PINX:BEST Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x Quarterly report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2012

 

o Transition report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from _______ to _______.

 

001-33960

(Commission file number)

 

SHINER INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

Nevada 98-0507398
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
   

19/F, Didu Building, Pearl River Plaza,

No. 2 North Longkun Road

Haikou, Hainan Province

China 570125

(Address of principal executive offices)

 

011-86-898-68581104 (Issuer’s telephone number)

 

N/A

 (Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)

Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o Accelerated filer                   o
Non-accelerated filer   o Smaller reporting company  x
(Do not check if a smaller reporting company)  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

 

On August 14, 2012, 27,541,491 shares of the registrant's common stock were outstanding.

 

 
 

 

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION    
Item 1. Financial Statements   3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   23
Item 3. Quantitative and Qualitative Disclosures About Market Risk   31
Item 4. Controls and Procedures   31
PART II – OTHER INFORMATION    
Item 1. Legal Proceedings   31
Item 1A. Risk Factors   31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   32
Item 3. Defaults Upon Senior Securities   32
Item 4. Mine Safety Disclosures   32
Item 5. Other Information   32
Item 6. Exhibits   32

 

2
 

 

 

PART 1 - FINANCIAL INFORMATION

 

ITEM 1.  Financial Statements.

 

SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

 

   June 30,   December 31, 
   2012   2011 
   (unaudited)     
ASSETS          
           
CURRENT ASSETS:          
Cash & equivalents  $3,435,300   $2,831,808 
Restricted cash   214,645    57,613 
Accounts receivable, net of allowance for doubtful          
accounts of $216,097 and $121,017 at 2012 and 2011   7,518,337    7,744,377 
Advances to suppliers   12,123,083    10,042,214 
Notes receivable   23,760    7,865 
Inventory, net   12,601,434    10,252,955 
Prepaid expenses & other current assets   597,395    1,072,326 
           
Total current assets   36,513,954    32,009,158 
           
Property and equipment, net   35,287,561    27,836,253 
Construction in progress   4,868,557    12,037,154 
Advance for the purchase of equipment   786,082    763,427 
Intangible assets, net   2,966,848    3,063,646 
Goodwill   2,037,492    2,023,342 
TOTAL ASSETS  $82,460,494   $77,732,980 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
CURRENT LIABILITIES:          
Accounts payable  $3,227,289   $5,133,835 
Other payables   6,848,762    7,021,179 
Unearned revenue   1,759,492    1,313,320 
Accrued payroll   154,069    193,884 
Short-term loans   17,676,554    10,684,625 
           
Total current liabilities   29,666,166    24,346,843 
           
Long-term loans   11,088,000    9,957,090 
           
Total Liabilities   40,754,166    34,303,933 
           
Commitments and contingencies          
           
EQUITY:          
Shiner stockholders' equity:          
Common stock, par value $0.001; 75,000,000 shares authorized,          
27,603,336 shares issued and 27,541,491 shares outstanding   27,603    27,603 
Additional paid-in capital   14,334,424    14,332,392 
Treasury stock (61,845 shares)   (58,036)   (58,036)
Other comprehensive income   5,721,604    5,426,393 
Statutory reserve   3,301,528    3,523,273 
Retained earnings   16,731,553    18,478,618 
Total Shiner stockholders' equity   40,058,676    41,730,243 
Noncontrolling interest   1,647,652    1,698,804 
Total equity   41,706,328    43,429,047 
           
TOTAL LIABILITIES AND EQUITY  $82,460,494   $77,732,980 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3
 

 

SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)
(unaudited)

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2012   2011   2012   2011 
                 
                 
Net Revenue  $16,401,485   $17,867,227   $33,771,509   $33,774,072 
Cost of goods sold   15,913,476    15,347,733    31,112,559    28,887,471 
Gross profit   488,009    2,519,494    2,658,950    4,886,601 
                     
Operating expenses                    
Selling   577,500    548,952    1,232,031    993,628 
General and administrative   1,386,968    666,360    3,033,445    1,383,399 
Total operating expenses   1,964,468    1,215,312    4,265,476    2,377,027 
                     
Income (loss) from operations   (1,476,459)   1,304,182    (1,606,526)   2,509,574 
                     
Non-operating income (expense):                    
Other income, net   294,712    (122,778)   193,529    71,833 
Interest income   9,565    2,191    18,394    8,464 
Interest expense   (323,196)   (271,329)   (611,865)   (414,280)
Exchange (loss)   (3,775)   116,508    (9,648)   60,713 
Total non-operating income (expense)   (22,694)   (275,408)   (409,590)   (273,270)
                     
Income (loss) before income tax   (1,499,153)   1,028,774    (2,016,116)   2,236,304 
                     
Income tax expense (benefit)   (63,222)   222,402    15,721    433,238 
                     
Net income (loss)   (1,435,931)   806,372    (2,031,837)   1,803,066 
                     
Net loss attributed to noncontrolling interest   (21,641)   7,001    (63,027)   (1,309)
                     
Net income (loss) attributed to Shiner  $(1,414,290)  $799,371   $(1,968,810)  $1,804,375 
                     
Comprehensive income (loss)                    
Net income (loss)  $(1,435,931)  $806,372   $(2,031,837)  $1,803,066 
Foreign currency translation gain   28,762    476,031    307,086    702,545 
                     
Comprehensive income (loss)  $(1,407,169)  $1,282,403   $(1,724,751)  $2,505,611 
                     
Weighted average shares outstanding :                    
Basic   27,541,491    27,541,491    27,541,491    27,541,491 
Diluted   27,541,491    27,541,491    27,541,491    27,541,491 
                     
Earnings (loss) per share attributed to Shiner common stockholders                    
Basic  $(0.05)  $0.03   $(0.07)  $0.07 
Diluted  $(0.05)  $0.03   $(0.07)  $0.07 

 

 

 The accompanying notes are an integral part of these consolidated financial statements.

