019 were 1 RMB to 0.1477 USD and 1 RMB to 0.1422 USD, respectively. The average translation rates applied to income and cash
flow statement amounts for the three months ended December 31, 2020 and 2019 were 1 RMB to 0.1510 USD and 1 RMB to 0.1420 USD,
respectively.
Comprehensive
Income (Loss)
Comprehensive
income (loss) consists of two components, net income (loss) and other comprehensive income (loss). The foreign currency translation
gain or loss resulting from translation of the financial statements expressed in RMB to USD is reported in other comprehensive
income (loss) in the unaudited condensed consolidated statements of income (loss) and comprehensive income (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, 2020 and
2019.
New
Accounting Pronouncements
In
November 2019, the FASB issued ASU No. 2019-08, Compensation - Stock Compensation (Topic 718) and Revenue from Contracts with
Customers (Topic 606). The guidance identifies, evaluates, and improves areas of GAAP for which cost and complexity can be reduced
while maintaining or improving the usefulness of the information provided. The amendments in that ASU expanded the scope
of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. For entities that
have adopted the amendments in Update 2018-07, the updated guidance is effective for annual periods beginning after December 15,
2019, and is applicable to the Company in fiscal 2021. Early adoption is permitted. The Company expects that the adoption of this
ASU will not 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 expects that the adoption of this ASU will 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 condensed
unaudited consolidated financial statements.
NOTE
3 – INVENTORIES, NET
The
inventories, net consisted of the following:
|
|
December 31,
2020
|
|
|
June 30,
2020
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
387,904
|
|
|
$
|
958,206
|
|
Work-in-process
|
|
|
1,917,546
|
|
|
|
529,655
|
|
Finished goods
|
|
|
2,017,285
|
|
|
|
1,433,423
|
|
Less: inventory reserve
|
|
|
(1,307,076
|
)
|
|
|
(1,121,408
|
)
|
Total inventories, net
|
|
$
|
3,015,659
|
|
|
$
|
1,799,876
|
|
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.
NOTE
4 - PROPERTY AND EQUIPMENT, NET
Property
and equipment, net consisted of the following:
|
|
December 31,
2020
|
|
|
June 30,
2020
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
8,186,862
|
|
|
$
|
11,525,458
|
|
Machinery and equipment
|
|
|
931,365
|
|
|
|
860,610
|
|
Motor vehicles
|
|
|
62,368
|
|
|
|
57,630
|
|
Office equipment
|
|
|
250,182
|
|
|
|
231,174
|
|
Farmland leasehold improvements
|
|
|
3,219,058
|
|
|
|
2,974,508
|
|
|
|
|
12,649,835
|
|
|
|
15,649,380
|
|
Less: accumulated depreciation and amortization
|
|
|
(6,434,784
|
)
|
|
|
(6,159,896
|
)
|
Total property and equipment, net
|
|
$
|
6,215,051
|
|
|
$
|
9,489,484
|
|
Depreciation
and amortization expense charged to operations was US$ 310,725 and US$ 419,958 for the six months ended December 31, 2020 and
2019, respectively. Depreciation and amortization expense charged to operations was US$ 158,618 and US$ 241,743 for the three
months ended December 31, 2020 and 2019, respectively.
Farmland
leasehold improvements consisted of following:
|
|
December 31,
2020
|
|
|
June 30,
2020
|
|
|
|
|
|
|
|
|
Blueberry farmland leasehold improvements
|
|
$
|
2,473,023
|
|
|
$
|
2,285,149
|
|
Yew tree planting base reconstruction
|
|
|
277,070
|
|
|
|
256,021
|
|
Greenhouse renovation
|
|
|
468,965
|
|
|
|
433,338
|
|
Total farmland leasehold improvements
|
|
$
|
3,219,058
|
|
|
$
|
2,974,508
|
|
NOTE
5 - LAND USE RIGHTS, NET
Land use rights are recognized at cost less
accumulated amortization. According to the Chinese laws and regulations regarding land use rights, land in urban districts is
owned by the state, while land in the rural areas and suburban areas, except otherwise provided for by the state,
is collectively owned by individuals designated as resident farmers by the state. However, in accordance with the legal
principle that land ownership is separate from the right to the use of the land, the government grants the user a “land
use right” to use the land. The Company has the land use right to use the land for 50 years and amortizes the rights
on a straight-line basis over the period of 50 years.
