UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
[X]
QUARTERLY REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the quarterly period ended September 30,
2020
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 |
|
(I.R.S.
Employer |
incorporation
or organization) |
|
Identification
No.) |
Room
1001, Building T5, DaZu Square,
Daxing
District, Beijing
People’s Republic of China 100176
(Address
of Principal Executive Offices)
(+86) 10-87227366
(Registrant’s
telephone number, including area code)
N/A
(Former
name, former address and former fiscal year, if changed since last
report)
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 [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (Sec. 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes [X] 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 [X] |
|
|
|
Emerging
growth company [X] |
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 17(a)(2)(B) of the Securities Act.
[ ]
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act). Yes [ ] No [X]
As of
November 13, 2020, the registrant had 3,039,943 shares of common
stock outstanding.
TABLE
OF CONTENTS
PART I. FINANCIAL
INFORMATION
ITEM 1. FINANCIAL
STATEMENTS
SHINECO, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
September 30, |
|
|
June 30, |
|
|
|
2020 |
|
|
2020 |
|
|
|
(Unaudited) |
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
CURRENT
ASSETS: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
23,130,106 |
|
|
$ |
32,371,372 |
|
Accounts
receivable, net |
|
|
12,257,280 |
|
|
|
11,008,485 |
|
Due from related
parties |
|
|
125,713 |
|
|
|
120,939 |
|
Inventories,
net |
|
|
3,843,944 |
|
|
|
1,799,876 |
|
Advances to
suppliers, net |
|
|
20,083,865 |
|
|
|
13,313,946 |
|
Other
current assets |
|
|
3,723,229 |
|
|
|
905,380 |
|
TOTAL CURRENT
ASSETS |
|
|
63,164,137 |
|
|
|
59,519,998 |
|
|
|
|
|
|
|
|
|
|
Property and
equipment, net |
|
|
9,709,334 |
|
|
|
9,489,484 |
|
Land use right,
net of accumulated amortization |
|
|
1,234,806 |
|
|
|
1,195,943 |
|
Investments |
|
|
4,708,898 |
|
|
|
4,515,124 |
|
Distribution
rights |
|
|
1,085,092 |
|
|
|
1,043,887 |
|
Long-term deposit
and other noncurrent assets |
|
|
98,964 |
|
|
|
96,280 |
|
Right of use
assets |
|
|
3,204,393 |
|
|
|
3,227,895 |
|
TOTAL
ASSETS |
|
$ |
83,205,624 |
|
|
$ |
79,088,611 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES: |
|
|
|
|
|
|
|
|
Short-term
loans |
|
$ |
2,426,019 |
|
|
$ |
2,333,894 |
|
Accounts
payable |
|
|
159,665 |
|
|
|
148,209 |
|
Advances from
customers |
|
|
6,930 |
|
|
|
6,324 |
|
Due to related
parties |
|
|
1,383,813 |
|
|
|
1,355,919 |
|
Other payables and
accrued expenses |
|
|
6,308,263 |
|
|
|
4,018,684 |
|
Operating lease
liabilities - current |
|
|
92,909 |
|
|
|
97,633 |
|
Taxes
payable |
|
|
3,438,773 |
|
|
|
3,386,662 |
|
TOTAL CURRENT
LIABILITIES |
|
|
13,816,372 |
|
|
|
11,347,325 |
|
|
|
|
|
|
|
|
|
|
Income tax payable
- noncurrent portion |
|
|
566,022 |
|
|
|
566,022 |
|
Operating lease
liabilities - non-current |
|
|
424,605 |
|
|
|
401,891 |
|
Deferred tax liability |
|
|
271,273 |
|
|
|
260,972 |
|
TOTAL
LIABILITIES |
|
|
15,078,272 |
|
|
|
12,576,210 |
|
|
|
|
|
|
|
|
|
|
Commitments and
contingencies |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
EQUITY: |
|
|
|
|
|
|
|
|
Common stock; par value $0.001,
100,000,000 shares authorized; |
|
|
|
|
|
|
|
|
3,039,943 and 3,039,943 shares
issued and outstanding at September 30, 2020 and June 30,
2020* |
|
|
3,040 |
|
|
|
3,040 |
|
Additional paid-in
capital |
|
|
27,302,051 |
|
|
|
27,302,051 |
|
Statutory
reserve |
|
|
4,199,964 |
|
|
|
4,198,107 |
|
Retained
earnings |
|
|
39,047,151 |
|
|
|
40,106,518 |
|
Accumulated other comprehensive loss |
|
|
(3,662,816 |
) |
|
|
(6,283,835 |
) |
Total
Stockholders’ equity of Shineco, Inc. |
|
|
66,889,390 |
|
|
|
65,325,881 |
|
Non-controlling interest |
|
|
1,237,962 |
|
|
|
1,186,520 |
|
TOTAL
EQUITY |
|
|
68,127,352 |
|
|
|
66,512,401 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND EQUITY |
|
$ |
83,205,624 |
|
|
$ |
79,088,611 |
|
* Retrospectively restated for effect of stock split on August 14,
2020
The
accompanying notes are an integral part of these unaudited
condensed consolidated financial statements
SHINECO,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(LOSS)
(UNAUDITED)
|
|
For the
Three Months Ended September 30, |
|
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
REVENUE |
|
$ |
4,143,383 |
|
|
$ |
7,046,781 |
|
|
|
|
|
|
|
|
|
|
COST OF REVENUE |
|
|
|
|
|
|
|
|
Cost of product
and services |
|
|
3,222,611 |
|
|
|
5,394,423 |
|
Business and sales related tax |
|
|
12,191 |
|
|
|
12,463 |
|
Total
cost of revenue |
|
|
3,234,802 |
|
|
|
5,406,886 |
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT |
|
|
908,581 |
|
|
|
1,639,895 |
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES |
|
|
|
|
|
|
|
|
General and
administrative expenses |
|
|
1,820,732 |
|
|
|
3,354,643 |
|
Selling expenses |
|
|
33,635 |
|
|
|
121,886 |
|
Total
operating expenses |
|
|
1,854,367 |
|
|
|
3,476,529 |
|
|
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS |
|
|
(945,786 |
) |
|
|
(1,836,634 |
) |
|
|
|
|
|
|
|
|
|
OTHER INCOME
(EXPENSE) |
|
|
|
|
|
|
|
|
Income from equity
method investments |
|
|
15,287 |
|
|
|
69,899 |
|
Other income
(expense) |
|
|
2,788 |
|
|
|
(9,754 |
) |
Interest expense, net |
|
|
(19,972 |
) |
|
|
(3,126 |
) |
Total
other income (expense) |
|
|
(1,897 |
) |
|
|
57,019 |
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE
PROVISION FOR INCOME TAXES |
|
|
(947,683 |
) |
|
|
(1,779,615 |
) |
|
|
|
|
|
|
|
|
|
PROVISION (BENEFIT) FOR INCOME TAXES |
|
|
105,297 |
|
|
|
(4,783 |
) |
|
|
|
|
|
|
|
|
|
NET LOSS |
|
|
(1,052,980 |
) |
|
|
(1,774,832 |
) |
|
|
|
|
|
|
|
|
|
Net
income attributable to non-controlling interest |
|
|
4,530 |
|
|
|
17,805 |
|
|
|
|
|
|
|
|
|
|
NET
LOSS ATTRIBUTABLE TO SHINECO, INC. |
|
$ |
(1,057,510 |
) |
|
$ |
(1,792,637 |
) |
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
LOSS |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,052,980 |
) |
|
$ |
(1,774,832 |
) |
Other
comprehensive income (loss): foreign currency translation income
(loss) |
|
|
2,667,931 |
|
|
|
(2,858,537 |
) |
Total
comprehensive income (loss) |
|
|
1,614,951 |
|
|
|
(4,633,369 |
) |
Less:
comprehensive income (loss) attributable to non-controlling
interest |
|
|
51,442 |
|
|
|
(24,360 |
) |
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO SHINECO, INC. |
|
$ |
1,563,509 |
|
|
$ |
(4,609,009 |
) |
|
|
|
|
|
|
|
|
|
Weighted
average number of shares basic and diluted* |
|
|
3,037,048 |
|
|
|
2,687,433 |
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per common share |
|
$ |
(0.35 |
) |
|
$ |
(0.67 |
) |
* Retrospectively restated for effect of stock split on August 14,
2020
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 SEPTEMBER 30, 2020 AND 2019
(UNAUDITED)
|
|
COMMON STOCK |
|
|
ADDITIONAL PAID-IN |
|
|
STATUTORY |
|
|
RETAINED |
|
|
ACCUMULATED OTHER
COMPREHENSIVE |
|
|
NON- CONTROLLING |
|
|
TOTAL |
|
|
|
SHARES |
|
|
AMOUNT |
|
|
CAPITAL |
|
|
RESERVE |
|
|
EARNINGS |
|
|
LOSS |
|
|
INTEREST |
|
|
EQUITY |
|
Balance at June 30, 2019 |
|
|
2,541,308 |
(*) |
|
$ |
2,541 |
|
|
$ |
24,779,687 |
|
|
$ |
4,198,107 |
|
|
$ |
46,735,190 |
|
|
$ |
(4,184,024 |
) |
|
$ |
1,100,613 |
|
|
|
72,632,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
issuance |
|
|
495,740 |
(*) |
|
|
496 |
|
|
|
2,522,367 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,522,863 |
|
Net
income (loss) for the year |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,792,637 |
) |
|
|
- |
|
|
|
17,805 |
|
|
|
(1,774,832 |
) |
Foreign currency translation loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,816,372 |
) |
|
|
(42,165 |
) |
|
|
(2,858,537 |
) |
Balance
at September 30, 2019 |
|
|
3,037,048 |
(*) |
|
$ |
3,037 |
|
|
$ |
27,302,054 |
|
|
$ |
4,198,107 |
|
|
$ |
44,942,553 |
|
|
$ |
(7,000,396 |
) |
|
$ |
1,076,253 |
|
|
$ |
70,521,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2020 |
|
|
3,039,943 |
(*) |
|
$ |
3,040 |
|
|
$ |
27,302,051 |
|
|
$ |
4,198,107 |
|
|
$ |
40,106,518 |
|
|
$ |
(6,283,835 |
) |
|
$ |
1,186,520 |
|
|
$ |
66,512,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) for the year |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,857 |
|
|
|
(1,059,367 |
) |
|
|
- |
|
|
|
4,530 |
|
|
|
(1,052,980 |
) |
Foreign currency translation gain |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,621,019 |
|
|
|
46,912 |
|
|
|
2,667,931 |
|
Balance at September 30, 2020 |
|
|
3,039,943 |
(*) |
|
$ |
3,040 |
|
|
$ |
27,302,051 |
|
|
$ |
4,199,964 |
|
|
$ |
39,047,151 |
|
|
$ |
(3,662,816 |
) |
|
$ |
1,237,962 |
|
|
$ |
68,127,352 |
|
*
Retrospectively restated for effect of stock split on August 14,
2020
The
accompanying notes are an integral part of these unaudited
condensed consolidated financial statements
SHINECO, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
For the
Three Months Ended September 30, |
|
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
CASH FLOWS FROM
OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,052,980 |
) |
|
$ |
(1,774,832 |
) |
Adjustments to
reconcile net loss to net cash provided by (used in) operating
activities: |
|
|
|
|
|
|
|
|
Depreciation and
amortization |
|
|
204,786 |
|
|
|
187,429 |
|
Loss from disposal
of property and equipment |
|
|
- |
|
|
|
61,098 |
|
Provision for
doubtful accounts |
|
|
1,049,672 |
|
|
|
1,334,666 |
|
Provision for
inventory reserve |
|
|
13,831 |
|
|
|
177,197 |
|
Deferred tax
benefit |
|
|
- |
|
|
|
(145,624 |
) |
Loss from equity
method investments |
|
|
(15,287 |
) |
|
|
(69,899 |
) |
Amortization of
right of use assets |
|
|
111,215 |
|
|
|
- |
|
Restricted shares
issued for management |
|
|
- |
|
|
|
1,022,661 |
|
|
|
|
|
|
|
|
|
|
Changes in
operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts
receivable |
|
|
(1,413,046 |
) |
|
|
(539,538 |
) |
Advances to
suppliers |
|
|
(6,557,896 |
) |
|
|
2,974,205 |
|
Inventories |
|
|
(1,953,484 |
) |
|
|
(32,176 |
) |
Other
receivables |
|
|
(1,741,772 |
) |
|
|
(891,900 |
) |
Prepaid expense
and other assets |
|
|
(557 |
) |
|
|
245,005 |
|
Due from related
parties |
|
|
- |
|
|
|
59,550 |
|
Right of use
assets |
|
|
- |
|
|
|
(2,858,396 |
) |
Prepaid
leases |
|
|
- |
|
|
|
2,796,461 |
|
Accounts
payable |
|
|
5,511 |
|
|
|
37,914 |
|
Advances from
customers |
|
|
350 |
|
|
|
(367,577 |
) |
Other
payables |
|
|
2,332,197 |
|
|
|
(50,311 |
) |
Operating lease
liabilities |
|
|
(7,931 |
) |
|
|
- |
|
Taxes
payable |
|
|
(74,637 |
) |
|
|
(20,058 |
) |
NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES |
|
|
(9,100,028 |
) |
|
|
2,145,875 |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM
INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Acquisitions of
property and equipment |
|
|
- |
|
|
|
(1,497 |
) |
Proceeds from
disposal of property and equipment |
|
|
- |
|
|
|
79,387 |
|
Payment for
construction in progress |
|
|
- |
|
|
|
(2,118 |
) |
Advances of loans to third parties |
|
|
(1,228,630 |
) |
|
|
(56,992 |
) |
NET CASH
PROVIDED BY (USED IN) INVESTING ACTIVITIES |
|
|
(1,228,630 |
) |
|
|
18,780 |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM
FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from
short-term loans |
|
|
289,089 |
|
|
|
285,051 |
|
Repayment of
short-term loans |
|
|
(289,089 |
) |
|
|
(285,051 |
) |
Repayment of other
short-term loans |
|
|
- |
|
|
|
(7,126 |
) |
Proceeds from
issuance of common stock |
|
|
- |
|
|
|
1,500,203 |
|
Proceeds from (repayments of) advances from related parties |
|
|
(11,429 |
) |
|
|
62,554 |
|
NET CASH
PROVIDED BY (USED IN) FINANCING ACTIVITIES |
|
|
(11,429 |
) |
|
|
1,555,631 |
|
|
|
|
|
|
|
|
|
|
EFFECT OF
EXCHANGE RATE CHANGE ON CASH |
|
|
1,098,821 |
|
|
|
(1,438,380 |
) |
|
|
|
|
|
|
|
|
|
NET INCREASE
(DECREASE) IN CASH |
|
|
(9,241,266 |
) |
|
|
2,281,906 |
|
|
|
|
|
|
|
|
|
|
CASH -
Beginning of the Period |
|
|
32,371,372 |
|
|
|
35,330,676 |
|
|
|
|
|
|
|
|
|
|
CASH - End of
the Period |
|
$ |
23,130,106 |
|
|
$ |
37,612,582 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH
FLOW DISCLOSURES: |
|
|
|
|
|
|
|
|
Cash paid for
income taxes |
|
$ |
469,853 |
|
|
$ |
- |
|
Cash paid for
interest |
|
$ |
29,622 |
|
|
$ |
30,277 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
NON-CASH OPERATING ACTIVITY: |
|
|
|
|
|
|
|
|
Right-of-use
assets obtained in exchange for operating lease obligations |
|
$ |
- |
|
|
$ |
413,810 |
|
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 (“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 (“WFOE”) 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 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 Group”.