 

4
 

 

SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Six Months Ended June 30, 
   2012   2011 
           
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income (loss)  $(2,031,837)  $1,803,066 
Adjustments to reconcile net income (loss) to net cash          
used in operating activities:          
Depreciation   1,654,126    1,151,187 
Amortization   118,214    46,606 
Stock compensation expense   2,032    1,390 
Change in working capital components:          
Accounts receivable   280,177    2,967,525 
Inventory   (2,276,621)   (2,353,513)
Advances to suppliers   (2,010,504)   (5,942,213)
Other assets   475,505    165,556 
VAT receivable   -    (1,547,708)
Accounts payable and accrued expenses   (1,942,069)   (186,329)
Unearned revenue   439,576    1,433,840 
Other payables   (219,453)   1,409,669 
Accrued payroll   (41,167)   2,460 
           
Net cash used in operating activities   (5,552,021)   (1,048,464)
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchase of Shimmer Sun Ltd   -    (1,300,000)
Cash acquired in acquisition of Shimmer Sun Ltd   -    248,742 
Issuance of notes receivable   (23,764)   - 
Payment on note receivable   7,925    25,684 
Payments for property and equipment   (1,675,316)   (8,830,790)
Payments for construction in progress   -    (4,002,547)
Increase in restricted cash   (156,619)   - 
           
Net cash used in investing activities   (1,847,774)   (13,858,911)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Repayment of short-term loans   (11,655,944)   (6,880,500)
Proceeds from short-term loans   18,572,677    7,645,000 
Proceeds from long-term loans   1,061,206    9,036,390 
           
Net cash provided by financing activities   7,977,939    9,800,890 
           
Effect of exchange rate changes on cash and cash equivalents   25,348    14,533 
           
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS   603,492    (5,091,952)
           
CASH AND EQUIVALENTS, BEGINNING BALANCE   2,831,808    8,622,035 
           
CASH AND EQUIVALENTS, ENDING BALANCE  $3,435,300   $3,530,083 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          
Interest paid  $546,020   $397,998 
Income taxes paid  $7,608   $439,962 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5
 

  

SHINER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012 AND 2011(unaudited)

 

 

 Note 1 - Organization and Basis of Presentation

 

The unaudited consolidated financial statements were prepared by Shiner International, Inc., a Nevada corporation (the “Company” or “Shiner”), pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”). The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) were omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K. The results for the six months ended June 30, 2012, are not necessarily indicative of the results to be expected for the year ending December 31, 2012.

 

Organization and Line of Business

 

“Shiner” was incorporated in the State of Nevada on November 12, 2003. The Company, through its subsidiaries manufactures Biaxially Oriented Polypropylene (“BOPP”) tobacco film, coated films, color printing products, advanced film, and water based coatings selling to customers throughout China, Asia, Australia, Europe, the Middle East and North America. Our products are sold to companies in these industries: food, tobacco, chemical, agribusiness, medical, pharmaceutical, personal care, electronics, automotive, construction, graphics, music and video publishing and other consumer goods. 

 

Except as otherwise indicated by the context, all references in this report to “Shiner,” “Company,” “we,” “us” or “our” are to Shiner and its direct and indirect subsidiaries: (i) Hainan Shiner Industrial Co., Ltd., or “Hainan Shiner,” (ii) Hainan Shiny-Day Color Printing Packaging Co., Ltd., or “Shiny-Day,” (iii) Hainan Modern Hi-Tech Industrial Co., Ltd., or “Hainan Modern,” (iv) Zhuhai Modern Huanuo Packaging Material Co., Ltd., or “Zhuhai Modern,” (v) Shanghai Juneng Functional Film Company, Ltd., or “Shanghai Juneng,” (vi) Shimmer Sun Ltd., or “Shimmer Sun,” (vii) Hainan Jingyue New Material Co., Ltd ., or “Jingyue,” (viii) Hainan Shunhao New Material Co., Ltd., or “Shunhao,” (viii) Hainan Yongxin Environmental Co., Ltd., or “Yongxin,” and (ix) Ningbo Neisuoer Latex Co., Ltd., or "Ningbo".

 

Basis of Presentation

 

The accompanying consolidated financial statements include the accounts of Shiner and its subsidiaries as follows:

 

 Subsidiary   Place Incorporated   Percentage Owned    Parent
             
Shiner International, Inc.   Nevada, USA       None
Hainan Shiner   China   100%   Shiner International, Inc.
Shiny-Day   China   100%   Shiner International, Inc.
Hainan Modern   China   100%   Shiny Day
Zhuhai Modern   China   100%   Shiny Day
Shanghai Junneng   China   70%   Shiner International, Inc.
Shimmer Sun   China   100%   Shiner International, Inc.
Jingyue   China   100%   Shimmer Sun Ltd.
Shunhao   China   100%   Jingyue
Yongxin   China   100%   Shunhao
Ningbo   China   65%   Yongxin

 

6
 

 

 

The accompanying consolidated financial statements were prepared in conformity with US GAAP. The Company’s functional currency is the Chinese Yuan Renminbi (“RMB”); however, the accompanying consolidated financial statements were translated and presented in United States Dollars (“$” or “USD”).

 

Noncontrolling Interest

 

On September 20, 2010, the Company commenced operations of a majority-owned subsidiary, Shanghai Juneng Functional Film Company, Ltd. (“Shanghai Juneng”), with Shanghai Shifu Film Material, Co., Ltd., (‘Shanghai Shifu”).  Under the terms of the agreement, Shiner owns 70% of Shanghai Juneng, and Shanghai Shifu owns 30%. The general manager of Shanghai Juneng reports directly to Shiner’s Chief Executive Officer.  Shanghai Juneng pursues sales opportunities among China’s leading food producers in the Yangtze River Delta, one of China’s largest economic centers. 

 

On May 2, 2011, Shiner acquired 100% of the stock of Shimmer Sun Ltd. ("Shimmer") for $3.2 million. The Company paid $1.3 million in cash and the remaining $1.9 million was recorded as “other payables’ which was paid by September 30, 2011. The acquisition gave Shiner a 65% controlling interest in Shimmer's subsidiary, Ningbo Neisuoer Latex Co., Ltd. ("Ningbo"). The transaction was accounted for under the acquisition method of accounting, with the purchase price allocated based on the fair value of the individual assets acquired and liabilities assumed.

 

The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, “Consolidation,” which governs the accounting for and reporting of noncontrolling interests (“NCIs”) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs be treated as a separate component of equity, not as a liability, that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions rather than as step acquisitions or dilution gains or losses, and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. This standard also required changes to certain presentation and disclosure requirements.

 

The net income (loss) attributed to the NCI was separately designated in the accompanying statements of operations and other comprehensive income. Losses attributable to the NCI in a subsidiary may exceed the NCI’s interests in the subsidiary’s equity. The excess attributable to the NCI is attributed to those interests. The NCI shall continue to be attributed its share of losses even if that attribution results in a deficit NCI balance.

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of Shiner International, Inc. and its subsidiaries. All significant intercompany transactions and balances were eliminated in consolidation.

