SHINECO, INC. Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is subject to the safe harbor created by those sections. All statements other than statements of historical fact are "forward-looking statements" for purposes of federal and state securities laws. Forward-looking statements involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as "anticipate," "estimate," "plan," "project," "continuing," "ongoing," "expect," "believe," "intend," "may," "should," "will," "could," and similar expressions denoting uncertainty or an action that may, will or is expected to occur in the future. These statements involve estimates, assumptions, known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements.
Examples of forward-looking statements include:
? the timing of the development of future products;
? projections of revenue, earnings, capital structure, and other financial
items;
? local, regional, national, and global Luobuma and herbal medicines price
fluctuations;
? statements of our plans and objectives, including those that relate to our
proposed expansions and the effect such expansions may have on our revenue;
? statements regarding the capabilities of our business operations; ? statements of expected future economic performance; ? the impact of the COVID-19 outbreak; ? statements regarding competition in our market; and ? assumptions underlying statements regarding us or our business.
The ultimate correctness of these forward-looking statements depends upon a number of known and unknown risks and events. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that impact our business. In particular, we encourage you to review the risks and uncertainties described in "Risk Factors" in our annual report on Form 10-K for the fiscal year endedJune 30, 2022 filed with theSEC onSeptember 28, 2022 (the "Annual Report") and otherSEC filings. These risks and uncertainties could cause actual results to differ materially from those projected or implied by our forward-looking statements contained in this report. In addition, many factors could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Consequently, you should not place undue reliance on these forward-looking statements. The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Nonetheless, we reserve the right to make such updates from time to time by press release, periodic report, or other method of public disclosure without the need for specific reference to this Quarterly Report. No such update shall be deemed to indicate that other statements not addressed by such update is incorrect or create an obligation to provide any other updates. 38 The information included in this Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes included in this Quarterly Report, and the audited consolidated financial statements and notes and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report. All monetary figures are presented inU.S. dollars, unless otherwise indicated. General OverviewShineco, Inc. is a holding company incorporated inDelaware . As a holding company with no material operations of our own, we conduct a substantial majority of our operations through the operating entities established inthe People's Republic of China , or the PRC, primarily the variable interest entities (the "VIEs"). We do not have any equity ownership of the VIEs, instead we are entitled to receive the economic benefits of the VIEs' business operations through certain contractual arrangements. Our common stock that currently listed on theNasdaq Capital Markets are shares of ourDelaware holding company that maintains service agreements with the associated operating companies. The Chinese regulatory authorities could disallow our structure, which could result in a material change in our operations and the value of our securities could decline or become worthless. We use our subsidiaries and the VIEs' vertically and horizontally integrated production, distribution, and sales channels to provide health and well-being focused plant-based products. Our products are only sold domestically inChina . We utilize modern engineering technologies and biotechnologies to produce, among other products, Chinese herbal medicines, organic agricultural produce, and specialized textiles. Our health and well-being focused plant-based products business is divided into three major segments: Processing and distributing traditional Chinese herbal medicine products as well as other pharmaceutical products - This segment is conducted throughAnkang Longevity Pharmaceutical (Group) Co., Ltd. ("Ankang Longevity Group "), a Chinese company formerly under contractual arrangement with the Company which operates 66 cooperative retail pharmacies throughout Ankang, a city in southernShaanxi province,China , through which we sell directly to individual customers traditional Chinese medicinal products produced by us as well as by third parties.Ankang Longevity Group also owns a factory specializing in decoction, which is the process by which solid materials are heated or boiled in order to extract liquids, and distributes decoction products to wholesalers and pharmaceutical companies aroundChina . OnJune 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 inAnkang Longevity Group toYushe County Guangyuan Forest Development Co., Ltd. ("Guangyuan")'s Shareholders in exchange for the Guangyuan Shareholders entering into VIE agreements with Tenet-Jove, which composes of one group of similar identifiable assets; (ii) Tenet-Jove entered a Termination Agreement withAnkang Longevity Group and the Ankang Longevity Group Shareholders; (iii) as a consideration to the Restructuring Agreement and based on a valuation report on the equity interests of Guangyuan issued by an independent third party, Tenet-Jove relinquished all of its rights and interests inAnkang Longevity Group and transferred those rights and interests to the Guangyuan Shareholders; and (iv) Guangyuan and the Guangyuan Shareholders entered into a series of variable interest entity agreements with Tenet-Jove. After signing of the Restructuring Agreement, the Company and the shareholders ofAnkang Longevity Group and Guangyuan actively carried out the transferring of rights and interests inAnkang Longevity Group and Guangyuan, and the transferring was completed subsequently onJuly 5, 2021 . Afterwards, with the completion of all other follow-ups works, onAugust 16, 2021 , the Company, through its subsidiary Tenet-Jove, completed the previously announced acquisition pursuant to the Restructuring Agreement datedJune 8, 2021 . The management determined thatJuly 5, 2021 was the disposal date ofAnkang Longevity Group . The results of operations ofAnkang Longevity Group have been reclassified to "net loss from discontinued operations" in the unaudited condensed consolidated statements of loss and comprehensive loss for the six and three months endedDecember 31, 2022 and 2021. 39
Processing and distributing green and organic agricultural produce as well as growing and cultivating yew trees (taxus media) - We currently cultivate and sell yew mainly to group and corporate customers, but do not currently process yew into Chinese or Western medicines. This segment is conducted through the VIEs:Qingdao Zhihesheng Agricultural Produce Services, Ltd ("Qingdao Zhihesheng"). Meanwhile, we entered the market of planting fast-growing bamboo willows and scenic greening trees through the newly acquired VIE,Yushe County Guangyuan Forest Development Co., Ltd. ("Guangyuan"). The operations of this segment are located in the North regions of Mainland China, mostly carried
out inShanxi Province . Providing domestic air and overland freight forwarding services - We currently provide domestic air and overland freight forwarding services by outsourcing these services to a third party. This segment is conducted through our VIE,Yantai Zhisheng International Freight Forwarding Co., Ltd ("Zhisheng Freight"). Developing and distributing specialized fabrics, textiles, and other byproducts derived from an indigenous Chinese plant Apocynum Venetum, grown in theXinjiang region ofChina , and known in Chinese as "Luobuma" or "bluish dogbane" - Our Luobuma products are specialized textile and health supplement products designed to incorporate traditional Eastern medicines with modern scientific methods. These products are predicated on centuries-old traditions of Eastern herbal remedies derived from the Luobuma raw material. This segment is channeled through our directly-owned subsidiary,Beijing Tenet-Jove Technological Development Co., Ltd. ("Tenet-Jove"), and its 90% subsidiaryTianjin Tenet Huatai Technological Development Co., Ltd. ("Tenet Huatai"). Financing Activities
