UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For
the quarterly period ended
OR
For the transition period from _______ to _______
Commission
File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)
Room 3310, North Tower, Zhengda Center,
No. 20, Jinhe East Road, Chaoyang District
Beijing, People’s Republic of China 100020
(Former address of principal executive offices) (Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each Class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The
|
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.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
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 | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of May 12, 2023, there were shares of common stock, par value $0.001 per share, outstanding.
TABLE OF CONTENTS
| i |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHINECO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
| March 31, | June 30, | |||||||
| 2023 | 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Advances to suppliers, net | ||||||||
| Other current assets, net | ||||||||
| TOTAL CURRENT ASSETS | ||||||||
| Property and equipment, net | ||||||||
| Investment in unconsolidated entity | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Long-term deposit and other noncurrent assets | ||||||||
| Operating lease right-of-use assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Short-term loans | $ | $ | ||||||
| Accounts payable | ||||||||
| Advances from customers | ||||||||
| Other payables and accrued expenses | ||||||||
| Operating lease liabilities - current | ||||||||
| Convertible note payable | ||||||||
| Taxes payable | ||||||||
| TOTAL CURRENT LIABILITIES | ||||||||
| Income tax payable - noncurrent portion | ||||||||
| Operating lease liabilities - non-current | ||||||||
| Deferred tax liability | ||||||||
| TOTAL LIABILITIES | ||||||||
| Commitments and contingencies | ||||||||
| EQUITY: | ||||||||
| Common stock; par value $, shares authorized; and shares issued and outstanding at March 31, 2023 and June 30, 2022 | ||||||||
| Additional paid-in capital | ||||||||
| Subscription receivable | ( | ) | ( | ) | ||||
| Subscribled common stock | ||||||||
| Statutory reserve | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total Stockholders’ equity of Shineco, Inc. | ||||||||
| Non-controlling interest | ( | ) | ||||||
| TOTAL EQUITY | ||||||||
| TOTAL LIABILITIES AND EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 1 |
SHINECO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
(Unaudited)
For the Nine Months Ended March 31, | For the Three Months Ended March 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| REVENUE | $ | $ | $ | $ | ||||||||||||
| COST OF REVENUE | ||||||||||||||||
| Cost of product and services | ||||||||||||||||
| Stock written off due to natural disaster | ||||||||||||||||
| Business and sales related tax | ||||||||||||||||
| Total cost of revenue | ||||||||||||||||
| GROSS LOSS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OPERATING EXPENSES | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Selling expenses | ||||||||||||||||
| Research and development expenses | ||||||||||||||||
| Impairment loss of distribution rights | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| LOSS FROM OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||
| Impairment loss on an unconsolidated entity | ( | ) | ||||||||||||||
| Loss from equity method investments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expenses), net | ( | ) | ( | ) | ||||||||||||
| Amortization of debt issuance costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest income (expenses), net | ( | ) | ( | ) | ||||||||||||
| Total other expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| LOSS BEFORE PROVISION FOR INCOME TAXES FROM CONTINUING OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| BENEFIT FOR INCOME TAXES | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| NET LOSS FROM CONTINUING OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| DISCONTINUED OPERATIONS: | ||||||||||||||||
| Loss on disposal of discontinued operations | ( | ) | ||||||||||||||
| Net loss from discontinued operations | ( | ) | ||||||||||||||
| NET LOSS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) attributable to non-controlling interest | ( | ) | ( | ) | ||||||||||||
| NET LOSS ATTRIBUTABLE TO SHINECO, INC. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| COMPREHENSIVE LOSS | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Other comprehensive income (loss): foreign currency translation income (loss) | ( | ) | ||||||||||||||