 

Foreign Currency Translation

 

The accounts of the Company’s Chinese subsidiaries are maintained in the RMB and the accounts of the U.S. parent company are maintained in the USD. The accounts of the Chinese subsidiaries are translated into USD in accordance with ASC Topic 830 “Foreign Currency Matters,” with the RMB as the functional currency for the Chinese subsidiaries. According to Topic 830, all assets and liabilities are translated at the exchange rate on the balance sheet date, stockholders’ equity is translated at historical rates and statement of operations items are translated at the weighted average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with ASC Topic 220, “Comprehensive Income.” Gains and losses resulting from the translations of foreign currency transactions and balances are reflected in the statement of operations.

 

Note 2 - Summary of Significant Accounting Policies

 

Use of Estimates

 

7
 

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Cash and Equivalents

 

Cash and equivalents include cash in hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.

 

Restricted Cash

 

Restricted cash consists of monies restricted by the Company’s lender related to its outstanding debt obligations.

 

Accounts Receivable

 

The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis.

 

Advances to Suppliers

 

To insure a steady supply of raw materials, the Company is required from time to time to make cash advances when placing its purchase orders. Management determined that no reserve was necessary for advances to suppliers. The advances to suppliers are interest free and unsecured.

 

Inventory

 

Inventory is valued at the lower of the inventory’s cost (weighted average basis) or the current market price of the inventory. Management compares the cost of inventory with its market value and an allowance is made to write down inventory to market value, if lower.

 

Notes Receivable

 

Notes receivable consist of bank notes received from customers as payment of their accounts receivable balance. The notes are guaranteed by a bank and bear no interest. The notes are generally due within six months from the date of issuance.

 

Property and Equipment

 

Property and equipment are stated at cost. Expenditures for maintenance and repairs are expenses as incurred; additions, renewals and improvements are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives as follows:

 

Operating equipment     10 years  
Vehicles     8 years  
Office equipment     5 years  
Buildings and improvements     20 years  

 

The following are the details regarding the Company’s property and equipment at June 30, 2012 and December 31, 2011:

 

8
 

 

   June 30,   December 31, 
   2012   2011 
       (audited) 
Operating equipment  $29,935,161   $14,028,345 
Vehicles   695,286    801,057 
Office equipment   317,947    250,809 
Buildings   12,175,805    18,912,102 
Building and equipment improvements   559,410    538,930 
    43,683,609    34,531,243 
Less accumulated depreciation   (8,396,048)   (6,694,990)
   $35,287,561   $27,836,253 

 

Construction in Progress and Government Grants

 

Construction in progress mainly consists of amounts expended to build a manufacturing workshop in Hainan and a product line for a BOPP tobacco line. The costs incurred and capitalized as construction in progress at June 30, 2012 and December 31, 2011 are $4.9 million and $12.0 million, respectively, which includes the facility and the equipment. Once the project is completed, the project will be transferred from “Construction in progress” to “Property and equipment. The first phase of the project was completed during 2010. The total cost of the new Hainan manufacturing workshop and the BOPP tobacco line is expected to be $25.1 million. In October 2009, the Company received a government grant for this project of RMB29.1 million (or $4.3 million based on the exchange rate at December 31, 2009) from the Hainan Province Finance Bureau (“HPFB”). The Company is required to provide detailed expenses of the construction project to the HPFB. At the end of the project, the government will determine if the funds were used in accordance with the grant. At June 30, 2012 and December 31, 2011, respectively, the RMB 29.1 million (or $4.5 million based on the exchange rate at June 30, 2012) government grant was recorded in “Other payables” on the accompanying consolidated financial statements. If the government determines the funds were used for their intended purpose, the amount of the government grant is then amortized into other income over the useful life of the asset on the same basis used to depreciate the asset.

 

In December 2011, the Company received a government grant of RMB 14 million (or $2.2 million based on the exchange rate of $0.1584 as of June 30, 2012) from the Haikou Finance Bureau (“HFB”) for the adjustment and expansion of our operation and related capital expenditures for construction and equipment purchase. The Company is required to provide detailed expenses of the construction project to HFB. At the end of the project, the government will determine if the funds were used in accordance with the grant. At June 30, 2012 and December 31, 2011, respectively, the grant was recorded in “Other payables” on the accompanying consolidated financial statements. If the government determines the funds were used for their intended purpose, the amount of the government grant is then amortized into other income over the useful life of the asset on the same basis being used to depreciate the asset.

 

In Jan 2012, the Company received a government grant of RMB 1.8 million (or $0.3 million based on the exchange rate of $0.1584 as of June 30, 2012) from the HFB for the adjustment and expansion of our operation and related capital expenditures for construction and equipment purchase. The Company is required to provide detailed expenses of the construction project to the HFB. At the end of the project, the government will determine if the funds were used in accordance with the grant. At June 30, 2012, the grant was recorded in “Other payables” on the accompanying consolidated financial statements. If the government determines the funds were used for their intended purpose, the amount of the government grant is then amortized into other income over the useful life of the asset on the same basis being used to depreciate the asset.

 

Long-Lived Assets

 

 The Company applies ASC Topic 360, “Property, Plant, and Equipment,” which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. ASC 360 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair values are reduced to recognize the cost of disposal. Based on its review, the Company believes that as of June 30, 2012 and December 31, 2011, respectively, there was no significant impairment of its long-lived assets.

 

9
 

 

 

Intangible Assets

 

Intangible assets consist of rights to use three plots of land in Haikou City granted by the Municipal Administration of China for state-owned land. For two of these plots, the Company’s rights run through January 2059 and, for the third plot, the Company’s rights run through October 2060. The Company also acquired a patent with the acquisition of Shimmer that is being amortized over 10 years. The Company evaluates intangible assets for impairment, at least on an annual basis and whenever events or changes in circumstances indicate the carrying value may not be recoverable from its estimated future cash flows. Recoverability of intangible and other long-lived assets is measured by comparing their net book value to the related projected undiscounted cash flows from these assets, considering a number of factors including past operating results, budgets, economic projections, market trends and product development cycles. If the net book value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired, and a second test is performed to measure the amount of impairment loss.

 

Goodwill

 

Goodwill represents the excess of purchase price over the underlying net assets of businesses acquired. Under accounting requirements, goodwill is not amortized but is subject to annual impairment tests. The impairment testing is based on the fair value of the reporting units, which is estimated based on a discounted cash flow valuation model and the projected future cash flows of the underlying businesses. As of December 31, 2011 the Company performed the required impairment review which resulted in no impairment adjustments.