|
|
December 31,
2020
|
|
|
June 30,
2020
|
|
|
|
|
|
|
|
|
Land use rights
|
|
$
|
1,702,676
|
|
|
$
|
1,573,325
|
|
Less: accumulated amortization
|
|
|
(425,760
|
)
|
|
|
(377,382
|
)
|
Total land use rights, net
|
|
$
|
1,276,916
|
|
|
$
|
1,195,943
|
|
For
the six months ended December 31, 2020 and 2019, the Company recognized amortization expenses of US$ 18,982 and US$ 18,427,
respectively. For the three months ended December 31, 2020 and 2019, the Company recognized amortization expenses of US$
9,682 and US$ 9,213, respectively.
The
estimated future amortization expenses are as follows:
12 months ending December 31:
|
|
|
|
2021
|
|
$
|
34,054
|
|
2022
|
|
|
34,054
|
|
2023
|
|
|
34,054
|
|
2024
|
|
|
34,054
|
|
2025
|
|
|
34,054
|
|
Thereafter
|
|
|
1,106,646
|
|
Total
|
|
$
|
1,276,916
|
|
NOTE
6 - 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. As of December 31, 2020, the
distribution rights were evaluated at RMB7,380,000 (US$ 1,129,711).
NOTE
7 - INVESTMENTS
In 2013, Ankang Longevity Group
entered into two equity investment agreements with Shaanxi Pharmaceutical Group Pai’ang Medicine Co. Ltd. (“Shaanxi
Pharmaceutical Group”), a Chinese state-owned pharmaceutical enterprise, to invest a total of RMB6.8 million
(approximately US$1.0 million) for a 49% equity interest in a pharmacy retail company called Shaanxi Pharmaceutical Sunsimiao
Drugstores Ankang Retail Chain Co., Ltd. (“Sunsimiao Drugstores”), and a 49% equity interest in a pharmaceutical wholesale
distribution company named Shaanxi Pharmaceutical Holding Group Longevity Pharmacy Co., Ltd. (“Shaanxi Longevity Pharmacy”).
These two entities were incorporated to collaborate with Shaanxi Pharmaceutical Group to expand sales to regional hospitals
and clinics and to establish the presence of retail pharmacies under the brand name “Sunsimiao.” The
investments are accounted for using the equity method because Ankang Longevity Group has significant influence, but no control
of these two entities. Ankang Longevity Group recorded a loss of US$1,975,729 and income of US$140,582 for the six months
ended December 31, 2020 and 2019, respectively and recorded a loss of US$1,991,016 and income of US$70,683 for the three
months ended December 31, 2020 and 2019, respectively, from the investments, which was included in “Income from equity method
investments” in the unaudited condensed consolidated statements of income (loss) and comprehensive income (loss). (See
Note 11.)
In 2013, Ankang
Longevity Group entered into a supplemental agreement with Shaanxi Pharmaceutical Group. According to the supplemental agreement,
new 49% equity investment companies established by Shaanxi Pharmaceutical Group and Ankang Longevity Group are required to exclusively
purchase certain raw materials and drug products from Shaanxi Pharmaceutical Group. In return, Shaanxi Pharmaceutical Group has
agreed to compensate Ankang Longevity Group with a purchase rebate of 7% of the total purchases made from Shaanxi Pharmaceutical
Group. For the six and three months ended December 31, 2020 and 2019, no income was recognized by Ankang Longevity Group from
this supplemental agreement in addition to its 49% share of the income from the equity investment companies.