Pursuant
to the VIE Agreements, Tenet-Jove has the exclusive right to
provide to the Zhisheng Group 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 Group 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 Group and Ankang
Longevity Group. Therefore, the Zhisheng Group 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 Group and Ankang Longevity Group, Shineco owns 100% of
Tenet-Jove. Accordingly, Shineco, Tenet-Jove, and its VIEs, the
Zhisheng Group and Ankang Longevity Group are effectively
controlled by the same majority shareholders. Therefore, Shineco,
Tenet-Jove and its VIEs 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
April 19, 2017, Tenet-Jove established Xinjiang Tiankunrunze
Biological Engineering Co., Ltd. (“Tiankunrunze”) with registered
capital of RMB 50.0 million (US$ 7,262,000) and owns 65% interest
of Tiankunrunze. On April 28, 2017, Tiankunrunze established
Xinjiang Tianzhuo Technology Development Co., Ltd. (“Tianzhuo”)
with registered capital of RMB 10.0 million (US$ 1,450,233). On May
22, 2017, Tiankunrunze established Xinjiang Tianhuihechuang
Agriculture Development Co., Ltd. (“Tianhuihechuang”) with
registered capital of RMB 10.0 million (US$ 1,452,294). On May 23,
2017, Tiankunrunze established Xinjiang Tianxintongye Biotechnology
Development Co., Ltd. (“Tianxintongye”) with registered capital of
RMB 10.0 million (US$ 1,451,615). Therefore, Tenet-Jove controls
Tiankunrunze and its wholly owned subsidiaries.
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, the Company and Biorefinery own 80%
and 20% of the equity interests of ICAITR, respectively. Shineco
invested RMB 5.0 million (US$ 737,745) as the registered capital,
and Biorefinery will 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 RMB 10.0 million (US$ 1,502,650). On September 30, 2017,
Tenet-Jove established Xinjiang Tianyi Runze Bioengineering Co.,
Ltd. (“Runze”) with registered capital of RMB 10.0 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 RMB
14,000,000 (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 that 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 E-Commerce Co., Ltd. (“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 (“JD”), 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 RMB 20 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, 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 RMB 10.0
million (US$ 1,502,650). TNB became a wholly-owned subsidiary of
Tenet-Jove.
The
business operation of Tiankunrunze and its wholly owned
subsidiaries was ceased in July 2019.
On
August 22, 2019, Tenet-Jove established Shineco Zhong Hemp Group
Co., Ltd. (“Zhong Hemp”) with registered capital of RMB 200.0
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) Zhisheng Group is 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 (“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, 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 are as
follows:
|
|
September 30,
2020 |
|
|
June 30,
2020 |
|
|
|
|
|
|
|
|
Current assets |
|
$ |
61,596,986 |
|
|
$ |
58,350,565 |
|
Plant and equipment, net |
|
|
8,350,796 |
|
|
|
8,168,594 |
|
Other
non-current assets |
|
|
9,223,659 |
|
|
|
11,054,954 |
|
Total assets |
|
|
79,171,441 |
|
|
|
77,574,113 |
|
Total
liabilities |
|
|
(7,496,725 |
) |
|
|
(6,189,172 |
) |
Net assets |
|
$ |
71,674,716 |
|
|
$ |
71,384,941 |
|
|
|
For the three months ended
September 30, |
|
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
Net sales |
|
$ |
4,122,691 |
|
|
$ |
7,011,877 |
|
Gross profit |
|
$ |
912,427 |
|
|
$ |
1,805,879 |
|
Income (loss) from operations |
|
$ |
(294,564 |
) |
|
$ |
522,355 |
|
Net income (loss) |
|
$ |
(400,077 |
) |
|
$ |
569,490 |
|
Non-controlling Interests
US
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. Accordingly, the
Company’s business, financial condition, and results of operations
may be influenced by the political, economic, and legal environment
in the PRC, as well as by the general state of the PRC economy. The
Company’s operations in the PRC 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 other factors, 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
situations and believes that it is in compliance with existing laws
and regulations, changes could affect the Company’s interest in
these entities and its operations in the PRC.
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 US 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 rendering 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 June 30,
2020 and 2019, 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 September 30, 2020 and June 30, 2020 the
allowance for doubtful accounts was US$ 6,065,185 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 September 30,
2020 and June 30, 2020, the inventory reserve was US$ 1,179,743 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 September 30, 2020 and June 30, 2020, the Company
had an allowance for uncollectible advances to suppliers of US$
3,900,865 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 twelve 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 us not to reassess under the new standard our 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:
|
|
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 three months ended September 30,
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 does not have any uncertain tax positions
at June 30, 2020 and 2019. The Company has not provided deferred
taxes for undistributed earnings of non-U.S. subsidiaries at June
30, 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 September 30, 2020, the tax years
ended December 31, 2014 through December 31, 2019 for the Company’s
People’s Republic of China (“PRC”) subsidiaries remain 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 will be 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 has caused us to re-measure the Company’s 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 US 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 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
is on raw materials and other materials included in the cost of
producing finished products or acquiring finished products. The
Company records a VAT payable or VAT receivable in the accompanying
unaudited condensed consolidated financial statements.
Foreign Currency Translation
The
Company uses the United States dollar (“U.S. dollars”, “USD” or
“US$”) for financial reporting purposes. The Company’s subsidiaries
and VIEs maintain their books and records in their functional
currency of Renminbi (“RMB”), the currency of the PRC.
In
general, for consolidation purposes, the Company translates the
assets and liabilities of its subsidiaries and VIEs into U.S.
dollars using the applicable exchange rates prevailing at the
balance sheet date, and the statements of income and cash flows are
translated at average exchange rates during the reporting periods.
As a result, amounts related to assets and liabilities reported on
the statement of cash flows will not necessarily agree with changes
in the corresponding balances on the balance sheet. Equity accounts
are translated at historical rates. Adjustments resulting from the
translation of the financial statements of the subsidiaries and
VIEs are recorded as accumulated other comprehensive
loss.
The
balance sheet amounts, with the exception of equity, at September
30, 2020 and June 30, 2020 were translated at 1 RMB to 0.1470 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
three months ended September 30, 2020 and 2019 were at 1 RMB to
0.1445 USD and at 1 RMB to 0.1425 USD, respectively.
Comprehensive Loss
Comprehensive
loss consists of two components, net income (loss) and other
comprehensive loss. The foreign currency translation gain or loss
resulting from translation of the financial statements expressed in
RMB to USD is reported in other comprehensive loss in the unaudited
condensed consolidated statements of income (loss) and
comprehensive 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 three months ended September 30, 2020
and 2019.
New Accounting Pronouncements
In
August 2018, the FASB issued ASU No. 2018-13, “Fair Value
Measurement (Topic 820): Disclosure Framework – Changes to the
Disclosure Requirements for Fair Value Measurement,” to improve the
effectiveness of disclosures in the notes to financial statements
related to recurring or nonrecurring fair value measurements by
removing amounts and reasons for transfers between Level 1 and
Level 2 of the fair value hierarchy, policies for timing of
transfers between different levels for fair value measurements, and
the valuation processes for Level 3 fair value measurements. The
new standard requires disclosure of the range and weighted average
of significant unobservable inputs used to develop Level 3 fair
value measurements. The amendments in this update are effective for
all entities for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2019. The Company
expects that the adoption of this ASU will not have a material
impact on its financial statements.
In
August 2018, the FASB issued ASU No. 2018-15, “Intangibles -
Goodwill and Other - Internal-Use Software (Subtopic 350-40):
Customer’s Accounting for Implementation Costs Incurred in a Cloud
Computing Arrangement That Is a Service Contract,” (ASU 2018-15),
to align the requirements for capitalizing implementation costs in
a hosting arrangement that is a service contract with the
requirements for capitalizing implementation costs relating to
internal-use software. The update requires entities in a hosting
arrangement that is a service contract to follow the guidance in
Subtopic 350-40 to determine which implementation costs to
capitalize as an asset and which costs to expense. ASU 2018-15 is
effective for the Corporation on January 1, 2020 and may be applied
using either the retrospective or prospective approach. Early
adoption is permitted. The Company expects that the adoption of
this ASU will have a material impact on its financial
statements.
In
October 2018, the FASB issued ASU No. 2018-17, “Consolidation
(Topic 810): Targeted Improvements to Related Party Guidance for
Variable Interest Entities”. The new standard changes how entities
evaluate decision-making fees under the variable interest entity
guidance. The new standard is effective for fiscal years beginning
after December 15, 2019, and interim periods within those fiscal
years. Early adoption is permitted in any interim period after
issuance. The standard should be applied on a modified
retrospective basis through a cumulative-effect adjustment directly
to retained earnings at the beginning of the period of adoption.
The Company expects that the adoption of this ASU will not have a
material impact on its financial statements.
In
November 2018, the FASB issued ASU No. 2018-19, “Codification
Improvements to Topic 326, Financial Instruments-Credit Losses.”
ASU 2018-19 clarifies that receivables arising from operating
leases are not within the scope of Subtopic 326-20. Instead,
impairment of receivables arising from operating leases should be
accounted for in accordance with Accounting Standard Codification
(“ASC”) 842, Leases. The Company expects that the adoption of this
ASU will not have a material impact on its financial
statements.
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 Update 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 Board 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 Update were submitted by
stakeholders as part of the Simplification Initiative. For public
business entities, the amendments in this Update 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 financial
statements.
NOTE
3 – INVENTORIES, NET
The
inventories, net consisted of the following:
|
|
September 30,
2020 |
|
|
June 30,
2020 |
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
702,649 |
|
|
$ |
958,206 |
|
Work-in-process |
|
|
2,621,429 |
|
|
|
529,655 |
|
Finished goods |
|
|
1,699,609 |
|
|
|
1,433,423 |
|
Less:
inventory reserve |
|
|
(1,179,743 |
) |
|
|
(1,121,408 |
) |
Total
inventories, net |
|
$ |
3,843,944 |
|
|
$ |
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:
|
|
September 30,
2020 |
|
|
June 30,
2020 |
|
|
|
|
|
|
|
|
Buildings |
|
$ |
11,980,396 |
|
|
$ |
11,525,458 |
|
Machinery and equipment |
|
|
894,580 |
|
|
|
860,610 |
|
Motor vehicles |
|
|
59,905 |
|
|
|
57,630 |
|
Office equipment |
|
|
240,300 |
|
|
|
231,174 |
|
Farmland
leasehold improvements |
|
|
3,091,919 |
|
|
|
2,974,508 |
|
|
|
|
16,267,100 |
|
|
|
15,649,380 |
|
Less:
accumulated depreciation and amortization |
|
|
(6,557,766 |
) |
|
|
(6,159,896 |
) |
Total property
and equipment, net |
|
$ |
9,709,334 |
|
|
$ |
9,489,484 |
|
Depreciation
and amortization expense charged to operations was US$ 152,107 and
US$ 178,215 for the three months ended September 30, 2020 and 2019,
respectively.