 

Summary of changes in goodwill by reporting segments is as follows:

 

   Water-based     
   latex   Total 
           
 Balance, December 31, 2011  $2,023,342   $2,023,342 
 Foreign currency adjustment   14,150    14,150 
 Balance, June 30, 2012  $2,037,492   $2,037,492 

 

Fair Value of Financial Instruments

 

For certain of the Company’s financial instruments, including cash and equivalents, restricted cash, accounts receivable, advances to suppliers, accounts payable, accrued liabilities and short-term debt, the carrying amounts approximate their fair values due to their short maturities. In addition, the Company has long-term debt with financial institutions. The carrying amounts of the line of credit and other long-term liabilities approximate their fair values based on current rates of interest for instruments with similar characteristics.

 

ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value (“FV”) of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines FV, and establishes a three-level valuation hierarchy for disclosures of FV measurement that enhances disclosure requirements for FV measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:

 

·Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.

 

 

10
 

 

·Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in inactive markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

·Level 3 inputs to the valuation methodology us one or more unobservable inputs which are significant to the FV measurement.

 

The Company analyzes all financial instruments with features of both liabilities and equity under ASC Topic 480, “Distinguishing Liabilities from Equity,” and ASC Topic 815, “Derivatives and Hedging.”

 

As of June 30, 2012 and December 31, 2011, respectively, the Company did not identify any assets and liabilities required to be presented on the balance sheet at FV.

 

Revenue Recognition

 

The Company’s revenue recognition policies comply with FASB ASC Topic 605. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.

 

Sales revenue consists of the invoiced value of goods, which is net of value-added tax (“VAT”). All of the Company’s products sold in the People’s Republic of China (“PRC”) are subject to Chinese VAT of 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing their end product. The Company recorded VAT payable and VAT receivable net of payments in the financial statements. The VAT tax return is filed offsetting the payables against the receivables.

 

Sales and purchases are recorded net of VAT collected and paid. VAT taxes are not affected by the income tax holiday.

 

Sales returns and allowances was $0 for the six months ended June 30, 2012 and 2011. The Company does not provide unconditional right of return, price protection or any other concessions to its dealers or other customers.

 

Other Income

 

The Company recognizes other income in the period the Company has earned the revenue and collectability is reasonably assured. Other income in 2011 consists primarily of subsidy income which is received from Chinese Government Agencies for developing technology and research and development. The Company must manage the funds according to government requirements. The Company recognizes the revenue over the contract period.

 

Advertising Costs

 

The Company expenses the cost of advertising as incurred or, as appropriate, the first time the advertising takes place. Advertising costs for the three and six months ended June 30, 2012 and 2011, were not significant.

 

Research and Development

 

The Company expenses its research and development (“R&D”) costs as incurred. R&D costs included in general and administrative expenses for the three and six months ended June 30, 2012 were $649,976 and $1,336,942, respectively, and $306,738 and $463,818 for the three and six months ended June 30, 2011 respectively.

 

Stock-Based Compensation

 

The Company records stock-based compensation in accordance with ASC Topic 718, “Compensation – Stock Compensation.” ASC Topic 718 requires companies to measure compensation cost for stock-based employee compensation at FV at the grant date and recognize the expense over the employee’s requisite service period. The Company recognizes in the statement of operations the grant-date FV of stock options and other equity-based compensation issued to employees and non-employees. There were 90,000 options outstanding as of June 30, 2012.

11
 

 

Income Taxes

 

The Company accounts for income taxes in accordance with ASC Topic 740, “Income Taxes.” ASC 740 requires a company to use the asset and liability method of accounting for income taxes, whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all of, the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

Under ASC 740, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is more than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

 

Basic and Diluted Earnings Per Share

 

Earnings per share is calculated in accordance with the ASC Topic 260, “Earnings Per Share.” Basic earnings per share (“EPS”) is based upon the weighted average number of common shares outstanding. Diluted EPS is based on the assumption that all dilutive convertible shares and stock warrants were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. There were 90,000 options and 521,664 warrants outstanding as of June 30, 2012 with weighted-average exercise prices of $0.95 and $1.70, respectively. All options and warrants were excluded from the diluted loss per share for the six months ended June 30, 2012 due to the anti-diluted effect. The following is a reconciliation of the number of shares (denominator) used in the basic and diluted EPS computations for three and six months ended June 30, 2012 and 2011:

 

   Three Months Ended June 30, 
   2012   2011 
       Per Share       Per Share 
   Shares   Amount   Shares   Amount 
Basic earnings (loss) per share   27,541,491   $(0.05)   27,541,491   $0.03 
Effect of dilutive stock options                    
and warrants   -    -    -    - 
Diluted earnings(loss) per share   27,541,491   $(0.05)   27,541,491   $0.03 

 

   Six Months Ended June 30, 
   2012   2011 
       Per Share       Per Share 
   Shares   Amount   Shares   Amount 
Basic earnings (loss) per share   27,541,491   $(0.07)   27,541,491   $0.07 
Effect of dilutive stock options                    
and warrants   -    -    -    - 
Diluted earnings (loss) per share   27,541,491   $(0.07)   27,541,491   $0.07 

 

12
 

Foreign Currency Translation

 

The accounts of the Company’s Chinese subsidiaries are maintained in RMB and the accounts of the U.S. parent company are maintained in USD. The accounts of the Chinese subsidiaries were translated into USD in accordance with ASC Topic 830, “Foreign Currency Matters,” with the RMB as the functional currency for the Chinese subsidiaries. According to ASC Topic 830, all assets and liabilities were translated at the exchange rate on the balance sheet date, stockholders’ equity is translated at historical rates and statement of operations items are translated at the weighted average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with ASC Topic 220, “Comprehensive Income.” Gains and losses resulting from the translations of foreign currency transactions and balances are reflected in the statement of operations.

 

Foreign Currency Transactions and Comprehensive Income

 

US GAAP generally requires recognized revenue, expenses, gains and losses be included in net income. Certain statements, however, require entities to report specific changes in assets and liabilities, such as gain or loss on foreign currency translation, as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. The functional currency of the Company’s Chinese subsidiaries is the RMB. Translation gains of $5,721,604 and $5,426,393 at June 30, 2012 and December 31, 2011, respectively, are classified as an item of other comprehensive income in the stockholders’ equity section of the consolidated balance sheets.

 

Statement of Cash Flows

 

In accordance with ASC Topic 230, “Statement of Cash Flows,” cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rates. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.

 

Segment Reporting

 

ASC Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. The Company has determined it has five reportable segments. See Note 14.

 

Dividends

 

The Company's Chinese subsidiaries have restrictions on the payment of dividends to the Company. China has currency and capital transfer regulations that may require the Company's Chinese subsidiaries to comply with complex regulations for the movement of capital. These regulations include a public notice issued in October 2005 by the State Administration of Foreign Exchange (“SAFE”) requiring PRC residents, including both legal persons and natural persons, to register with the competent local SAFE branch before establishing or controlling any company outside of China.  Although the Company believes its Chinese subsidiaries are in compliance with these regulations, should these regulations or the interpretation of them by courts or regulatory agencies change, the Company may not be able to pay dividends outside of China.