| Total comprehensive loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Less: comprehensive income (loss) attributable to non-controlling interest | ( | ) | ( | ) | ||||||||||||
| COMPREHENSIVE LOSS ATTRIBUTABLE TO SHINECO, INC. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of shares basic and diluted | ||||||||||||||||
| Basic and diluted loss per common share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per common share | ||||||||||||||||
| Continuing operations - Basic and Diluted | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Discontinued operations - Basic and Diluted | ( | ) | ||||||||||||||
| Net loss per common share - basic and diluted | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 2 |
SHINECO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 2023 AND 2022
(UNAUDITED)
| RETAINED | ACCUMULATED | |||||||||||||||||||||||||||||||||||||||
| COMMON STOCK | SUBSCRIPTION | COMMON STOCK | ADDITIONAL PAID-IN | STATUTORY | EARNINGS (ACCUMULATED | OTHER COMPREHENSIVE |
|
NON- CONTROLLING | TOTAL | |||||||||||||||||||||||||||||||
| SHARES | AMOUNT | RECEIVABLE | SUBSCRIBLED | CAPITAL | RESERVE | DEFICIT) | LOSS | INTEREST | EQUITY | |||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | ( | ) | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||
| Stock issuance | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares for convertible notes redemption | ||||||||||||||||||||||||||||||||||||||||
| Beneficial conversion feature associated with convertible notes | - | |||||||||||||||||||||||||||||||||||||||
| Disposal of Ankang | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Net loss for the period | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Foreign currency translation gain | - | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||
| Acquisition of Biowin | - | |||||||||||||||||||||||||||||||||||||||
| Stock issuance | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Proceeds received from investors for subscription of common stock | - | |||||||||||||||||||||||||||||||||||||||
| Issuance of common shares for convertible notes redemption | ||||||||||||||||||||||||||||||||||||||||
Common stock issued for management and employees | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Common stock issued for services | ||||||||||||||||||||||||||||||||||||||||
| Net income (loss) for the period | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Foreign currency translation gain (loss) | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 3 |
SHINECO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022
(UNAUDITED)
| ACCUMULATED | ||||||||||||||||||||||||||||||||||||||||
| COMMON STOCK | SUBSCRIPTION | COMMON STOCK | ADDITIONAL PAID-IN | STATUTORY | ACCUMULATED | OTHER COMPREHENSIVE | NON- CONTROLLING | TOTAL | ||||||||||||||||||||||||||||||||
| SHARES | AMOUNT | RECEIVABLE | SUBSCRIBLED | CAPITAL | RESERVE | DEFICIT | LOSS | INTEREST | EQUITY | |||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
| Stock issuance | ||||||||||||||||||||||||||||||||||||||||
| Net loss for the period | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Foreign currency translation gain (loss) | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||
| Acquisition of Biowin | - | |||||||||||||||||||||||||||||||||||||||
| Stock issuance | - | |||||||||||||||||||||||||||||||||||||||
| Proceeds received from investors for subscription of common stock | - | |||||||||||||||||||||||||||||||||||||||
| Issuance of common shares for convertible notes redemption | ||||||||||||||||||||||||||||||||||||||||
| Common stock issued for management and employees | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Common stock issued for services | ||||||||||||||||||||||||||||||||||||||||
| Net income (loss) for the period | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Foreign currency translation gain (loss) | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 4 |
SHINECO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Net loss from discontinued operations, net of tax | ( | ) | ||||||
| Net loss from continuing operations | ( | ) | ( | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Loss from disposal of property and equipment | ||||||||
| Provision for doubtful accounts | ||||||||
| Provision for (reversal of) inventory reserve | ( | ) | ||||||
| Stock written off due to natural disaster | ||||||||
| Deferred tax benefit | ( | ) | ||||||
| Loss from equity method investments | ||||||||
| Amortization of right of use assets | ||||||||
| Impairment loss on distribution rights | ||||||||
| Impairment loss on an unconsolidated entity | ||||||||