OnJune 16, 2021 , the Company entered into a securities purchase agreement pursuant to which the Company issued an unsecured convertible promissory note with a one-year maturity term to an institutional accredited investor,Streeterville Capital, LLC ("Investor"). The note had an original principal amount ofUS$3,170,000 and Investor gave consideration ofUS$3.0 million , reflecting original issue discount ofUS$150,000 and Investor's legal fee ofUS$20,000 . Interest accrues on the outstanding balance of the note at 6% per annum. The Company has received the principal in full from the Investor and used the proceeds for general working capital purposes. OnSeptember 7, 2022 , the Company signed an extension amendment with the Investor to extend the maturity date toJune 15, 2023 . OnOctober 21, 2022 , the Company signed a standstill agreement with the Investor, pursuant to which the Investor would not seek to redeem any portion of the Note during the period fromOctober 21, 2022 toJanuary 20, 2023 . On or aroundJanuary 20, 2023 , the Investor re-started the redemption of the Notes. As ofDecember 31, 2022 , no share of the Company's common stock under this agreement was issued by the Company to the Investor, and the Notes balance wasUS$3,555,888 , with a carrying value ofUS$3,677,455 , net of deferred financing costs ofUS$121,567 was recorded in the accompanying unaudited condensed consolidated balance sheets. OnJuly 16, 2021 , the Company entered into another securities purchase agreement with the Investor, pursuant to which the Company issued the Investor two unsecured convertible promissory notes each with a one-year maturity term. The first convertible promissory note had an original principal amount ofUS$3,170,000 and the Investor gave consideration ofUS$3.0 million , reflecting original issue discount ofUS$150,000 and Investor's legal fee ofUS$20,000 . The second convertible promissory note has the original principal amount ofUS$4,200,000 and Investor gave consideration ofUS$4.0 million , reflecting original issue discount ofUS$200,000 . Interest accrues on the outstanding balance of the Notes at 6% per annum. The Company has received the principal in full from the Investor and used the proceeds for general working capital purposes. As ofDecember 31, 2022 , the Notes was fully converted and shares of the Company's common stock totaling 1,946,766 were issued by the Company to the Investor equaling principal and interests amounted toUS$7,472,638 . 40 OnAugust 19, 2021 , the Company entered into another securities purchase agreement with the Investor, pursuant to which the Company issued the Investor an unsecured convertible promissory note with a one-year maturity term. The note has an original principal amount ofUS$10,520,000 and Investor gave consideration ofUS$10.0 million , reflecting original issue discount ofUS$500,000 and Investor's legal fee ofUS$20,000 . Interest accrues on the outstanding balance of the note at 6% per annum. The Company has received the principal in full from the Investor and used the proceeds for general working capital purposes. OnSeptember 7, 2022 , the Company signed an extension amendment with the Investor to extend the maturity date toAugust 18, 2023 . OnOctober 21, 2022 , the Company signed a standstill agreement with the Investor, pursuant to which the Investor will not seek to redeem any portion of the Note during the period fromOctober 21, 2022 toJanuary 20, 2023 . As ofDecember 31, 2022 , shares of the Company's common stock totaling 427,699 were issued by the Company to the Investor equaling principal and interests amounted toUS$420,000 , and the Notes balance wasUS$11,169,044 , with a carrying value ofUS$11,603,465 , net of deferred financing costs ofUS$434,421 was recorded in the accompanying unaudited condensed consolidated balance sheets. OnJune 13, 2022 , the Company entered into a certain stock purchase agreement (the "SPA") with certain non-U.S. investors (the "Purchasers"), pursuant to which the Company agreed to sell, and the Purchasers agreed to purchase, severally and not jointly, an aggregate of 2,354,500 shares of common stock of the Company (the "Shares") at a price ofUS$2.12 per share. The Company's shareholders approved the offer and sale of the Shares at a meeting of the shareholders of the Company that was held onJuly 21, 2022 . The closing for the offer and sale of the Shares occurred onJuly 26, 2022 and the Company issued the Shares in exchange for gross proceeds of$5.0 million . OnAugust 11, 2022 , the Company entered into a securities purchase agreement (the "Purchase Agreement") with certain non-US investors (the "Investors"). Under the Purchase Agreement, the Company will sell to the Investors, up to 1,921,683 shares (the "Shares") of its common stock at a per share purchase price of$0.915 (subject to the terms and conditions of the Purchase Agreement) for gross proceeds of up toUS$1,758,340 . As the date of this report, proceeds amounted toUS$1.25 million has been received by the Company, and the remaining balance of the proceeds is expected to be fully collected byMarch 31, 2023 .
Factors Affecting Financial Performance
We believe that the following factors will affect our financial performance:
Increasing demand for our products - We believe that the increasing demand for our agricultural products will have a positive impact on our financial position. We plan to develop new products and expand our distribution network as well as to grow our business through possible mergers and acquisitions of similar or synergetic businesses, all aimed at increasing awareness of our brand, developing customer loyalty, meeting customer demands in various markets and providing solid foundations for our growth. As of the date of this Quarterly Report, however, we do not have any agreements, undertakings or understandings to acquire any such entities and there can be no guarantee that we ever will. Maintaining effective control of our costs and expenses - Successful cost control depends upon our ability to obtain and maintain adequate material supplies as required by our operations at competitive prices. We will focus on improving our long-term cost control strategies including establishing long-term alliances with certain suppliers to ensure adequate supply is maintained. We will carry forward the economies of scale and advantages from our nationwide distribution network and diversified offerings. Moreover, we will step up our efforts in higher value-added products of Luobuma by using an exclusive and patented technology, to optimize quality management, procurement processes and cost control, and give full play to the strong production capacity and trustworthy sales teams to maximize our profit and bring better long-term return for our stockholders. 41 Economic and Political Risks Our operations are conducted primarily in the PRC and subject to special considerations and significant risks not typically associated with companies operating inNorth America and/orWestern Europe . These include risks with, among others, the political, economic and legal environment and foreign currency exchange. Our results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversions, remittances abroad, and rates and methods of taxation, among other things. COVID-19 Impact The COVID-19 outbreak has resulted in the implementation of significant governmental measures, including lockdowns, closures, quarantines, and travel bans, intended to control the spread of the virus. In accordance with the epidemic control measures imposed by the local governments related to COVID-19, our offices and retail stores remained closed or had limited business operations after theChinese New Year holiday until earlyApril 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 inChina and globally could prolong the deterioration in economic conditions and could cause decreases in or delays in spending and reduce and/or negatively impact our short-term ability to grow our revenue. Due to the resurgence of COVID-19 cases inChina , our headquarter inBeijing was closed down onApril 25, 2022 and only resumed our business inmid-June 2022 . Meanwhile, the business of our subsidiaries and VIEs was also negatively affected during this period, including but not limited to the execution of our sales contract and fulfillment of customer orders and the collection of the payments from customers in a timely manner. The resurgence of COVID-19 impact on our operating results and financial performance seems to be temporary, we will continue to monitor and modify the operating strategies in response to the COVID-19. In earlyDecember 2022 ,China announced a nationwide loosening of its zero-covid policy, and the country faced a wave in infections after the lifting of these restrictions. The extent of the future impact of COVID-19 is still highly uncertain and cannot be predicted as of the date our unaudited condensed consolidated financial statements are released.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity withU.S. generally accepted accounting principles ("U.S. GAAP") requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements as well as the reported amounts of revenue and expenses during the reporting period. Critical accounting policies are those accounting policies that may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and that have a material impact on financial condition or operating performance. While we base our estimates and judgments on our experience and on various other factors that we believe to be reasonable under the circumstances, actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies used in the preparation of our unaudited condensed consolidated financial statements require significant judgments and estimates. For additional information relating to these and other accounting policies, see Note 3 to our unaudited condensed consolidated financial statements included elsewhere in this Report. 42
Consolidation of Variable Interest Entities
VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision-making ability. All VIEs and their subsidiaries with which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.