On
October 21, 2013, the Company, through its controlled subsidiaries, Zhisheng Freight and Zhisheng Agricultural, entered into an
agreement with an unrelated third party, Zhejiang Zhen’Ai Network Warehousing Services Co., Ltd. (“Zhen’Ai Network”),
and invested RMB14.5 million (approximately US$ 2.2 million) into Tiancang Systematic Warehousing project (“Tiancang
Project”) operated by Zhen’Ai Network. The Tiancang Project is an online platform established to provide comprehensive
warehousing and logistic solutions to companies involved in E-commerce. The Company is entitled to 29% of Tiancang Project’s
after-tax net income annually, less 30% statutory reserve and a 10 % employee welfare fund contribution. When the amount of the
accumulated statutory reserve reaches 30% of the total investment for the Tiancang Project, no additional appropriation to the
statutory reserve is required. 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, 2020.
The
Company’s investments in unconsolidated entities consist of the following:
|
|
December 31,
2020
|
|
|
June 30,
2020
|
|
|
|
|
|
|
|
|
Shaanxi Pharmaceutical Holding Group Longevity Pharmacy Co., Ltd. (Ankang Longevity Pharmacy)
|
|
$
|
1,964,245
|
|
|
$
|
3,690,419
|
|
Shaanxi Pharmaceutical Sunsimiao Drugstores Ankang Chain Co., Ltd.
|
|
|
874,138
|
|
|
|
824,705
|
|
Total investment
|
|
$
|
2,838,383
|
|
|
$
|
4,515,124
|
|
Summarized
financial information of unconsolidated entities is as follows:
|
|
December 31,
2020
|
|
|
June 30,
2020
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
36,239,278
|
|
|
$
|
38,546,879
|
|
Noncurrent assets
|
|
|
463,571
|
|
|
|
324,725
|
|
Current liabilities
|
|
|
30,925,994
|
|
|
|
29,671,104
|
|
|
|
For the six months ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
16,282,274
|
|
|
$
|
16,283,932
|
|
Gross profit
|
|
|
1,315,615
|
|
|
|
1,674,366
|
|
Income (loss) from operations
|
|
|
(4,006,758
|
)
|
|
|
287,432
|
|
Net income (loss)
|
|
|
(4,032,100
|
)
|
|
|
286,902
|
|
NOTE
8 - LEASES
Effective
July 1, 2019, the Company adopted the new lease accounting standard using the optional transition method, which allowed
it to continue to apply the guidance under the lease standard in effect at the time in the comparative periods presented.
In addition, the Company elected the package of practical expedients, which allowed it to not reassess whether any existing
contracts contain a lease, to not reassess historical lease classification as operating or finance leases, and to not reassess
initial direct costs. The Company has not elected the practical expedient to use hindsight to determine the lease term for its
leases at transition. The Company has also elected the practical expedient, allowing it to not separate the lease
and non-lease components for all classes of underlying assets. Adoption of this standard resulted in the recording of operating
lease ROU assets and corresponding operating lease liabilities of $3,587,788 and $450,123, respectively, as of July 1, 2019 with
no impact on accumulated deficit. Financial position for reporting periods beginning on or after July 1, 2019, are presented under
the new guidance, while prior-period amounts are not adjusted and continue to be reported in accordance with previous guidance.
The Company leases offices space under non-cancelable
operating leases, with terms ranging from one to six years. In addition, the Zhisheng VIEs 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. The lease terms vary from five 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.
|
|
December 31,
2020
|
|
|
June 30,
2020
|
|
|
|
|
|
|
|
|
ROU lease assets
|
|
$
|
3,181,849
|
|
|
$
|
3,227,895
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities – current
|
|
|
97,916
|
|
|
|
97,633
|
|
Operating lease liabilities – non-current
|
|
|
447,489
|
|
|
|
401,891
|
|
Total operating lease liabilities
|
|
$
|
545,405
|
|
|
$
|
499,524
|
|
The
weighted average remaining lease terms and discount rates for all of operating leases were as follows as of December 31, 2020
and June 30, 2020:
|
|
December 31,
2020
|
|
|
June 30,
2020
|
|
|
|
|
|
|
|
|
Remaining lease term and discount rate:
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term (years)
|
|
|
9.22
|
|
|
|
9.26
|
|
Weighted average discount rate
|
|
|
5.0
|
|
|
|
5.0
|
|
Rent
expenses totaled US$ 224,957 and US$ 201,328 for the six months ended December 31, 2020 and 2019, respectively. Rent expenses
totaled US$ 111,842 and US$ 109,003 for the three months ended December 31, 2020 and 2019, respectively.