| Common stock issued for management and employees | ||||||||
| Common stock issued for services | ||||||||
| Amortization of debt issuance costs | ||||||||
| Accrued interest expense for convertible notes | ||||||||
| Accrued interest expenses due to related parties | ||||||||
| Accrued interest income from related parties | ( | ) | ( | ) | ||||
| Accrued interest income from third parties | ( | ) | ( | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Advances to suppliers | ||||||||
| Inventories | ( | ) | ( | ) | ||||
| Other current assets | ( | ) | ||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Advances from customers | ( | ) | ( | ) | ||||
| Other payables and accrued expenses | ||||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Taxes payable | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Acquisitions of property and equipment | ( | ) | ( | ) | ||||
| Proceeds from disposal of property and equipment | ||||||||
| Payment made for loans to third parties | ( | ) | ( | ) | ||||
| Repayments of loans to third parties | ||||||||
| Payment made for loans to related parties | ( | ) | ||||||
| Repayments of loans to related parties | ||||||||
| Investment in unconsolidated entity | ( | ) | ||||||
| Payment made for business acquisition | ( | ) | ||||||
| Acquisition of subsidiaries, net of cash | ||||||||
| Disposal of a VIE - Ankang, net of cash | ( | ) | ||||||
| Net cash provided (used in) by investing activities | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from short-term bank loans | ||||||||
| Repayment of short-term bank loans | ( | ) | ||||||
| Proceeds from issuance of common stock | ||||||||
| Proceeds received from investors for subscription of common stock | ||||||||
| Proceeds from (repayments of) advances from related parties | ( | ) | ||||||
| Proceeds from issuance of convertible notes | ||||||||
| Net cash provided by financing activities | ||||||||
| EFFECT OF EXCHANGE RATE CHANGE ON CASH AND CASH EQUIVALENTS | ( | ) | ||||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | ( | ) | ||||||
| CASH AND CASH EQUIVALENTS - Beginning of the period | ||||||||
| CASH AND CASH EQUIVALENTS - End of the period | $ | $ | ||||||
| SUPPLEMENTAL NON-CASH OPERATING, INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Issuance of common shares for convertible notes redemption | $ | $ | ||||||
| Issuance of common shares for proceeds received in prior year | $ | $ | ||||||
| Issuance of common shares for business acquisition | $ | $ | ||||||
| Right-of-use assets obtained in exchange for operating lease obligations | $ | $ | ||||||
| Reduction of right-of-use assets and operating lease obligations due to early termination of lease agreement | $ | $ | ||||||
| Repayments of loans to third parties offset by other payables | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
Shineco, Inc. (“Shineco” or the “Company”) was incorporated in the State of Delaware on August 20, 1997. The Company is a holding company whose primary purpose is to develop business opportunities in the People’s Republic of China (the “PRC” or “China”).
On
December 30, 2004, the Company acquired all of the issued and outstanding shares of Beijing Tenet-Jove Technological Development Co.,
Ltd. (“Tenet-Jove”), a PRC company, in exchange for restricted shares of the Company’s common stock, and the sole operating
business of the Company became that of its subsidiary, Tenet-Jove. Tenet-Jove was incorporated on December 15, 2003 under the laws of
China. Consequently, Tenet-Jove became a
On December 31, 2008, June 11, 2011, and May 24, 2012, Tenet-Jove entered into a series of contractual agreements including an Executive Business Cooperation Agreement, a Timely Reporting Agreement, an Equity Interest Pledge Agreement, and an Executive Option Agreement (collectively, the “VIE Agreements”), with each one of the following entities, Ankang Longevity Pharmaceutical (Group) Co., Ltd. (“Ankang Longevity Group”), Yantai Zhisheng International Freight Forwarding Co., Ltd. (“Zhisheng Freight”), Yantai Zhisheng International Trade Co., Ltd. (“Zhisheng Trade”), Yantai Mouping District Zhisheng Agricultural Produce Cooperative (“Zhisheng Agricultural”), and Qingdao Zhihesheng Agricultural Produce Services., Ltd. (“Qingdao Zhihesheng”). On February 24, 2014, Tenet-Jove entered into the same series of contractual agreements with Shineco Zhisheng (Beijing) Bio-Technology Co., Ltd. (“Zhisheng Bio-Tech”), which was incorporated in 2014. Zhisheng Bio-Tech, Zhisheng Freight, Zhisheng Trade, Zhisheng Agricultural, and Qingdao Zhihesheng are collectively referred to herein as the “Zhisheng VIEs”.