Use of Estimates Significant estimates required to be made by management include, but are not limited to, useful lives of property and equipment, and intangible assets, the recoverability of long-lived assets and the valuation of accounts receivable, advances to suppliers, deferred taxes and inventory reserves. Actual results could differ from those estimates. Accounts Receivable, Net
Accounts receivable are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts, as necessary. We review the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, we consider many factors, including the age of the balance, the customers' historical payment history, their current credit-worthiness and current economic trends. The fair value of long-term receivables is determined using a present value technique by discounting the future expected contractual cash flows using current rates at which similar instruments would be issued at the measurement date. As ofDecember 31, 2022 andJune 30, 2022 , the allowance for doubtful accounts wasUS$7,085,240 andUS$7,317,236 , respectively. Accounts are written off against the allowance after efforts at collection prove unsuccessful. Inventories, Net
Inventories, which are stated at the lower of cost or net realizable value, consist of raw materials, work-in-progress, and finished goods related to our products. Cost is determined using the first in first out method. Agricultural products that we farm are recorded at cost, which includes direct costs such as seed selection, fertilizer, labor cost, and contract fees that are spent in growing agricultural products on the leased farmland, and indirect costs such as amortization of prepayments of farmland leases and farmland development costs. All the costs are accumulated until the time of harvest and then allocated to the harvested crops costs when they are sold. We periodically evaluate our inventory and records an inventory reserve for certain inventories that may not be saleable or whose cost exceeds net realizable value. As ofDecember 31, 2022 andJune 30, 2022 , the inventory reserve wasUS$1,208,807 andUS$1,249,543 ,
respectively. Revenue Recognition
We previously recognized revenue from sales of Luobuma products, Chinese medicinal herbal products, and agricultural products, as well as providing logistic services and other processing services to external customers. We recognized revenue when all of the following have occurred: (i) there was persuasive evidence of an arrangement with a customer; (ii) delivery had occurred or services had been rendered; (iii) the sales price was fixed or determinable; and (iv) our collection of such fees was reasonably assured. These criteria, as related to our revenue, were considered to have been met as follows:
Sales of products: We recognized revenue from the sale of products when the goods were delivered and title to the goods passed to the customer provided that there were no uncertainties regarding customer acceptance; persuasive evidence of an arrangement existed; the sales price was fixed or determinable; and collectability was deemed probable. 43
Revenue from provision of services: The Company merely acts as an agent in this type of services transactions. Revenue from domestic air and overland freight forwarding services was recognized upon the performance of services as stipulated in the underlying contract or when commodities were being released from the customer's warehouse; the service price was fixed or determinable; and collectability was deemed probable. With the adoption of ASC 606, "Revenue from Contracts with Customers," revenue is recognized when all of the following five steps are met: (i) identify the contract(s) with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations; (v) recognize revenue when (or as) each performance obligation is satisfied. The Company adopted the new revenue standard beginningJuly 1, 2018 , and adopted a modified retrospective approach upon adoption. The Company has assessed the impact of the guidance by reviewing its existing customer contracts to identify differences that will result from applying the new requirements, including the evaluation of its performance obligations, transaction price, customer payments, transfer of control, and principal versus agent considerations. In accordance with ASC 606, the Company evaluates whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions. When the Company is a principal, that the Company obtains control of the specified goods or services before they are transferred to the customers, the revenues should be recognized in the gross amount of consideration to which it expects to be entitled in exchange for the specified goods or services transferred. When the Company is an agent and its obligation is to facilitate third parties in fulfilling their performance obligation for specified goods or services, the revenues should be recognized in the net amount for the amount of commission which the Company earns in exchange for arranging for the specified goods or services to be provided by other parties. Based on the assessment, the Company concluded that there was no change to the timing and pattern of revenue recognition for its current revenue streams in scope of Topic 606 and therefore there was no material changes to the Company's unaudited condensed consolidated financial statements upon adoption of ASC 606.
Fair Value of Financial Instruments
We follow the provisions of ASC 820, "Fair Value Measurements and Disclosures." ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 applies to assets or liabilities for which there are inputs, other than quoted prices in level, that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data. Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the asset or liability.
The carrying value of financial instruments included in current assets and liabilities approximate their fair values because of the short-term nature of these instruments.
44
Results of Operations for the Six Months Ended
Overview
The following table summarizes our results of operations for the six months
ended
Six Months Ended
December 31, Variance
2022 2021 Amount %
Revenue $ 1,074,945 $ 1,362,332 $ (287,387 ) (21.10 )%
Cost of revenue 1,285,690 2,653,568 (1,367,878 ) (51.55 )%
Gross loss (210,745 ) (1,291,236 ) 1,080,491 (83.68 )%
General and administrative
expenses 4,203,856 10,506,466 (6,302,610 ) (59.99 )%
Selling expenses 18,551 18,332 219 1.19 %
Impairment loss of
distribution rights - 1,140,551 (1,140,551 ) (100.00 )%
Loss from operations (4,433,152 ) (12,956,585 ) 8,523,433 (65.78 )%
Impairment loss on an
unconsolidated entity - (149,790 ) 149,790 (100.00 )%
Loss from equity method
investments (6,221 ) (106,988 ) 100,767 (94.19 )%
Other income, net 28,758 1,443 27,315 1,892.93 %
Amortization of debt
issuance costs (355,972 ) (854,318 ) 498,346 (58.33 )%
Interest income (expenses),
net (448,244 ) 67,139 (515,383 ) (767.64 )%
Loss before income tax
provision from continuing
operations (5,214,831 ) (13,999,099 ) 8,784,268 (62.75 )%
Benefit for income taxes - (6,478 ) 6,478 (100.00 )%
Net loss from continuing
operations (5,214,831 ) (13,992,621 ) 8,777,790 (62.73 )%
Net loss from discontinued
operations - (3,135,237 ) 3,135,237 (100.00 )%
Net loss $ (5,214,831 ) $ (17,127,858 ) $ 11,913,027 (69.55 )%
Comprehensive loss
attributable to Shineco Inc. $ (6,377,429 ) $ (16,317,063 ) $ 9,939,634 (60.92 )%
Revenue
Currently, we, through our PRC subsidiaries and the VIEs, have three revenue
streams derived from our three major business segments from continuing
operations. First, developing, manufacturing, and distributing specialized
fabrics, textiles, and other by-products derived from an indigenous Chinese
plant Apocynum Venetum, known in Chinese as "Luobuma" or "Bluish Dogbane," as
well as Luoboma raw materials processing; this segment is channeled through our
wholly owned subsidiary, Tenet-Jove. Second, planting, processing and
distributing green and organic agricultural produce, growing and cultivation of
yew trees, as well as planting fast-growing bamboo willows and scenic greening
trees; this segment is conducted through Qingdao Zhihesheng and Guangyuan.
Third, providing domestic air and overland freight forwarding services by
outsourcing these services to a third party; this segment is conducted through
Zhisheng Freight . For the business segment, that processing and distributing
traditional Chinese medicinal herbal products as well as other pharmaceutical
products; this segment is conducted via the VIE, Ankang Longevity Group and its
subsidiaries, which was disposed and did not generate any sales during the six
months ended December 31, 2021 .