The
following is a schedule, by years, of maturities of lease liabilities as of December 31, 2020:
Remainder of 2021
|
|
$
|
277,203
|
|
2022
|
|
|
344,690
|
|
2023
|
|
|
342,445
|
|
2024
|
|
|
342,445
|
|
2025
|
|
|
342,445
|
|
Thereafter
|
|
|
1,599,921
|
|
Total lease payments
|
|
|
3,249,149
|
|
Less: imputed interest
|
|
|
(67,298
|
)
|
Less: prepayments
|
|
|
(2,636,446
|
)
|
Present value of lease liabilities
|
|
$
|
545,405
|
|
NOTE
9 - SHORT-TERM LOANS
Short-term
loans consisted of the following:
Lender
|
|
December 31,
2020
|
|
|
Maturity
Date
|
|
Int.
Rate/Year
|
|
Agricultural Bank of China-a
|
|
|
1,530,773
|
|
|
2021/2/27
|
|
|
5.66
|
%
|
Agricultural Bank of China-b
|
|
|
306,155
|
|
|
2021/9/1
|
|
|
5.66
|
%
|
Total short-term loans
|
|
$
|
1,836,928
|
|
|
|
|
|
|
|
Lender
|
|
June 30,
2020
|
|
|
Maturity
Date
|
|
Int.
Rate/Year
|
|
Agricultural Bank of China-b*
|
|
$
|
282,896
|
|
|
2020-8-22
|
|
|
5.60
|
%
|
Agricultural Bank of China-a
|
|
|
636,517
|
|
|
2020-12-23
|
|
|
4.65
|
%
|
Agricultural Bank of China-a
|
|
|
1,414,481
|
|
|
2021-2-24
|
|
|
5.66
|
%
|
Total short-term loans
|
|
$
|
2,333,894
|
|
|
|
|
|
|
|
The
loans outstanding were guaranteed by the following properties, entities or individuals:
a.
|
Guaranteed
by a commercial credit guaranty company unrelated to the Company and also by Jiping Chen, a stockholder of the Company.
|
|
|
b.
|
Collateralized
by the building owned by Xiaoyan Chen and Jing Chen, who are both related parties of the Company. Xiaoyan Chen is one of the
shareholders of Ankang Longevity Group. Jing Chen is the sister of Xiaoyan Chen but not a shareholder of Ankang Longevity
Group.
|
|
|
*
|
The
Company repaid the loan in full on maturity date.
|
The
Company recorded interest expenses of US$ 63,267 and US$ 58,266 for the six months ended December 31, 2020 and 2019, respectively.
The annual weighted average interest rates were 5.30% and 5.32% for the six months ended December 31, 2020 and 2019, respectively.
The
Company recorded interest expenses of US$ 33,645 and US$ 27,989 for the three months ended December 31, 2020 and 2019,
respectively. The annual weighted average interest rates were 5.30% and 5.52% for the three months ended December 31, 2020
and 2019, respectively.
NOTE
10 - ACQUISITION
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 Noncontrolling 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.
The
fair value of distribution rights and its estimated useful lives are as follows:
|
|
Preliminary
Fair Value
|
|
|
Weighted Average
Useful Life
(in Years)
|
Distribution rights
|
|
$
|
1,129,711
|
|
|
(a)
|
(a)
The distribution rights with no expiration date has been determined to have an indefinite life.
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 $nil in the six and three months ended December 31, 2020.
NOTE
11 - RELATED PARTY TRANSACTIONS
Due from Related Parties
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. Those advances
are due on demand and non-interest bearing.