Farmland
leasehold improvements consist of following:
|
|
September 30,
2020 |
|
|
June 30,
2020 |
|
|
|
|
|
|
|
|
Blueberry farmland
leasehold improvements |
|
$ |
2,375,350 |
|
|
$ |
2,285,149 |
|
Yew tree planting base
reconstruction |
|
|
266,127 |
|
|
|
256,021 |
|
Greenhouse
renovation |
|
|
450,442 |
|
|
|
433,338 |
|
Total farmland
leasehold improvements |
|
$ |
3,091,919 |
|
|
$ |
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” (the “Right”) to use the land. The Company has the Right to
use the land for 50 years and amortizes the rights on a
straight-line basis over the period of 50 years.
|
|
September 30,
2020 |
|
|
June 30,
2020 |
|
|
|
|
|
|
|
|
Land use rights |
|
$ |
1,635,428 |
|
|
$ |
1,573,325 |
|
Less:
accumulated amortization |
|
|
(400,622 |
) |
|
|
(377,382 |
) |
Total land use
rights, net |
|
$ |
1,234,806 |
|
|
$ |
1,195,943 |
|
For
the three months ended September 30, 2020 and 2019, the Company
recognized amortization expense of US$ 9,300 and US$ 9,214,
respectively.
The
estimated future amortization expenses are as follows:
Twelve months ending September 30: |
|
|
|
|
|
|
|
2021 |
|
$ |
32,709 |
|
2022 |
|
|
32,709 |
|
2023 |
|
|
32,709 |
|
2024 |
|
|
32,709 |
|
2025 |
|
|
32,709 |
|
Thereafter |
|
|
1,071,261 |
|
Total |
|
$ |
1,234,806 |
|
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 June 30, 2020, the
distribution rights were evaluated at RMB 7,380,000 (US$
1,085,092).
NOTE
7 - INVESTMENTS
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 RMB 6.8 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 equity investments were formed as
new business entities 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 income
of US$ 15,287 and US$ 69,899 for the three months ended September
30, 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 loss (see Note 11).
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 three months ended September 30, 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,
respectively.
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
RMB 14.5 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’s unlikely to obtain any
investment income in the future, and decided the make a fully
impairment on this investment during the year ended June 30,
2020.
On
November 21, 2016, the Company (the “Investor”) entered into an
agreement with Original Lab Inc., a California corporation (the
“Investee”), and made a payment of US$ 200,000 in exchange for the
right to acquire certain shares of the Investee’s common and
preferred stock. The Company considered it’s unlikely to obtain any
investment income in the future, and decided the make a fully
impairment on this investment during the year ended June 30,
2019.
The
Company’s investments in unconsolidated entities consist of the
following:
|
|
September 30,
2020 |
|
|
June 30,
2020 |
|
|
|
|
|
|
|
|
Shaanxi Pharmaceutical
Holding Group Longevity Pharmacy Co., Ltd. (Ankang Longevity
Pharmacy) |
|
$ |
3,853,750 |
|
|
$ |
3,690,419 |
|
Shaanxi
Pharmaceutical Sunsimiao Drugstores Ankang Chain Co., Ltd. |
|
|
855,148 |
|
|
|
824,705 |
|
Total
investment |
|
$ |
4,708,898 |
|
|
$ |
4,515,124 |
|
Summarized
financial information of unconsolidated entities is as
follows:
|
|
September 30,
2020 |
|
|
June 30,
2020 |
|
|
|
|
|
|
|
|
Current assets |
|
$ |
39,876,243 |
|
|
$ |
38,546,879 |
|
Noncurrent assets |
|
|
385,893 |
|
|
|
324,725 |
|
Current liabilities |
|
|
30,667,280 |
|
|
|
29,671,104 |
|
|
|
For the three months ended
September 30, |
|
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
Net sales |
|
$ |
7,890,100 |
|
|
$ |
7,540,520 |
|
Gross profit |
|
|
554,304 |
|
|
|
764,612 |
|
Income from operations |
|
|
24,327 |
|
|
|
138,891 |
|
Net income |
|
|
31,198 |
|
|
|
144,590 |
|
NOTE
8 - LEASES
Effective
July 1, 2019, the Company adopted the new lease accounting standard
using the optional transition method which allowed us 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 us 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 us 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, one of the
Company’s controlled subsidiaries, Zhisheng Group 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 5 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 right of use assets and lease
liabilities. Lease expense for lease payment is recognized on a
straight-line basis over the lease term. Leases with initial term
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 discount 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.
|
|
September 30,
2020 |
|
|
June 30,
2020 |
|
|
|
|
|
|
|
|
Rights of use lease assets |
|
$ |
3,204,393 |
|
|
$ |
3,227,895 |
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities –
current |
|
|
92,909 |
|
|
|
97,633 |
|
Operating lease
liabilities – non-current |
|
|
424,605 |
|
|
|
401,891 |
|
Total operating
lease liabilities |
|
$ |
517,514 |
|
|
$ |
499,524 |
|
The
weighted average remaining lease terms and discount rates for all
of operating leases were as follows as of September 30. 2020 and
June 30, 2020:
|
|
September 30,
2020 |
|
|
June 30,
2020 |
|
|
|
|
|
|
|
|
Remaining lease term and discount
rate: |
|
|
|
|
|
|
|
|
Weighted average remaining
lease term (years) |
|
|
9.23 |
|
|
|
9.26 |
|
Weighted average discount
rate |
|
|
5.0 |
|
|
|
5.0 |
|
Rent
expense totaled US$113,115 and US$ 92,325 for the three months
ended September 30, 2020 and 2019, respectively.
The
following is a schedule, by years, of maturities of lease
liabilities as of September 30, 2020:
2021 |
|
$ |
300,401 |
|
2022 |
|
|
277,157 |
|
2023 |
|
|
328,920 |
|
2024 |
|
|
328,920 |
|
2025 |
|
|
319,213 |
|
Thereafter |
|
|
1,720,775 |
|
Total lease payments |
|
|
3,275,386 |
|
Less: imputed interest |
|
|
(70,991 |
) |
Less:
prepayments |
|
|
(2,686,881 |
) |
Present
value of lease liabilities |
|
$ |
517,514 |
|
NOTE
9 - SHORT-TERM LOANS
Short-term
loans consist of the following:
Lender |
|
September 30,
2020 |
|
|
Maturity
Date |
|
Int.
Rate/Year |
|
Agricultural Bank of
China-a |
|
$ |
661,642 |
|
|
2020/12/31 |
|
|
4.65 |
% |
Agricultural Bank of China-a |
|
|
1,470,314 |
|
|
2021/2/27 |
|
|
5.66 |
% |
Agricultural
Bank of China-b |
|
|
294,063 |
|
|
2021/9/1 |
|
|
5.66 |
% |
Total
short-term loans |
|
$ |
2,426,019 |
|
|
|
|
|
|
|
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 shareholder 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
the Xiaoyan Chen but not a shareholder of Ankang Longevity
Group. |
|
|
* |
The
Company repaid the loan in full on maturity date. |
The
Company recorded interest expense of US$ 29,622 and US$ 30,277 for
the three months ended September 30, 2020 and 2019, respectively.
The annual weighted average interest rates are 5.31% and 5.31% for
the three months ended September 30, 2020 and 2019,
respectively.
NOTE
10 - ACQUISITION
On
December 12, 2016, the Company entered into a merger and
acquisition agreement with Tianjin Tajite E-Commerce Co., Ltd.
(“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 a 51 % equity interest
of Tianjin Tajite.
Pursuant
to the agreement, the Company made a payment of RMB 14,000,000
(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 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 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
following table summarizes the allocation of estimated fair values
of net assets acquired and liabilities assumed:
Accounts receivable,
net |
|
|
27,288 |
|
Inventory |
|
|
58,679 |
|
Other current assets |
|
|
186,519 |
|
Distribution rights |
|
|
1,085,092 |
|
Property, plant and equipment |
|
|
14,205 |
|
Advance from customers |
|
|
(79,017 |
) |
Tax payable |
|
|
(17,056 |
) |
Deferred tax liabilities |
|
|
(271,273 |
) |
Salary payable |
|
|
(25,362 |
) |
Accrued liabilities and other
current liabilities |
|
|
(1,004,308 |
) |
Non-controlling interest |
|
|
1,440 |
|
Goodwill |
|
|
2,059,939 |
|
Total
purchase price for acquisition, net of US$ 22,294 of cash |
|
$ |
2,036,146 |
|
The
excess of the purchase price over the aggregate fair value of
assets acquired was allocated to goodwill. 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 is
as follows:
|
|
Preliminary
Fair Value |
|
|
Weighted Average Useful Life
(in Years) |
Distribution
rights |
|
$ |
1,085,092 |
|
|
(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 three months ended September 30, 2020.
NOTE
11 - RELATED PARTY TRANSACTIONS
DUE
FROM RELATED PARTIES
The
Company had previously made temporary advances to certain
shareholders of the Company and to other entities that are either
owned by family members of those shareholders or to other entities
that the Company has investments in. Those advances are due on
demand, non-interest bearing.
As of
September 30, 2020 and June 30, 2020, the outstanding amounts due
from related parties consist of the following:
|
|
September 30,
2020 |
|
|
June 30,
2020 |
|
|
|
|
|
|
|
|
Yang Bin |
|
$ |
44,109 |
|
|
$ |
42,434 |
|
Beijing Huiyinansheng Asset Management
Co., Ltd (a.) |
|
|
22,055 |
|
|
|
21,217 |
|
Wang Qiwei |
|
|
59,549 |
|
|
|
57,288 |
|
Total due from
related parties |
|
$ |
125,713 |
|
|
$ |
120,939 |
|
a. |
This
Company is wholly owned by one of the Company’s senior
management. |
|
|
b. |
This
Company is wholly owned by one of the Company’s
shareholders. |
DUE
TO RELATED PARTIES
As of
September 30, 2020 and June 30, 2020, the Company had related party
payables of US$ 1,355,919 and US$ 1,355,919, respectively,
mainly due to the principal shareholders or certain relatives of
the shareholders of the Company who lend funds for the Company’s
operations. The payables are unsecured, non-interest bearing and
due on demand.
|
|
September 30,
2020 |
|
|
June 30,
2020 |
|
|
|
|
|
|
|
|
Wu Yang |
|
$ |
94,174 |
|
|
$ |
90,598 |
|
Wang Sai |
|
|
90,964 |
|
|
|
90,629 |
|
Chen Jiping |
|
|
3,024 |
|
|
|
3,024 |
|
Zhou Guocong |
|
|
799,548 |
|
|
|
648,308 |
|
Li Baolin |
|
|
220,546 |
|
|
|
353,619 |
|
Zhao
Min |
|
|
175,557 |
|
|
|
169,741 |
|
Total due to
related parties |
|
$ |
1,383,813 |
|
|
$ |
1,355,919 |
|
SALES
TO RELATED PARTIES
For
the three months ended September 30, 2020 and 2019, the Company
recorded sales to Shaanxi Pharmaceutical Group, a related party
(see Note 7), of US$759,366 and US$ 795,548, respectively. As of
September 30, 2020 and June 30, 2020, the balance of accounts
receivable due from Shaanxi Pharmaceutical Group was US$ 1,722,124
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 entities 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 VIE entities 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 “Tax Cuts and Jobs Act” (“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 us to re-measure the Company’s 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 expense (benefit) are as
follows:
|
|
For the three months ended
September 30, |
|
|
|
2020 |
|
|
2019 |
|
Current income tax
provision |
|
$ |
105,297 |
|
|
$ |
140,841 |
|
Deferred income
tax provision (benefit) |
|
|
- |
|
|
|
(145,624 |
) |
Total income
tax expense |
|
$ |
105,297 |
|
|
$ |
(4,783 |
) |
|
|
September 30,
2020 |
|
|
June 30,
2020 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
498,846 |
|
|
$ |
428,879 |
|
Inventory
reserve |
|
|
265,487 |
|
|
|
252,022 |
|
Net
operating loss carry-forwards |
|
|
524,678 |
|
|
|
504,754 |
|
Total |
|
|
1,289,011 |
|
|
|
1,185,655 |
|
Valuation allowance |
|
|
(1,289,011 |
) |
|
|
(1,185,655 |
) |
Total deferred tax
assets |
|
|
- |
|
|
|
- |
|
Deferred tax liability: |
|
|
|
|
|
|
|
|
Distribution rights |
|
|
(271,273 |
) |
|
|
(260,972 |
) |
Total
deferred tax liability |
|
|
(271,273 |
) |
|
|
(260,972 |
) |
Deferred tax
liability, net |
|
$ |
(271,273 |
) |
|
$ |
(260,972 |
|
Movement
of the valuation allowance:
|
|
September 30,
2020 |
|
|
June 30,
2020 |
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
1,185,655 |
|
|
$ |
519,671 |
|
Current year addition |
|
|
56,555 |
|
|
|
680,901 |
|
Exchange
difference |
|
|
(46,801 |
) |
|
|
(14,917 |
) |
Ending balance |
|
$ |
1,289,011 |
|
|
$ |
1,185,655 |
|
(b)
Value Added Tax
The
Company is subject to a value added tax (“VAT”) for selling
merchandise. The applicable VAT rate is 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 will be expensed in the
period if and when a determination is made by the tax authorities.
