10KSB 1 form10ksb.htm SHINECO FORM 10-KSB 123106 form10ksb.htm
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549


FORM 10-KSB


x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2006


¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______________ to __________________


SHINECO, INC.
(Name of small business in its charter)


Delaware
000-50913
52-2175898
(State or other Jurisdiction of Employer)
(Commission Identification #)
(IRS file number)


Room 3106, Building B,
#39 East 3rd Ring Middle Road, Chaoyang District
(Address of Principal Executive Office - street and number)


Beijing, PR China 100022
(City, State and ZIP Code)


Issuer's telephone number: (0086) 10-58693011


Securities registered under Section 12(b) of the Act: None


Securities registered under Section 12(g) of the Act: Common Stock $.001 par value

 

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

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. x

Issuer's revenue for its most recent fiscal year: $1,447,024

State the aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and asked priced of such stock, as of a specified date within the past 60 days (See definition of affiliate in Rule 12b-2):  $-0-

The number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 9,298,823 as of June 15, 2007.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain statements contained herein constitute "forward-looking statements" within the meaning of Section 27 A of the Securities Exchange Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements can be identified by the use of predictive, future-tense or forward-looking terminology, such as "believes," "anticipates," "expects," "estimates," "plans," "may," "intends," "will," or similar terms. These statements appear in a number of places in this report and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things: (i) the Company's business and growth strategies and the Company's financing plans.

Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may differ from those projected in the forward-looking statements.
 
 
SHINECO, INC.
Form 10-QSB
INDEX

     
Page No.
     
PART I
  
   
Item 1.   Description of Business
4
     
 
Overview
4
     
 
Products
5
     
 
Manufacturing
6
     
 
Patents
 
     
 
Sales and Marketing
10
     
 
Market
10
     
 
Competition
10
     
 
Administrative Offices
12
       
 
Employees
  
12
   
Item 2.   Properties
12
   
Item 3.   Legal Proceedings
12
   
Item 4.   Submission of Matters to a Vote of Security Holders
12
       
PART II
  
       
Item 5.   Market for Registrant’s Common Equity and Related Stockholder Matters
13
   
Item 6.   Management’s Discussion and Analysis or Plan of Operation
13
   
Item 7.   Financial Statements
16 - 28
   
Item 8.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
29
   
Item 8A. Controls and Procedures
29
   
PART III
  
       
Item 9.   Directors, Executive Officers, Promoters and Control Persons
30
   
Item 10.   Executive Compensation
31
   
Item 11.  Security Ownership of Certain Beneficial Owners and Management
33
   
Item 12.  Certain Relationships and Related Transactions
33
   
Item 13.  Exhibits and Reports on Form 8-K
33
   
Item 14.  Principal Accountant Fees and Services
34
       
 
Signatures
  
35
 
PART I

ITEM 1.     DESCRIPTION OF BUSINESS

BUSINESS OVERVIEW

Shineco, Inc. (“the Company,” or “we”) was incorporated under Delaware state law on August 20, 1997.  On December 30, 2004, the Company acquired all of the issued and outstanding shares of Beijing Tenet-Jove Technological Development Co., Ltd. (“Tenet-Jove”), a People’s Republic of China 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. On June 9, 2005, the Company changed its name to Shineco, Inc.

Our Tenet-Jove subsidiary was organized under the laws of the People’s Republic of China in 2003 and is headquartered in Beijing.

In August, 2006, Beijing Tenet-Jove successfully acquired business certificates from China’s Ministry of Commerce, The State Administration of Foreign Exchange, The Beijing Administration For Industry & Commerce, The Beijing Municipal Office, and The State Administration of Taxation. It has therefore completed the legal process of acquisition under both Chinese and US law.

Tenet-Jove currently develops, manufactures and distributes textiles and health supplements derived from a native Chinese plant known in Chinese as “Luobuma” (scientific name: Apocynum venetum).  We currently market and distribute our Apocynum products in China’s growing economy through our national marketing network. Our Apocynum products are specialized textile and health supplement products designed to incorporate traditional Eastern medicines with modern scientific methods. Our products are predicated on centuries-old traditions of Eastern herbal remedies derived from the Apocynum venetum raw material. These remedies have been carefully documented in Li Shizhen’s famous Compendium of Materia Medica (Chinese: Bencao Gangmu), which dates back to 1578 A.D., during the Ming Dynasty.

We do not manufacture, distribute, or sell any of our products in the United States or Canada.

BUSINESS OF THE COMPANY

The Company’s principal products are derived from the Chinese Luobuma plant (Apocynum venetum). This plant has a long history in Chinese herbal medicine and is documented in Li Shizhen’s Compendium of Materia Medica (Chinese: Bencao Gangmu), first published in 1578 A.D.  It is one of the most famous encyclopedias ever written on Chinese herbal medicine, and it is still used as a reference work by herbal medicine practitioners today. In China, Luobuma has been used both internally and externally for centuries to treat high blood pressure, depression, dizziness, pain, insomnia, and other ailments.

History and Development of Far-Infrared Radiant Textiles

Our company’s scientists and other Chinese researchers have brought modern scientific methods to the study of Apocynum venetum’s characteristics, and we have discovered that Apocynum fibers have an increased tendency to radiate light at the “far infrared” end of the light spectrum, with wavelengths measuring between 8-15 microns (referred to as “FIR”).  Chinese scientific studies have observed that Apocynum’s FIR-radiating qualities exert a positive effect on various functions of the human body, including cellular metabolism.

For example, tests conducted by the P.R.C.’s National Institute of Metrology have reported that the radiance rate of far infrared light from Apocynum fiber is 84%, 2 to 4 times higher than that from cotton and other natural fibers.  The same tests found that the FIR radiance rate from our proprietary bio-ceramic powder reaches 91%.  Healthful benefits have been observed at levels above 70%.

Based on these observations about FIR radiance, we have developed textiles that our customers can wear and from which they can receive health benefits commonly associated with Chinese herbal remedies.

First Generation. We were not the first to discover FIR-radiant textiles. The “First Generation” of FIR-radiant textiles initially became popular in China around 1989, when manufacturers learned to add 3% of a FIR-radiant inorganic material to synthetic fibers comparable to nylon or polyester. This “First Generation” FIR material employs a relatively low level of technology and has relatively few health benefits.

 
 
Second Generation. However, Tenet-Jove was one of the first companies in China to commercially develop the natural FIR-radiant properties of the Apocynum venetum plant. We refer to this natural Apocynum fiber as a “Second-Generation” FIR textile.

Our newly developed Apocynum fabrics have been a success in the Chinese market, generating gross sales of over US$4 million in 2004 and 2005 alone. The technology applied to our Apocynum-based FIR Therapeutic Clothing and Textile Products has received a “Special Golden Award” from the China National Intellectual Property Bureau at China’s National Patent and Brand Expo. Our products under the brand name of “Tenethealth®” have also been honored with the title of “Consumer’s Favorite Products” by the Chinese Consumer Association.

Part of the appeal of the natural Apocynum FIR material is that its fibers can contain up to 32 additional medicinal compounds, many of which are familiar to practitioners of traditional Chinese medicine.  In addition, our processes for manufacturing Apocynum textiles produce a fabric that is smooth, air-permeable, and soft.

Third Generation. We are also developing a “Third Generation” of FIR textiles under a contract with the Institute of Process Engineering at the Chinese Academy of Sciences, one of the leading scientific institutions in China. Our current research and development focuses on adding nanotechnology enhancements to our Apocynum textile products, in which we use small-scale nanotechnology to embed or impregnate our Apocynum-fiber textiles with other FIR-radiant materials, bio-ceramic materials, or other Chinese herbal remedies.

Using these nanotechnology methods, we plan to develop and market health-promoting textile goods that function in a manner analogous to a nicotine patch: the textiles manufactured with the Company's Apocynum fabrics are impregnated with FIR-radiant materials or other Chinese herbal remedies, which are then absorbed through the wearer's skin.

PRODUCT DESCRIPTIONS

The Company presently has approximately 100 products based on the Apocynum plant or FIR technology. These products range from herbal teas to textiles, blankets, pillows, and clothing. We have classified our products into 3 series, described as follows:

1 - Apocynum Fiber Textiles

The products in this category include:

-  
Far Infrared bedding sets (including various pillows, comforters, and sheets)
-  
Far Infrared underwear, T-shirts, and socks
-  
Far Infrared waist supports
-  
Far Infrared body wraps or protectors (for the ankle, elbow, wrist, and knee)
-  
Far Infrared blankets

All Far Infrared textile products are made of Apocynum-based fibers and are impregnated with bio-ceramic powder. Both the fiber and the bio-ceramic powder are developed with the Company’s proprietary techniques and have been protected with patents.

Sales from this category comprised about 88% of our overall sales revenue in 2006.

2 - Apocynum Nutritional Supplements

The products in this category include:

-  
Apocynum Tea,
-  
Apocynum Royal Jelly Honey,
-  
Tenet Bojian Capsule

The Apocynum tea and honey contain active medical constituents extracted from Apocynum plants through the Company’s proprietary procedure. The products have shown benefits in regulating blood pressure and blood lipids, relieving cough, removing phlegm, and relieving inflammation.

Sales from this category comprised about 4% of our overall sales revenue in 2006 (since the Tenet Bojian Capsule was just launched, its sales were not considered).

 
 
3 - Home-Use Therapeutic Equipment (Using FIR Technology)

Recently, we have developed a Multifunction Low Frequency Therapy System which incorporates our understanding of the benefits derived from far infrared (FIR) technology. The Multifunction System is a home-use medical appliance that emits far infrared light and low frequency electric pulses to specified areas of body as designated in traditional Chinese meridian theory. Like our other products, it is a combination of ancient traditional medicine and modern technology. The product can stimulate reactive areas on a user’s hand or foot, or it can stimulate acupuncture points according to the traditional Chinese understanding of energy meridians in the body.

Home-use therapeutic equipment products are in the introductory stage.

Sales from this category comprised about 8% of our overall sales revenue in 2006.

MANUFACTURING AND PRODUCTION FACILITIES

All of our products are developed and manufactured in our research, development and manufacturing facility in Tianjin, China.  We have also formed strategic alliances with several certified knitting and clothing manufacturers. We assign them limited manufacturing jobs and require certain conditions, including protecting our proprietary techniques and meeting our quality standards.

To assure the reliability of resources and reduce the cost of raw materials, the Company plans to establish an Apocynum raw material production base in Ku’erle, Xinjiang Province, to provide raw materials and semi-finished products to the company.

OUR RESEARCH AND DEVELOPMENT

Our Research and Development Center in TianJin is owned by our subsidiary, Tenet-Jove, and is headed by Dr. Li Zhenhao, a Chinese Medical Doctor and a member of Tenet-Jove’s Board of Directors.  The Center is managed by 7 other senior research fellows, who specialize in different but related scientific fields, such as biochemistry, electrical engineering, textile engineering, medical and clinical studies, and pharmaceuticals.  In the last few years, new technologies developed by our R & D Center have been awarded 13 patents from the China National Patent Bureau. 2 of them received a special “Golden Award” at the China National Patent and Brand Expo.