Pursuant to the VIE Agreements, Tenet-Jove has the exclusive right to provide to the Zhisheng VIEs and Ankang Longevity Group consulting services related to their business operations and management. All the above contractual agreements obligate Tenet-Jove to absorb a majority of the risk of loss from the Zhisheng VIEs and Ankang Longevity Group’s activities and entitle Tenet-Jove to receive a majority of their residual returns. In essence, Tenet-Jove has become the primary beneficiary of the operations of the Zhisheng VIEs and Ankang Longevity Group. Therefore, the Zhisheng VIEs and Ankang Longevity Group are treated as variable interest entities (“VIEs”) under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810 “Consolidation.” Accordingly, the accounts of these entities are consolidated with those of Tenet-Jove.
Since
Shineco is effectively controlled by the majority shareholders of the Zhisheng VIEs and Ankang Longevity Group, Shineco owns
On
September 30, 2017, Tenet-Jove established Xinjiang Shineco Taihe Agriculture Technology Ltd. (“Xinjiang Taihe”) with registered
capital of RMB
| 6 |
On
December 10, 2016, Tenet-Jove entered into a purchase agreement with Tianjin Tajite E-Commerce Co., Ltd. (“Tianjin Tajite”),
an online e-commerce company based in Tianjin, China, specializing in distributing Luobuma related products and branded products of Daiso
100-yen shops, pursuant to which Tenet-Jove would acquire a
On
March 13, 2019, Tenet-Jove established Beijing Tenjove Newhemp Biotechnology Co., Ltd. (“TNB”) with registered capital of
RMB
On
July 23, 2020, Shanghai Jiaying International Trade Co., Ltd. (“Shanghai Jiaying”) was established with registered capital
of RMB
On
January 7, 2021, Inner Mongolia Shineco Zhonghemp Biotechnology Co., Ltd. (“SZB”) was established with registered capital
of RMB
On
December 07, 2021, the Company established Shineco Life Science Research Co., Ltd. (“Life Science”) as a wholly foreign-owned
entity with registered capital of US$
On
April 13, 2022, the Company established Shineco Life Science Group Hong Kong Co., Limited (“Life Science HK”) as a wholly
owned entity with registered capital of US$
On June 8, 2021, Tenet-Jove entered into a Restructuring Agreement with various parties. Pursuant to the terms of the Restructuring Agreement, (i) the Company transferred all of its rights and interests in Ankang Longevity to Yushe County Guangyuan Forest Development Co., Ltd. (“Guangyuan”)’s Shareholders in exchange for Guangyuan Shareholders entering into the VIE Agreements with Tenet-Jove, which composes of one group of similar identifiable assets; (ii) Tenet-Jove entered a Termination Agreement with Ankang Longevity and the Ankang Shareholders; (iii) as a consideration to the Restructuring Agreement and based on a valuation report on the equity interests of Guangyuan issued by an independent third party, Tenet-Jove relinquished all of its rights and interests in Ankang Longevity and transferred those rights and interests to the Guangyuan Shareholders; and (iv) Guangyuan and the Guangyuan Shareholders entered into a series of variable interest entity agreements with Tenet-Jove. After signing of the Restructuring Agreement, the Company and the shareholders of Ankang and Guangyuan actively carried out the transferring of rights and interests in Ankang and Guangyuan, and the transferring was completed subsequently on July 5, 2021. Afterwards, with the completion of all other follow-ups works, on August 16, 2021, the Company, through its subsidiary Tenet-Jove, completed the previously announced acquisition pursuant to the Restructuring Agreement dated June 8, 2021.
| 7 |
On
December 30, 2022, Life Science closed the acquisition of
On
January 13, 2023, the Company entered into a non-binding framework agreement (the “LOI”) with certain shareholders of Dream
Partner Limited (“Dream Ltd.”) to acquire
The Company, its subsidiaries, its VIEs, and its VIEs’ subsidiaries (collectively the “Group”) currently operate four main business segments: 1) Tenet-Jove is engaged in manufacturing and selling Bluish Dogbane and related products, also known in Chinese as “Luobuma,” including therapeutic clothing and textile products made from Luobuma; 2) Qingdao Zhihesheng and Guanyuan are engaged in planting, processing, and distributing green agricultural produce; (“Agricultural Products”); 3) Zhisheng Freight is providing domestic and international logistic services (“Freight Services”); and 4) Biowin is specializing in development, production and distribution of innovative rapid diagnostic products and related medical devices for the most common diseases (“Rapid Diagnostic Products”). These different business activities and products can potentially be integrated and benefit from one another.