There were no assessed penalties during the three months ended
September 30, 2020 and 2019.
(c)
Taxes Payable
Taxes
payable consists of the following:
|
|
September 30,
2020 |
|
|
June 30,
2020 |
|
|
|
|
|
|
|
|
Income tax payable |
|
$ |
3,457,740 |
|
|
$ |
3,424,043 |
|
Value added tax payable |
|
|
540,730 |
|
|
|
522,615 |
|
Business tax
and other taxes payable |
|
|
6,325 |
|
|
|
6,026 |
|
Total tax payable |
|
|
4,004,795 |
|
|
|
3,952,684 |
|
Less: current
portion |
|
|
3,438,773 |
|
|
|
3,386,662 |
|
Income tax
payable - noncurrent portion |
|
$ |
566,022 |
|
|
$ |
566,022 |
|
NOTE
13 - SHAREHOLDERS’ 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 June 30,
2020 and 2019, the balance of the required statutory reserves was
US$ 4,199,964 and US$ 4,198,107, respectively.
On
January 23, 2018, Shineco, Inc. entered into a Common Stock
Purchase Agreement (“Purchase Agreement”) with IFG Opportunity Fund
LLC (“IFG Fund”) whereby, upon the terms and subject to the
conditions and limitations set forth therein, the Company had the
right, from time to time in its sole discretion during the 24-month
term of the Purchase Agreement, to direct IFG Fund to purchase up
to a total of US$ 15,000,000 worth of shares of common stock. As
consideration for IFG Fund to enter into the Purchase Agreement,
the Company agreed to issue 22,222 shares of the Company’s Common
Stock (the “Commitment Shares”) to IFG Fund. The Purchase Shares
are being offered in an indirect primary offering consisting of an
equity line of credit, in accordance with the terms and conditions
of the Purchase Agreement. The total number of Purchase Shares
shall not exceed 444,444. On January 23, 2018, the Company issued
the Commitment Shares to IFG Fund. On July 3, 2018, the Company and
IFG Fund entered into a termination agreement, dated July 3, 2018
(the “Termination Agreement”) effective as of July 3, 2018, to
terminate the Purchase Agreement and the Registration Rights
Agreement. IFG retained the 22,222 commitment shares which were
valued at US$ 434,000 and written off during the nine months ended
March 31, 2019.
On
September 27, 2018, the Company entered into a securities purchase
agreement with selected investors whereby the Company agreed to
sell up to 181,967 of common stock at a purchase price of US$ 9 per
share, for gross proceeds to the Company of approximately US$
1,637,700 (the “2018 Offering”). After deducting the offering cost,
the net proceeds the Company received was US$ 1,589,892. The 2018
Offering closed on September 28, 2018. The 2018 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 May 8,
2019, TNB, filed with the United States Securities and Exchange
Commission a Notice of Exempt Offering of Securities on Form D
regarding an offering (“Offering”) of simple agreement for future
tokens. Tenet-Jove intends to use the net proceeds from sales of
the tokens to develop land and facilities for cultivating
industrial hemp in China under a newly formed wholly owned
subsidiary (the “Operations”). The minimum target amount in this
private placement is $1,000,000. Once Shineco raises $1,000,000,
investors will have the option to convert smart contracts that
represent preferred stock into Shinceo’s common stock. For this,
smart contracts that shall be convertible into common stock at the
following ratio of 180:1. If Shineco raises $1,000,000 in this
private placement, then up to 55,556 shares of common stock will be
issued pursuant to the following calculation if the smart contract
holders choose to convert their smart contracts that represent
preferred stock into Shinceo’s common stock:
1.
Each smart contract is $ 0.1;
2.
$1,000,000 can get 10,000,000 smart contracts. ($1,000,000 divided
by 0.1 equals to 10,000,000 smart contracts.)
3.
The conversion ratio of smart contracts to common stock is
180:1
4.
Therefore,-10,000,000-smart-contracts-divided by 180
-equals-55,556-common stock.
Shineco
plans to issue no more than 444,444 shares in connection with this
transaction, specifically for the exchange of smart
contracts.
On
September 3, 2019, the Company granted 184,763 restricted shares to
its employees as compensation cost for awards. The fair value of
the restricted shares was US$ 1,022,660 based on the closing stock
price US$ 5.54 at September 3, 2019. These restricted shares were
vested immediately from 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 (the “Shares”) at a purchase price of US$ 4.68 per
Share. The net proceeds that the Company received was US$
1,500,203. The offering is being 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 shareholders approved to effect a
1-for-9 reverse stock split of the shares (the “Reverse Stock
Split”) of the Company’s common stock, par value $0.001 per share
with the market effective date of August 14, 2020. As a result of
the Reverse Stock Split, each nine pre-split shares of common stock
outstanding will automatically combine and convert to one issued
and outstanding share of common stock without any action on the
part of the stockholder. No fractional shares of common stock will
be issued to any shareholders in connection with the Reverse Stock
Split. Each shareholder will be 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 remains at 100,000,000 shares, and the par
value of the common stock following the Reverse Stock Split shall
remain at $0.001 per share. As of August 14, 2020 (immediately
prior to the effective date), there were 27,333,428 common stock
outstanding, and the number of common stock outstanding after the
Reverse Stock Split is 3,037,048, taking into account of the effect
of rounding fractional shares into whole shares. As a result of
this Reverse Stock Split, the Company’s shares and per share data
as reflected in the unaudited condensed consolidated financial
statements has been retroactively restated as if the transaction
occurred at the beginning of the periods presented.
NOTE
14 - CONCENTRATIONS AND RISKS
The
Company maintains principally all bank accounts in the PRC. The
cash balance held in the PRC bank accounts was US$ 23,113,638 and
US$ 32,358,252 as of September 30, 2020 and June 30, 2020,
respectively.
During
the three months ended September 30, 2020 and 2019, 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 three months ended September 30, 2020, four customers accounted
for approximately 18%, 15%, 14% and 10% of the Company’s total
sales, respectively. At September 30, 2020, five customers
accounted for approximately 64% of the Company’s accounts
receivable.
For
the three months ended September 30, 2019, five customers accounted
for approximately 14%, 12%, 11%, 10% and 10% of the Company’s total
sales, respectively.
For
the three months ended September 30, 2020, three vendors accounted
for approximately 51%, 13% and 10% of the Company’s total
purchases, respectively. For the three months ended September 30,
2019, three vendors accounted for approximately 36%, 16% and 12% of
the Company’s total purchases, respectively.
NOTE
15 - COMMITMENTS AND CONTIGENCIES
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 alleges 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 alleges that the Company breached the Agreement and seeks
money damages up to US$ 6 million. As the date of this report,
there is 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
City.
● |
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 Group, is 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 Group has 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
three months ended September 30, 2020:
|
|
For the three months ended September 30, 2020 |
|
|
|
Luobuma |
|
|
Herbal |
|
|
Other
agricultural |
|
|
|
|
|
|
products |
|
|
products |
|
|
products |
|
|
Total |
|
Segment revenue |
|
$ |
24,615 |
|
|
$ |
3,135,406 |
|
|
$ |
983,362 |
|
|
$ |
4,143,383 |
|
Cost of revenue and related business
and sales tax |
|
|
28,462 |
|
|
|
2,492,463 |
|
|
|
713,877 |
|
|
|
3,234,802 |
|
Gross profit (loss) |
|
|
(3,847 |
) |
|
|
642,943 |
|
|
|
269,485 |
|
|
|
908,581 |
|
Gross profit (loss) % |
|
|
(16 |
)% |
|
|
20.5 |
% |
|
|
27.4 |
% |
|
|
21.9 |
% |
The
following table presents summarized information by segment for the
three months ended September 30, 2019:
|
|
For the three months ended September 30, 2019 |
|
|
|
Luobuma |
|
|
Herbal |
|
|
Other
agricultural |
|
|
|
|
|
|
products |
|
|
products |
|
|
products |
|
|
Total |
|
Segment revenue |
|
$ |
65,519 |
|
|
$ |
3,300,321 |
|
|
$ |
3,680,941 |
|
|
$ |
7,046,781 |
|
Cost of revenue and related business
and sales tax |
|
|
231,504 |
|
|
|
2,599,404 |
|
|
|
2,575,978 |
|
|
|
5,406,886 |
|
Gross profit |
|
|
(165,985 |
) |
|
|
700,917 |
|
|
|
1,104,963 |
|
|
|
1,639,895 |
|
Gross profit % |
|
|
(253.3 |
)% |
|
|
21.2 |
% |
|
|
30.0 |
% |
|
|
23.3 |
% |
Total
Assets as of
|
|
September 30,
2020 |
|
|
June 30,
2020 |
|
|
|
|
|
|
|
|
Luobuma products |
|
$ |
3,265,271 |
|
|
$ |
2,836,450 |
|
Herbal products |
|
|
45,107,523 |
|
|
|
43,855,815 |
|
Other
agricultural products |
|
|
34,832,830 |
|
|
|
32,396,346 |
|
Total
assets |
|
$ |
83,205,624 |
|
|
$ |
79,088,611 |
|
NOTE
17 - SUBSEQUENT EVENTS
These
unaudited condensed consolidated financial statements were approved
by management and available for issuance on November 16, 2020, 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.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
document contains certain statements of a forward-looking nature.
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,” “we believe,” “we
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; |
|
|
|
|
● |
statements
of our plans and objectives, including those that relate to our
proposed expansions and the effect such expansions may have on our
revenues; |
|
|
|
|
● |
statements
regarding the capabilities of our business
operations; |
|
|
|
|
● |
statements
of expected future economic performance; |
|
|
|
|
● |
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. We discuss our
known material risks under the heading “Risk Factors” in our annual
report on Form 10-K and Registration Statement on Form S-1. 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, the
Company reserves 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 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.
ITEM 2. |
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS |
The
following discussion and analysis of the results of our operations
and financial condition for the three months ended September 30,
2020 and 2019 should be read in conjunction with our unaudited
condensed consolidated financial statements, and the notes to those
unaudited condensed consolidated financial statements that are
included elsewhere in this Report and our annual report on Form
10-K for the twelve months ended June 30, 2020 and 2019, including
the consolidated financial statements and notes thereto. All
monetary figures are presented in U.S. dollars, unless otherwise
indicated.
Forward-Looking
Statements
The
statements in this discussion that are not historical facts are
“forward-looking statements” within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and are subject to the
“safe harbor” created by those sections The words “may,” “will,”
“expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,”
“continue,” the negative forms thereof, or similar expressions, are
intended to identify forward-looking statements, although not all
forward-looking statements are identified by those words or
expressions. Forward-looking statements by their nature involve
substantial risks and uncertainties, certain of which are beyond
our control. Actual results, performance or achievements may differ
materially from those expressed or implied by forward-looking
statements depending on a variety of important factors, including,
but not limited to, weather, local, regional, national and global
Luobuma and herbal medicines price fluctuations, availability of
financing and interest rates, competition, changes in, or failure
to comply with, government regulations, costs, uncertainties and
other effects of legal and other administrative proceedings, and
other risks and uncertainties. Actual results and the timing of the
events may differ materially from those contained in these forward
looking statements due to many factors, including those discussed
in the “Forward-Looking Statements” set forth elsewhere in this
quarterly report on Form 10-Q. We are not undertaking to update or
revise any forward-looking statement, whether as a result of new
information, future events or circumstances or
otherwise.
Business
Overview and Corporate Structure
Shineco,
Inc. (the “Company”, “we”, “us” and “our”) was incorporated in the
State of Delaware on August 20, 1997. 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 our restricted
shares of common stock. Consequently, Tenet-Jove became our 100%
owned subsidiary and its operating business became that of the
Company. Tenet-Jove was incorporated on December 15, 2003 under the
laws of China and was officially granted the status of a Wholly
Foreign-Owned Entity (“WFOE”) by Chinese authorities on July 14,
2006. This transaction was accounted for as a recapitalization.
Tenet-Jove owns a 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 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 Group.” Zhisheng Agricultural has not had any significant
business activities and thus we have deregistered it in 2017. We
have transferred all assets, rights and liabilities to an
affiliated entity, Zhisheng Freight.