We are engaged in R&D of new products under cooperation with universities and research institutions.

Our Strategy for Research and Development

·  
•To keep our products proprietary and patented;
·  
•To focus on our core product lines: Apocynum-based products, FIR technology, and herbal medicines;
·  
•To build strategic alliances with other universities and scientific institutions.

The Company specializes in developing Apocynum products and combining FIR technology with natural herbal medicines. The Company’s continued success will depend on improving its techniques to industrialize Apocynum by developing a series of Apocynum-derived products such as Apocynum functional fiber and Apocynum nutritional supplements.

We estimate that there are large supplies of Apocynum in China’s Xinjiang Province.  Currently, these supplies are largely undeveloped. The local government has developed favorable policies to encourage development of businesses in this region.

A Key Element in Our Strategy: A High-Pressure Steam Degumming Process

We currently produce an extensive line of Apocynum-based textile products; we have exclusive patents on Apocynum fiber technology and yarn spinning methods; and we hold proprietary rights to several FIR mineral herbal medicines.  However, one main factor that holds us back from developing the large-scale production of Apocynum fiber products is the limited yield of Apocynum fiber and the high cost of obtaining that fiber. A central technical challenge is how to quickly and efficiently remove the gum and sap from the Apocynum plants so that only the natural fiber remains.

 
 
To solve this problem, in August 2006 we signed a Technology Development Contract with the Institute of Process Engineering at the Chinese Academy of Science, one of China’s leading scientific institutes. According to our contract, the Institute of Process Engineering will work with us to develop a high-pressure steam degumming process for the mass production of Apocynum fiber, as well as its byproducts. A literal translation of the project name is “The Stream Steam Explosion Project.” Essentially, the project will develop a method for quickly blasting a large amount of high-pressure steam into a large container filled with raw Apocynum plants. The steam will remove the gum and sap and leave the fiber for use in textile production. The gum and sap and other Apocynum byproducts will be washed out with the steam and collected in a separate place for other uses.
 
According to the contract, the Institute will complete initial laboratory experiments within four months. If the initial laboratory experiments are successful, an enlarged series of experiments will be undertaken. If the enlarged series of experiments turns out to be successful, we expect that our annual yield of Apocynum fiber will rise by over 30 times—from lower than 100 tons to 3000 tons per year, and the cost of extracting the fiber will be reduced by 50-60%.  During the Stream Steam Explosion process, a certain amount of steam will be used, but no poisonous water will be discharged, because the fiber will be collected in one place, and the liquefied gum and sap and other material will be collected in another place for herbal medicinal uses. This technique is relatively simple and convenient to operate. Apocynum fiber produced by this technique is more like cotton and more spinnable than before.

We are not the only ones optimistic about the Stream Steam Explosion project.  It has been put on the list of National Key Basic Research Programs (also known as the “973 Program,”) founded by China’s Ministry of Science and Technology.  The Apocynum Stream Steam Explosion Degumming Technique is one of the most important parts of this project. This project is currently being carried out by the Institute of Process Engineering at the Chinese Academy of Sciences under the direction of Mr. Cheng Hongzhang, Chief Scientist, Doctor Advisor, and Deputy Dean of the Bio-chemical laboratory at China’s National Key Basic Research Program.

To promote the success of this project, the Institute of Process Engineering at the Chinese Academy of Sciences has been conducting systematic studies and experiments on hemp degumming for ten years.  This scientific research has been conducted specifically to achieve a technologically feasible method of generating large-scale, low-cost Apocynum fiber production.

Products Currently In Development:

a)  Byproducts from Apocynum Processing

Through our cooperative agreement with the Institute of Process Engineering at the Chinese Academy of Sciences, and by applying the Company’s patents and proprietary FIR materials, the Company is developing third-generation Apocynum fiber products and a series of byproducts, such as Apocynum CC fiber, Apocynum medicines, Apocynum degraded fiberboard, pectin, alcohol, and fertilizer.

b)  Nano-engineered Apocynum Fabrics

In our FIR Therapeutic Product Line, we plan to introduce third-generation FIR functional fabrics, such as nano-engineered Apocynum fabrics, in cooperation with the National Center for Nanoscience and Technology, China (NCNST). We are researching how to develop medicine-embedded Apocynum fiber products that will combine Apocynum medicinal fibers with nanoscale technology to improve the comfort and performance of Apocynum textiles. We plan to launch our first nano-engineered Apocynum fabrics into the market by late 2007 or 2008.

c)  Apocynum Milk Tablets

Tenet-Jove is developing this nutritional supplement jointly with Australia’s Montro Dairy Company. The raw materials for the tablets are Apocynum herb extracts and low-fat milk. The ingredients are processed into Apocynum milk tablets. This kind of tablet contains monounsaturated fatty acids and more than 30 herbal medicinal compounds.

d)           Apocynum Capsule

These capsules will contain medicinal compounds derived from Apocynum stems and leaves through a botanical extracting process. We currently believe that capsules could have some effect in improving immunity and relieving the symptoms of high blood pressure, high levels of blood lipids and other cardio-vascular diseases.

e)           Apocynum and Chlorella Tablet

Apocynum is composed of more than 30 medicinal ingredients, while Chlorella’s capacity for photosynthesis is significantly higher than that of many other plants. Chlorella produces a large amount of protein, which we currently estimate at about 38 times that of soy beans, and about 55 times that of rice. It could be used by some traditional herbalists in connection with numerous blood ailments.

 
 
f)           Medical Absorbable Suture

This material, like all our products, is not being sold in the United States or Canada. It is not subject to US food and drug laws. The main material in the Medical Absorbable Suture comes from abyssal fauna fiber, one of the same sources from which water-soluble Chitosan is distilled. Our suture’s advantages: no need to remove the sutures, because they can be absorbed by the human body; they leave a less noticeable scar on the body; and they have an antibacterial quality. Laboratory experiments on the suture have been concluded in China, and small quantities are being produced for use in Chinese clinical trials according to Chinese medical protocols. This technology has been granted a national patent in China.

g)           Double Layer Synthetic Skin

According to our limited Chinese clinical studies, this product works well on patients with large-area burns or scalds, and it improves the healing time of a wound. We developed this product from Chitosan. It has been observed to resist infection, promote new cell growth and accelerate wound healing. The technology for our double-layer synthetic skin has been granted a patent in China.

INTELLECTUAL PROPERTY

Trademarks: We market our products under our brand name of “Tenethealth®” and “Tenet Bojian™.” In Chinese, “Tenet” means “Benefit from Nature.”   We currently own these trademarks.

Patents: Our core technology and its derivative applications are covered by the company’s 12 patents filed in China. Our patents relate to methods of extracting and processing the Apocynum fiber itself, as well as our formulations of the active medicinal constituents of the Apocynum plant. Several major Chinese hospitals have conducted extensive human clinical studies of the safety and efficacy of our therapeutic products, and these studies have reported favorable conclusions.

Presently the company has obtained patents in the People’s Republic of China for:

·  
Apocynum fiber blending method (patent number: ZL 941120295)
·  
Far-infrared ceramic material (patent number: ZL 981261701)
·  
Apocynum far-infrared multifunctional surface material (patent number: ZL 992144736)
·  
40* fine Apocynum cloth (patent number: ZL 023381736)
·  
Apocynum far-infrared foot pillow (patent number: ZL 2004 2 0092818.8)
·  
Apocynum far-infrared noon pillow (patent number: ZL 2004 2 0092815.4)
·  
Apocynum far-infrared healthcare socks with mineral Chinese medicine (patent number: ZL 2004 2 0029463.2)
·  
Apocynum cushion with magnetic therapy (patent number: ZL 2004 2 0028883.9)
·  
Heart-protecting card (patent number: ZL 2004 2 0028885.8)
·  
Apocynum cotton terry blanket (patent number: ZL 2004 2 0029465.1)
·  
Apocynum four-season mat (patent number: ZL 2004 2 0029462.8)
·  
Apocynum flannelette blanket (patent number: ZL 2004 2 0029464.7)

DISTRIBUTION NETWORK

We market our products through our growing distribution network, which at the end of 2006 consisted of 7 large distributors who distributed our products to a total of 506 outlets, including flagship stores, retail stores and sales counters. These 7 distributors sell our products in the 7 biggest regional markets in mainland China. They all carried our proprietary brand name and “Tenethealth” trademark in 2006. Apart from these 7 major distributors, the Company also distributed its products to an additional 1,390 retail stores and sales counters throughout China. Thus, in 2006, the Company placed its products in a total of 1,896 retail stores and sales counters throughout China.

Our sales and distribution strategy focuses on expanding our distribution network of retail stores and sales counters into all major provinces and cities of China. We also plan to use our current distribution network to introduce our newly developed products into target markets more efficiently and effectively.

 
 
As of the end of 2006, the Company had 7 major distributors in 7 of China’s major markets. The Company held a minority equity participation in each of these major distributors (see details in Table 1). There were a total of 506 outlets under these 7 distributors, including flagship stores, retail stores and sales counters throughout China. The 7 distributors were responsible for expanding business inside their target markets, building branch stores, and meeting sales targets. The Company provided information and training about its lines of products to these 7 distributors as well as to various sales staff at individual stores and sales counters, and the Company exercised its contractual right to audit the financial condition of some or all of these distributors in order to protect its minority equity investment in their operations.

Table 1

Name of Distributor’s Market
  
Our Equity Participation
  
Date We Began Participation
1.  Jinan
  
25%
  
11/25/2005
2.  Changchun
  
25%
  
10/26/2005
3.  Liaoyang
  
25%
  
12/31/2005
4.  Xuzhou
  
15%
  
7/26/2005
5.  Shenyang
  
15%
  
9/26/2005
6.  Qiqihaer
  
19%
  
1/31/2006
7.  Nanjing
  
15%
  
9/1/2006

In addition to the 7 major independent distributors in whom the Company held a minority equity position, the Company distributed its products to many more sales outlets in whom the Company held no equity position. These “certified outlets” of the Company’s products included approximately 1,390 retail stores and sales counters across 13 provinces of China. All of these certified outlets operate independently, but they prominently display our trade names “Tenethealth®” and “Tenet Bojian™.” These independent retailers sell our products as well as other products.