NOTE 2. GOING CONCERN UNCERTAINTIES
As
disclosed in the Company’s unaudited condensed consolidated financial statements, the Company had recurring net losses of US$
Despite those negative financial trends, as of March 31, 2023, the Company had positive working capital due to the following measurements the management has taken to enhance the Company’s liquidity:
| 1) | On
August 11, 2022, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with certain non-US
investors (the “Investors”). Under the Purchase Agreement, the Company will sell to the Investors, up to shares
of its common stock at a per share purchase price of $ for gross proceeds of up to US$ |
| 8 |
| 2) | On January 12, 2023, the Board of the Company approved the sales of shares of the Company’s common stock to the Company’s employees for gross proceeds of up to US$, and the balance of the proceeds is expected to be fully collected by September 30, 2023. |
| 3) | The
Company financed from commercial banks. As of March 31, 2023, the Company had US$ |
| 4) | As
of March 31, 2023, the Company had cash and cash equivalents in the amount of approximately US$ |
Management believes that the foregoing measures collectively will provide sufficient liquidity for the Company to meet its future liquidity needs 12 months from the date of this filing.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information pursuant to the rules of the SEC and have been consistently applied. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended June 30, 2022, which was filed on September 28, 2022.
The unaudited condensed consolidated financial statements of the Company reflect the principal activities of the Company, its subsidiaries, its VIEs and its VIEs’ subsidiaries. The non-controlling interest represents the minority shareholders’ interest in the Company’s majority owned subsidiaries and VIEs. All intercompany accounts and transactions have been eliminated in consolidation. Operating results for the nine months ended March 31, 2023 and 2022 are not necessarily indicative of the results that may be expected for the full year.
Consolidation of Variable Interest Entities
VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision-making ability. All VIEs and their subsidiaries with which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.
The total carrying amount of the VIEs and their subsidiaries’ unaudited condensed consolidated assets and liabilities and income information were as follows:
March 31, 2023 | June 30, 2022 | |||||||
| Current assets | $ | $ | ||||||
| Non-current assets | ||||||||
| Total assets | ||||||||
| Total liabilities | ( | ) | ( | ) | ||||
| Net assets | $ | $ | ||||||
For the nine months ended March 31, | For the three months ended March 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Gross loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Income (loss) from operations | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Net income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| 9 |
The carrying amount of the VIEs and their subsidiaries’ unaudited condensed consolidated income information held for discontinued operations were as follows:
For the nine months ended March 31, | For the three months ended March 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net loss | $ | $ | ( | ) | $ | $ | ||||||||||
The carrying amount of the VIEs and their subsidiaries’ unaudited condensed consolidated assets and liabilities and income information held for continued operations were as follows:
March 31, 2023 | June 30, 2022 | |||||||
| Current assets | $ | $ | ||||||
| Non-current assets | ||||||||
| Total assets | ||||||||
| Total liabilities | ( | ) | ( | ) | ||||
| Net assets | $ | $ | ||||||
For the nine months ended March 31, | For the three months ended March 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Gross loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Income (loss) from operations | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Net income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
Non-controlling Interests
U.S. GAAP requires that non-controlling interests in subsidiaries and affiliates be reported in the equity section of a company’s balance sheet. In addition, the amounts attributable to the non-controlling interests in the net income (loss) of these entities are reported separately in the unaudited condensed consolidated statements of loss and comprehensive loss.
| 10 |
Risks and Uncertainties
The operations of the Company are located in the PRC and are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic, and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political, regulatory, and social conditions in the PRC, and by changes in governmental policies or interpretations with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things. Although the Company has not experienced losses from these factors and believes that it is in compliance with existing laws and regulations, there is no guarantee that the Company will continue to do so in the future.