45
The following table sets forth the breakdown of our revenue for each of the
three segments for the six months ended December 31, 2022 and 2021,
respectively:
Six Months Ended December 31, Variance
2022 % 2021 % Amount %
Luobuma products $ 19,222 1.78 % $ 34,768 2.55 % $ (15,546 ) (44.71 )%
Other agricultural products 823,685 76.63 % 875,191 64.24 % (51,506 ) (5.89 )%
Freight services 232,038 21.59 % 452,373 33.21 % (220,335 ) (48.71 )%
Total Amount $ 1,074,945 100.00 % $ 1,362,332 100.00 % $ (287,387 ) (21.10 )%
For the six months endedDecember 31, 2022 and 2021, revenue from sales of Luobuma products wasUS$19,222 andUS$34,768 , respectively, which represented a decrease ofUS$15,546 , or 44.71%. The decrease of revenue from this segment was mainly due to the decrease in revenue from Tenet-Jove and Tenet Huatai. The low revenue from sales of Luobuma products is because we did not launch any new products and reduced our resources and investments in our E-commerce distribution channel, and currently, we mainly focused on clearing off our remaining old stocks. Hence, revenue from this segment continued falling during the six months endedDecember 31, 2022 as compared to the same period in 2021. For the six months endedDecember 31, 2022 and 2021, revenue from sales of other agricultural products wasUS$823,685 andUS$875,191 , respectively, representing a decrease ofUS$51,506 , or 5.89%. Since our sales of yew trees were adversely affected by the COVID-19 outbreak, we modified our operating strategies in response to the pandemic. Instead of selling more unmatured yew trees, we are now cultivating more matured yew trees, which can be used to extract Taxol, a more valuable chemical substance which is used experimentally as a drug in
the treatment of cancer.
For the six months endedDecember 31, 2022 and 2021, revenue from provision of freight services wasUS$232,038 andUS$452,373 , respectively, representing a decrease ofUS$220,335 , or 48.71%. The decrease was mainly due to we outsourced our domestic and international logistic services to third-party logistic companies due to the change in our business strategies. Since we merely served as an agent in this type of transactions, our revenue from domestic and international logistic services was recognized in the net amount during the six months endedDecember 31, 2022 .
Cost of Revenue and Related Tax
The following table sets forth the breakdown of the cost of revenue for each of
our three segments for the six months ended
Six Months Ended December 31, Variance
2022 % 2021 % Amount %Luobuma products$ 8,942 0.69 %$ 150,305 5.67 %$ (141,363 ) (94.05 )% Other agricultural products 1,115,447 86.76 % 2,084,782 78.56 % (969,335 ) (46.50 )% Freight services 161,299 12.55 % 415,224 15.65 % (253,925 ) (61.15 )% Business and sales related tax 2 0.00 % 3,257
0.12 % (3,255 ) (99.94 )%
Total Amount $ 1,285,690 100.00 % $ 2,653,568 100.00 % $ (1,367,878 ) (51.55 )%
For the six months ended December 31, 2022 and 2021, cost of revenue from sales
of our Luobuma products was US$8,942 and US$150,305 , respectively, representing
a decrease of US$141,363 , or 94.05%. The decrease was mainly due to the
decreased allowance we accrued for our slow-moving inventories amounted to
US$133,123 on our remaining old stocks during the six months ended December31, 2022. 46 For the six months endedDecember 31, 2022 and 2021, cost of revenue from sales of other agricultural products wasUS$1,115,447 andUS$2,084,782 , respectively, representing a decrease ofUS$969,335 , or 46.50%. The decrease was mainly due to less stock written off during the six months endedDecember 31, 2022 . Due to the continuous impact of Covid-19 inChina , which resulted in the damage and death of a large number of yew trees, we continued writing off a large amount of our inventory during the six months endedDecember 31, 2022 . For the six months endedDecember 31, 2022 and 2021, cost of revenue from provision of freight services wasUS$161,299 andUS$415,224 , respectively, representing a decrease ofUS$253,925 , or 61.15%. The decrease was due to decreased cost of revenue from domestic and international logistic services, as we now only acted as an agent in this type of this transactions as mentioned above. Gross Profit (Loss)
The following table sets forth the breakdown of the gross profit (loss) for each
of our three segments for the six months ended
Six Months Ended December 31, Variance
2022 % 2021 % Amount %
Luobuma products $ 10,278 (4.87 )% $ (115,537 ) 8.95 % $ 125,815 (108.90 )%
Other agricultural products (291,762 ) 138.44 % (1,209,591 ) 93.67 % 917,829 (75.88 )%
Freight services 70,739 (33.57 )% 33,892 (2.62 )% 36,847 108.72 %
Total Amount $ (210,745 ) 100.00 % $ (1,291,236 ) 100.00 % $ 1,080,491 (83.68 )%
Gross loss from Luobuma product sales decreased by US$125,815 or 108.90%, for
the six months ended December 31, 2022 as compared to the same period in 2021.
The decrease was mainly due to decrease in allowance we accrued for our
slow-moving inventories during the six months ended December 31, 2022 .
Gross loss from sales of other agricultural products decreased by US$917,829 , or
75.88%, for the six months ended December 31, 2022 as compared to the same
period in 2021. The decrease in gross loss was mainly due to less stock written
off as mentioned above, as well as less price discounts we offered to our
customers during the six months ended December 31, 2022 .
Gross profit from provision of freight services increased by US$36,847 , or
108.72%, for the six months ended December 31, 2022 as compared to the same
period in 2021. As mentioned above, we outsourced our domestic and international
logistic services to third-party logistic companies due to the change in our
business strategies, which improved our operating efficiency and profitability
during the six months ended December 31, 2022 .
Expenses
The following table sets forth the breakdown of our operating expenses for the
six months ended
Six Months Ended December 31, Variance
2022 % 2021 % Amount %
General and administrative
expenses $ 4,203,856 99.56 % $
10,506,466 90.06 %
18,551 0.44 % 18,332 0.16 % 219 1.19 %
Impairment loss of distribution
rights - - 1,140,551 9.78 % (1,140,551 ) (100.00 )%
Total Amount $ 4,222,407 100.00 % $ 11,665,349 100.00 % $ (7,442,942 ) (63.80 )%
47
General and Administrative Expenses
For the six months endedDecember 31, 2022 , our general and administrative expenses wereUS$4,203,856 , representing a decrease ofUS$6,302,610 , or 59.99%, as compared to the same period in 2021. The decrease was mainly due to the deceased bad debt expense during the six months endedDecember 31, 2022 , as we recorded a significant amount of bad debt expense as a result of the impact from COVID-19 during the same period last year. We recorded allowance according to our accounting policy based on our best estimates. Management will continue putting effort in collection of overdue receivables and utilize our advances to our vendors. The decrease was also due to decreased professional service fees in relation to the Company's issuance of common stock and convertible notes and decreased compensation expenses in relation to the Company's lawsuit. The decrease was partially offset by the increased intermediary fee paid to a third party as commission for the Company intended acquisition as well as the increased stock compensation expenses incurred during the six months endedDecember 31, 2022 .
Impairment Loss of Distribution Rights
For the six months endedDecember 31, 2022 and 2021, our impairment loss of distribution right was US$ nil andUS$1,140,551 , respectively. We acquired distribution rights to distribute branded products of Daiso100-yen shops through the acquisition of Tianjin Tajite. During the six months endedDecember 31, 2021 , the management performed evaluation on the impairment of distribution rights. As the Company is unable to generate any revenue and profit from the distribution right due to the unfavorable policy of China Customs and current business environment caused by the continuous impact from the COVID-19, the management fully recorded an impairment loss on distribution rights ofTianjin Tajite.