The location and number of retail stores and sales counters selling our products, including all sales outlets (both those connected with our 7 major distributors and other independent sellers) are listed below:

Name of Province
  
Number of  Major Distributors
  
Number of Flagship Stores
  
Total Number
of Certified Outlets
Heilongjiang
  
2
  
7
  
373
Liaoning
  
1
  
4
  
224
Jilin
  
1
  
3
  
184
Shandong
  
1
  
2
  
99
Jiangsu
  
2
  
6
  
203
Anhui
  
0
  
3
  
293
Gansu
  
0
  
1
  
111
Shaanxi
  
0
  
2
  
82
Qinghai
  
0
  
0
  
37
Xinjiang
  
0
  
1
  
77
Sichuan
  
0
  
0
  
54
Guangdong
  
0
  
0
  
91
Tianjin
  
0
  
1
  
68
TOTALS
  
7
  
30
  
1,896
 
 

 
 
 
SALES AND MARKETING

The Company’s sales are generated through the following five major channels:

1.  
Retail stores and sales counters. Sales through this channel contributed 52% of our total sales revenue in 2006.

2.  
Sales to group or institutional customers. Through this channel, we generated 28% of our sales revenue in 2006. Because a majority of new consumers need to learn about our new products before buying them, it becomes very important and effective for us to organize or sponsor seminars and events to present healthcare knowledge while introducing and selling our products to new users.

3.  
Event Marketing. Through this channel, we generated 7% of our sales revenue in 2006.

4.  
OTC Drug Stores.  Especially effective in Shenzhen City, this channel allows us to put our products on the shelves of OTC drug chain stores through a strategic alliance arrangement. This channel contributed 10% of our overall sales in 2006.

5.  
E-commerce.  Selling through the Internet has become increasingly important to our sales in undeveloped regions and developed cities. This channel contributed 3% of our sales in 2006.

THE MARKET

We primarily market our products in China. We do not sell any of our products in the United States or Canada. China’s domestic healthcare product market is fast-growing but underdeveloped. On the demand side, the following three forces drive market growth:

1)  
The rapid growth of China’s economy, which is projected to grow at an annual rate of 8% for the next five years. This growing economy will significantly increase people’s purchasing power.

2)  
The increase of the aging population. The China Census Bureau predicts that the majority of the China “baby boom” population (40% of China’s total population) will begin to turn to 65 between 2010 and 2020, which represents over 500 million potential consumers of healthcare products.

3)  
People’s increasing desires and expectations for a healthy life in old age, especially in urban areas.

According to a marketing study entitled 2000-2005 China Healthcare Market Research and Prediction Report, published in February 2004 by CCID Consulting of Hong Kong, China’s healthcare product sales volume is projected to exceed RMB 68 billion (US$8.7 billion) in 2009. Moreover, the compound growth rate in the next five years is projected to be up to 15%; by comparison, this study estimated that the overall healthcare product market in the world will be over US$200 billion if measured by sales volume.

On the supply side, the industry can be described as a highly fragmented and undercapitalized sector. There are thousands of manufacturers and merchants competing in this market, and many new players enter the market every day. According to CCID’s study, among those thousands of market participants, only 1.45% of them have annual sales exceeding RMB 100 million (US$12.8 million); around 3% of them have annual sales between RMB 50 and 100 million (between US$6.4 million and US$12.8); while 12.5% of them have sales between RMB 100,000 to RMB 50 million (US$12,800 to US$6.4 million). The rest of them, i.e. 83.05% of the companies, have annual sales below RMB 100,000 (US$12,800).

Our market in China presents an opportunity to reach over 1 billion consumers, but there is also very aggressive competition to attract the attention of those consumers.

COMPETITION

We compete with other top-tier healthcare companies in China. Many of them are more established than we are and have significantly greater financial, technical, marketing and other resources than we presently possess. Some of our competitors may have greater name recognition and a larger customer base. Those competitors may be able to respond more quickly to new or changing opportunities and customer requirements and may be able to undertake more extensive promotional activities, offer more attractive terms to customers, and adopt more aggressive pricing policies. Some of our competitors have also developed similar products that compete with ours.

 
- 10 -
 
 
According to the Summary section on page 1 of the CCID study, the most prominent competitors in China’s healthcare market are the Joymain Group in Nanjing and the Tianjin Saiyuan Health Products Co., Ltd. in Tianjin.  Both of them carry FIR therapeutic products and have higher sales revenues than we do.

The Joymain Group, founded in 2000, is a well-capitalized publicly listed company with around 3,600 franchises or exclusive sales stores. In its peak sales year of 2004, it had RMB1.4 billion (US$179 million) in sales revenue.

Tianjin Saiyuan, with a smaller market share than The Joymain Group, generated RMB 390 million (US$50 million) in sales revenue in 2004.

In 2005, sales by both these companies have dropped significantly due to increased market competition.

In competing with these and other competitors, we believe that we possess the following competitive advantages:

1.  
Our Proprietary Technique and Materials. In the FIR Therapy Product category, our clothing and textile products are made of Apocynum fabric, which has better FIR features than what our competitors are offering, such as cotton or synthetic materials. So far, the Company has maintained a strong relationship with suppliers of Apocynum fiber.

2.  
Our distribution network and sales model, which allows us to expand rapidly without carrying huge overhead.

3.  
Our Capacity for New Product Development. Supported by our own R&D team and strategic alliances in China’s science and technology research fields, including the Institute of Process Engineering at the Chinese Academy of Science, the Company has developed a series of innovative products in its new product pipeline and continues to get them ready to put into the market.

In the next two years, we plan to pursue the following measures to maintain our competitiveness:

·  
Invest more on research & development to foster our capacity for large-scale production;
·  
Take better control of our source of raw materials by establishing our own material collection and processing base in Xinjiang Province, the heartland for Apocynum production;
·  
Use more effectively our Apocynum resources by developing the byproducts from Apocynum;
·  
Develop our distribution network by establishing greater market presence in more of China’s provinces;
·  
Open new offices in Hong Kong, Macao, and Taiwan within the next two years;
·  
Explore overseas markets by developing sales and distribution agents in other countries, such as Japan, Korea, and the USA, where FIR and other Chinese traditional remedies have shown signs of increased popular acceptance.

REGULATORY ENVIRONMENT

We do not sell our products in the United States or Canada and are not subject to US food and drug laws. Our principal sales market is presently in the People's Republic of China. We are subject to China’s Food Sanitation Law, which governs the licensing, manufacturing, marketing and distribution of food and nutritional supplement products in China. Because Beijing Tenet-Jove is a wholly foreign owned enterprise, we are subject to the law on foreign investment enterprises in China, and the foreign company provisions of the Company Law of China, which governs the conduct of our wholly owned subsidiary and its officers and directors. Additionally, we are also subject to varying degrees of regulations and permit systems by the Chinese government.

The governmental approval process in the PRC for a newly developed health product such as ours is as follows: a product sample is sent to a clinical testing agent designated by the Ministry of Health, who conducts extensive clinical testing and examination to verify if the product has the specified functions as stated by the company producing the product. A report will be issued by the clinical testing agent confirming or negating such functions. It generally takes approximately six months to one year for the report to be issued. This report then has to be submitted to a provincial Health Management Commission for approval. A letter of approval issued by such commission will then be submitted to the Ministry of Health for the issuance of a certificate that authorizes the sale and marketing of the product in the PRC. The whole process generally takes one and a half to two years.  We have followed this process for our products currently on the market.

 
- 11 -
 
 
COMPLIANCE WITH ENVIRONMENTAL LAW

Our products are environmentally friendly. They are all made of natural materials. We comply with the Environmental Protection Law of China and its local regulations. In addition to statutory and regulatory compliance, we have also proactively participated in local environmental protection activities, especially in Xinjiang and Tianjin, where we have production facilities. Our costs of compliance with applicable environmental laws are minimal, because the processing and manufacturing of Apocynum-based products and bio-ceramic additives is conducted in a closed environment without discharge into the surrounding environment. The spinning and knitting processes also generate very limited pollution, if any, to the environment. Penalties would be levied upon us if we failed to adhere to certain standards. Such failure has not occurred in the past, and we generally do not anticipate that it may occur in the future, but no assurance can be given in this regard.

ADMINISTRATIVE OFFICES

The Company currently maintains offices at Room 3106, BLD B, 39 East 3rd Ring Middle Road, Chaoyang District, Beijing, P.R. China, 100022, telephone number 86 105869-3011.

The Beijing offices are leased at a cost of $15,000 per annum.

EMPLOYEES

The Company currently has more than 127 full-time employees, 57 of them working in the Company’s headquarters in Beijing. All of our employees work in one of the following three divisions:

R&D Division:
22
Manufacturing Division:
60
Sales and Distribution Division:
45
 
The Company plans to hire additional employees as required. Its management and employees enjoy both compensation and welfare benefits pursuant to Chinese laws.

ITEM 2.   PROPERTIES

The Company currently maintains offices at Room 3106, Bldg. B, #39 East 3rd Ring Middle Road, Chaoyang District, Beijing 100022, P.R. China, Telephone No. 86 105869-3011. These offices are leased at a cost of $15,000 per annum, pursuant to a lease that expires in June 2010.

We currently have no investments in real estate, real estate mortgages, or real estate securities, and do not anticipate making any such investments in the future. However, the policy of the Company with respect to investment in real estate assets could be changed in the future without a vote of security holders.

ITEM 3.   LEGAL PROCEEDINGS

The Company is not a party to any pending legal proceedings, and no such proceedings are known to be contemplated.

No director, officer or affiliate of the Company and no owner of record or beneficial owner of more than 5.0 percent of the securities of the Company, or any associate of any such director, officer or security holder is a party adverse to the Company or has a material interest adverse to the Company in reference to pending litigation.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the security holders of the Company during the period ended December 31, 2006.


 
- 12 -
 
PART II

ITEM 5.   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

There has been no established public trading market for the Company's securities since its inception on August 20, 1997, and there can be no assurance that such market will develop. As of December 31, 2006, there were 9,298,823 shares outstanding, and the Company had 39 shareholders of record.

ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion relates to the results of our operations to date, and our financial condition. This report contains forward looking statements relating to our Company's future economic performance, plans and objectives of management for future operations, projections of revenue mix and other financial items that are based on the beliefs of, as well as assumptions made by and information currently known to, our management. The words "expects, intends, believes, anticipates, may, could, should" and similar expressions and variations thereof are intended to identify forward-looking statements. The cautionary statements set forth in this section are intended to emphasize that actual results may differ materially from those contained in any forward looking statement.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10-KSB.

Critical Accounting Policies and Estimates

Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. We base these estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, and these estimates form the basis for our judgments concerning the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically evaluate these estimates and judgments based on available information and experience. Actual results will differ from our estimates under different assumptions and conditions. If actual results significantly differ from our estimates, our financial condition and results of operations could be materially impacted.

We believe that the accounting policies described below are critical to understanding our business, results of operations and financial condition because they involve significant judgments and estimates used in the preparation of our consolidated financial statements. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our consolidated financial statements. We have discussed the development, selection and application of our critical accounting policies with our board of directors, and our board of directors has reviewed our disclosure relating to our critical accounting policies in this "Management's Discussion and Analysis or Plan of Operations."

Revenue Recognition

The Company follows the guidance of the Securities and Exchange Commission's Staff Accounting Bulletin 104 for revenue recognition. In general, the Company records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured.