As
of December 31, 2020 and June 30, 2020, the outstanding amounts due from related parties consisted of the following:
|
|
December 31,
2020
|
|
|
June 30,
2020
|
|
|
|
|
|
|
|
|
Yang Bin
|
|
$
|
45,923
|
|
|
$
|
42,434
|
|
Beijing Huiyinansheng Asset Management Co., Ltd (a.)
|
|
|
22,962
|
|
|
|
21,217
|
|
Wang Qiwei
|
|
|
61,998
|
|
|
|
57,288
|
|
Total due from related parties
|
|
$
|
130,883
|
|
|
$
|
120,939
|
|
a.
|
This
company is wholly owned by one of the Company’s senior management.
|
Due to Related Parties
As
of December 31, 2020 and June 30, 2020, the Company had related party payables of US$ 1,416,360 and US$ 1,355,919, 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.
|
|
December 31,
2020
|
|
|
June 30,
2020
|
|
|
|
|
|
|
|
|
Wu Yang
|
|
$
|
98,046
|
|
|
$
|
90,598
|
|
Wang Sai
|
|
|
91,327
|
|
|
|
90,629
|
|
Chen Jiping
|
|
|
-
|
|
|
|
3,024
|
|
Zhou Guocong
|
|
|
820,412
|
|
|
|
648,308
|
|
Li Baolin
|
|
|
229,616
|
|
|
|
353,619
|
|
Zhao Min
|
|
|
176,959
|
|
|
|
169,741
|
|
Total due to related parties
|
|
$
|
1,416,360
|
|
|
$
|
1,355,919
|
|
Sales to Related Parties
For
the six and three months ended December 31, 2020, the Company recorded sales to Shaanxi Pharmaceutical Group, a related party
(see Note 7), of US$ 1,295,199 and US$ 535,833, respectively. For the six and three months ended December 31, 2019, the Company
recorded sales to Shaanxi Pharmaceutical Group, a related party, of US$ 1,545,849 and US$ 750,301, respectively. As of December
31, 2020 and June 30, 2020, the balance of accounts receivable due from Shaanxi Pharmaceutical Group was US$ 718,617 and US$ 1,567,160,
respectively.
NOTE
12 - 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 its 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 expenses (benefit) were as follows:
|
|
For the six months ended December 31,
|
|
|
For the three months ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Current income tax provision (benefit)
|
|
$
|
83,106
|
|
|
$
|
333,902
|
|
|
$
|
(22,191
|
)
|
|
$
|
193,061
|
|
Deferred income tax benefit
|
|
|
-
|
|
|
|
(169,510
|
)
|
|
|
-
|
|
|
|
(23,886
|
)
|
Total
|
|
$
|
83,106
|
|
|
$
|
164,392
|
|
|
$
|
(22,191
|
)
|
|
$
|
169,175
|
|
|
|
December 31,
2020
|
|
|
June 30,
2020
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
529,503
|
|
|
$
|
428,879
|
|
Inventory reserve
|
|
|
296,110
|
|
|
|
252,022
|
|
Net operating loss carry-forwards
|
|
|
546,253
|
|
|
|
504,754
|
|
Total
|
|
|
1,371,866
|
|
|
|
1,185,655
|
|
Valuation allowance
|
|
|
(1,371,866
|
)
|
|
|
(1,185,655
|
)
|
Total deferred tax assets
|
|
|
-
|
|
|
|
-
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
Distribution rights
|
|
|
(282,428
|
)
|
|
|
(260,972
|
)
|
Total deferred tax liability
|
|
|
(282,428
|
)
|
|
|
(260,972
|
)
|
Deferred tax liability, net
|
|
$
|
(282,428
|
)
|
|
$
|
(260,972
|
|
Movement
of the valuation allowance:
|
|
December 31,
2020
|
|
|
June 30,
2020
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
1,185,655
|
|
|
$
|
519,671
|
|
Current year addition
|
|
|
88,732
|
|
|
|
680,901
|
|
Exchange difference
|
|
|
97,479
|
|
|
|
(14,917
|
)
|
Ending balance
|
|
$
|
1,371,866
|
|
|
$
|
1,185,655
|
|
(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, 2020 and 2019.