Impairment Loss on An Unconsolidated Entity
For the six months endedDecember 31, 2021 , our impairment loss on an unconsolidated entity wasUS$149,790 . The management performed evaluation on the impairment of the investment make onShanxi Pharmaceutical Group Yushe Pharmaceutical Development Co., Ltd. , ("Yushe Pharmaceutical") and considered it is unlikely to obtain any investment income in the future, hence, the management fully recorded impairment loss on this investment.
Loss from Equity Method Investments
Our VIE, Guangyuan has a 20% equity interest inShanxi Pharmaceutical Group Yushe Pharmaceutical Development Co., Ltd. ("Yushe Pharmaceutical"). We recorded a loss ofUS$16,153 for the six months endedDecember 31, 2021 from this investment. As we fully impaired the investment subsequently, no income or loss was recorded for the six months endedDecember 31, 2022 from this investment. OnAugust 31, 2021 , we entered into a capital injection agreement with the other shareholders ofShanghai Gaojing Private Fund Management ("Gaojing Private Fund "), a Chinese private fund management company, to complete the injection of a totalRMB 4.8 million (approximatelyUS$0.70 million ) for its 32% equity interest inGaojing Private Fund . We recorded a loss ofUS$6,221 andUS$90,835 for the six months endedDecember 31, 2022 and 2021 from this investment, respectively. The decrease in net loss was primarily due to lower net loss generated by the equity investment company in the current period.
Amortization of Debt Issuance Costs
For the six months endedDecember 31, 2022 , our amortization of debt issuance costs expenses wasUS$355,972 , representing a decrease ofUS$498,346 , or 58.33%, as compared to amortization of debt issuance costs expenses ofUS$854,318 , in the same period in 2021. We entered into four convertible note agreements and two of them was fully converted, hence, resulted in a decrease in amortization of debt issuance costs expenses for the six months endedDecember 31, 2022 as compared to the same period last year. 48
Interest Income (Expenses), Net
For the six months endedDecember 31, 2022 , our net interest expenses wereUS$448,244 , representing an increase ofUS$515,383 , or 767.64%, as compared to net interest income wasUS$67,139 in the same period in 2021. The increase in net interest expenses was attributable to the increased interest expenses on loans borrowed from third parties. The increase was also due to less interest income generated from loans to third parties and related parties during the six months endedDecember 31, 2022 as some of the loans have been fully collected.
Net Loss from Continuing Operations
Our net loss from continuing operations wasUS$5,214,831 for the six months endedDecember 31, 2022 , a decrease ofUS$8,777,790 , or 62.73%, from net loss from continuing operations ofUS$13,992,621 for the six months endedDecember 31, 2021 . The decrease in net loss was primarily a result of the decrease in general and administrative expenses, impairment loss of distribution rights and amortization of debt issuance costs.
Net Loss from Discontinued Operations
As mentioned above, after signing of the Restructuring Agreement onJune 8, 2021 , we and the shareholders ofAnkang Longevity Group and Guangyuan actively carried out the transferring of rights and interests inAnkang Longevity Group and Guangyuan, and the transferring was completed subsequently onJuly 5, 2021 , and the management determined thatJuly 5, 2021 was the disposal date ofAnkang Longevity Group . We had a total net loss from discontinued operations ofUS$3,135,237 for the six months endedDecember 31, 2021 . Net Loss
Our net loss wasUS$5,214,831 for the six months endedDecember 31, 2022 , a decrease ofUS$11,913,027 or 69.55%, from a net loss ofUS$17,127,858 for the same period in 2021. The decrease in net loss was primarily a result of the decreased net loss from continuing operations, as well as the decreased net loss from discontinued operations as mentioned above. Comprehensive Loss The comprehensive loss wasUS$6,371,142 for the six months endedDecember 31, 2022 , a decrease ofUS$9,942,410 from a comprehensive loss ofUS$16,313,552 for the same period in 2021. After deduction of non-controlling interest, the comprehensive loss attributable to us wasUS$6,377,429 for the six months endedDecember 31, 2022 , compared to a comprehensive loss attributable to us in the amount ofUS$16,317,063 for the six months endedDecember 31, 2021 . The decrease of comprehensive loss was due to the decrease in net loss as mentioned above, which was partially offset by the decrease in the recorded income of foreign currency translation where the financial statements denominated in RMB were translated to the USD denomination. 49
Results of Operations for the Three Months EndedDecember 31, 2022 and 2021
Overview
The following table summarizes our results of operations for the three months
ended
Three Months Ended
December 31, Variance
2022 2021 Amount %
Revenue $ 539,247 $ 732,574 $ (193,327 ) (26.39 )%
Cost of revenue 659,115 1,294,265 (635,150 ) (49.07 )%
Gross loss (119,868 ) (561,691 ) 441,823 (78.66 )%
General and administrative
expenses 2,317,413 1,932,810 384,603 19.90 %
Selling expenses 5,450 9,990 (4,540 ) (45.45 )%
Loss from operations (2,442,731 ) (2,504,491 ) 61,760 (2.47 )%
Impairment loss on an
unconsolidated entity - (149,790 ) 149,790 (100.00 )%
Income (loss) from equity
method investments 83 (79,068 ) 79,151 (100.10 )%
Other income, net 14,023 473 13,550 2,864.69 %
Amortization of debt
issuance costs (201,569 ) (395,340 ) 193,771 (49.01 )%
Interest income (expenses),
net (142,317 ) 237,338 (379,655 ) (159.96 )%
Loss before income tax
provision from continuing
operations (2,772,511 ) (2,890,878 ) 118,367 (4.09 )%
Benefit for income taxes - (6,478 ) 6,478 (100.00 )%
Net loss from continuing
operations (2,772,511 ) (2,884,400 ) 111,889 (3.88 )%
Net loss from discontinued
operations - - - -
Net loss $ (2,772,511 ) $ (2,884,400 ) $ 111,889 (3.88 )%
Comprehensive loss
attributable to Shineco Inc. $ (1,633,023 ) $ (2,058,096 ) $ 425,073 (20.65 )%
Revenue
Currently, we, through our PRC subsidiaries and the VIEs, have three revenue
streams derived from our three major business segments from continuing
operations. First, developing, manufacturing, and distributing specialized
fabrics, textiles, and other by-products derived from an indigenous Chinese
plant Apocynum Venetum, known in Chinese as "Luobuma" or "Bluish Dogbane," as
well as Luoboma raw materials processing; this segment is channeled through our
wholly owned subsidiary, Tenet-Jove. Second, planting, processing and
distributing green and organic agricultural produce, growing and cultivation of
yew trees, as well as planting fast-growing bamboo willows and scenic greening
trees; this segment is conducted through Qingdao Zhihesheng and Guangyuan.
Third, providing domestic air and overland freight forwarding services by
outsourcing these services to a third party; this segment is conducted through
Zhisheng Freight . For the business segment that processing and distributing
traditional Chinese medicinal herbal products as well as other pharmaceutical
products; this segment is conducted via the VIE, Ankang Longevity Group and its
subsidiaries, which was disposed and did not generate any sales during the three
months ended December 31, 2021 .