Foreign Currency Translation

Transactions and balances originally denominated in U.S. dollars are presented at their original amounts. Transactions and balances in other currencies are converted into U.S. dollars in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation," and are included in determining net income or loss.

For foreign operations with the local currency as the functional currency, assets and liabilities are translated from the local currencies into U.S. dollars at the exchange rate prevailing at the balance sheet date. Revenues and expenses are translated at weighted average exchange rates for the period to approximate translation at the exchange rates prevailing at the dates those elements are recognized in the financial statements. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive gain or loss.

 
- 13 -
 
 
The functional currency of the Company's subsidiaries is the local currency, Chinese Renminbi (RMB). The financial statements of the subsidiary are translated to United States dollars using year-end rates of exchange for assets and liabilities (7.81 RMB to one U.S. Dollar), and average rates of exchange for the period for revenues, costs, and expenses (7.94 RMB to one U.S. Dollar). Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations and were not material during the periods presented. The effect of exchange rate changes on cash for the year ended December 31, 2006 was $4,417.

DISCUSSION OF RESULTS OF OPERATIONS

Beijing Tenet Jove Technological Development Co., Ltd is a healthcare product manufacturer and health solution provider in the PRC, principally developing, manufacturing, and distributing its proprietary therapeutic products through a national sales network to its customers in the PRC.

Since the establishment of Tenet-Jove in 2003, we have gradually developed a series of products and established a nation-wide distribution network.

·  
REVENUES

Our revenues for the year ended December 31, 2006 were $1,447,024, representing a decrease of approximately 35.5% from $2,243,047 for the period of fiscal year 2005. We derived our revenues primarily from sales of Apocynum-based healthcare products in China. Those decreases were mainly attributable to our decreased marketing and sales activities, due to the fact that on August 11, 2006 we became a wholly foreign-owned enterprise under Chinese law. Thus, from August to November 2006, Chinese law prohibited us from selling our own products, and we had to apply for government permission to increase the scope of our sales. This process required several steps of governmental approval over the 4 months specified above. Although we increased our advertising expenditures during this period, the process of obtaining governmental permission to sell our products in China as a foreign-owned entity had the net effect of reducing our marketing and sales activities for the year.  We believe we now have the proper permits to allow us to conduct sales as before.  We do not expect such permit issues to recur.

·  
GROSS PROFIT MARGIN

Our gross margin on sales was $883,105, or 61.0% for the period of fiscal 2006 as compared to $1,141749, or 50.9% for the period of fiscal 2005. Our gross margin increased by 19.8% in 2006 as compared to the previous year. The increased margin was mainly due to a decrease in the cost of goods sold, though it was also affected by the reduced sales revenues for the year as well—a situation we expect to remedy by increasing our marketing and sales efforts in the year to come, now that we have completed our transition to a wholly foreign-owned entity and have acquired the proper permits to allow us to sell our products in China as a wholly foreign-owned enterprise.

·  
OPERATING EXPENSES

Our total operating expenses were $1,655,230 for the period of fiscal 2006, an increase of 72.6% compared with total operating expenses of $958,785 for the period of fiscal 2005. The increase was mainly caused by increases in advertising expense, inventory written off, other selling expense, salary and benefit expense, depreciation and amortization expense, and other general and administrative expense, offset by a decrease in bad debt expense.

·  
NET INCOMEAND LOSS

Our consolidated net loss was $531,768 for the year ended December 31, 2006 as compared to a consolidated net income of $72,836 for the prior year period. Our net income rate of 3.2% in 2005 decreased to a net loss of 36.7% in 2006. This decrease was attributable to a decrease in revenues as well as increased advertising expense, inventory written off, other selling expense, salary and benefit expense, depreciation and amortization expense, and other general and administrative expense, offset by reductions in our cost of goods sold and bad debt expense.

·  
LIQUIDITY AND SOURCES OF CAPITAL

At December 31, 2006, our cash and cash equivalents were $49,981, compared to $273,367 at year-end 2005. As of December 31, 2006, we had inventories of $1,417,970, compared to $1,906,004 at year-end 2005. At December 31, 2006, we had total current assets of $4,197,660, total current liabilities of $2,477,907 and working capital of $1,719,753.  By contrast, at year-end 2005 we had total current assets of $4,569,340, total current liabilities of $2,244,407, and working capital of $2,324,933.  Thus, our liquidity for fiscal year 2006 decreased compared to the previous year.

 
- 14 -
 
 
 
We generally finance our operations from cash flows generated internally, as well as customer deposits. In 2006, we also generated increased cash flow from related party payables and repayments on short-term notes payable as well as a small issuance of preferred stock. As of December 31, 2006, we had received $305,631 from financing activities. Our shareholders’ equity was $1,084,191 in 2006, compared to $1,716,429 in 2005—a decrease of $632,238.
 
In the next 12 months, we anticipate that sufficient funds to maintain the Company’s current level of operations will be generated from our operating activities, while we would seek funds for expanding our businesses through debt or equity financings conducted in compliance with exemptions from registration. We anticipate that we need US$950,000 to be used for expanding our scale of operations, of which we plan to allocate approximately $200,000 for R&D, approximately $250,000 for advertising, approximately $200,000 for wages and salaries, and approximately $300,000 for working capital.

·  
FOREIGN CURRENCY AND COMPREHENSIVE INCOME/LOSS

Our consolidated comprehensive loss for the year ended December 31, 2006 was $548,238, as compared to a consolidated comprehensive income of $126,159 for the year ended December 31, 2005. The difference between our 2006 comprehensive income and net income was attributable to a foreign currency adjustment. As the exchange rate from US dollars to RMB changed during 2006, the foreign currency translation adjustment was US$16,470 for the year ended December 31, 2006.  There was a foreign currency translation adjustment of US$53,323 for the year ended December 31, 2005.

·  
OFF-BALANCE SHEET ARRANGEMENTS

For the years ended December 31, 2006 and December 31, 2005, the Company had no off-balance-sheet arrangements.

 

 
- 15 -

ITEM 7. FINANCIAL STATEMENTS

Attached hereto, beginning with page F-1.


Report of Independent Registered Public Accounting Firm


To the Board of Directors and Audit Committee
Shineco, Inc.
Beijing, People’s Republic of China


We have audited the consolidated balance sheets of Shineco, Inc. (the Company) as of December 31, 2006 and 2005, and the related consolidated statements of operations and comprehensive income, stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Shineco, Inc. as of December 31, 2006 and 2005, and the results of its consolidated operations and its consolidated cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.



Child, Van Wagoner & Bradshaw, PLLC
Salt Lake City, Utah
March 23, 2007


 
- 16 -

SHINECO, INC.
CONSOLIDATED BALANCE SHEETS

   
December 31,
  
   
2006
    
2005
  
             
ASSETS
            
             
Current assets
            
Cash and cash equivalents
   $
49,981
     $
273,367
  
Trade receivables, net
    
1,417,970
      
1,906,004
  
Other receivables
    
88,798
      
275,138
  
Vendor deposits
    
596,632
      
178,262
  
Prepaid expenses
    
--
      
29,813
  
Inventories
    
2,044,279
      
1,906,756
  
Total current assets
    
4,197,660
      
4,569,340
  
                 
Property, plant and equipment, net
    
124,362
      
120,538
  
Related party receivables
    
33,690
      
41,721
  
Investment in unconsolidated subsidiaries
    
56,363
      
78,335
  
Deferred charge
    
48,291
      
--
  
Intangibles, net
    
147,467
      
162,674
  
Total assets
   $
4,607,833
     $
4,972,608
  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
                
                 
Current liabilities
                
Trade payables
   $
815,611
     $
882,609
  
Related party payables
    
453,327
      
259,788
  
Accrued liabilities
    
74,460
      
41,356
  
Other payables
    
76,456
      
84,167
  
Notes payable
    
822,566
      
675,324
  
Taxes payable
    
58,505
      
41,271
  
Customer deposits
    
44,873
      
202,964
  
Accrued employee benefits
    
41,109
      
49,928
  
Accrued dividends on preferred stock
    
91,000
      
7,000
  
Total current liabilities
    
2,477,907
      
2,244,407
  
                 
Series A Convertible preferred stock, net of subscription receivable of $359,892 and $401,065;
    par value $.001; liquidation preference $.70 per share;
    5,000,000 shares authorized; 2,000,000 and 0 shares issued and outstanding
    
1,040,108
      
998,935
  
                 
Minority interest
    
5,627
      
12,837
  
                 
Stockholders' equity
                
Common stock: par value $.001; 50,000,000 shares authorized;
   9,298,823 shares issued and outstanding
    
9,299
      
9,299
  
Additional paid in capital
    
1,079,908
      
1,079,908
  
Retained earnings
     (42,069 )    
573,699
  
Accumulated other comprehensive income
    
37,053
      
53,523
  
Total stockholders' equity
    
1,084,191
      
1,716,429
  
                 
Total liabilities and stockholders' equity
   $
4,607,833
     $
4,972,608
  

 
See notes to consolidated financial statements.

 
- 17 -
SHINECO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME

   
Year ended December 31,
  
   
2006
    
2005
  
             
Revenues
            
Sales revenues
   $
1,447,024
     $
2,243,047
  
Cost of goods sold
    
563,919
      
1,101,298
  
Gross profit
    
883,105
      
1,141,749
  
                 
Operating expenses
                
Advertising
    
507,705
      
34,797
  
Bad debt expense
    
166,353
      
250,171
  
Inventory written off
    
60,577
      
--
  
Other selling expenses
    
98,562
      
21,626
  
Salaries and benefits
    
401,879
      
360,232
  
Depreciation and amortization
    
40,786
      
30,311
  
Other general and administrative expenses
    
379,368
      
261,648
  
Total operating expenses
    
1,655,230
      
958,785
  
Operating income
     (772,125 )    
182,964
  
                 
Other income (expense)
                
Interest income
    
517
      
--
  
Interest expense
     (125,973 )     (102,108 )
Income (loss) on equity investments
    
24,773
       (21,155 )
Other
    
333,977
      
10,590
  
Total other income (expense)
    
233,294
       (112,673 )
                 
Income before taxes and minority interest
     (538,831 )    
70,291
  
Provision for income taxes
    
--
      
1,332
  
Income before minority interest
     (538,831 )    
68,959
  
                 
Minority interest in (income)/loss of subsidiaries
    
7,063
      
4,237
  
Income from continuing operations
     (531,768 )    
73,196
  
                 
Income (loss) from operations of disposed subsidiaries
    
--
       (215 )
Gain (loss) on disposal of subsidiaries
    
--
       (145 )
Net income (loss) from discontinued operations
    
--
       (360 )
                 
Net income (loss)
   $ (531,768 )   $
72,836
  
                 
Foreign currency translation adjustment
     (16,470 )    
53,323
  
                 
Comprehensive income (loss)
   $ (548,238 )   $
126,159
  
                 
Basic earnings (loss) per common share:
                
From continuing operations
   $ (0.07 )   $
0.01
  
From discontinued operations
   $
--
     $
--
  
From net income (loss)
   $ (0.07 )   $
0.01
  
                 
Diluted earnings (loss) per common share:
                
From continuing operations
   $ (0.07 )   $
0.01
  
From discontinued operations
   $
--
     $
--
  
From net income (loss)
   $ (0.07 )   $
0.01
  
                 
Denominator for basic earnings per share
    
9,298,823
      
9,298,823
  
Denominator for diluted earnings per share
    
9,298,823
      
9,298,823
  

See notes to consolidated financial statements.
 