Pursuant
to the VIE Agreements, Tenet-Jove has the exclusive right to
provide to each of the Zhisheng Group entities and Ankang Longevity
Group consulting services related to their business operations and
management. All these contractual agreements obligate Tenet-Jove to
absorb a majority of the risk of loss from each of the Zhisheng
Group entities 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 each of the
Zhisheng Group and Ankang Longevity Group. Based on these
contractual arrangements, the Zhisheng Group and Ankang Longevity
Group are treated as Variable Interest Entities (“VIEs”) under
Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 810 “Consolidation”. Accordingly, the accounts
of each of the Zhisheng Group entities and Ankang Longevity Group
are consolidated with those of Tenet-Jove. Ankang Longevity Group
has several subsidiaries. We carry out all of our business in China
through our PRC subsidiaries, our VIEs and their
subsidiaries.
On
April 19, 2017, Tenet-Jove established Xinjiang Tiankunrunze
Biological Engineering Co., Ltd. (“Tiankunrunze”) with registered
capital of RMB 50.0 million (US$ 7,262,000) and owns 65% interest
of Tiankunrunze. On April 28, 2017, Tiankunrunze established
Xinjiang Tianzhuo Technology Development Co., Ltd. (“Tianzhuo”)
with registered capital of RMB 10.0 million (US$ 1,450,233). On May
22, 2017, Tiankunrunze established Xinjiang Tianhuihechuang
Agriculture Development Co., Ltd. (“Tianhuihechuang”) with
registered capital of RMB 10.0 million (US$ 1,452,294). On May 23,
2017, Tiankunrunze established Xinjiang Tianxintongye Biotechnology
Development Co., Ltd. (“Tianxintongye”) with registered capital of
RMB 10.0 million (US$ 1,451,615). Therefore, Tenet-Jove controls
Tiankunrunze and its wholly owned subsidiaries.
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, the Company and Biorefinery own 80%
and 20% of the equity interests of ICAITR, respectively. Shineco
invested RMB 5.0 million (US$ 737,745) as the registered capital,
and Biorefinery will invest a technology patent for “Steam
Explosion Degumming”.
On
September 21, 2017, the Company, through its wholly owned
subsidiary Tenet-Jove, entered into a Strategic Cooperation
Agreement (the “Agreement”) with Mr. Jianjun Wang, who is
experienced in apocynum planting, manufacturing and knowledgeable
in apocynum market and administration procedures with relevant
authorities in apocynum industry in China, to establish an Apocynum
Industrial Park in Xinjiang, China. Pursuant to the Agreement
entered into on September 21, 2017, both parties have agreed to
establish a new company, namely, Xinjiang Shineco Taihe Agriculture
Technology Ltd. to hold and operate the Apocynum Industrial Park,
with a total investment of RMB 50 million (approximately US$ 7.57
million), of which the Company will invest RMB 47.5 million and Mr.
Wang will invest RMB 2.5 million. Upon the closing of the
Agreement, Shineco owns 95% of the equity interest of Xinjiang
Taihe.
On
September 30, 2017, Tenet-Jove established Xinjiang Shineco Taihe
Agriculture Technology Ltd. (“Xinjiang Taihe”) with registered
capital of RMB 10.0 million (US$ 1,502,650). On September 30, 2017,
Tenet-Jove established Xinjiang Tianyi Runze Bioengineering Co.,
Ltd. (“Runze”) with registered capital of RMB 10.0 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, 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
E-Commerce Co., Ltd. (“Tianjin Tajite”), a professional e-commerce
company distributing Luobuma fabric commodities and branded
products of Daiso 100-yen shops, based in Tianjin, China, for cash
consideration of RMB 14,000,000 (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
that 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 equity
interest in Tianjin Tajite.
On
October 27, 2017, the Company, through its subsidiary Tianjin
Tajite E-Commerce Co., Ltd. (“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 (“JD”), 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 RMB 20 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 waits
for the opening of the China-Japan-South Korea Free Trade
Zone.
On
November 1, 2017, the Company established the Apocynum Industrial
Park in Xinjiang, China.
We
ceased the business operation of Tenet-Jove Xuzhou branch in
November 2017.
On
March 13, 2019, Tenet-Jove established Beijing Tenjove Newhemp
Biotechnology Co., Ltd. (“TNB”) with registered capital of RMB 10.0
million (US$ 1,502,650). TNB became wholly-owned subsidiaries of
the Company.
We
ceased the business operation of Tiankunrunze and its wholly owned
subsidiaries in July 2019.
On
August 22, 2019, Tenet-Jove established Shineco Zhong Hemp Group
Co., Ltd. (“Zhong Hemp”) with registered capital of RMB 200.0
million (US$ 28,237,022) and owns 60% interest of Zhong
Hemp.
The
Company, through its subsidiary, Xinjiang Taihe has entered into a
definitive Share Exchange and Acquisition Agreement (the “Xinjiang
Tiansheng Agreement”) with Western Xinjiang Tiansheng Agricultural
Development Co., Ltd (“Xinjiang Tiansheng”). Pursuant to the
Xinjiang Tiansheng Agreement, Xinjiang Taihe will receive 51%
equity ownership in Xinjiang Tiansheng for further investment in
apocynum business expansion in Xinjiang, China, in exchange for a
combination of 14% equity ownership in Xinjiang Taihe and cash
payments in three separate installments (the “Acquisition
Consideration”). The first installment in the amount of RMB 810,000
(approximately US$ 117,933) was paid to Xinjiang Tiansheng (the
“Xinjiang Tiansheng Deposit”). The Acquisition Consideration in the
aggregate is valued at RMB 23.8 million (approximately US$ 3.5
million) contingent upon certain milestones in the next years. The
Company and Xinjiang Tiansheng terminated the Xinjiang Tiansheng
Agreement on July 10, 2018 and Xinjiang Tiansheng returned the full
Xinjiang Tiansheng Deposit following such termination by the end of
July 2018.
We
ceased the business operation of Xinjiang Taihe and Runze in
September 2020 and October 2020, respectively.
Currently,
we have three main business segments: (i) Tenet-Jove is engaged in
developing, manufacturing and selling of Bluish Dogbane and related
products, also known in Chinese as “Luobuma,” including therapeutic
clothing and textile products made from Luobuma, as well as
purchasing Luoboma raw materials processing; (ii) Zhisheng Group is
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, (iii) Ankang Longevity 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.
Financing
Activities
On
January 23, 2018, the Company entered into a Common Stock Purchase
Agreement (the “Purchase Agreement”) with IFG OPPORTUNITY FUND LLC
(“IFG Fund”) whereby, the Company had the right, from time to time
in its sole discretion during the 24-month term of the Purchase
Agreement, to direct IFG Fund to purchase up to a total of US$
15,000,000 of shares of Common Stock and an additional 22,222
shares of Common Stock (the “Commitment Shares”) as consideration
for IFG to enter into the Purchase Agreement. The Company and IFG
Fund, on January 23, 2018, entered into a Registration Rights
Agreement for certain registration rights in connection with the
Purchase Agreement (the “Registration Rights Agreement”). The IFG
Fund offering was made pursuant to a prospectus supplement dated
and filed with the Securities and Exchange Commission (“SEC”) on
January 26, 2018 and an accompanying prospectus dated November 21,
2017, under the Company’s shelf registration statement on Form S-3
declared effective by the SEC on December 19, 2017 (File No.
333-221711). On January 23, 2018, the Company issued the Commitment
Shares to IFG Fund. On July 3, 2018, the Company and IFG Fund
entered into a termination agreement, dated July 3, 2018 effective
as of July 3, 2018, to terminate the Purchase Agreement and the
Registration Rights Agreement. IFG retained the 22,222 commitment
shares which were valued at US$ 434,000 and written off during the
year ended June 30, 2019.
On
September 27, 2018, the Company entered into a securities purchase
agreement with selected investors whereby the Company agreed to
sell up to 181,967 of common stock at a purchase price of US$ 9 per
share, for gross proceeds to the Company of approximately US$
1,637,700 (the “2018 Offering”). After deducting the offering cost,
the net proceeds the Company received was US$ 1,589,892. The 2018
Offering closed on September 28, 2018. The 2018 Offering was made
pursuant to the Company’s effective registration statement on Form
S-3 (Registration Statement No. 333-221711) previously filed with
the SEC and a prospectus supplement thereunder.
On
May 8, 2019, TNB, filed with the United States Securities and
Exchange Commission a Notice of Exempt Offering of Securities on
Form D regarding an offering (“Offering”) of simple agreement for
future tokens. Tenet-Jove intends to use the net proceeds from
sales of the tokens to develop land and facilities for cultivating
industrial hemp in China under a newly formed wholly owned
subsidiary (the “Operations”). The minimum target amount in this
private placement is $1,000,000. Once Shineco raises $1,000,000,
investors will have the option to convert smart contracts that
represent preferred stock into Shinceo’s common stock. For this,
smart contracts that shall be convertible into common stock at the
following ratio of 180:1. If Shineco raises $1,000,000 in this
private placement, then up to 55,556 shares of common stock will be
issued pursuant to the following calculation if the smart contract
holders choose to convert their smart contracts that represent
preferred stock into Shinceo’s common stock:
1.
Each smart contract is $ 0.1;
2.
$1,000,000 can get 10,000,000 smart contracts. ($1,000,000 divided
by 0.1 equals to 10,000,000 smart contracts.)
3.
The conversion ratio of smart contracts to common stock is
180:1
4.
Therefore, -10,000,000-smart-contracts-divided by 180
-equals-55,556-common stock.
Shineco
plans to issue no more than 444,444 shares in connection with this
transaction, specifically for the exchange of smart
contracts.
On
September 5, 2019, the Company entered into a securities purchase
agreement with select investors whereby the Company agreed to sell,
and the investors agreed to purchase, up to 310,977 shares of
common stock (the “Shares”) at a purchase price of US$ 4.68 per
Share. The net proceeds that the Company received was US$
1,500,203. The offering is being 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.
Factors
Affecting Financial Performance
We
believe that the following factors will affect our financial
performance:
Increasing demand for our products - 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 continuous growth.
As of the date of this 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.
Expansion of our sources of supply, production capacity and sales
network - To meet the increasing demand for our products,
we need to expand our sources of supply and production capacity. We
plan to make capital improvements in our existing production
facilities which would improve both their efficiency and capacity.
In the short-run, we intend to increase our investment in our
reliable supply network, personnel training, information technology
applications and logistic system upgrades. We also participate in
two non-equity investment opportunities through a VIE, both of
which we expect to provide us with new networks and
platforms.
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 shareholders.
Economic
and Political Risks
Our
operations are conducted primarily in the PRC. Accordingly, our
business, financial conditions and results may be influenced by the
political, economic and legal environment in the PRC, and by the
general state of the PRC economy.
Our
operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North
America and Western Europe. These include risks with, among others,
the political, economic and legal environment and foreign currency
exchange. Our Company’s 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
In
December 2019, a novel strain of coronavirus was reported in Wuhan,
China. On March 11, 2020, the World Health Organization categorized
it as a pandemic. The outbreak 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 revenues.
Although we have taken all possible measures to overcome the
adverse impact derived from the COVID-19 outbreak and have resumed
our normal business activities in early May 2020. Our management
believes the outbreak had a negative impact on our operation result
during the three months ended September 30, 2020. Our revenue for
the three months ended September 30, 2020 were approximately US$
4.1 million, a decrease of approximately US$ 2.9 million or 41.2%
from approximately US$ 7.0 million for the same period in 2019. As
of the date of this report, the COVID-19 outbreak in China appears
to have been under relative control. While the disruption is
currently expected to be temporary, there is uncertainty around the
duration. Therefore, while we expect this matter to negatively
impact our business, results of operations, and financial position,
the related financial impact cannot be reasonably estimated at this
time.
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 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
consolidated financial statements require significant judgments and
estimates. For additional information relating to these and other
accounting policies, see Note 2 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
The
preparation of the unaudited condensed consolidated financial
statements in conformity with US 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.
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 September 30, 2020 and June 30, 2020 the
allowance for doubtful accounts was US$ 6,065,185 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 September 30,
2020 and June 30, 2020, the inventory reserve was US$ 1,179,743 and
US$ 1,121,408, respectively.
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 rendering 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.
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.