 

Recent Accounting Pronouncements

 

In May 2011, the FASB issued ASU 2011-04 to provide a consistent definition of FV and ensure that the FV measurement and disclosure requirements are similar between US GAAP and IFRS. ASU 2011-04 changes certain FV measurement principles and enhances the disclosure requirements particularly for Level 3 FV measurements.  This guidance was effective for the Company on January 1, 2012.  The adoption of ASU 2011-04 did not have a significant impact the Company’s consolidated financial statements.

 

13
 

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income. ASU 2011-05 revises the manner in which entities present comprehensive income in their financial statements. The new guidance removes the presentation options in Accounting Standards Codification (ASC) 220, Comprehensive Income, and requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The new guidance does not change the items that must be reported in other comprehensive income. In December 2011, the FASB issued ASU 2011-12 which defers the requirement in ASU 2011-05 that companies present reclassification adjustments for each component of accumulated other comprehensive income in both net income and other comprehensive income on the face of the financial statements. ASU 2011-05 is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2011, with early adoption permitted. The adoption of ASU 2011-05, as amended by ASU 2011-12, did not have a significant impact the Company’s consolidated financial statements.

 

In September 2011, the FASB issued ASU 2011-08 which provides an entity the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test for goodwill impairment.  If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the FV of a reporting unit is less than its carrying amount, the quantitative impairment test is required.  Otherwise, no further testing is required. The revised standard is effective for the Company for its annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  The adoption of ASU 2011-08 did not significantly impact the Company’s consolidated financial statements.

 

In July 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment.  The ASU provides entities with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired.  If an entity concludes that it is more than 50% likely that an indefinite-lived intangible asset is not impaired, no further analysis is required.  However, if an entity concludes otherwise, it would be required to determine the FV of the indefinite-lived intangible asset to measure the amount of actual impairment, if any, as currently required under US GAAP. The ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.  Early adoption is permitted. The adoption of this pronouncement will not have a material impact on its financial statements.

 

Note 3 - Inventory

 

Inventory at June 30, 2012 and December 31, 2011(audited), respectively, consisted of the following:

 

   June 30,   December 31, 
   2012   2011 
       (audited) 
Raw Material  $6,541,109   $4,093,316 
Work in process   794,110    1,724,754 
Finished goods   5,816,217    4,781,927 
    13,151,436    10,599,997 
Less: Obsolescence reserve   (550,002)   (347,042)
   $12,601,434   $10,252,955 

 

Note 4 - Intangible Assets

 

Intangible assets at June 30, 2012 and December 31, 2011(audited), respectively, consisted of the following:

 

   June 30,   December 31, 
   2012   2011 
       (audited) 
Patent  $2,135,175   $2,120,348 
Right to use land   1,161,500    1,153,434 
Less: Accumulated amortization   (329,827)   (210,136)
Intangible assets, net  $2,966,848   $3,063,646 

 

 

14
 

 

Pursuant to the regulations, the PRC government owns all land. The Company has recognized the amounts paid for the acquisition of rights to use land as an intangible asset and amortizing such rights over the period the Company has use of the land, which range from 54 to 57 years.

 

Note 5 – Other Payables

 

Other payables at June 30, 2012 and December 31, 2011(audited), respectively, consisted of the following:

 

   June 30,   December 31, 
   2012   2011 
       (audited) 
Special purpose fund for Shi Zi Ling workshop  $4,455,792   $4,577,430 
Special purpose fund for structure and equipment   2,143,680    2,202,200 
Miscellaneous payables   249,290    241,549 
   $6,848,762   $7,021,179 

 

The $4,455,792 and $2,143,680 payables at June 30, 2012 are liabilities recorded pursuant to the funds received as part of government grants. See “Construction in Progress and Government Grants in Note 2.

 

Note 6 - Debt

 

Short-term loans at June 30, 2012 and December 31, 2011(audited), respectively, consisted of the following:

 

   June 30,   December 31, 
   2012   2011 
       (audited) 
From February 28, 2011 to February 28, 2012, with interest of 6.06% at December 31, 2011, collateralized by equipment  $-   $4,247,100 
           
From March 16, 2012 to February 18, 2013, with interest of 8.53% at June 30, 2012, collateralized by equipment   1,584,000    - 
           
From June 19, 2012 to June 19, 2013, with interest of 8.20% at June 30, 2012, collateralized by equipment   2,376,000    - 
           
From June 8, 2012 to June 7, 2013, with interest of 7.26% at June 30, 2012, collateralized by equipment   4,276,800    - 
           
From June 30, 2011 to June 30, 2012, with interest of 8.203% at June 30, 2012, collateralized by buildings and equipment   1,584,000    1,573,000 
           
Various short-term loans payable to bank, with interest from 3.21% to 6.41%, due through September 28, 2012 and collateralized by accounts receivable.   1,666,938    2,795,039 
           
Various bank acceptance bills, payable on various dates through December 15, 2012.   3,521,411    2,069,486 
           
From May 30, 2012 to August 30, 2012, with interest of 8.1% at June 30, 2012,collateralized by a letter of credit   2,667,405    - 
           
   $17,676,554   $10,684,625 

15
 

 

 

Long-term loans at June 30, 2012 and December 31, 2011, respectively, consisted of the following:

 

   June 30,   December 31, 
   2012   2011 
       (audited) 
From January 24, 2011 to January 24, 2018, with interest of 6.60%, collateralized by buildings and land use rights  $2,534,400   $2,516,800 
           
From February 10, 2011 to February 10, 2018, with interest of 6.60%, collateralized by buildings and land use rights   2,851,200    2,831,400 
           
From February 16, 2011 to February 16, 2018, with interest of 6.60%, collateralized by buildings and land use rights   2,296,800    2,280,850 
           
From February 17, 2011 to February 17, 2018, with interest of 6.60%, collateralized by buildings and land use rights   1,251,360    1,242,670 
           
From March 25, 2011 to March 25, 2018, with interest of 6.60%, collateralized by buildings and land use rights   427,680    424,710 
           
From November 30, 2011 to November 30, 2018, with interest of 6.60%, collateralized by buildings and land use rights   158,400    157,300 
           
From December 23, 2011 to December 23, 2018, with interest of 6.60%, collateralized by buildings and land use rights   506,880    503,360 
           
From March 19, 2012 to January 18, 2018, with interest of 6.60% collateralized by buildings and land use rights   1,061,280    - 
           
   $11,088,000   $9,957,090 

 

On August 2, 2010, Hainan Shiner Industrial Co., Ltd. (“Hainan Shiner”), the Company’s wholly owned subsidiary, entered into a credit facility with the Hainan Branch of the Bank of China.  The credit facility is a secured revolving credit facility in an aggregate of RMB 70 million (or approximately $11.1 million based on the exchange rate on December 31, 2010) for a term of seven years.  Under the credit facility arrangement, Hainan Shiner is permitted to only use the loan proceeds to improve the technology of its BOPP film and to purchase certain equipment necessary for the improvement.  Proceeds under the facility not used for these purposes would be subject to a misappropriation penalty interest rate that is 100% of the current interest rate on the loan.