- 18 -

 
 
SHINECO, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


                           
Additional
          
Other
        
   
Preferred Stock
    
Common Stock
    
Paid In
    
Retained
    
Comprehensive
        
   
Shares
    
Amount
    
Shares
    
Amount
    
Capital
    
Earnings
    
Income (Loss)
    
Total
  
                                                 
Balance January 1, 2005
    
--
     $
--
           $
9,299
     $
1,079,908
     $
507,863
     $
--
     $
1,597,070
  
                                                                 
Net income for the year
                                            
72,836
              
72,836
  
Accrued preferred dividends
                                             (7,000 )             (7,000 )
Currency translation adjustment
    
--
      
--
      
--
      
--
      
--
      
--
      
53,523
      
53,523
  
Balance December 31, 2005
    
--
      
--
      
9,298,823
      
9,299
      
1,079,908
      
573,699
      
53,523
      
1,716,429
  
                                                                 
Net income for the year
                                             (531,768 )             (531,768 )
Accrued preferred dividends
                                             (84,000 )             (84,000 )
Currency translation adjustment
    
--
      
--
      
--
      
--
      
--
      
--
       (16,470 )     (16,470 )
Balance December 31, 2006
    
--
     $
--
      
9,298,823
     $
9,299
     $
1,079,908
     $ (42,069 )   $
37,053
     $
1,084,191
  


 
 
 
 
See notes to consolidated financial statements.


 
- 19 -

SHINECO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
Year ended December 31,
  
   
2006
    
2005
  
             
Cash flows from operating activities:
            
     Net income
   $ (531,768 )   $
72,836
  
  Adjustments to reconcile net income to net cash used in operations:
                
     Depreciation and amortization
    
45,340
      
30,312
  
     Provision for allowance on receivables
    
131,021
      
250,171
  
     Inventory reserves
    
60,577
      
--
  
     Loss (gain) from unconsolidated subsidiaries
     (24,773 )    
21,155
  
     Minority interest
     (7,063 )     (4,237 )
     Loss (gain) on disposal of subsidiary
    
--
      
145
  
  Changes in operating assets and liabilities:
                
     Trade receivables
    
349,122
       (621,441 )
     Other receivables
    
172,577
       (454,613 )
     Vendor deposits
     (403,866 )     (48,656 )
     Prepaid expenses
     (17,105 )     (3,387 )
     Inventories
     (127,307 )    
256,727
  
     Trade payables
     (95,110 )     (141,081 )
     Accrued liabilities
    
31,046
      
29,784
  
     Other payables
    
49,062
       (32,338 )
     Taxes payable
    
15,503
       (44,657 )
     Customer deposits
     (161,639 )     (206,981 )
     Accrued employee benefits
     (10,306 )    
28,480
  
Net cash used in operations
     (524,689 )     (867,781 )
                 
Cash flows from investing activities:
                
     Investment in unconsolidated subsidiaries
    
--
       (99,490 )
     Related party receivables
    
12,283
      
37,325
  
     Proceeds from sale of subsidiary
    
--
      
73,863
  
     Purchase of intangible assets
     (251 )     (2,808 )
     Purchase of property and equipment
     (20,777 )     (23,144 )
Net cash used in investing activities
     (8,745 )     (14,254 )
                 
Cash flows from financing activities:
                
     Related party payables
    
142,782
       (328,413 )
     Repayments on short-term notes payable
    
121,676
      
361,315
  
     Proceeds from sale of preferred stock
    
41,173
      
998,935
  
Net cash provided by financing activities
    
305,631
      
1,031,837
  
                 
     Effect of rate changes on cash
    
4,417
      
59,293
  
Increase in cash and cash equivalents
     (223,386 )    
209,095
  
                 
Cash and cash equivalents, beginning of period
    
273,367
      
64,272
  
Cash and cash equivalents, end of period
   $
49,981
     $
273,367
  
                 
Supplemental disclosures of cash flow information:
                
      Cash paid for interest
   $
125,973
     $
102,108
  
      Cash paid for income taxes
   $
--
     $
1,617
  
                 
Supplemental disclosures of non-cash investing and financing activities:
                
      Stock issued for services
   $
--
     $
--
  
      Inventory and intangibles acquired in business combination
   $
--
     $
--
  
      Accrual of preferred stock dividend
   $
84,000
     $
7,000
  

See notes to consolidated financial statements.

 
- 20 -

SHINECO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.           NATURE OF OPERATIONS

Shineco, Inc. (the Company) was incorporated on August 20, 1997 in the State of Delaware as Supcor, Inc. On December 30, 2004 the Company acquired all of the outstanding stock of Beijing Tenet Jove Technological Development Co., Ltd. (“Beijing Tenet Jove”) in exchange for stock of the Company. The stock exchange agreement is subject to the Chinese government’s approval, which has been received from the PRC government in August 11, 2006. Beijing Tenet Jove has finished entire registration change procedure from Chinese domestic enterprise to foreign invested enterprise and acquired corporative operational license from Beijing Administration for Industry & Commerce on that date. Now Shineco is legally enforceable in the PRC. The consolidated results of operations are primarily those of Beijing Tenet Jove and its consolidated subsidiaries.

Beijing Tenet Jove was incorporated on December 16, 2003 under the laws of the People’s Republic of China (the PRC). In the PRC, Ltd, or Limited, is equivalent to Inc, or Incorporated, in the United States (US).

The Company primarily manufactures and sells (1) Far Infrared Therapeutic Clothing and Textile Products, (2) Apocynum-based Nutritional Supplements, and (3.) FIR Multi-functional Therapeutic Devices, which are innovative therapeutic products for complementary treatment of both acute and chronic health concerns. By incorporating traditional Chinese medical methodology with modern bio-technology, we have developed and commercialized over 100 products under our brand name of “Tenethealth®”, which means “Benefit from Nature.”

2.         BASIS OF PRESENTATION

The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) and have been retroactively restated to give effect to the recapitalization due to a reverse merger consummated on December 30, 2004. This basis differs from that used in the statutory accounts of the Company, which were prepared in accordance with the accounting principles and relevant financial regulations applicable to enterprises in the PRC. All necessary intercompany transactions and balances have been eliminated in consolidation, and all necessary adjustments have been made to present the consolidated financial statements in accordance with US GAAP.

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. The results of operations (through the date of sale) of subsidiaries that have been sold are included in income (loss) from discontinued operations. The Company’s subsidiaries during the years ended December 31, 2006 and 2005 are as follows:

Subsidiary name
  
Date acquired
  
Date sold
  
Ownership %
Tian Yi Hua Tai, Tianjin
  
April 27, 2004
  
n/a
  
90%
QiQiHaer
  
January 14, 2004
  
November 12, 2005
  
55%
Nan Jing
  
February 13, 2004
  
November 10, 2005
  
51%

3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ECONOMIC AND POLITICAL RISKS

The Company faces a number of risks and challenges as a result of having primary operations and markets in the PRC. Changing political climates in the PRC could have a significant effect on the Company’s business.

ESTIMATES

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

 
- 21 -
 
SHINECO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
CASH AND CASH EQUIVALENTS

For purposes of the statements of cash flows, cash and cash equivalents includes cash on hand and demand deposits held by banks. None of the Company’s deposits are insured by the Federal Deposit Insurance Corporation or any other entity of the U.S. government.

TRADE ACCOUNTS RECEIVABLE

Trade accounts receivable are recognized and carried at original invoice amount less an allowance for any uncollectible amounts. An allowance for doubtful accounts is made when collection of the full amount becomes questionable. The allowance for doubtful accounts was $213,481 and $86,226 at December 31, 2006 and 2005, respectively.

OTHER RECEIVABLES

Other receivables consist primarily of advances made to third parties. The balances due to the Company were $88,798 and $275,138 at December 31, 2006 and 2005, respectively.

INVENTORIES

Inventories consist of raw materials, packaging materials, sub-contracting materials, production costs, and finished products. The inventories are valued at the lower of cost (first-in, first-out method) or market. Impairment and changes in market value are evaluated on a per item basis.

If the cost of the inventory exceeds the market value evaluation based on total inventory, provisions are made for the difference between the cost and the market value. Provision for potential obsolete or slow moving inventory is made based on analysis of inventory levels, age of inventory and future sales forecasts. Inventories consisted of the following:

   
December 31,
  
   
2006
    
2005
  
             
Raw materials
    $
539,031
      $
628,095
  
Work in progress
    
111,471
      
69,449
  
Finished products
    
1,573,484
      
1,323,192
  
Obsolescence reserve
     (179,707 )     (113,980 )
     Totals
    $
2,044,279
      $
1,906,756
  

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is carried at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the useful lives of the assets. Amortization of leasehold improvements is calculated on a straight-line basis over the life of the asset or the term of the lease, whichever is shorter. Major renewals and betterments are capitalized and depreciated; maintenance and repairs that do not extend the life of the respective assets are charged to expense as incurred. Upon disposal of assets, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in income. Depreciation related to property and equipment used in production is reported in cost of sales.

Property and equipment are depreciated over their estimated useful lives as follows:

Machinery and equipment
10 years
Vehicles
7 years
Office equipment
7 years
 
 
- 22 -
 
SHINECO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
Long-term assets of the Company are reviewed annually to assess whether the carrying value has become impaired, according to the guidelines established in Statement of Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The Company also evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. No impairment of assets was recorded in the periods reported.

REVENUE RECOGNITION

Revenues are recognized as earned when the following four criteria are met: (1) a customer issues purchase orders or otherwise agrees to purchase products; (2) products are delivered to the customer; (3) pricing is fixed or determined in accordance with the purchase order or agreement; and (4) collectibility is reasonably assured. The Company sells its products primarily at the wholesale level and does not allow returns of its products. Consequently, no reserve for future returns has been established.

The Company has agreements with distributors for the territorial marketing of its products. No fees are paid to the Company by the distributors for such agreements.

ADVERTISING EXPENSE

Advertising costs are expensed as incurred. Advertising expense amounted to $507,705, and $34,797 for the years ended December 31, 2006 and 2005, respectively.

FOREIGN CURRENCY AND COMPREHENSIVE INCOME

The accompanying consolidated financial statements are presented in United States (US) dollars. The functional currency is the Renminbi (RMB). The consolidated financial statements are translated into US dollars from RMB at year-end exchange rates for assets and liabilities, and weighted average exchange rates for revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.