Results of Operations for the Three Months Ended September 30, 2020
and 2019
Overview
The
following table summarizes our results of operations for the three
months ended September 30, 2020 and 2019:
|
|
Three Months Ended
September 30, |
|
|
Variance |
|
|
|
2020 |
|
|
2019 |
|
|
Amount |
|
|
% |
|
Revenue |
|
$ |
4,143,383 |
|
|
$ |
7,046,781 |
|
|
$ |
(2,903,398 |
) |
|
|
(41.20 |
)% |
Cost of
revenue |
|
|
3,234,802 |
|
|
|
5,406,886 |
|
|
|
(2,172,084 |
) |
|
|
(40.17 |
)% |
Gross
profit |
|
|
908,581 |
|
|
|
1,639,895 |
|
|
|
(731,314 |
) |
|
|
(44.60 |
)% |
General and administrative
expenses |
|
|
1,820,732 |
|
|
|
3,354,643 |
|
|
|
(1,533,911 |
) |
|
|
(45.73 |
)% |
Selling
expenses |
|
|
33,635 |
|
|
|
121,886 |
|
|
|
(88,251 |
) |
|
|
(72.40 |
)% |
Loss from
operations |
|
|
(945,786 |
) |
|
|
(1,836,634 |
) |
|
|
890,848 |
|
|
|
(48.50 |
)% |
Income from equity method
investments |
|
|
15,287 |
|
|
|
69,899 |
|
|
|
(54,612 |
) |
|
|
(78.13 |
)% |
Other income (expense) |
|
|
2,788 |
|
|
|
(9,754 |
) |
|
|
12,542 |
|
|
|
(128.58 |
)% |
Interest
expense, net |
|
|
(19,972 |
) |
|
|
(3,126 |
) |
|
|
(16,846 |
) |
|
|
538.90 |
% |
Loss before income
tax provision |
|
|
(947,683 |
) |
|
|
(1,779,615 |
) |
|
|
831,932 |
|
|
|
(46.75 |
)% |
Provision
(benefit) for income taxes |
|
|
105,297 |
|
|
|
(4,783 |
) |
|
|
110,080 |
|
|
|
(2,301.48 |
)% |
Net
loss |
|
$ |
(1,052,980 |
) |
|
$ |
(1,774,832 |
) |
|
$ |
721,852 |
|
|
|
(40.67 |
)% |
Comprehensive income (loss) attributable to Shineco Inc. |
|
$ |
1,563,509 |
|
|
$ |
(4,609,009 |
) |
|
$ |
6,172,518 |
|
|
|
(133.92 |
)% |
Revenue
Currently,
we have three revenue streams derived from our three major business
segments. 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, processing and distributing
traditional Chinese medicinal herbal products as well as other
pharmaceutical products; this segment is conducted via our VIE,
Ankang Longevity Group and its subsidiaries. Third, planting,
processing and distributing green and organic agricultural produce
as well as growing and cultivation of yew trees; this segment is
conducted through our VIEs, the Zhisheng Group.
The
following table sets forth the breakdown of our revenue for each of
our three segments, for the three months ended September 30, 2020
and 2019, respectively:
|
|
Three Months Ended September 30, |
|
|
Variance |
|
|
|
2020 |
|
|
% |
|
|
2019 |
|
|
% |
|
|
Amount |
|
|
% |
|
Luobuma products |
|
$ |
24,615 |
|
|
|
0.60 |
% |
|
$ |
65,519 |
|
|
|
2.12 |
% |
|
$ |
(40,904 |
) |
|
|
(62.43 |
)% |
Chinese medicinal herbal products |
|
|
3,135,406 |
|
|
|
75.67 |
% |
|
|
3,300,321 |
|
|
|
43.91 |
% |
|
|
(164,915 |
) |
|
|
(5.00 |
)% |
Other
agricultural products |
|
|
983,362 |
|
|
|
23.73 |
% |
|
|
3,680,941 |
|
|
|
53.97 |
% |
|
|
(2,697,579 |
) |
|
|
(73.29 |
)% |
Total Amount |
|
$ |
4,143,383 |
|
|
|
100.00 |
% |
|
$ |
7,046,781 |
|
|
|
100.00 |
% |
|
$ |
(2,903,398 |
) |
|
|
(41.20 |
)% |
For
the three months ended September 30, 2020 and 2019, revenue from
sales of Luobuma products was US$ 24,615 and US$ 65,519,
respectively, which represented a decrease of US$ 40,904 or 62.43%.
The decrease of revenue from this segment was mainly due to the
decrease in revenue from Tenet-Jove and Tenet Huatai. Since last
year, we did not launch new products, and we mainly focused on
clearing off our old stocks. In addition, our sales of Luobuma
products were affected by the COVID-19 outbreak, as a result, sales
decreased during the three months ended September 30, 2020 as
compared to the same period in 2019.
For
the three months ended September 30, 2020 and 2019, revenue from
sales of Chinese medicinal herbal products was US$ 3,135,406 and
US$ 3,300,321, respectively, representing a slight decrease of US$
164,915 or 5.00%. Due to the COVID-19 outbreak, people become more
health conscious and wear masks at public area, which resulted in a
reduction of the incidence of other illness, hence, our sales of
Chinese medicinal herbal products decreased during the three months
ended September 30, 2020 as compared to the same period in
2019.
For
the three months ended September 30, 2020 and 2019, revenue from
sales of other agricultural products was US$ 983,362 and US$
3,680,941, respectively, representing a decrease of US$ 2,697,579
or 73.29%. The decrease was mainly due to the decline of sales
volume of yew trees during the three months ended September 30,
2020 as compared to the same period in 2019. Our sales of yew trees
were affected by the COVID-19 outbreak, which resulted in less
orders from our customers during the three months ended September
30, 2020 as compared to the same period in 2019. In addition, the
decrease was also due to a shift in our business strategy as our
yet trees business is adversely affected by the COVID-19. Instead
of selling more unmatured yew trees, we are now cultivating more
matured yew trees, which can be used to extracted Taxol, a more
valuable chemical substance which is used experimentally as a drug
in the treatment of cancer, in the future.
Cost
of Revenue and related tax
The
following table sets forth the breakdown of the Company’s cost of
revenue for each of our three segments, for the three months ended
September 30, 2020 and 2019, respectively:
|
|
Three Months Ended September 30, |
|
|
Variance |
|
|
|
2020 |
|
|
% |
|
|
2019 |
|
|
% |
|
|
Amount |
|
|
% |
|
Luobuma products |
|
$ |
28,462 |
|
|
|
0.87 |
% |
|
$ |
231,381 |
|
|
|
4.28 |
% |
|
$ |
(202,919 |
) |
|
|
(87.70 |
)% |
Chinese medicinal herbal products |
|
|
2,481,321 |
|
|
|
76.71 |
% |
|
|
2,589,930 |
|
|
|
47.90 |
% |
|
|
(108,609 |
) |
|
|
(4.19 |
)% |
Other agricultural products |
|
|
712,828 |
|
|
|
22.04 |
% |
|
|
2,573,112 |
|
|
|
47.59 |
% |
|
|
(1,860,284 |
) |
|
|
(72.30 |
)% |
Business and
sales related tax |
|
|
12,191 |
|
|
|
0.38 |
% |
|
|
12,463 |
|
|
|
0.23 |
% |
|
|
(272 |
) |
|
|
(2.18 |
)% |
Total Amount |
|
$ |
3,234,802 |
|
|
|
100.00 |
% |
|
$ |
5,406,886 |
|
|
|
100.00 |
% |
|
$ |
(2,172,084 |
) |
|
|
(40.17 |
)% |
For
the three months ended September 30, 2020 and 2019, cost of revenue
from sales of our Luobuma products was US$ 28,462 and US$ 231,381,
respectively, representing a decrease of US$ 202,919 or 87.70%. The
decrease was mainly due to the decrease in cost of revenue as we
sold less products, which was in line with the decrease in sales,
the decrease was also due to the decreased allowance we accrued for
our slow-moving inventories during the three months ended September
30, 2020.
For
the three months ended September 30, 2020 and 2019, cost of revenue
from sales of Chinese medicinal herbal products was US$ 2,481,321
and US$ 2,589,930, respectively, representing a decrease of US$
108,609 or 4.19%. The percentage of decrease in cost of revenue was
proportional to the percentage of the decrease in sales.
For
the three months ended September 30, 2020 and 2019, cost of revenue
from sales of other agricultural products was US$ 712,828 and US$
2,573,112, respectively, representing a decrease of US$ 1,860,284
or 72.30%. The decrease was mainly due to less yew trees we sold
during the three months ended September 30, 2020 as compared to the
same period in 2019 as mentioned above. The percentage of decrease
in cost of revenue was proportional to the percentage of the
decrease in sales.
Gross
Profit
The
following table sets forth the breakdown of the Company’s gross
profit for each of our three segments, for the three months ended
September 30, 2020 and 2019, respectively:
|
|
Three Months Ended September 30, |
|
|
Variance |
|
|
|
2020 |
|
|
% |
|
|
2019 |
|
|
% |
|
|
Amount |
|
|
% |
|
Luobuma products |
|
$ |
(3,847 |
) |
|
|
(0.42 |
)% |
|
$ |
(165,985 |
) |
|
|
(10.12 |
)% |
|
$ |
162,138 |
|
|
|
(97.68 |
)% |
Chinese medicinal herbal products |
|
|
642,943 |
|
|
|
70.76 |
% |
|
|
700,917 |
|
|
|
42.74 |
% |
|
|
(57,974 |
) |
|
|
(8.27 |
)% |
Other
agricultural products |
|
|
269,485 |
|
|
|
29.66 |
% |
|
|
1,104,963 |
|
|
|
67.38 |
% |
|
|
(835,478 |
) |
|
|
(75.61 |
)% |
Total Amount |
|
$ |
908,581 |
|
|
|
100.00 |
% |
|
$ |
1,639,895 |
|
|
|
100.00 |
% |
|
$ |
(731,314 |
) |
|
|
(44.60 |
)% |
Gross
loss from Luobuma product sales reduced by US$ 162,138 or 97.68%
for the three months ended September 30, 2020 as compared to the
same period in 2019. During the three months ended September 30,
2020, our gross loss or negative gross profit was US$ 3,847, it was
mainly due to clearance of our old stocks, as we sold some of our
products below their original costs during the three months ended
September 30, 2020. Hence, resulted in a negative gross profit
during the year ended June 30, 2020. However, our negative gross
profit decreased which was mainly due to less allowance we accrued
for our slow-moving inventories amounted to US$ 163,366 during the
three months ended September 30, 2020 as compared to the same
period in 2019.
Gross
profit from sales of Chinese medicinal herbal products decreased by
US$ 57,974 or 8.27% for the three months ended September 30, 2020
as compared to the same period in 2019. The percentage of the
variance in gross profit was proportional to the percentage of the
variance in revenue due to the stable gross margin of our
products.
Gross
profit from sales of other agricultural products decreased by US$
835,478 or 75.61% for the three months ended September 30, 2020 as
compared to the same period in 2019. As mentioned above, the
decrease was mainly due to less yew trees we sold during the three
months ended September 30, 2020 as mentioned above. The percentage
of the variance in gross profit was proportional to the percentage
of the variance in revenue due to the stable gross margin of our
products.
Expenses
The
following table sets forth the breakdown of our operating expenses
for the three months ended September 30, 2020 and 2019,
respectively:
|
|
Three Months Ended September 30, |
|
|
Variance |
|
|
|
2020 |
|
|
% |
|
|
2019 |
|
|
% |
|
|
Amount |
|
|
% |
|
General and administrative
expenses |
|
$ |
1,820,732 |
|
|
|
98.19 |
% |
|
$ |
3,354,643 |
|
|
|
96.49 |
% |
|
$ |
(1,533,911 |
) |
|
|
(45.73 |
)% |
Selling
expenses |
|
|
33,635 |
|
|
|
1.81 |
% |
|
|
121,886 |
|
|
|
3.51 |
% |
|
|
(88,251 |
) |
|
|
(72.40 |
)% |
Total Amount |
|
$ |
1,854,367 |
|
|
|
100.00 |
% |
|
$ |
3,476,529 |
|
|
|
100.00 |
% |
|
$ |
(1,622,162 |
|
|
|
(46.66 |
)% |
General
and Administrative Expenses
For
the three months ended September 30, 2020, our general and
administrative expenses were US$ 1,820,732, representing a decrease
of US$ 1,533,911 for three months ended September 30 or 45.73%, as
compared to the same period in 2019. The decrease in general and
administrative expenses was mainly due to a decrease in staff
salary expenses as we issued restricted shares to the management as
compensation of US$ 1,022,661 last year, as well as a decrease in
bad debt expense of US$ 284,994 during the three months ended
September 30, 2020.
Selling
Expenses
For
the three months ended September 30, 2020, our selling and
distribution expenses were US$ 33,635, representing a decrease of
US$ 88,251, or 72.40%, as compared to the same period in 2019. The
decrease was mainly due to the decrease in promotion expense,
commission expenses for our online shops of Tenet-Jove which was in
line with the decrease in our sales during the three months ended
September 30, 2020. The decrease was also due to the decrease in
salary related expenses as a result of reduced number of staff
during the three months ended September 30, 2020.
Income
from Equity Method Investments
We
are 49% owners in two equity investment companies with Shaanxi
Pharmaceutical Group Pai’ang Medicine Co. Ltd. (“Shaanxi
Pharmaceutical Group”): Shaanxi Pharmaceutical Sunsimiao Drugstores
Ankang Retail Chain Co., Ltd. (“Sunsimiao Drugstores”), and Shaanxi
Pharmaceutical Holding Group Longevity Pharmacy Co., Ltd. (“Shaanxi
Longevity Pharmacy”). We recorded net income of US$ 15,287 and US$
69,899 from these equity method investments for the for the three
months ended September 30, 2020 and 2019, respectively. The
decrease in net income was primarily due to lower net profit in the
two 49% equity investment companies in the current
period.
Provision
for Income Taxes
For
the three months ended September 30, 2020 and 2019, the Company’s
provision for income taxes increased by US$ 108,987 or 2,278.63% to
US$ 104,204 for the three months ended September 30, 2020 from an
income tax benefit of US$ 4,783 for the three months ended
September 30, 2019. The increase in provision for income taxes was
mainly due to the decreased deferred income tax benefits arisen
from the allowance for doubtful accounts and inventory reserve
during the three months ended September 30, 2020 as compared to the
same period of 2019.