50
The following table sets forth the breakdown of our revenue for each of the
three segments for the three months ended December 31, 2022 and 2021,
respectively:
Three Months Ended December 31, Variance
2022 % 2021 % Amount %Luobuma products$ 13,648 2.53 %$ 21,260 2.90 %$ (7,612 ) (35.80 )% Other agricultural products 395,089 73.27 % 422,804 57.72 % (27,715 ) (6.56 )% Freight services 130,510 24.20 % 288,510 39.38 % (158,000 ) (54.76 )% Total Amount$ 539,247 100.00 %$ 732,574
100.00 %$ (193,327 ) (26.39 )% For the three months endedDecember 31, 2022 and 2021, revenue from sales of Luobuma products wasUS$13,648 andUS$21,260 , respectively, which represented a slight decrease ofUS$7,612 , or 35.80%. The decrease of revenue from this segment was mainly due to the decrease in revenue from Tenet-Jove and TenetHuatai . The low revenue from sales of Luobuma products is because we did not launch any new products and reduced our resources and investments in our E-commerce distribution channel, and currently, we mainly focused on clearing off our remaining old stocks. Hence, revenue from this segment continued falling during the three months endedDecember 31, 2022 as compared to the same period in 2021. For the three months endedDecember 31, 2022 and 2021, revenue from sales of other agricultural products wasUS$395,089 andUS$422,804 , respectively, representing a slight decrease ofUS$27,715 , or 6.56%. Since our sales of yew trees were adversely affected by the COVID-19 outbreak, we modified our operating strategies in response to the pandemic. Instead of selling more unmatured yew trees, we are now cultivating more matured yew trees, which can be used to extract Taxol, a more valuable chemical substance which is used experimentally as a drug in the treatment of cancer. For the three months endedDecember 31, 2022 and 2021, revenue from provision of freight services wasUS$130,510 andUS$288,510 , respectively, representing a decrease ofUS$158,000 , or 54.76%. The decrease was mainly due to we outsourced our domestic and international logistic services to third-party logistic companies due to the change in our business strategies. Since we merely served as an agent in this type of transactions, our revenue from domestic and international logistic services was recognized in the net amount during the three months endedDecember 31, 2022 .
Cost of Revenue and Related Tax
The following table sets forth the breakdown of the cost of revenue for each of
our three segments for the three months ended
Three Months Ended December 31, Variance
2022 % 2021 % Amount %
Luobuma products $ 8,736 1.33 % $ 8,467 0.66 % $ 269 3.18 %
Other agricultural products 566,505 85.95 % 1,016,528 78.54 % (450,023 ) (44.27 )%
Freight services 83,872 12.72 % 267,268 20.65 % (183,396 ) (68.62 )%Business and sales related tax 2 0.00 % 2,002
0.15 % (2,000 ) (99.90 )%
Total Amount $ 659,115 100.00 % $ 1,294,265 100.00 % $ (635,150 ) (49.07 )%
For the three months endedDecember 31, 2022 and 2021, cost of revenue from sales of our Luobuma products wasUS$8,736 andUS$8,467 , respectively, representing an increase ofUS$269 , or 3.18%. The increase was mainly due to a slight increased allowance we accrued for our slow-moving inventories amounted toUS$4,121 on our remaining old stocks during the three months endedDecember 31, 2022 . 51
For the three months endedDecember 31, 2022 and 2021, cost of revenue from sales of other agricultural products wasUS$566,505 andUS$1,016,528 , respectively, representing a decrease ofUS$450,023 , or 44.27%. The decrease was mainly due to less stock written off during the three months endedDecember 31, 2022 . Due to the continuous impact of Covid-19 inChina , which resulted in the damage and death of a large number of yew trees, we continued writing off a large amount of our inventory during the three months endedDecember 31, 2022 . For the three months endedDecember 31, 2022 and 2021, cost of revenue from provision of freight services wasUS$83,872 andUS$267,268 , respectively, representing a decrease ofUS$183,396 , or 68.62%. The decrease was due to decreased cost of revenue from domestic and international logistic services, as we now only acted as an agent in this type of this transactions as mentioned above. Gross Profit (Loss) The following table sets forth the breakdown of the gross profit (loss) for each of our three segments for the three months endedDecember 31, 2022 and 2021: Three Months Ended December 31, Variance 2022 % 2021 % Amount % Luobuma products$ 4,910 (4.09 )%$ 12,793 (2.28 )%$ (7,883 ) (61.62 )% Other agricultural products (171,416 ) 143.00 % (593,724 ) 105.71 % 422,308 (71.13 )% Freight services 46,638 (38.91 )% 19,240 (3.43 )% 27,398 142.40 % Total Amount$ (119,868 ) 100.00 %$ (561,691 ) 100.00 %$ 441,823 (78.66 )% Gross profit from Luobuma product sales decreased byUS$7,883 or 61.62%, for the three months endedDecember 31, 2022 as compared to the same period in 2021. The decrease was mainly due to an increase in allowance we accrued for our slow-moving inventories during the three months endedDecember 31, 2022 . Gross loss from sales of other agricultural products decreased byUS$422,308 , or 71.13%, for the three months endedDecember 31, 2022 as compared to the same period in 2021. The decrease in gross loss was mainly due to less stock written off as mentioned above, as well as less price discounts we offered to our customers during the three months endedDecember 31, 2022 . Gross profit from provision of freight services increased byUS$27,398 , or 142.40%, for the threemonths endedDecember 31, 2022 as compared to the same period in 2021. As mentioned above, we outsourced our domestic and international logistic services to third-party logistic companies due to the change in our business strategies, which improved our operating efficiency and profitability during the three months endedDecember 31, 2022 . Expenses
The following table sets forth the breakdown of our operating expenses for the
three months ended
Three Months Ended December 31, Variance
2022 % 2021 % Amount %
General and administrative expenses $ 2,317,413 99.77 % $ 1,932,810 99.49 % $ 384,603 19.90 %
Selling expenses 5,450 0.23 % 9,990 0.51 % (4,540 ) (45.45 )%
Total Amount $ 2,322,863 100.00 % $ 1,942,800 100.00 % $ 380,063 19.56 %
52
General and Administrative Expenses
For the three months endedDecember 31, 2022 , our general and administrative expenses wereUS$2,317,413 , representing an increase ofUS$384,603 , or 19.90%, as compared to the same period in 2021. The increase was mainly due to the increased bad debt expense during the three months endedDecember 31, 2022 , as we recorded a significant amount of bad debt expense as a result of the impact from COVID-19 during the last quarter of year 2022. We recorded allowance according to our accounting policy based on our best estimates. Management will continue putting effort in collection of overdue receivables and utilize our advances to our vendors. The increase was partially offset by the decreased professional service fees in relation to the Company's issuance of common stock and decreased compensation expenses in relation to the Company's lawsuit during the three months endedDecember 31, 2022 .
Impairment Loss on An Unconsolidated Entity
For the three months endedDecember 31, 2021 , our impairment loss on an unconsolidated entity wasUS$149,790 . The management performed evaluation on the impairment of the investment make onShanxi Pharmaceutical Group Yushe Pharmaceutical Development Co., Ltd. , ("Yushe Pharmaceutical") and considered it's unlikely to obtain any investment income in the future, hence, the management fully recorded impairment loss on this investment.