Members of the current management team own controlling interests in the Company and are also the owners of the VIEs in the PRC. The Company only has contractual arrangements with the VIEs, which obligate it to absorb the risk of loss and to receive the residual expected returns. As such, the controlling shareholders of the Company and the VIEs could cancel these agreements or permit them to expire at the end of the agreement terms, as a result of which the Company would not retain the economic benefits from the VIEs. In addition, should these agreements be challenged or litigated, they would also be subject to the laws and courts of the PRC legal system, which could make enforcing the Company’s rights difficult.
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements as well as the reported amounts of revenue and expenses during the reporting periods. Significant estimates required to be made by management include, but are not limited to, useful lives of property and equipment, and intangible assets, the recoverability of long-lived assets, and the valuation of accounts receivable, advances to suppliers, deferred taxes, and inventory reserves. Actual results could differ from those estimates.
Revenue Recognition
We previously recognized revenue from sales of Luobuma products, Chinese medicinal herbal products, agricultural products and rapid diagnostic products, as well as providing logistic services and other processing services to external customers. We recognized revenue when all of the following have occurred: (i) there was persuasive evidence of an arrangement with a customer; (ii) delivery had occurred or services had been rendered; (iii) the sales price was fixed or determinable; and (iv) our collection of such fees was reasonably assured. These criteria, as related to our revenue, were considered to have been met as follows:
Sales of products: The Company recognized revenue from the sale of products when the goods were delivered and title to the goods passed to the customer, provided that there were no uncertainties regarding customer acceptance; persuasive evidence of an arrangement existed; the sales price was fixed or determinable; and collectability was deemed probable.
Revenue from the provision of services: The Company merely acts as an agent in these type of services transactions. Revenue from domestic air and overland freight forwarding services was recognized upon the performance of services as stipulated in the underlying contract or when commodities were being released from the customer’s warehouse; the service price was fixed or determinable; and collectability was deemed probable.
| 11 |
With the adoption of ASC 606, “Revenue from Contracts with Customers,” revenue is recognized when all of the following five steps are met: (i) identify the contract(s) with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations; (v) recognize revenue when (or as) each performance obligation is satisfied. The Company adopted the new revenue standard beginning July 1, 2018, and adopted a modified retrospective approach upon adoption. The Company has assessed the impact of the guidance by reviewing its existing customer contracts to identify differences that will result from applying the new requirements, including the evaluation of its performance obligations, transaction price, customer payments, transfer of control, and principal versus agent considerations. In accordance with ASC 606, the Company evaluates whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions. When the Company is a principal, that the Company obtains control of the specified goods or services before they are transferred to the customers, the revenues should be recognized in the gross amount of consideration to which it expects to be entitled in exchange for the specified goods or services transferred. When the Company is an agent and its obligation is to facilitate third parties in fulfilling their performance obligation for specified goods or services, the revenues should be recognized in the net amount for the amount of commission which the Company earns in exchange for arranging for the specified goods or services to be provided by other parties. Based on the assessment, the Company concluded that there was no change to the timing and pattern of revenue recognition for its current revenue streams in scope of Topic 606 and therefore there was no material changes to the Company’s consolidated financial statements upon adoption of ASC 606.
Cash and Cash Equivalents
Cash
and cash equivalents consist of cash on hand, cash on deposit, and other highly liquid investments which are unrestricted as to withdrawal
or use, and which have original maturities of three months or less when purchased. The Company maintains cash with various financial
institutions mainly in the PRC. As of March 31, 2023 and June 30, 2022, the Company had
Under PRC law, it is generally required that a commercial bank in the PRC that holds third-party cash deposits protect the depositors’ rights over and interests in their deposited money. PRC banks are subject to a series of risk control regulatory standards, and PRC bank regulatory authorities are empowered to take over the operation and management of any PRC bank that faces a material credit crisis. The Company monitors the banks utilized and has not experienced any problems.