Net
Loss
Our
net loss was US$ 1,052,980 for three months ended September 30,
2020, a decrease of US$ 721,852 or 40.67% from net loss of US$
1,774,832 for three months ended September 30, 2019. The decrease
in net loss was primarily a result of the decrease in decrease in
general and administrative expenses, which was partially offset by
the decrease in gross profit.
Comprehensive
Income (Loss)
The
comprehensive income was US$ 1,614,951 for the three months ended
September 30, 2020, an increase of US$ 6,248,320 from comprehensive
loss of US$ 4,633,369 for the three months ended September 30,
2019. After deduction of non-controlling interest, the
comprehensive income attributable to the Company was US$ 1,563,509
for the three months ended September 30, 2020, compared to
comprehensive loss attributable to the Company of US$ 4,609,009 for
the three months ended September 30, 2019. The reason of the
significant increase of comprehensive income was due to the
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 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
September 30, 2020 and June 30, 2020, we do not engage in any
foreign currency borrowings or loan contracts.
Liquidity and Capital Resources
We
currently finance our business operations primarily through cash
flows from operations and proceeds from our initial public
offering, as well as from short-term loans 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
September 28, 2016, we completed the initial public offering of
190,354 shares of the Company’s 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.
On
September 27, 2018, we entered into a securities purchase agreement
with selected investors whereby the Company agreed to sell up to
181,967 of common stock at a purchase price of US$ 9 per share, for
gross proceeds of US$ 1.6 million and net proceeds of approximately
US$ 1.6 million.
On
September 5, 2019, we entered into a securities purchase agreement
with select investors whereby the Company sold 310,977 shares of
common stock at a purchase price of US$ 4.68 per share, for the net
proceeds of approximately US$ 1.5 million.
As of
September 30, 2020, we had US$ 2,426,019 bank loan outstanding. We
expect that we will be able to renew our existing bank loan upon
its maturity based on past experience and our good credit
history.
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 September 30, 2020 and June 30, 2020:
|
|
September 30, 2020 |
|
|
June 30, 2020 |
|
|
|
|
|
|
|
|
Current Assets |
|
$ |
63,164,137 |
|
|
$ |
59,519,998 |
|
Current
Liabilities |
|
|
13,816,372 |
|
|
|
11,347,325 |
|
Working
Capital |
|
$ |
49,347,765 |
|
|
$ |
48,172,673 |
|
The
working capital remained relatively stable with a slight increased
by US$ 1,175,092 or 2.4% as of September 30, 2020 from June 30,
2020, primarily as a result of an increase in advances to
suppliers, inventories, other current assets and account
receivables, partially offset by a decrease in cash during the
three months ended September 30, 2020. We believe that we currently
have sufficient working capital to operate our business.
As of
September 30, 2020 and June 30, 2020, the other major component of
our working capital is accounts receivable. The accounts receivable
as of September 30, 2020 were US$ 12,257,280, an increase of
approximately 11.3% from US$ 11,008,485 as of June 30, 2020. Due to
the recent COVID-19 outbreak in China, many of our customers’
businesses were adversely affected during this period, which
resulted in slow collection of our receivables. Management will
continue putting effort in collection of overdue account
receivables from the customers.
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.
As of
September 30, 2020 from June 30, 2020, we had no material capital
commitments or contingent liabilities.
Cash Flows
The
following table provides detailed information about our net cash
flows for the three months ended September 30, 2020 and
2019.
|
|
For the three months ended
September30, |
|
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
Net cash provided by (used
in) operating activities |
|
$ |
(9,100,028 |
) |
|
$ |
2,145,875 |
|
Net cash provided by (used in)
investing activities |
|
|
(1,228,630 |
) |
|
|
18,780 |
|
Net cash provided by (used in)
financing activities |
|
|
(11,429 |
) |
|
|
1,555,631 |
|
Effect of
exchange rate changes on cash |
|
|
1,098,821 |
|
|
|
(1,438,380 |
) |
Net increase (decrease) in
cash |
|
|
(9,241,266 |
) |
|
|
2,281,906 |
|
Cash,
beginning of period |
|
|
32,371,372 |
|
|
|
35,330,676 |
|
Cash, end of
period |
|
$ |
23,130,106 |
|
|
$ |
37,612,582 |
|
Operating
Activities
Net
cash used in operating activities during the three months ended
September 30, 2020 was approximately US$ 9.1 million, consisting of
net loss of US$ 1.1 million, bad debt expenses of US$ 1.0 million,
and net changes in our operating assets and liabilities, which
mainly included an increase in advances to suppliers of US$ 6.6
million inventories of US$ 2.0 million, other receivables of US$
1.7 million and accounts receivables of US$ 1.4 million, partially
offset by the increase in other payable of US$ 2.3 million. Net
cash provided by operating activities during the three months ended
September 30, 2019 was approximately US$ 2.1 million, consisting of
net loss of US$ 1.8 million, bad debt expenses of US$ 1.3 million,
restricted shares issued for management of US$ 1.0 million, and net
changes in our operating assets and liabilities, which mainly
included a decrease in advances to suppliers of US$ 3.0 million,
partially offset by the increase in other receivables of US$ 0.9
million.
Investing
Activities
For
the three months ended September 30, 2020, net used in by investing
activities was US$ 1.2 million, primarily due to the advances of
loans to third parties of US$ 1.2 million during the three months
ended September 30, 2020. For the three months ended September 30,
2019, net cash provided by investing activities was approximately
US$ 18,780, primarily due to the proceeds from disposal of property
and equipment of US$ 79,387, partial offset by advances of loans to
third parties of US$ 56,992 during the three months ended September
30, 2019.
Financing
Activities
For
the three months ended September 30, 2020, net cash used in
financing activities amounted to approximately US$ 11,429,
primarily due to the repayment of advances from related parties of
US$ 11,429. For the three months ended September 30, 2019, net cash
provided by financing activities amounted to US$ 1.6 million,
primarily due to the proceeds from issuance of common stock of US$
1.5 million, and proceeds from short-term loans of US$ 0.3 million,
partially offset by the repayment of short-term loans of US$ 0.3
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 the Company’s disclosure controls and procedures
were not effective at the reasonable assurance level as of the end
of the period covered by this report due to following material
weaknesses:
|
● |
Lack
of full-time U.S. GAAP personnel in the accounting department to
monitor the recording of the transactions; |
|
● |
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
plans to take 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. |
The
Company believes the foregoing measures will remediate the
identified material weaknesses in future periods. The Company is
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
have been 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 our first fiscal quarter of 2021. 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 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 except as set forth
below:
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 alleges 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 alleges that the Company breached
the Agreement and seeks money damages up to $6 million. The Company
believes that these claims are without merit and intends to
vigorously defend itself.
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.
There
have been no unregistered sale of equity securities during the
three months ended September 30, 2020.
ITEM 3. DEFAULTS UPON SENIOR
SECURITIES.
None.
ITEM 4. MINE SAFETY
DISCLOSURES
Not
applicable.
ITEM 5. OTHER
INFORMATION.
None.
ITEM 6. EXHIBITS
Number |
|
Exhibit |
3.1† |
|
Certificate
of Incorporation of Shineco, Inc. (1) |
|
|
|
3.2† |
|
Amended
and Restated Bylaws of Shineco, Inc.(1) |
|
|
|
4.1† |
|
Specimen
Common Stock Share Certificate (3) |
|
|
|
4.2† |
|
2016
Share Incentive Plan (2) |
|
|
|
10.1† |
|
Exclusive
Business Cooperation Agreement between Beijing Tenet-Jove
Technological Development Co., Ltd. and Shineco Zhisheng (Beijing)
Bio-Technology Co., Ltd. dated February 24, 2014.
(1) |
|
|
|
10.2† |
|
Timely
Reporting Agreement between Shineco Inc. and Shineco Zhisheng
(Beijing) Bio-Technology Co., Ltd. dated July 3, 2014.
(1) |
|
|
|
10.3† |
|
Equity
Interest Pledge Agreement among Beijing Tenet Jove Technological
Development Co., Ltd., Wang Qiwei, Wang Sai, Yin Weixing, Liu Yu,
Zhou Qi, Yang Chunhong, and Shineco Zhisheng (Beijing)
Bio-Technology Co., Ltd. dated February 24, 2014.
(1) |
|
|
|
10.4† |
|
Exclusive
Option Agreement among Beijing Tenet Jove Technological Development
Co., Ltd., Wang Qiwei, Wang Sai, Yin Weixing, Liu Yu, Zhou Qi, Yang
Chunhong (Shareholders from Shineco Zhisheng (Beijing)
Bio-Technology Co., Ltd.), and Shineco Zhisheng (Beijing)
Bio-Technology Co., Ltd. dated February 24, 2014.
(1) |
|
|
|
10.5† |
|
Power
of Attorney by and between Yang Chunhong and Beijing Tenet Jove
Technological Development Co., Ltd. regarding shareholding of
Shineco Zhisheng (Beijing) Bio-Technology Co., Ltd. dated February
24, 2014. (1) |
Number |
|
Exhibit |
10.6† |
|
Power
of Attorney by and between Yin Weixing and Beijing Tenet Jove
Technological Development Co., Ltd. regarding shareholding of
Shineco Zhisheng (Beijing) Bio-Technology Co., Ltd. dated February
24, 2014. (1) |
|
|
|
10.7† |
|
Power
of Attorney by and between Liu Yu and Beijing Tenet Jove
Technological Development Co., Ltd. regarding shareholding of
Shineco Zhisheng (Beijing) Bio-Technology Co., Ltd. dated February
24, 2014. (1) |
|
|
|
10.8† |
|
Power
of Attorney by and between Wang Qiwei and Beijing Tenet Jove
Technological Development Co., Ltd. regarding shareholding of
Shineco Zhisheng (Beijing) Bio-Technology Co., Ltd. dated February
24, 2014. (1) |
|
|
|
10.9† |
|
Power
of Attorney by and between Wang Sai and Beijing Tenet-Jove
Technological Development Co., Ltd. regarding shareholding of
Shineco Zhisheng (Beijing) Bio-Technology Co., Ltd. dated February
24, 2014. (1) |
|
|
|
10.10† |
|
Power
of Attorney by and between Zhou Qi and Beijing Tenet-Jove
Technological Development Co., Ltd. regarding shareholding of
Shineco Zhisheng (Beijing) Bio-Technology Co., Ltd. dated February
24, 2014. (1) |
|
|
|
10.11† |
|
Exclusive
Business Cooperation Agreement between Beijing Tenet-Jove
Technological Development Co., Ltd. and Yantai Zhisheng
International Freight Forwarding Co., Ltd. dated June 16, 2011.
(1) |
|
|
|
10.12† |
|
Timely
Reporting Agreement between Shineco Inc. and Yantai Zhisheng
International Freight Forwarding Co., Ltd. dated July 3, 2014.
(1) |
|
|
|
10.13† |
|
Equity
Interest Pledge Agreement among Beijing Tenet-Jove Technological
Development Co., Ltd., Wang Qiwei, Wang Sai, Yin Weixing, Zhang
Weisheng, Zhou Qi, Yang Chunhong, and Yantai Zhisheng International
Freight Forwarding Co., Ltd. dated June 16, 2011.
(1) |
|
|
|
10.14† |
|
Exclusive
Option Agreement among Beijing Tenet-Jove Technological Development
Co., Ltd., Wang Qiwei, Wang Sai, Yin Weixing, Zhang Weisheng, Zhou
Qi, Yang Chunhong, and Yantai Zhisheng International Freight
Forwarding Co., Ltd. dated June 16, 2011. (1) |
|
|
|
10.15† |
|
Power
of Attorney by and between Zhou Qi and Beijing Tenet-Jove
Technological Development Co., Ltd. regarding shareholding of
Yantai Zhisheng International Freight Forwarding Co., Ltd. dated
June 16, 2011. (1) |
|
|
|
10.16† |
|
Power
of Attorney by and between Zhang Weisheng and Beijing Tenet-Jove
Technological Development Co., Ltd. regarding shareholding of
Yantai Zhisheng International Freight Forwarding Co., Ltd. dated
June 16, 2011. (1) |
|
|
|
10.17† |
|
Power
of Attorney by and between Yang Chunhong and Beijing Tenet Jove
Technological Development Co., Ltd. regarding shareholding of
Yantai Zhisheng International Freight Forwarding Co., Ltd. dated
June 16, 2011. (1) |
Number |
|
Exhibit |
10.18† |
|
Power
of Attorney by and between Wang Qiwei and Beijing Tenet Jove
Technological Development Co., Ltd. regarding shareholding of
Yantai Zhisheng International Freight Forwarding Co., Ltd. dated
June 16, 2011. (1) |
|
|
|
10.19† |
|
Power
of Attorney by and between Wang Sai and Beijing Tenet Jove
Technological Development Co., Ltd. regarding shareholding of
Yantai Zhisheng International Freight Forwarding Co., Ltd. dated
June 16, 2011. (1) |
|
|
|
10.20† |
|
Power
of Attorney by and between Yin Weixing and Beijing Tenet Jove
Technological Development Co., Ltd. regarding shareholding of
Yantai Zhisheng International Freight Forwarding Co., Ltd. dated
June 16, 2011. (1) |
|
|
|
10.21† |
|
Exclusive
Business Cooperation Agreement between Beijing Tenet Jove
Technological Development Co., Ltd. and Yantai Zhisheng
International Trade Co., Ltd. dated June 16, 2011.