RMB is not freely convertible into the currency of other nations. All such exchange transactions must take place through authorized institutions. There is no guarantee the RMB amounts could have been, or could be, converted into US dollars at rates used in translation.

TAXES

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statement of operations in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.

Currently, the Company has recorded only minimal income taxes and no deferred taxes because it is a high-tech company registered in Chinese Zhongguancun Science Park. In China, high-tech companies are encouraged to promote their technologies to the market, so the Company is exempted from income tax for its first three years.

EARNINGS PER SHARE

Basic earnings per common share ("EPS") is calculated by dividing net income by the weighted average number of common shares outstanding during the year. Diluted earnings per common share are calculated by adjusting the weighted average outstanding shares, assuming conversion of all potentially dilutive securities, such as stock options, warrants and conversion features attached to preferred stock or debt.

 
- 23 -
 
SHINECO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
The Company issued convertible preferred stock on December 1, 2005, but no exercise can be made until after one year from issue, and then only if there is a public market for the common stock of the Company. At December 31, 2006 there were no exercisable conversion rights attached to the preferred stock.

The numerator and denominator used in the basic and diluted EPS of common stock computations are presented in the following table:

   
Year ended December 31,
  
   
2006
    
2005
  
             
NUMERATOR FOR BASIC AND DILUTED EPS
            
Income from continuing operations
     (531,768 )    
72,836
  
Accrued dividend on Series A Preferred stock
     (84,000 )     (7,000 )
Income from continuing operations available to common shareholders
     (615,768 )    
65,836
  
Income (loss) from discontinued operations
    
--
       (360 )
Net income to common stockholders
   $ (615,768 )   $
65,476
  
                 
DENOMINATOR FOR BASIC EPS
                
Weighted average shares of common stock outstanding
    
9,298,823
      
9,298,823
  
EPS - Basic from continuing operations
   $ (0.07 )   $
0.01
  
EPS - Basic from discontinued operations
   $
--
     $
--
  
EPS - Basic
   $ (0.07 )   $
0.01
  
                 
DENOMINATOR FOR FULLY DILUTED EPS
                
Weighted average shares of common stock outstanding
    
9,298,823
      
9,298,823
  
Exercisable warrants
    
--
      
--
  
Series A Preferred stock conversion rights
    
--
      
--
  
Weighted average common shares and warrants outstanding
    
9,298,823
      
9,298,823
  
                 
EPS - Fully diluted from continuing operations
   $ (0.07 )   $
0.01
  
EPS - Fully diluted from discontinued operations
   $
--
     $
--
  
EPS - Fully diluted
   $ (0.07 )   $
0.01
  

4.
BUSINESS COMBINATIONS

On January 14, 2004, QiQiHaer was established in the PRC as a 55% owned subsidiary of Beijing Tenet Jove. At the inception of QiQiHaer, Beijing Tenet Jove contributed 275,000 RMB ($33,213) as 55% of the registered capital of QiQiHaer and recorded it as an investment in subsidiary, which account was eliminated on consolidation.

On February 13, 2004 Nan Jing was established in the PRC as a 51% owned subsidiary of Beijing Tenet Jove. At the inception of Nan Jing, Beijing Tenet Jove contributed 408,000 RMB ($49,275) as 51% of the registered capital of Nan Jing and recorded it as an investment in subsidiary, which account was eliminated on consolidation.
 

 
 
- 24 -
 
SHINECO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
Tian Yi Hua Tai, Tianjin (Tianjin) was incorporated in the PRC on August 12, 2003 as a manufacturer of clothing and related products. On April 27, 2004 Tianjin merged into Beijing Tenet Jove, becoming a 90% subsidiary. The Company paid cash of $36,232 and notes payable of $100,823 for an aggregate of $137,055 to the owners in exchange for the 90% interest. As the principal owners of Tianjin were the same as the principal owners of Beijing Tenet Jove, the transaction was accounted for as a transfer of entities under common control whereby the assets and liabilities of the acquired company were recorded at their historical cost basis and the results of its operations are consolidated with those of the Company as if the transfer had occurred at the beginning of the first period presented. No adjustment to additional paid-in capital was required, as the amount paid was equal to the historical cost basis of the net assets acquired. The following table details the net assets acquired in the transaction.

Cash
   $
27,559
  
Accounts receivable
    
5,398
  
Inventory
    
467,065
  
Other receivables
    
123,672
  
Vendor deposits
    
205,263
  
Fixed assets
    
43,197
  
Payables
     (707,821 )
Accrued liabilities
     (12,050 )
Net assets of subsidiary
    
152,283
  
    Minority interest @ 10%
     (15,228 )
Net assets acquired
   $
137,055
  

On November 4, 2004, owners of Beijing Tenet Jove acquired a controlling interest in the Company from its previous stockholders. On December 30, 2004, the Company issued 6,800,000 shares of its common stock in exchange for 100% of the outstanding registered capital of Beijing Tenet Jove. Beijing Tenet Jove is treated as the accounting acquirer in a reverse merger. Consequently, these financial statements reflect the accounts and operations of Beijing Tenet Jove and its consolidated subsidiaries, with the adopted capital structure of the Company retroactively restated.

On November 10, 2005 Beijing Tenet Jove sold all of its equity interest in Nan Jing, and on November 12, 2005 Beijing Tenet Jove sold all of its equity interest in QiQiHaer. In aggregate, the Company recognized losses of $145 on the sales of these subsidiaries.

5.
COMMON AND PREFERRED STOCK TRANSACTIONS

Prior to the reverse merger, the Company issued 1,125,000 shares of its common stock for consulting services valued at par, for an aggregate of $2,250.

Pursuant to the reverse merger, the Company issued 6,800,000 shares of its common stock to acquire 100% of Beijing Tenet Jove.

On November 12, 2005 the Company effected a 1:2 reverse stock split. Immediately prior to the split there were 18,597,640 common shares outstanding and immediately following the split there were 9,298,823 common shares outstanding.

On December 1, 2005 the Company issued 2,000,000 shares of Series A Convertible Preferred Stock (“Preferred”) at $.70 per share for an aggregate amount of $1,400,000 less subscriptions receivable of $359,892. The Preferred stock has a par value of $0.001 and a stated value and liquidation preference of $0.70 per share. The Preferred stock bears cumulative dividends at 6% per annum, is redeemable for cash for $0.70 per share plus unpaid dividends at the Company’s option and has a mandatory redemption clause for those same amounts in the case of a change in control. The stock is convertible, after one year from the date of issue, for common stock at 88% of the market price of the common stock on the date of conversion. For every four common shares received upon conversion the converting shareholder is also to receive a warrant to purchase one additional share of common stock at an exercise price of $2.00 per share. The Preferred stockholders are protected from dilution and have voting rights equal to the common shares they would hold as if converted at the time of any vote. The cumulative dividend and redemption features make the Preferred stock more akin to debt than to equity. Accordingly, the redemption value is presented as a liability on the balance sheet. The conversion feature is not detachable and has therefore not been provided with a value separate from the Preferred stock.
 
 
- 25 -
 
SHINECO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
6.
RELATED PARTY TRANSACTIONS

Related party receivables consist of advances due from stockholders. The amounts bear no interest and are payable on demand. Balances at December 31, 2006 and 2005 are $33,690 and $41,721, respectively.

Related party payables consist of loans from its stockholders. The loans bear no interest and are payable on demand. Balances at December 31, 2006 and 2005 are $453,327 and $259,788, respectively.

7.
PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following at December 31,

   
2006
    
2005
  
Machinery and equipment
   $
40,545
     $
27,270
  
Vehicles
    
54,243
      
52,455
  
Office equipment
    
85,399
      
74,010
  
Subtotal
    
180,187
      
153,735
  
Less: accumulated depreciation
     (55,825 )     (33,197 )
Net property and equipment
   $
124,362
     $
120,538
  

Depreciation expense was $22,628 and $6,880 for years ending December 31, 2006 and 2005, respectively.

8.
INVESTMENTS

During 2005 and 2006, the Company acquired equity interests in ten of its distributors by contributing inventory to such distributors. The Company accounts for these investments using the equity method if the ownership percentage exceeds 20% or if the ownership percentage is less than 20% and significant control is evidenced by significant intercompany sales transactions. Investments where the ownership percentage is less than 20% and significant control is not evident are accounted for at cost. The following table reflects certain information about the Company’s investments in unconsolidated subsidiaries.

 
Date
        
12/31/05
    
Increase
    
Withdraw
    
Share of
    
Exchange
    
12/31/06
  
Name
Acquired
  
Ownership
    
Investment
    
Investment
    
Investment
    
Income(Loss)
    
Reserve
    
Investment
  
                                             
Jinan
11/25/2005
    
25.00%
     $
38,833
     $
--
     $
--
     $ (25,526 )   $
790
     $
14,097
  
Changchun
10/26/2005
    
25.00%
      
18,879
      
--
      
--
      
10,350
      
860
      
30,089
  
Liaoyang
12/31/2005
    
25.00%
      
4,707
      
--
      
--
      
1,112
      
183
      
6,002
  
Xuzhou
7/26/2005
    
15.00%
      
3,293
      
--
      
--
       (1,484 )    
82
      
1,891
  
Qiqihaer
1/31/2006
    
19.00%
      
--
      
3,283
      
--
       (1,889 )     (39 )    
1,355
  
Nanjing
9/1/2006
    
15.00%
      
--
      
14,630
      
--
       (11,728 )     (245 )    
2,657
  
Shenyang
9/26/2005
    
15.00%
      
263
      
--
      
--
    
N/A
      
9
      
272
  
Sub-totals
           $
65,975
     $
17,913
     $
--
     $ (29,165 )   $
1,640
     $
56,363
  
                                                           
Yantai
10/26/2005
    
25.00%
      
9,869
      
--
       (44,754 )    
34,758
      
127
      
--
  
Shenzhen
12/31/2005
    
15.00%
      
2,491
      
--
       (8,411 )    
5,888
      
32
      
--
  
Huaian
7/26/2005
    
15.00%
      
--
      
--
       (13,292 )    
13,292
      
-
      
--
  
Sub-totals
           $
12,360
     $
--
     $ (66,457 )   $
53,938
     $
159
     $
--
  
                                                           
Total
             $
78,335
     $
17,913
     $ (66,457 )   $
24,773
     $
1,799
     $
56,363
  

On January 4, 2006 Beijing Tenet Jove withdrew the investment in unconsolidated subsidiary to Huaian, and on June 2, 2006 Beijing Tenet Jove withdrew the investments in unconsolidated subsidiaries to Yantai and Shenzhen. In aggregate, the company recognized gains of $53,938 on the disposal of these subsidiaries.
 
 
- 26 -
 
SHINECO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
9.
INTANGIBLES

Intangibles consist primarily of manufacturing patent rights, acquired in the business combination with Tianjin as well as a purchased trademark. They are determined to have a finite life of 10 years and are being amortized straight line over that period. Accumulated amortization at December 31, 2006 and 2005 is $56,195 and $29,665, respectively. Amortization expense recognized during 2006 and 2005 is $26,530 and $23,199, respectively.