Income (Loss) from Equity Method Investments
Our VIE, Guangyuan has a 20% equity interest inShanxi Pharmaceutical Group Yushe Pharmaceutical Development Co., Ltd. ("Yushe Pharmaceutical"). We recorded a loss ofUS$11,967 for the three months endedDecember 31, 2021 from this investment. As we fully impaired the investment subsequently, no income or loss was recorded for the three months endedDecember 31, 2022 from this investment. OnAugust 31, 2021 , we entered into a capital injection agreement with the other shareholders ofShanghai Gaojing Private Fund Management ("Gaojing Private Fund "), a Chinese private fund management company, to complete the injection of a totalRMB 4.8 million (approximatelyUS$0.70 million ) for its 32% equity interest inGaojing Private Fund . We recorded an income ofUS$83 and a loss ofUS$67,101 for the three months endedDecember 31, 2022 and 2021 from this investment, respectively. The decrease in net loss was primarily due to lower net loss generated by the equity investment company in the current period.
Amortization of Debt Issuance Costs
For the three months endedDecember 31, 2022 , our amortization of debt issuance costs expenses wasUS$201,569 , representing a decrease ofUS$193,771 , or 49.01%, as compared to amortization of debt issuance costs expenses ofUS$395,340 , in the same period in 2021. We entered into four convertible note agreements and two of them was fully converted, hence, resulted in a decrease in amortization of debt issuance costs expenses for the three months endedDecember 31, 2022 as compared to the same period last year.
Interest Income (Expenses), Net
For the three months endedDecember 31, 2022 , our net interest expenses wereUS$142,317 , representing an increase ofUS$379,655 , or 159.96%, as compared to net interest income wasUS$237,338 in the same period in 2021. The increase in net interest expenses mainly due to less interest income generated from loans to third parties and related parties during the three months endedDecember 31, 2022 as some of the loans have been fully collected. 53 Net Loss
Our net loss wasUS$2,772,511 for the three months endedDecember 31, 2022 , a decrease ofUS$118,367 , or 3.88%, from net loss ofUS$2,884,400 for the three months endedDecember 31, 2021 . The decrease in net loss was primarily a result of the decrease in gross loss and amortization of debt issuance costs, which was partially offset by the increased general and administrative expenses and interest expenses. Comprehensive Loss
The comprehensive loss wasUS$1,647,484 for the three months endedDecember 31, 2022 , a decrease ofUS$423,180 from a comprehensive loss ofUS$2,070,664 for the same period in 2021. After deduction of non-controlling interest, the comprehensive loss attributable to us wasUS$1,633,023 for the three months endedDecember 31, 2022 , compared to a comprehensive loss attributable to us in the amount ofUS$2,058,096 for the three months endedDecember 31, 2021 . The decrease of comprehensive loss was due to the decrease in net loss as mentioned above, as well as an increase in the recorded income of foreign currency translation where the financial statements denominated in RMB were translated to the USD denomination. Treasury Policies We have established treasury policies with the objectives of achieving effective control of treasury operations and of lowering cost of funds. Therefore, funding for all operations and foreign exchange exposure have been centrally reviewed and monitored from the top level. To manage our exposure to fluctuations in exchange rates and interest rates on specific transactions and foreign currency borrowings, currency structured instruments and other appropriate financial instruments will be used to hedge material exposure, if any.
Our policy precludes us from entering into any derivative contracts purely for speculative activities. Through our treasury policies, we aim to:
(a) Minimize interest risk
This is accomplished by loan re-financing and negotiation. We will continue to closely monitor the total loan portfolio and compare the loan margin spread under our existing agreements against the current borrowing interest rates under different currencies and new offers from banks. (b) Minimize currency risk In view of the current volatile currency market, we will closely monitor the foreign currency borrowings at the company level. As ofDecember 31, 2022 andJune 30, 2022 , except the above-mentioned convertible note, we did not engage in any foreign currency borrowings or loan contracts.
Liquidity and Capital Resources
We currently finance our business operations primarily through advances from our related parties, convertible notes and the sale of our common stock. Our current cash primarily consists of cash on hand and cash in bank, which is unrestricted as to withdrawal and use and is deposited with banks inChina .
On
54
OnJune 16, 2021 , we entered into a securities purchase agreement pursuant to which we issued an unsecured convertible promissory note with a one-year maturity term to an institutional accredited investorStreeterville Capital, LLC ("Investor"). The convertible promissory note has the original principal amount ofUS$3,170,000 and Investor gave consideration ofUS$3.0 million , reflecting original issue discount ofUS$150,000 and Investor's legal fee ofUS$20,000 . We received principal in full from the Investor. OnSeptember 7, 2022 , we signed an extension amendment with the Investor to extend the maturity date toJune 15, 2023 . OnOctober 21, 2022 , the Company signed a standstill agreement with the Investor, pursuant to which the Investor would not seek to redeem any portion of the Note during the period fromOctober 21, 2022 toJanuary 20, 2023 . On or aroundJanuary 20, 2023 , the Investor re-started the redemption of the Notes. OnJuly 16, 2021 , we entered into a securities purchase agreement pursuant to which we issued two unsecured convertible promissory notes with a one-year maturity term to the same investor. The first convertible promissory note has an original principal amount ofUS$3,170,000 and the Investor gave consideration ofUS$3.0 million , reflecting original issue discount ofUS$150,000 and Investor's legal fee ofUS$20,000 . The second convertible promissory note has an original principal amount ofUS$4,200,000 and the Investor gave consideration ofUS$4.0 million , reflecting original issue discount ofUS$200,000 . OnAugust 19, 2021 , we entered into a securities purchase agreement pursuant to which we issued an unsecured convertible promissory note with a one-year maturity term to the same investor. The Note has the original principal amount ofUS$10,520,000 and Investor gave consideration ofUS$10.0 million , reflecting original issue discount ofUS$500,000 and Investor's legal fee ofUS$20,000 . We received principal in full from the Investor and we anticipate using the proceeds for general working capital purposes. OnSeptember 7, 2022 , the Company signed an extension amendment with the Investor to extend the maturity date toAugust 18, 2023 . OnOctober 21, 2022 , the Company signed a standstill agreement with the Investor, pursuant to which the Investor will not seek to redeem any portion of the Note during the period fromOctober 21, 2022 toJanuary 20, 2023 . For the above-mentioned convertible promissory notes issued, as ofDecember 31, 2022 , shares of the Company's common stock totaling 2,374,465 were issued by the Company to the Investor equaling principal and interests amounted toUS$7,892,638 , and the Notes balance wasUS$14,724,932 , with a carrying value ofUS$15,280,920 , net of deferred financing costs ofUS$555,988 . OnDecember 6, 2021 , we entered into a securities purchase agreement withGHS Investments, LLC ("GHS"). Under the Purchase Agreement, we sold GHS 291,775 shares of its common stock at a per share purchase price of$6.8546 for gross proceeds of$2,000,000 . After the deduction of issuance cost, we received net proceeds ofUS$1,970,000 . OnApril 11, 2022 , we entered into a securities purchase agreement (the "Purchase Agreement") withJing Wang (the "Investor"). Under the Purchase Agreement, we will sell to the Investor, up to 973,451 shares (the "Shares") of its common stock at a per share purchase price of$2.26 (subject to the terms and conditions of the Purchase Agreement) for gross proceeds of up to$2,200,000 which were fully received, and the Shares were issued to the Investor onApril 18, 2022 . OnJune 13, 2022 , we entered into a certain stock purchase agreement (the "SPA") with certain non-U.S. investors (the "Purchasers"), pursuant to which we agreed to sell, and the Purchasers agreed to purchase, severally and not jointly, an aggregate of 2,354,500 shares of common stock of the Company (the "Shares") at a price ofUS$2.12 per share. our shareholders approved the offer and sale of the Shares at a meeting of the shareholders of the Company that was held onJuly 21, 2022 . The closing for the offer and sale of the Shares occurred onJuly 26, 2022 and we issued the Shares in exchange for gross proceeds of$5.0 million . 