(1) |
|
|
|
10.22† |
|
Timely
Reporting Agreement between Shineco Inc. and Yantai Zhisheng
International Trade Co., Ltd. dated July 3, 2014.
(1) |
|
|
|
10.23† |
|
Equity
Interest Pledge Agreement among Beijing Tenet Jove Technological
Development Co., Ltd., Wang Qiwei, Wang Sai, Yin Weixing, Zhang
Weisheng, Zhou Qi, Yang Chunhong, and Yantai Zhisheng International
Trade Co., Ltd. dated June 16, 2011. (1) |
|
|
|
10.24† |
|
Exclusive
Option Agreement among Beijing Tenet Jove Technological Development
Co., Ltd., Wang Qiwei, Wang Sai, Yin Weixing, Zhang Weisheng, Zhou
Qi, Yang Chunhong, and Yantai Zhisheng International Trade Co.,
Ltd. dated June 16, 2011. (1) |
|
|
|
10.25† |
|
Power
of Attorney by and between Zhang Weisheng and Beijing Tenet-Jove
Technological Development Co., Ltd. regarding shareholding of
Yantai Zhisheng International Trade Co., Ltd. dated June 16, 2011.
(1) |
|
|
|
10.26† |
|
Power
of Attorney by and between Zhou Qi and Beijing Tenet-Jove
Technological Development Co., Ltd. regarding shareholding of
Yantai Zhisheng International Trade Co., Ltd. dated June 16, 2011.
(1) |
|
|
|
10.27† |
|
Power
of Attorney by and between Wang Qiwei and Beijing Tenet Jove
Technological Development Co., Ltd. regarding shareholding of
Yantai Zhisheng International Trade Co., Ltd. dated June 16, 2011.
(1) |
|
|
|
10.28† |
|
Power
of Attorney by and between Yin Weixing and Beijing Tenet-Jove
Technological Development Co., Ltd. regarding shareholding of
Yantai Zhisheng International Trade Co., Ltd. dated June 16, 2011.
(1) |
|
|
|
10.29† |
|
Power
of Attorney by and between Wang Sai and Beijing Tenet-Jove
Technological Development Co., Ltd. regarding shareholding of
Yantai Zhisheng International Trade Co., Ltd. dated June 16, 2011.
(1) |
|
|
|
10.30† |
|
Power
of Attorney by and between Yang Chunhong and Beijing Tenet-Jove
Technological Development Co., Ltd. regarding shareholding of
Yantai Zhisheng International Trade Co., Ltd. dated June 16, 2011.
(1) |
Number |
|
Exhibit |
10.31† |
|
Exclusive
Business Cooperation Agreement between Beijing Tenet-Jove
Technological Development Co., Ltd. and Qingdao Zhihesheng
Agricultural Produce Services, Co., Ltd. dated May 24, 2012.
(1) |
|
|
|
10.32† |
|
Timely
Reporting Agreement between Shineco Inc. and Qingdao Zhihesheng
Agricultural Produce Services, Co., Ltd. dated July 3, 2014.
(1) |
|
|
|
10.33† |
|
Equity
Interest Pledge Agreement among Beijing Tenet-Jove Technological
Development Co., Ltd., Wang Qiwei, Wang Sai, Yin Weixing, Zhang
Weisheng, Zhou Qi, Yang Chunhong, and Qingdao Zhihesheng
Agricultural Produce Services, Co., Ltd. dated May 24, 2012.
(1) |
|
|
|
10.34† |
|
Exclusive
Option Agreement among Beijing Tenet-Jove Technological Development
Co., Ltd., Wang Qiwei, Wang Sai, Yin Weixing, Zhang Weisheng, Zhou
Qi, Yang Chunhong, and Qingdao Zhihesheng Agricultural Produce
Services, Co., Ltd. dated May 24, 2012. (1) |
|
|
|
10.35† |
|
Power
of Attorney by and between Wang Sai and Beijing Tenet-Jove
Technological Development Co., Ltd. regarding shareholding of
Qingdao Zhihesheng Agricultural Produce Services Co., Ltd. dated
May 24, 2012. (1) |
|
|
|
10.36† |
|
Power
of Attorney by and between Wang Qiwei and Beijing Tenet-Jove
Technological Development Co., Ltd. regarding shareholding of
Qingdao Zhihesheng Agricultural Produce Services Co., Ltd. dated
May 24, 2012. (1) |
|
|
|
10.37† |
|
Power
of Attorney by and between Yin Weixing and Beijing Tenet-Jove
Technological Development Co., Ltd. regarding shareholding of
Qingdao Zhihesheng Agricultural Produce Services, Co., Ltd. dated
May 24, 2012. (1) |
|
|
|
10.38† |
|
Power
of Attorney by and between Zhang Weisheng and Beijing Tenet-Jove
Technological Development Co., Ltd. regarding shareholding of
Qingdao Zhihesheng Agricultural Produce Services, Co., Ltd. dated
May 24, 2012. (1) |
|
|
|
10.39† |
|
Power
of Attorney by and between Zhou Qi and Beijing Tenet-Jove
Technological Development Co., Ltd. regarding shareholding of
Qingdao Zhihesheng Agricultural Produce Services, Co., Ltd. dated
May 24, 2012. (1) |
|
|
|
10.40† |
|
Power
of Attorney by and between Yang Chunhong and Beijing Tenet-Jove
Technological Development Co., Ltd. regarding shareholding of
Qingdao Zhihesheng Agricultural Produce Services, Co., Ltd. dated
May 24, 2012. (1) |
|
|
|
10.41† |
|
Exclusive
Business Cooperation Agreement between Beijing Tenet-Jove
Technological Development Co., Ltd. and Yantai Mouping District
Zhisheng Agricultural Produce Cooperative dated June 16, 2011.
(1) |
|
|
|
10.42† |
|
Timely
Reporting Agreement between Shineco Inc. and Yantai Mouping
District Zhisheng Agricultural Produce Cooperative dated July 3,
2014. (1) |
Number |
|
Exhibit |
10.43† |
|
Guarantee
Agreement among Beijing Tenet-Jove Technological Development Co.,
Ltd., Wang Qiwei, and Yantai Mouping District Zhisheng Agricultural
Produce Cooperative dated June 16, 2011. (1) |
|
|
|
10.44† |
|
Power
of Attorney by and between Zhang Weisheng and Beijing Tenet-Jove
Technological Development Co., Ltd. regarding shareholding of
Yantai Mouping District Zhisheng Agricultural Produce Cooperative
dated June 16, 2011. (1) |
|
|
|
10.45† |
|
Power
of Attorney by and between Yin Weixing and Beijing Tenet-Jove
Technological Development Co., Ltd. regarding shareholding of
Yantai Mouping District Zhisheng Agricultural Produce Cooperative
dated June 16, 2011. (1) |
|
|
|
10.46† |
|
Power
of Attorney by and between Wang Sai and Beijing Tenet-Jove
Technological Development Co., Ltd. regarding shareholding of
Yantai Mouping District Zhisheng Agricultural Produce Cooperative
dated June 16, 2011. (1) |
|
|
|
10.47† |
|
Power
of Attorney by and between Wang Qiwei and Beijing Tenet-Jove
Technological Development Co., Ltd. regarding shareholding of
Yantai Mouping District Zhisheng Agricultural Produce Cooperative
dated June 16, 2011. (1) |
|
|
|
10.48† |
|
Exclusive
Business Cooperation Agreement between Beijing Tenet-Jove
Technological Development Co., Ltd. and Ankang Longevity
Pharmaceutical (Group) Co., Ltd. dated December 31, 2008.
(1) |
|
|
|
10.49† |
|
Timely
Reporting Agreement between Shineco Inc. and Ankang Longevity
Pharmaceutical (Group) Co., Ltd. dated July 3, 2014.
(1) |
|
|
|
10.50† |
|
Equity
Interest Pledge Agreement among Beijing Tenet-Jove Technological
Development Co., Ltd., Chen Jiping, Chen Xiaoyan, and Ankang
Longevity Pharmaceutical (Group) Co., Ltd. dated December 31, 2008.
(1) |
|
|
|
10.51† |
|
Exclusive
Option Agreement among Beijing Tenet-Jove Technological Development
Co., Ltd., Chen Jiping, Chen Xiaoyan, and Ankang Longevity
Pharmaceutical (Group) Co., Ltd. dated December 31, 2008.
(1) |
|
|
|
10.52† |
|
Power
of Attorney by and between Chen Xiaoyan and Beijing Tenet-Jove
Technological Development Co., Ltd. regarding shareholding of
Ankang Longevity Pharmaceutical (Group) Co., Ltd. dated December
31, 2008. (1) |
|
|
|
10.53† |
|
Power
of Attorney by and between Chen Jiping and Beijing Tenet-Jove
Technological Development Co., Ltd. regarding shareholding of
Ankang Longevity Pharmaceutical (Group) Co., Ltd. dated December
31, 2008. (1) |
|
|
|
10.54† |
|
Summary
translation of Cooperation Agreement between Shaanxi Pharmacy
Sunsimiao Drugstore Chain Co., Ltd. and Ankang Longevity
Pharmaceutical (Group) Co., Ltd. dated September 27, 2012.
(1) |
|
|
|
10.55† |
|
Summary
translation of Cooperation Agreement between Shaanxi Pharmacy
Holding Group Xi’an Pharmaceutical Co., Ltd. and Ankang Longevity
Pharmaceutical (Group) Co., Ltd. dated September 27, 2012.
(1) |
Number |
|
Exhibit |
10.56† |
|
Summary
translation of Loan Contract between Beijing Tenet-Jove
Technological Development Co., Ltd. and Beijing Rural Commercial
Bank Co., Ltd. Tiantongyuan Branch dated December 31, 2009.
(1) |
|
|
|
10.57† |
|
Summary
translation of Project Shares Purchase Contract among Yantai
Zhisheng International Freight Forwarding Co., Ltd., Yantai Mouping
District Zhisheng Agricultural Produce Cooperative and Zhejiang
Zhen’Ai Network Warehousing Services Co., Ltd. dated October 21,
2013. (1) |
|
|
|
10.58† |
|
Summary
translation of Contractual Management/Operation Agreement between
Ankang Longevity Pharmaceutical Group Chain Co., Ltd. and Qiu
Haiyin dated March 1, 2013. (1) |
|
|
|
10.59† |
|
Summary
translation of Supplementary Agreement between Ankang Longevity
Pharmaceutical Group Chain Co., Ltd. and Qiu Haiyin dated February
28, 2014. (1) |
|
|
|
10.60† |
|
Form
of Independent Director Engagement Letter (2) |
|
|
|
10.61† |
|
2016
Share Incentive Plan (included in Exhibit 4.2) (2) |
|
|
|
10.62† |
|
Translated
Definitive Share Exchange and Acquisition Agreement between
Xinjiang Taihe and Western Xinjiang Tiansheng Agricultural
Development Co., Ltd., dated December 6, 2017 (Incorporated by
reference to the Company’s Form 8-K filed with the SEC on December
11, 2017) |
|
|
|
10.63† |
|
Common
Stock Purchase Agreement between the Company and IFG Opportunity
Fund LLC, dated January 23, 2018 (Incorporated by reference to the
Company’s Form 8-K filed with the SEC on January 26,
2018) |
|
|
|
10.64† |
|
Registration
Rights Agreement between the Company and IFG Opportunity Fund LLC,
dated January 23, 2018 (Incorporated by reference to the Company’s
Form 8-K filed with the SEC on January 26, 2018) |
|
|
|
10.65† |
|
Termination
Agreement between the Company and IFG Opportunity Fund LLC, dated
July 3, 2018 (Incorporated by reference to the Company’s Form 8-K
filed with the SEC on July 5, 2018) |
|
|
|
10.66† |
|
Form
of Securities Purchase Agreement among the Company and selected
investors, dated September 27, 2018 (Incorporated by reference to
the Company’s Form 8-K filed with the SEC on September 28,
2018) |
* |
Filed
herewith. |
|
|
** |
Furnished
but not filed. |
|
|
† |
Previously
filed. |
(1) |
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). |
|
|
(2) |
Incorporated
by reference to the Company’s Annual Report on Form 10-K filed with
the SEC September 28, 2016. |
|
|
(3) |
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). |
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:
November 16, 2020 |
By: |
/s/
Guocong Zhou |
|
|
Guocong
Zhou |
|
|
Chief
Executive Officer |
|
|
(Principal
Executive Officer) |
|
|
|
Dated:
November 16, 2020 |
By: |
/s/
Sai (Sam) Wang |
|
|
Sai
(Sam) Wang |
|
|
Chief
Financial Officer |
|
|
(Principal
Financial and Accounting Officer) |