 

The initial interest rate on each withdrawal from the facility will be the 5-year benchmark lending rate announced by the People’s Bank of China on the date of such withdrawal, and is subject to adjustment every 12 months based upon the benchmark.  Additional interest will be paid on an overdue loan under this credit facility of 50% of the current interest rate on the loan. Hainan Shiner and certain of its affiliates, including the Company, have provided guarantees and certain land, buildings, and property as collateral under this facility.

 

16
 

 

 

The credit facility includes financial covenants that prohibit Hainan Shiner from making distributions to the Company, its sole shareholder, if (a) its after-tax net income for the fiscal year is zero or negative, (b) its after-tax net income is insufficient to make up its accumulated loss for the last several fiscal years, (c) its income before tax is not utilized in paying off the capital, interest and expense of the lender, or (d) its income before tax is insufficient to pay the capital, interest and expense of the lender.

 

As of June 30, 2012, the Company drew down the entire RMB70 million credit facility.

 

Note 7 - Stock Options and Warrants

 

Stock Options

 

The following is a summary of the Company’s stock option activity for the six months ended June 30, 2012:

 

       Weighted     
       Average   Aggregate 
   Options   Exercise Price   Intrinsic 
   Outstanding   Price   Value 
Outstanding at December 31, 2011   120,000    1.03      
Granted   -    -      
Canceled/Expired   (30,000)   1.25      
Exercised   -    1.25      
Outstanding at June 30, 2012   90,000   $0.95   $- 
Exercisable at June 30, 2012   70,000   $0.99   $- 

 

The number and weighted average exercise prices of all options outstanding as of June 30, 2012, are as follows:

 

Options Outstanding 
            Weighted 
        Weighted   Average 
    Number   Average   Remaining 
Range of   Outstanding   Exercise   Contractual Life 
Exercise Price   June 30, 2012   Price   (Years) 
                  
$0.80    60,000   $0.80    4.44 
 1.25    30,000   $1.25    1.93 
      90,000           

 

The number and weighted average exercise prices of all options exercisable as of June 30, 2012, are as follows:

 

Options Exercisable 
            Weighted 
        Weighted   Average 
    Number   Average   Remaining 
Range of   Outstanding   Exercise   Contractual Life 
Exercise Price   June 30, 2012   Price   (Years) 
                  
$0.80    40,000   $0.80    4.44 
 1.25    30,000   $1.25    1.93 
      70,000           

17
 

 

Warrants

 

The following is a summary of the Company’s warrant activity for the six months ended June 30, 2012:

 

           Weighted 
       Weighted   Average 
       Average   Remaining 
   Warrants   Exercise Price   Contractual Life 
   Outstanding   Price   (Years) 
Outstanding at December 31, 2011   521,664    1.70      
Granted   -    -      
Canceled   -    -      
Exercised   -    -      
Outstanding at June 30, 2012   521,664   $1.70    0.74 
Exercisable at June 30, 2012   521,664   $1.70    0.74 

 

Note 8 - Employee Welfare Plans

 

The expense for employee common welfare was $40,302 and $$42,805 for the three and six months ended June 30, 2012, respectively, and $33,571 and $96,700 for the three and six months ended June 30, 2011, respectively.  

 

Note 9 - Statutory Common Welfare Fund

 

As stipulated by the Company Law of the PRC, net income after taxation can only be distributed as dividends after appropriation has been made for the following:

 

i.Making up cumulative prior years’ losses, if any;

 

ii.Allocations to the “statutory surplus reserve” of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the reserve reaches 50% of the Company’s registered capital;

 

iii.Allocations of 5% to 10% of income after tax, as determined under PRC accounting rules and regulations, to the Company’s “statutory common welfare fund,” which is established for the purpose of providing employee facilities and other collective benefits to the Company’s employees; and

 

iv.Allocations to the discretionary surplus reserve, if approved in the stockholders’ general meeting.

 

The Company appropriated $0 and $239,292 as reserve for the statutory surplus reserve and statutory common welfare fund for the six months ended June 30, 2012 and 2011, respectively.

 

Note 10 - Current Vulnerability Due to Certain Concentrations

 

Two customers accounted for 5% and 4%, respectively, of the Company’s sales for the six months ended June 30, 2012.

 

Two customers accounted for 7% and 5%, respectively of the Company’s sales for the six months ended June 30, 2011.

 

One vendor provided 17% of the Company’s raw materials for the six months ended June 30, 2012, and one vendor provided 20% of the Company’s raw materials for the six months ended June 30, 2011.

 

18
 

 

 

The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC and by the general state of the PRC’s economy. The Company’s business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

 

Note 11 – Commitments and Contingencies

 

At June 30, 2012, the Company is contingently liable to banks for discounted notes receivable and to vendors for endorsed notes receivable of $1,195,453.

 

Note 12 – Segment Information

 

The Company recognized our products as five segments: BOPP tobacco films, water-based latex, coated film, color printed packaging, and advanced film. The water-base latex is one of the raw materials used in coated film to make the packaging more environmental friendly and the barrier property better. Approximately 70% of the water-base latex products manufactured by Ningbo are sold to Hainan Shiner, Hainan Shiny-day and Zhuhai Huanuo.