Accounts Receivable, Net
Accounts
receivable are recorded at net realizable value, consisting of the carrying amount less an allowance for uncollectible accounts, as necessary.
The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the
collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many
factors, including the age of the balance, the customers’ historical payment history, their current credit-worthiness, and current
economic trends. The fair value of long-term receivables is determined using a present value technique by discounting the future expected
contractual cash flows using current rates at which similar instruments would be issued at the measurement date. As of March 31, 2023
and June 30, 2022, the allowance for doubtful accounts was US$
Inventories, Net
Inventories,
which are stated at the lower of cost or net realizable value, consist of raw materials, work-in-progress, and finished goods
related to the Company’s products. Net realizable value is the estimated selling price in the normal course of business less
any costs to complete and sell products. Cost is determined using the first in first out (“FIFO”) method. Agricultural
products that the Company farms are recorded at cost, which includes direct costs such as seed selection, fertilizer, labor cost and
contract fees that are spent in growing agricultural products on the leased farmland, and indirect costs which include amortization
of prepayments of farmland leases and farmland development costs. All the costs are accumulated until the time of harvest and then
allocated to the harvested crops costs when they are sold. The Company periodically evaluates its inventory and records an inventory
reserve for certain inventories that may not be saleable or whose cost exceeds net realizable value. As of March 31, 2023 and June
30, 2022, the inventory reserve was US$
| 12 |
Advances to Suppliers, Net
Advances
to suppliers consist of payments to suppliers for materials that have not been received. Advances to suppliers are reviewed periodically
to determine whether their carrying value has become impaired. As of March 31, 2023 and June 30, 2022, the Company had an allowance for
uncollectible advances to suppliers of US$
Business Acquisitions
Business acquisitions are accounted for under the acquisition method. The acquisition method requires the reporting entity to identify the acquirer, determine the acquisition date, recognize and measure the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquired entity, and recognize and measure goodwill or a bargain gain from the purchase. The acquiree’s results are included in the Company’s unaudited condensed consolidated financial statements from the date of acquisition. Assets acquired and liabilities assumed are recorded at their fair values on the date acquired and the excess of the purchase price over the amounts assigned is recorded as goodwill, or if the fair value of the net assets acquired exceeds the purchase price consideration, a bargain purchase gain is recorded. Adjustments to fair value assessments are generally recorded to goodwill over the measurement period (not longer than 12 months). The acquisition method also requires that acquisition-related transaction and post-acquisition restructuring costs be charged to expense as committed, and requires the Company to recognize and measure certain assets and liabilities, including those arising from contingencies and contingent consideration in a business combination.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of assets acquired. The goodwill impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, goodwill of the reporting unit would be considered impaired. To measure the amount of the impairment loss, the implied fair value of a reporting unit’s goodwill is compared to the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. If the carrying amount of a reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. For each of these tests, the fair value of each of the Company’s reporting units is determined using a combination of valuation techniques, including a discounted cash flow methodology. To corroborate the discounted cash flow analysis performed at each reporting unit, a market approach is utilized using observable market data such as comparable companies in similar lines of business that are publicly traded or which are part of a public or private transaction (to the extent available).
Leases
The Company follows FASB ASC No. 842, Leases (“Topic 842”). The Company leases office spaces, warehouse, and farmland which are classified as operating leases in accordance with Topic 842. Under Topic 842, lessees are required to recognize the following for all leases (with the exception of short-term leases, usually with initial term of 12 months or less) on the commencement date: (i) lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) right-of-use (“ROU”) asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and includes initial direct costs incurred. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expenses for minimum lease payments are recognized on a straight-line basis over the lease term. All operating lease ROU assets are reviewed for impairment annually. For the nine and three months ended March 31, 2023 and 2022, the Company did not recognize any impairment of its ROU assets.
| 13 |
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 | ||
| Machinery equipment | ||
| Motor vehicles | ||
| Office equipment |