55 OnAugust 11, 2022 , the Company entered into a securities purchase agreement (the "Purchase Agreement") with certain non-US investors (the "Investors"). Under the Purchase Agreement, the Company will sell to the Investors, up to 1,921,683 shares (the "Shares") of its common stock at a per share purchase price of$0.915 (subject to the terms and conditions of the Purchase Agreement) for gross proceeds of up toUS$1,758,340 . As the date of this report, proceeds amounted toUS$1.25 million has been received by the Company, and the remaining balance of the proceeds is expected to be fully collected byMarch 31, 2023 . Management believes that our current cash, cash flows from future operations, and access to loans will be sufficient to meet our working capital needs for at least the next 12 months. We intend to continue to carefully execute our growth plans and manage market risk. Working Capital
The following table provides the information about our working capital at
December 31, June 30,
2022 2022
Current Assets $ 56,280,107 $ 59,735,425
Current Liabilities 20,623,274 29,040,302
Working Capital $ 35,656,833 $ 30,695,123 The working capital increased by
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. OnMay 16, 2017 , Mrs.Guiqin Li (the "Plaintiff") commenced a lawsuit against us in the People'sCourt of Chongqing Pilot Free Trade Zone ofChina . Plaintiff alleged that due to the misguidance given by our security trading department, the Plaintiff did not manage to complete the sales of our common stock on the day of our initial public offering inthe United States . As the price of our common stock continued falling after initial public offering, the Plaintiff incurred losses and hence seek money damages against us. Based on the judgment of the first trail, we required to pay the Plaintiff a settlement payment, including the money compensation, interests and other legal fees. InJanuary 2023 , the Company entered into a Settlement Agreement and Release (the "Agreement") with the Plaintiff, pursuant to which the Company paid the Plaintiff a total sum ofUS$700,645 (approximatelyRMB 4.8 million ) as settlement payment, and upon acceptance of the settlement payment from the Company, the Plaintiff waived, released, and forever discharged the Company from all past and future claims. As the date of this report, the Company has paid the Plaintiff a total sum ofUS$110,000 according to the Agreement. 56
OnNovember 26, 2021 , the Company filed a complaint in theSupreme Court of the State of New York ,New York County againstLei Zhang andYan Li , as defendants, andTranshare Corporation , as a nominal defendant, asserting that defendants had not paid for restricted shares of the Company stock pursuant to stock purchase agreements they executed with the Company. The Company is seeking money damages of$9,088,125.00 plus interest, punitive damages, and reimbursement of all costs, expenses, and attorneys' fees. In December, defendants filed an answer and counterclaims against the Company, which they amended onJanuary 27, 2022 after the Company moved to dismiss their counterclaims. They claimed that the Company made false and materially misleading statements, specifically regarding the sale of the shares and the removal of their restrictive legends. Defendants seek a declaratory judgment, indemnification, and monetary damages of at least$9 million , punitive damages of$10 million , plus interest, costs, and fees. InApril 2022 , the Court granted the Company's motion for a preliminary injunction to restrain the Company's transfer agent from removing the restrictive legends on the shares, provided that the Company posts a bond in the amount ofUS$1.5 million byMay 20, 2022 , which the Company declined to do. OnJune 13, 2022 , the restriction imposed on the shares were lifted. The Company moved to dismiss the counterclaims, and its motion was fully submitted inApril 2022 . OnSeptember 9, 2022 , the Court granted the Company's motion to dismiss defendants' counterclaims on all but three counterclaims. Defendants' outstanding counterclaims are for breach of contract, conversion, and wrongful refusal to remove restrictions pursuant to 6 Del. C. § 8-401. Nominal defendantTranshare Corporation moved to dismiss the defendants' counterclaim against it for wrongful refusal to remove restrictions pursuant to 6 Del. C. § 8-401, and its motion was fully submitted inApril 2022 . OnSeptember 9, 2022 , the Court grantedTranshare Corporation's motion to dismiss defendants' counterclaim for wrongful refusal to remove restrictions. Defendants have appealed the Court'sSeptember 9, 2022 order dismissing defendants' counterclaim for wrongful refusal to remove restrictions. OnOctober 3, 2022 the parties submitted a stipulation dismissing defendants' outstanding counterclaim againstTranshare Corporation seeking declaratory judgment. Trial is currently scheduled forSeptember 18, 2023 . The outcome of this legal proceeding is uncertain at this point. The Company intends to recover on its claims, and vigorously defend itself in this litigation. As ofDecember 31, 2022 , the total unpaid shares issued toLei Zhang andYan Li by the Company was 982,500 shares, and the subscription receivable was amounted toUS$3,024,000 which was recorded on the unaudited condensed consolidated balance sheet.
As of
Off-Balance Sheet Commitments and Arrangements
We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our own common stock and classified as stockholders' equity, or that are not reflected in our unaudited condensed consolidated financial statements. 57 Cash Flows
The following table provides detailed information about our net cash flows for
the six months ended
Six Months Ended December 31,
2022 2021
Net cash used in operating activities$ (1,786,956 ) $ (5,610,545 ) Net cash provided by (used in) investing activities 2,405,585 (32,450,291 ) Net cash provided by financing activities 1,079,991
25,235,511
Effect of exchange rate changes on cash and cash equivalents (421,244 )
421,826
Net increase (decrease) in cash and cash equivalents 1,277,376 (12,403,499 ) Cash and cash equivalents, beginning of the period 15,165,231
29,024,394
Cash and cash equivalents, end of the period
Operating Activities Net cash used in operating activities during the six months endedDecember 31, 2022 was approximatelyUS$1.8 million , consisting of net loss from continuing operations ofUS$5.2 million , provision for bad debt expenses ofUS$0.9 million , restricted shares issued for management ofUS$0.6 million , and net changes in our operating assets and liabilities, which mainly included a decrease in advances to suppliers ofUS$1.2 million and an increase in other payables and accrued expenses ofUS$0.6 million . Net cash used in operating activities during the six months endedDecember 31, 2021 was approximatelyUS$ 5.6 million , consisting of net loss from continuing operations ofUS$ 14.0 million , bad debt expenses ofUS$ 5.8 million , impairment loss on distribution rights ofUS$ 1.1 million , and net changes in our operating assets and liabilities, which mainly included an increase in other current assets ofUS$ 4.6 million , partially offset by the decreased in advances to suppliers and increased in other payable. Investing Activities
For the six months ended
For the six months endedDecember 31, 2021 , net cash used in investing activities wasUS$ 32.5 million , primarily due to the disposal of Ankang ofUS$ 12.7 million , payment made for loans to third parties ofUS$ 12.2 million and repayments of loans from related parties ofUS$ 6.6 million . Financing Activities
For the six months ended
For the six months ended
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