 

The following tables summarize the Company’s segment information for the three and six months ended June 30, 2012 and 2011:

 

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2012   2011   2012   2011 
                 
 Revenues from unrelated entities                    
 Tobacco film  $10,596,958   $7,649,358   $20,634,999   $15,684,886 
 Water-based latex   278,999    173,437    292,810    173,437 
 Coated film   3,774,754    6,899,334    7,892,170    11,818,925 
 Color printing   385,673    1,472,768    1,416,479    3,128,942 
 Advanced film   1,365,101    1,672,330    3,535,051    2,967,882 
   $16,401,485   $17,867,227   $33,771,509   $33,774,072 
                     
 Intersegment revenues                    
 Tobacco film  $4,516,389   $1,980,087   $9,767,474   $3,877,174 
 Water-based latex   (119)   218,897    168,948    218,897 
 Coated film   1,581,823    1,381,007    3,735,720    1,770,597 
 Color printing   131,249    675,443    670,483    949,525 
 Advanced film   538,158    -    1,673,299    - 
   $6,767,500   $4,255,434   $16,015,924   $6,816,193 
                     
 Total Revenues                    
 Tobacco film  $15,113,347   $9,629,445   $30,402,473   $19,562,060 
 Water-based latex   278,880    392,334    461,758    392,334 
 Coated film   5,356,577    8,280,341    11,627,890    13,589,522 
 Color printing   516,922    2,148,211    2,086,962    4,078,467 
 Advanced film   1,903,259    1,672,330    5,208,350    2,967,882 
 Less Intersegment revenues   (6,767,500)   (4,255,434)   (16,015,924)   (6,816,193)
   $16,401,485   $17,867,227   $33,771,509   $33,774,072 

 

19
 

 

 

                     
 Income (loss) from operations                    
 Tobacco film  $(1,253,324)  $1,106,347   $(753,110)  $2,211,860 
 Water-based latex   59,830    11,556    60,513    11,556 
 Coated film   (169,752)   394,951    (554,756)   657,745 
 Color printing   (146,548)   (140,987)   (269,932)   (290,094)
 Advanced film   (7,624)   (1,080)   (65,042)   80,593 
 Holding Company   40,959    (66,605)   (24,199)   (162,086)
   $(1,476,459)  $1,304,182   $(1,606,526)  $2,509,574 
                     
 Interest income                    
 Tobacco film  $6,137   $1,645   $11,239   $3,910 
 Water-based latex   152    1,087    159    1,087 
 Coated film   2,206    471    4,299    1,871 
 Color printing   248    281    772    734 
 Advanced film   822    552    1,925    817 
 Holding Company   -    (1,844)   -    45 
   $9,565   $2,191   $18,394   $8,464 
                     
 Interest Expense                    
 Tobacco film  $212,604   $254,765   $368,844   $322,900 
 Water-based latex   3,622    -    3,837    - 
 Coated film   71,034    13,357    146,304    57,907 
 Color printing   10,245    (1,439)   29,601    16,905 
 Advanced film   25,021    4,646    61,933    16,568 
 Holding Company   670    -    1,346    - 
   $323,196   $271,329   $611,865   $414,280 
                     
 Income tax expense (benefit)                    
 Tobacco film  $(64,768)  $204,686   $9,274   $323,545 
 Water-based latex   -    2,454    -    2,454 
 Coated film   (448)   16,211    4,453    95,450 
 Color printing   -    -    -    - 
 Advanced film   1,994    (949)   1,994    11,789 
 Holding Company   -    -    -    - 
   $(63,222)  $222,402   $15,721   $433,238 
                     
 Net Income (loss)                    
 Tobacco film  $(1,219,285)  $740,267   $(974,336)  $1,704,535 
 Water-based latex   56,361    8,892    56,836    8,892 
 Coated film   (160,873)   348,388    (631,283)   505,815 
 Color printing   (156,545)   (130,824)   (298,761)   (306,265)
 Advanced film   25,763    (100,547)   (95,721)   51,845 
 Holding Company   40,289    (66,805)   (25,545)   (160,447)
   $(1,414,290)  $799,371   $(1,968,810)  $1,804,375 
                     
 Provision for depreciation                    
 Tobacco film  $631,228   $221,353   $992,620   $496,629 
 Water-based latex   10,716    2,052    21,446    2,052 
 Coated film   219,625    359,517    393,727    422,080 
 Color printing   34,892    42,169    79,662    121,415 
 Advanced film   81,292    7,633    166,671    109,010 
 Holding Company   -    -    -    - 
   $977,753   $632,724   $1,654,126   $1,151,186 

 

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   As of   As of 
   June 30,   December 31, 
   2012   2011 
 Total Assets          
 Tobacco film  $42,657,708   $31,239,495 
 Water-based latex   742,360    797,500 
 Coated film   16,920,389    20,810,552 
 Color printing   3,423,487    5,768,795 
 Advanced film   7,162,648    7,470,573 
 Holding Company   11,553,902    11,646,065 
   $82,460,494   $77,732,980 

 

Note 13 - Geographical Sales

 

The geographical distribution of Shiner’s revenue for the three and six months ended June 30, 2012 and 2012 is as follows:

 

 

   Three Months Ended June 30,   Six months ended June 30, 
Geographical Areas  2012   2011   2012   2011 
                 
Chinese Main Land  $13,569,643   $15,135,167   $27,947,584   $28,219,566 
Asia (outside Mainland China)   1,282,973    1,347,094    2,455,536    2,574,668 
Australia   997,009    564,614    1,920,232    980,912 
North America   374,903    280,254    632,842    881,672 
Middle East   99,183    378,655    419,020    953,748 
Europe   77,774    -    338,108    - 
Africa   -    142,172    33,841    142,172 
South America   -    19,271    24,346    21,334 
   $16,401,485   $17,867,227   $33,771,509   $33,774,072 

 

 

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Special Note Regarding Forward Looking Statements

 

In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as “believe,” “expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,” “aim,” “will” or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; and any statements regarding future economic conditions or performance, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements. Potential risks and uncertainties include, among other things, the factors discussed in  Item 1A, “Risk Factors” included in the Company annual report on Form 10-K filed on April 12, 2012.

 

Because the factors discussed in this report could cause actual results or outcomes to differ materially from those expressed in any forward-looking statement made by us or on our behalf, you should not place undue reliance on any such forward-looking statement. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events, except as required by law. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement.

 

Use of Terms

 

Except as otherwise indicated by the context, all references in this report to:

 

“Shiner,” “Company,” “we,” “us” or “our” are to Shiner and its direct and indirect subsidiaries: (i) Hainan Shiner Industrial Co., Ltd., or “Hainan Shiner,” (ii) Hainan Shiny-Day Color Printing Packaging Co., Ltd., or “Shiny-Day,” (iii) Hainan Modern Hi-Tech Industrial Co., Ltd., or “Hainan Modern,” (iv) Zhuhai Modern Huanuo Packaging Material Co., Ltd., or “Zhuhai Modern,” (v) Shanghai Juneng Functional Film Company, Ltd., or “Shanghai Juneng,” (vi) Shimmer Sun Ltd., or “Shimmer Sun,” (vii) Hainan Jingyue New Material Co., Ltd ., or “Jingyue,” (viii) Hainan Shunhao New Material Co., Ltd., or “Shunhao,” (viii) Hainan Yongxin Environmental Co., Ltd., or “Yongxin,” and (ix) Ningbo Neisuoer Latex Co., Ltd., or "Ningbo".