(c)
Taxes Payable
Taxes
payable consisted of the following:
|
|
December 31,
2020
|
|
|
June 30,
2020
|
|
|
|
|
|
|
|
|
Income tax payable
|
|
$
|
3,405,792
|
|
|
$
|
3,424,043
|
|
Value added tax payable
|
|
|
569,831
|
|
|
|
522,615
|
|
Business tax and other taxes payable
|
|
|
7,787
|
|
|
|
6,026
|
|
Total tax payable
|
|
|
3,983,410
|
|
|
|
3,952,684
|
|
Less: current portion
|
|
|
3,417,388
|
|
|
|
3,386,662
|
|
Income tax payable - noncurrent portion
|
|
$
|
566,022
|
|
|
$
|
566,022
|
|
NOTE
13 - 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, 2020 and June 30, 2020, 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$1,643,087. The offering was made pursuant to the Company’s effective registration statement on Form S-3 (Registration
Statement No. 333-221711) previously filed with the Securities and Exchange Commission and a prospectus supplement thereunder.
NOTE
14 - CONCENTRATIONS AND RISKS
The
Company maintains principally all bank accounts in the PRC. The cash balance held in the PRC bank accounts was US$ 24,338,188
and US$ 32,358,252 as of December 31, 2020 and June 30, 2020, respectively.
During
the six months ended December 31, 2020 and 2019, almost 100% of the Company’s assets were located in the PRC and 100% of
the Company’s revenue was derived from its subsidiaries and VIEs located in the PRC.
For
the six months ended December 31, 2020, four customers accounted for approximately 18%, 16%, 15%, and 10% of the Company’s
total sales, respectively. For the three months ended December 31, 2020, three customers accounted for approximately 18%, 16%,
and 15% of the Company’s total sales, respectively. At December 31, 2020, three customers accounted for approximately 38%
of the Company’s accounts receivable.
For
the six months ended December 31, 2019, four customers accounted for approximately 13%, 11%, 10%, and 10% of the Company’s
total sales, respectively. For the three months ended December 31, 2019, four customers accounted for approximately 12%, 10%,
10%, and 10% of the Company’s total sales, respectively.
For
the six months ended December 31, 2020, two vendors accounted for approximately 54% and 11% of the Company’s total purchases,
respectively. For the three months ended December 31, 2020, one vendor accounted for approximately 57% of the Company’s
total purchases.
For
the six months ended December 31, 2019, two vendors accounted for approximately 41% and 14% of the Company’s total purchases,
respectively. For the three months ended December 31, 2019, three vendors accounted for approximately 45%, 15% and
10% of the Company’s total purchases, respectively.
NOTE
15 - COMMITMENTS AND CONTINGENCIES
Legal
Contingencies
On
May 16, 2017, Bonwick Capital Partners, LLC (“Plaintiff”) commenced a lawsuit (Case No. 1:17-cv-03681-PGG) against
the Company in the United States District Court for the Southern District of New York. Plaintiff alleged that the Company
entered into an agreement with Plaintiff (the “Agreement”), pursuant to which Plaintiff was to provide the Company
with financial advisory services in connection with the Company’s initial public offering in the United States. Plaintiff
alleged that the Company breached the Agreement and seek money damages up to US$6 million. As of the date
of this report, there has been no progress in this lawsuit. The Company believes that these claims are without merit and
intends to vigorously defend its position.
NOTE
16 - 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 three 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, 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 companies of this segment, the Zhisheng VIEs, are engaged in the business of growing and distributing green and
organic vegetables and fruits as well as providing logistics services for distributing agricultural products. 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 the Zhisheng VIEs have newly developed over 100 acres of modern greenhouses for cultivating
yew trees and other plants.