10.
NOTES PAYABLE

Notes payable bear interest between 6% and 20% and have maturities between three to twelve months from issue. At December 31, 2006 and 2005, principal balances of notes payable due within a year totaled $822,566 and $675,324, respectively. Accrued interest of $24,364 and $13,447 relating to theses notes was included in other payables at December 31, 2006 and 2005.

11.
CUSTOMER DEPOSITS

Customer deposits at December 31, 2006 and 2005 consist of $44,873 and $202,964 in prepayments to the Company for merchandise that had not yet shipped. The Company will recognize the deposits as revenue as customers take delivery of the goods, in compliance with its revenue recognition policy.

12.       CONCENTRATIONS

Several of the Company’s distributors each accounted for greater than 5% of total sales in the year ended December 31, 2006. The loss of one or more of these distributors could have a significant adverse affect on the future operating results of the Company. The following table contains certain information with respect to these distributors.

   
2006 Sales
    
Percentage
  
Changchun
   $
406,086
       28.06 %
Xuzhou
    
336,225
       23.24 %
Wulumuqi
    
161,618
       11.17 %
JiNan
    
149,045
       10.30 %
YanTai
    
128,365
       8.87 %
QiQiHaer
    
93,899
       6.49 %
Totals
   $
1,275,238
       88.13 %

13.
COMMITMENTS

The Company leases factory and office space under non-cancelable leases. Future minimum lease payments are reflected in the following table:

2007
    
59,362
  
2008
    
44,521
  
2009
    
44,521
  
2010
    
--
  
Totals
   $
148,404
  

14.
CONTINGENCIES

The Company has not, historically, carried any property or casualty insurance. No amounts have been accrued for any liability that could arise from the lack of insurance. Management feels the chances of such an obligation arising are remote.
 
 
- 27 -
 
 
SHINECO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
15.
STOCK WARRANTS

Pursuant to the Stock Purchase Agreement executed in conjunction with the reverse merger of the Company and Beijing Tenet Jove, a warrant for 5% of the outstanding stock of the Company was issued to the selling stockholders, exercisable at par value, and expiring on December 12, 2005. None of these warrants was outstanding at December 31, 2006.

16.
NEW ACCOUNTING PRONOUNCEMENTS

In February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140.” The statement permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips are not subject to the requirements of Statement 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The Statement is effective for financial instruments acquired or issued after the beginning of the first fiscal year that begins after September 15, 2006. The Company is currently evaluating whether the Statement will have any impact on its financial statements.

In February 2006, the FASB issued Staff Position No. FAS 123(R)-4, “Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event.” This position address the classification of options and similar instruments issued as employee compensation that allow for cash settlement upon the occurrence of a contingent event, amending paragraphs 32 and A229 of SFAS No. 123 (revised 2004), “Share-Based Payment”. As the Company has not traditionally paid employee compensation through the issuance of equity securities, no impact is expected on its financial statements.

In October 2005, the FASB issued Staff Position No. FAS 13-1, “Accounting for Rental Costs Incurred during a Construction Period.” This position addresses the accounting for rental costs associated with operating leases that are incurred during a construction period. Management believes that this position has no application to the Company.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (“SFAS No. 154”), which replaced Accounting Principles Board Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 changes the requirements for the accounting for and reporting of a change in accounting principles. It requires retrospective application to prior periods’ financial statements of changes in accounting principles, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The impact on the Company’s operations will depend on future accounting pronouncements or changes in accounting principles.

In March 2005, the FASB issued FASB Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations.” FIN 47 clarifies that the term “Conditional Asset Retirement Obligation” as used in FASB Statement No. 143, “Accounting for Asset Retirement Obligation,” refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. Accordingly, an entity is required to recognize a liability for the fair value of a Conditional Asset Retirement Obligation if the fair value of the liability can be reasonably estimated. FIN 47 is effective no later than the end of the fiscal year ending after December 15, 2005. Management does not believe the adoption of FIN 47 will have a material affect on the Company’s financial position, results of operations or cash flows.
 
 

 
- 28 -

 
ITEM 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There have been no changes in our accountants or disagreements with our accountants on accounting matters or financial disclosure.

ITEM 8A.  CONTROLS AND PROCEDURES

Evaluation of Controls. As of December 31, 2006, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures ("Disclosure Controls"). This evaluation (“Evaluation”) was performed by our Chairman and Chief Executive Officer, Mr. Yuying Zhang, who is the principal executive officer of our Company (known as “CEO”), and our Chief Financial Officer, Dan Liu, who is our principal financial officer (“CFO”). In addition, we have discussed these matters with our securities counsel. In this section, we present the conclusions of our CEO and CFO based on their Evaluation as of December 31, 2006, with respect to the effectiveness of our Disclosure Controls.

CEO and CFO Certifications. Attached to this annual report, as Exhibits 31.1 through 31.2, are certain certifications of the CEO and CFO, which are required in accordance with the Exchange Act and the Commission's rules implementing such section (the "Rule 13a-14(a)/15d-14(a) Certifications"). This section of the annual report contains the information concerning the Evaluation referred to in the Rule 13a-14(a)/15d-14(a) Certifications. This information should be read in conjunction with the Rule 13a-14(a)/15d-14(a) Certifications for a more complete understanding of the topic presented.

Disclosure Controls. When we refer to Disclosure Controls in this document, we mean controls and other procedures of our company that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

The Disclosure Controls to which we refer do not necessarily include internal controls over financial reporting, as defined by Exchange Act Rule 13a-15(f) and 15d-15(f). We have not yet conducted a separate evaluation of our internal controls over financial reporting, because we are not required by law to do so according to SEC Release no. 33-8760, until our first fiscal year ending after December 15, 2007. We intend to comply with such reporting and evaluation at that time and all times thereafter.

Limitations on the Effectiveness of Controls. Our management does not expect that our Disclosure Controls will prevent all error and all fraud. A control system, no matter how well developed and operated, can provide only reasonable, but not absolute, assurance that the objectives of the Disclosure Controls are met. Further, the design of the Disclosure Controls must reflect the fact that there are resource constraints, and the benefits of Disclosure Controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of Disclosure Controls can provide absolute assurance that all Disclosure Control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, Disclosure Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the Disclosure Controls. The design of a system of Disclosure Controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all potential future conditions. Over time, Disclosure Controls may become inadequate because of changes in conditions, or because the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective system of Disclosure Controls, misstatements due to error or fraud may occur and not be detected, or may be detected later than expected.

Scope of the Evaluation. The CEO and CFO's evaluation of our Disclosure Controls included a review of the controls' (i) objectives, (ii) design, (iii) implementation, and (iv) the effect of the controls on the information generated for use in this annual report. In the course of the Evaluation, the CEO and CFO sought to identify data errors, control problems, acts of fraud, and they sought to confirm that appropriate corrective action, including process improvements, was being undertaken. This type of evaluation is done on a quarterly basis so that the conclusions concerning the effectiveness of our Disclosure Controls can be reported in our quarterly reports on Form 10-QSB and annual reports on Form 10-KSB. The overall goals of these various evaluation activities are to monitor our Disclosure Controls, and to make modifications if and as necessary. Our intent in this regard is that the Disclosure Controls will be maintained as dynamic systems that change (including improvements and corrections) as conditions warrant.
 
Conclusions. Based upon the Evaluation, our CEO and CFO have concluded that, as of December 31, 2006, our Disclosure Controls are effective at that reasonable assurance level to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported to management, including the CEO and CFO, within the time periods specified in the Commission's rules and forms, and that our Disclosure Controls are effective at that assurance level to provide reasonable assurance that our financial statements are fairly presented in conformity with accounting principles generally accepted in the United States. Additionally, there has been no change in our Disclosure Controls that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to affect, our Disclosure Controls.


 
- 29 -

PART III

ITEM 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

The directors and executive officers currently serving the Company are as follows:

Name
  
Age
  
Position(s) Held
         
Yuying Zhang
  
56
  
Chairman & CEO
Dan Liu
  
34
  
Director & CFO
Weixing Yin
  
49
  
Director
Shuanpeng Tian
  
56
  
Director
Xiaoguang Zhang
  
57
  
Director
Lin Wen
  
27
  
Secretary

The directors named above will serve until the next annual meeting of the Company's stockholders. Thereafter, directors will be elected for one-year terms at the annual stockholders' meeting. Officers will hold their positions at the pleasure of the board of directors, absent any employment agreement, of which none currently exists or is contemplated. There is no arrangement or understanding between any of the directors or officers of the Company and any other person pursuant to which any director or officer was or is to be selected as a director or officer.

Yuying Zhang: Chairman and CEO of Shineco, Inc.; Chairman and CEO of Beijing Tenet-Jove Technological Development Co., Ltd.

Mr. Zhang has been the Chairman and CEO of Shineco since 2004; he also served as chairman and CEO of Tenet-Jove since 2003. From 1995 until 2003, he worked as a general manager of Tianjin Balas Technological Development Co., Ltd. Prior to that, he worked as the vice-superintendent of Xi’an Herbal Medicine Multi-Subject Academy. Mr. Zhang received a Bachelor Degree in Chinese Language and Literature from the China Central Radio and Television University. He also holds the title of senior economist.

Mr. Zhang has 20 years of experience operating high tech enterprises; he has successfully organized and led several large-scale medical technology corporations.  His experience extends to comprehensive management of R&D and production, promotion and marketing of medicines and health care products.

Dan Liu: Director & CFO of Shineco, Inc.; CFO of Beijing Tenet-Jove Technological Development Co., Ltd.

Ms. Liu, age 34, has been a director and CFO of Shineco and Tenet-Jove since 2006. Also, Ms Liu has been the Chief Financial Officer of Beijing Tenet-Jove Technological Development Co., Ltd. since December 2006. Her duties are to direct and oversee all financial activities of the company, including preparation of current financial reports, financial summaries, and forecasts for future business growth, as well as providing accurate and complete financial information for decision making. She is also in charge of financial work related to fund-raising and obtaining listing or quotation of the Company’s securities in the US securities markets. Ms. Liu has 12 years of experience in economics and financial affairs.

Prior to joining Shineco, Ms. Liu was CFO of Shenzhen Aerospace Information Co., Ltd., from August 2004 to December 2006. From September 2002 to July 2004, she was a full time student at China Renmin University studying for her Master’s degree in Financial Management. Prior to this, Ms. Liu served as Vice President at YantaLu Sub-Branch, Shaanxi Branch, Bank of China from May 2002 to September 2002. Ms. Liu also received her Bachelor’s degree in Economics from Shanghai Financial and Economic University. She is a Chinese Certified Public Accountant, Chinese Evaluator of Registered Capital, and holds the title of economist.

Weixing Yin: Director of Shineco, Inc.; Vice Chairman of Beijing Tenet-Jove Technological Development Co., Ltd.

Mr. Yin has been the Vice-President and Director of Shineco since 2004; he has also served as deputy chairman of Tenet-Jove from 2003 to present. As a principal investor in Tenet-Jove, Mr. Yin has devoted himself to corporate long-term strategy and development layout. He is in charge of business expansion and corporate public relations. Prior to joining Shineco and Tenet-Jove he was the general manager of Beijing Superstar Culture and Communication Company continuously since 1994.

Mr. Yin graduated from the Beijing University of Art with a Bachelor Degree in Chinese Literature.   He is a professional writer adept at media event planning and media public relations. Mr. Yin has successfully organized many large TV shows and programs in China, such as the first “China 3.15 Consumers Day Shows,” “China 21st Century Senior Round Table Conference,” and the “Great Yaluzangbu Canyon Scientific Excursion.”

 
- 30 -
 
 
Shuangpeng Tian: Director of Shineco, Inc.; Director of Beijing Tenet-Jove Technological Development Co., Ltd.

Mr. Shuangpeng Tian, age 56, has been the Vice Board Chairman of Beijing Tenet-Jove Technological Development Co., Ltd. since December 2003 and director of Tianjin Tenethealth Technological Development Co., Ltd. since July 2003. His responsibilities at Shineco include participating in corporate decision making as a member of the Board of Directors.  Concurrent with his positions with Shineco, Inc. and Beijing Tenet-Jove Technological Development Co., Ltd., Mr. Tian has also served as Vice Chairman of Tianjin Kinghealth Technological Development Co., Ltd. since December 2003.  From August 1994 to April 2006, he served as General Manager of Renqiu Electric Power Company Hebei Province. Mr. Tian received his Bachelor’s degree in Electronic Engineering from Xi'an JiaoTong University.

Xiaoguang Zhang: Director of Shineco, Inc.

Concurrent with his position at Shineco, Mr. Xiaoguang Zhang, age 57, has also served as President of Beijing ZhongMeiRongGuang Investment Consulting Co., Ltd. from November 2003 to present. From August 2000 to November 2003, Mr. Zhang was Vice President of Dongfang Haoyu Investment Group in charge of investment services. From April 1992 to August 2000, Mr. Zhang served as the Supervising Department Director of the Industrial and Commercial Bank of China.

Mr. Zhang has over 20 years of experience in dealing with securities and financing transactions. His responsibilities at Shineco are establishing current and long-range goals, objectives, plans and policies, overseeing the adequacy and soundness of the organization’s financial structure, and managing day-to-day business development of the Company.

Nicole Wei Li: Corporate Secretary of Shineco, Inc.

Ms. Nicole Wei Li, age 27, has been the Corporate Secretary of Shineco, Inc. since May 18, 2006. She has also served as Corporate Secretary of Beijing Tenet-Jove Technological Development Co., Ltd. since May 2006. Her responsibilities at Shineco include: assisting the board of directors in SEC and NASD compliance issues, maintaining corporate governance records, and facilitating board of directors or committee meetings. Further responsibilities include assisting with the design of the company's capital operations and fundraising activities; coordinating relationships between the board of directors, supervisory board, and executive officers; and coordinating legal support and consultations regarding corporate decision making.

Prior to joining Shineco, she served as the enterprise management department director of China Force Oil & Grains Industrial Holdings Co., Ltd. from July 2004 to May 2006, where she participated in and supervised Chinese enterprises' corporate finance projects on the Chinese mainland and overseas, and she also had responsibilities in investment and corporate finance management. Ms. Wei served as an investment department director of the National Development Bank from March 2002 to July 2004. Ms. Wei received her Bachelor’s and Master’s degrees from the University of International Business and Economics in Beijing, China.

Compliance with Section 16(a) of the Exchange Act

The above-named officers and directors of the Company were each required to file an Initial Statement of Beneficial Ownership of Securities on Form 3 at the time they acquired their ownership in the Company’s stock.

ITEM 10.   EXECUTIVE COMPENSATION

As of December 31, 2006, none of the Company’s executive officers or directors currently serving as such had annual compensation which exceeded US$100,000 in any of the last three fiscal years.

Directors of the Company do not receive any compensation. The Company has no stock option, retirement pension or profit-sharing program for the benefit of directors, officers, or other employees, but the Board may adopt one or more such programs in the future.

 
 
- 31 -
 
 
Compensation Discussion and Analysis

We maintain a peer-based executive compensation program comprised of fixed and performance variable elements.  The design and operation of the program reflect the following objectives:

-  
Recruiting and retaining talented leadership.
-  
Implementing measurable performance targets.
-  
Correlating compensation directly with shareowner value.
-  
Emphasizing performance based compensation, progressively weighted with seniority level.
-  
Adherence to high ethical, safety and leadership standards.

Designing a Competitive Compensation Package

Recruitment and retention of leadership to manage our Company requires a competitive compensation package. Our Board of Directors emphasizes (i) fixed compensation elements of base salary that compare with our compensation peer group of companies, and (ii) variable compensation contingent on above-target performance. The compensation peer group consists of those companies in the geographical region that we deem to compete with our Company for executive talent. Individual compensation will vary depending on factors such as performance, job scope, abilities, tenure and retention risk.

Fixed Compensation

The principal element of fixed compensation not directly linked to performance targets is based salary. We target the value of fixed compensation generally at the median of our compensation peer group to facilitate a competitive recruitment and retention strategy.

Incentive Compensation

Our incentive compensation programs are linked directly to earnings growth, cash flow, and total shareowner return. Annual bonuses are tied to the current year’s performance of our company.  Restrictive stock awards are tied to an individual’s success in exceeding targeted results set by management.

The following table provides summary information for each of the last three fiscal years concerning cash and non-cash compensation paid or accrued by our chief executive officer, our chief financial officer, and any other executive officers earning in excess of US$100,000 for the past three years.

 
Name of Officer
Year
  
Salary
  
Bonus
  
Stock Awards
  
Option Awards
  
Non-Equity Incentive Plan Compensation
  
Nonqualified Deferred Compensation
  
All Other Compensation
  
Total
                                   
Yuying Zhang,
Director and CEO
2006 
  
11,965
  
--
  
--
  
--
  
--
  
--
  
--
  
11,965
Yuying Zhang,
Director and CEO
2005 
  
11,600
  
--
      
--
  
--
  
--
  
--
  
11,600
Yuying Zhang,
Director and CEO
2004
  
11,600
  
--
      
--
  
--
  
--
  
--
  
11,600
Dan Liu,
Director and CFO
2006
  
7,833
  
--
  
--
  
 
  
 
  
--
  
-- 
  
7,833
Dan Liu,
Director and CFO
2005
  
-0-
          
 
  
--
  
--
  
-- 
  
-0-
Dan Liu,
Director and CFO
2004
  
-0-
  
 
      
--
  
--
  
--
  
-- 
  
-0-
 
 
- 32 -
 
 
Compensation of Directors

The Company does not have any agreement or policy to compensate members of the Board of Directors for their service. Board members typically meet on a monthly basis.
ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of the end of the Company’s most recent fiscal year, the number of shares of common stock owned of record, and beneficially by executive officers, directors and persons who hold 5% or more of the outstanding Common Stock of the Company. Also included are the shares held by all executive officers and directors as a group.

1.1  Name
  
1.2  Address
  
Number of Shares
  
1.3  Percentage
Yuying Zhang
  
Suite 1203, Dingxiang Garden of Wanke Xincheng, Xin Yibai Avenue,
Beichen District, Tianjin, China, PC: 300402
  
2,715,148
  
29.20%
Min Zhao
  
Suite 1203, Dingxiang Garden of Wanke Xincheng, Xin Yibai Avenue,
Beichen District, Tianjin, China, PC: 300402
  
1,810,099
  
19.47%
Shuangpeng Tian
  
Electric Power Bureau of Renqiu City,
Hebei Province, China, PC:062550
  
1,176,564
  
12.65%
Guocong Zhou
  
Suite 233, 5 Nongfengli, North Chaoyang Street,
Chaoyang District, Beijing, China, PC: 100020
  
1,176,564
  
12.65%
Weixing Yin
  
Suite 1704, Building 1, Modern City, 88 Jianguo Street, Chaoyang District, Beijing, China, PC: 100022
  
814,545
  
8.76%
Li Shi
  
Suite 401, Entrance 2, Building 26, Dinghuisi Dongli,
Haidian District, Beijing, China, PC: 100036
  
814,545
  
8.76%
Guiqing Liu
  
Suite 10, Entrance 7, 7 Fenzi Hutong,
Xicheng District, Beijing, China, PC: 100032
  
543,030
  
5.84%
All officers and directors as a group
(3 persons)
      
4,706,257
  
50.61%

ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

There have been no transactions within the last two fiscal years in which the Company was a party, in which any director, executive officer, nominee for executive officer, director, or any material security holder, holding more than 5% of the shares, or any member of the immediate family of any of those persons, have a direct or indirect material interest.

ITEM 13.   EXHIBITS AND REPORTS ON FORM 8-K

(a)   The Exhibits listed below are filed as part of this Annual Report.

Exhibit No.

31.1                      Certification Under Section 302 of the Sarbanes-Oxley Act of 2002

31.2                      Certification Under Section 302 of the Sarbanes-Oxley Act of 2002

32.1                      Certification Under Section 906 of the Sarbanes-Oxley Act of 2002

(b)   We filed reports on Form 8-K on January 6, 2006 and August 23, 2006.

 
 
 
ITEM 14. Principal Accountant Fees and Services

Audit Fees

Child, Van Wagoner & Bradshaw, PLLC provided audit services to us for our annual reports for the fiscal years ended December 31, 2006 and 2005.The aggregate fees billed by them for the 2006 audit of our annual financial statements and review of financial statements included in Form 10-QSBs was approximately $30,000 and $3,500, respectively.

Audit-Related Fees

There were no fees billed in 2006 for professional services that are reasonably related to the audit or review of our financial statement that are not covered in the Audit Fees disclosure above.

Tax Fees

There were no fees billed for the year 2006 for professional services rendered by our auditors for tax advice and planning.

All Other Fees

There were no fees billed for the year 2006 for professional services rendered by our auditors for all other services not disclosed above.
 
 
 
 
- 34 -

SIGNATURES

In accordance with the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: July 12, 2007

SHINECO, INC.


/s/ Yuying Zhang
By: Yuying Zhang
Chairman, CEO, and Principal Executive Officer

 
/s/ Dan Liu
By: Dan Liu
CFO and Principal Accounting Officer


In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


/s/ Yuying Zhang
By: Yuying Zhang,
Director, CEO and President


/s/ Dan Liu
By: Dan Liu,
Director, CFO


/s/ Weixing Yin
By: Weixing Yin,
Director


/s/ Shuangpeng Tian
By: Shuangpeng Tian,
Director


/s/ Xiaoguang Zhang
By: Xiaoguang Zhang,
Director


 
- 35 -