The
following table presents summarized information by segment for the six months ended December 31, 2020:
|
|
For the six months ended December 31, 2020
|
|
|
|
Luobuma
|
|
|
Herbal
|
|
|
Other agricultural
|
|
|
|
|
|
|
products
|
|
|
products
|
|
|
products
|
|
|
Total
|
|
Segment revenue
|
|
$
|
73,009
|
|
|
$
|
5,408,725
|
|
|
$
|
1,724,630
|
|
|
$
|
7,206,364
|
|
Cost of revenue and related business and sales tax
|
|
|
130,628
|
|
|
|
4,449,905
|
|
|
|
4,372,320
|
|
|
|
8,952,853
|
|
Gross profit (loss)
|
|
|
(57,619
|
)
|
|
|
958,820
|
|
|
|
(2,647,690
|
)
|
|
|
(1,746,489
|
)
|
Gross profit (loss) %
|
|
|
(78.9
|
)%
|
|
|
17.7
|
%
|
|
|
(153.5
|
)%
|
|
|
(24.2
|
)%
|
The
following table presents summarized information by segment for the six months ended December 31, 2019:
|
|
For the six months ended December 31, 2019
|
|
|
|
Luobuma
|
|
|
Herbal
|
|
|
Other agricultural
|
|
|
|
|
|
|
products
|
|
|
products
|
|
|
products
|
|
|
Total
|
|
Segment revenue
|
|
$
|
138,759
|
|
|
$
|
6,839,600
|
|
|
$
|
7,937,034
|
|
|
$
|
14,915,393
|
|
Cost of revenue and related business and sales tax
|
|
|
269,157
|
|
|
|
5,227,120
|
|
|
|
5,414,234
|
|
|
|
10,910,511
|
|
Gross profit (loss)
|
|
|
(130,398
|
)
|
|
|
1,612,480
|
|
|
|
2,522,800
|
|
|
|
4,004,882
|
|
Gross profit (loss) %
|
|
|
(94.0
|
)%
|
|
|
23.6
|
%
|
|
|
31.8
|
%
|
|
|
26.9
|
%
|
The
following table presents summarized information by segment for the three months ended December 31, 2020:
|
|
For the three months ended December 31, 2020
|
|
|
|
Luobuma
|
|
|
Herbal
|
|
|
Other agricultural
|
|
|
|
|
|
|
products
|
|
|
products
|
|
|
products
|
|
|
Total
|
|
Segment revenue
|
|
$
|
48,394
|
|
|
$
|
2,273,319
|
|
|
$
|
741,268
|
|
|
$
|
3,062,981
|
|
Cost of revenue and related business and sales tax
|
|
|
102,165
|
|
|
|
1,957,442
|
|
|
|
3,658,443
|
|
|
|
5,718,051
|
|
Gross profit
|
|
|
(53,771
|
)
|
|
|
315,877
|
|
|
|
(2,917,175
|
)
|
|
|
(2,655,070
|
)
|
Gross profit %
|
|
|
(111.1
|
)%
|
|
|
13.9
|
%
|
|
|
(393.5
|
)%
|
|
|
(86.7
|
)%
|
The
following table presents summarized information by segment for the three months ended December 31, 2019:
|
|
For the three months ended December 31, 2019
|
|
|
|
Luobuma
|
|
|
Herbal
|
|
|
Other agricultural
|
|
|
|
|
|
|
products
|
|
|
products
|
|
|
products
|
|
|
Total
|
|
Segment revenue
|
|
$
|
73,240
|
|
|
$
|
3,539,279
|
|
|
$
|
4,256,093
|
|
|
$
|
7,868,612
|
|
Cost of revenue and related business and sales tax
|
|
|
37,653
|
|
|
|
2,627,716
|
|
|
|
2,838,256
|
|
|
|
5,503,625
|
|
Gross profit
|
|
|
35,587
|
|
|
|
911,563
|
|
|
|
1,417,837
|
|
|
|
2,364,987
|
|
Gross profit %
|
|
|
48.6
|
%
|
|
|
25.8
|
%
|
|
|
33.3
|
%
|
|
|
30.1
|
%
|
Total
Assets as of December 31, 2020 and June 30, 2020 were as follows:
|
|
December 31,
2020
|
|
|
June 30,
2020
|
|
|
|
|
|
|
|
|
Luobuma products
|
|
$
|
4,728,743
|
|
|
$
|
2,836,450
|
|
Herbal products
|
|
|
41,285,668
|
|
|
|
43,855,815
|
|
Other agricultural products
|
|
|
27,728,302
|
|
|
|
32,396,346
|
|
Total assets
|
|
$
|
73,742,713
|
|
|
$
|
79,088,611
|
|
NOTE
17 - SUBSEQUENT EVENTS
These unaudited condensed consolidated financial
statements were approved by management and available for issuance on February 19, 2021, 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.