 

“SEC” are to the United States Securities and Exchange Commission;

 

“Securities Act” are to the Securities Act of 1933, as amended; and “Exchange Act” are to the Securities Exchange Act of 1934, as amended;

 

“RMB” are to Renminbi, the legal currency of China; and “U.S. dollar,” “USD,” “US$” and “$” are to the legal currency of the United States;

 

“China,” “Chinese” and “PRC” are to the People’s Republic of China; and

 

“BVI” are to the British Virgin Islands.

 

 

22
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

We were incorporated in Nevada in November 2003, but since July 2007, have been headquartered in Hainan, China.  Through our operating subsidiaries, Hainan Shiner, Shiny-Day, Hainan Modern, Zhuhai Modern, Shimmer Sun, Ningbo and Shanghai Juneng we manufacture and sell packaging and anti-counterfeit plastic film to manufacturers and producers in China. We also sell three of our products, anti-counterfeit film, coated film, and color printing, in international markets through a network of distributors and converters.

 

Our primary business consists of the manufacture and distribution of technology driven advanced packaging film products in five business segments: bi-axially oriented polypropylene, or BOPP, film for wrapping tobacco; water-based latex; coated film; color printed packaging; and advanced film.  Our products are sold to customers in the food, tobacco, chemical, medical and pharmaceutical, personal care, electronics, automotive, construction, graphics, music and video publishing industries.  Our current production capacity consists of: five coated film lines with a total capacity of 15,000 tons a year; two BOPP tobacco film production lines with a capacity of 13,500 tons a year; one BOPP film production line with a capacity of 7,000 tons a year; three color printing lines; four anti-counterfeit film lines with a total capacity of 2,500 tons a year; and two water-based latex reaction kettles with a total capacity of 3,000 tons a year.

 

The table below shows the percentage of revenue by each of our business segments for the six months ended June 30, 2012 and 2011:

 

 

   Percent of Revenue
for the Six Months ended
   Percent of Revenue
for the Three Months ended
 
   2012   2011   2012   2011 
 BOPP tobacco film   61.1%   46%   64.6%   42.8%
 Water-based latex   0.9%   1%   1.7%   1.0%
 Coated film   23.4%   35%   23.0%   38.6%
 Color printing   4.2%   9%   2.4%   8.2%
 Advanced film   10.4%   9%   8.3%   9.4%
    100.0%   100.0%   100.0%   100.0%

 

We have 20 patents by the State Intellectual Property Office of China and have 9 patent applications relating to our products and manufacturing processes pending.  Although our patents and processes provide us a competitive advantage, we do not believe the loss of any single patent would have a material adverse effect on our business.

 

Our principal executive offices are located at 19th Floor, Didu Building, Pearl River Plaza, No. 2 North Longkun Road, Haikou, Hainan Province, China 570125. Our telephone number is +86-898-68581104 and our website is www.shinerinc.com.

 

Results of Operations

 

Comparison of the Three months Ended June 30, 2012 and 2011

 

   For the Three Months Ended June 30,   $   % 
   2012   2011   Change   Change 
Revenues  $16,401,485   $17,867,227   $(1,465,742)   -8.2%
Cost of goods sold   15,913,476    15,347,733    565,743    3.7%
Gross profit   488,009    2,519,494    (2,031,485)   -80.6%
Selling, general and administrative expenses   1,964,468    1,215,312    749,156    61.6%
Interest expense, net of interest income   313,631    269,138    44,493    16.5%
Other income (expense), net   294,712    (122,778)   417,490    340.0%
Exchange gain (loss)   (3,775)   116,508    (120,283)   -103.2%
Income tax expense   (63,222)   222,402    (285,624)   -128.4%
Net loss attributed to noncontrolling interest   21,641    (7,001)   28,642    409.1%
Net income (loss) attributed to Shiner  $(1,414,290)  $799,371   $(2,213,661)   -276.9%

 

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Revenues

 

Revenues for the three months ended June 30, 2012 decreased $1.5 million (or 8.2%), to $ 16.4 million compared to $17.9 million for the corresponding period in 2011. The decrease was primarily attributable to decreased revenues generated from coated film and color printing, which was partially offset by increase in revenues generated from BOPP tobacco, advanced film and water-based latex. For the three months ended June 30, 2012, revenue from coated film revenue decreased $3.1 million (or 45.3%) to $3.8 million from $6.9 million for the corresponding period in 2011, and sales from color printing decreased $1.1 million (or 73.8%) to $0.4 million from $1.5 million for the corresponding period in 2011. For the three months ended June 30, 2012, revenue from BOPP tobacco increased $3.0 million (or 38.5%) to $10.6 million from $7.6 million for the corresponding period in 2011; revenue from advanced film decreased $0.3 million (or 18.2%) to $1.4 million from $1.7 million for the corresponding period in 2011; and revenue from water-based latex increased $0.1 million (or 60.9%) to $0.3 million from $0.2 million for the corresponding period in 2011.

 

We sell or products both domestically an internationally. All international sales are indirect sale through a network of distributors and converters. For the three months ended in June 30, 2012, the division between our domestic and international sales remained substantially stable as compared to the corresponding period in 2011. For the three months ended in June 30, 2012 and June 30, 2011, sales generated domestically accounted for 82.7% and 84.7%, respectively, of our total revenues for that period, and sales generated internationally from selling our advanced, coated film, and color printing, accounted for 17.3% and 15.3%, respectively, of our total revenues for that period.

 

Cost of Goods Sold

 

Cost of goods sold (“COGS”) for the three months ended June 30, 2012 increased $0.6 million (or 3.7%) from $15.3 million to $15.9 million for the corresponding period in 2012. The COGS was 97.0% and 85.9% of our revenue for the three months ended June 30, 2012 and 2011, respectively. The principal cost component of our COGS is raw materials which includes petroleum. The increase in COGS year to year was primarily caused by an increase in raw material costs due to petroleum price fluctuations, an increase in the cost of labor, and the amortization of the added depreciation of Phase I of the Hainan manufacturing facility into the cost of goods sold. We estimate an increase in the price of crude oil of $10 per barrel would cause our raw material cost to increase by approximately 6%. There was some increase in the cost of our raw materials as a result of an increase in crude oil prices throughout the period. There has not been a significant difference in the COGS percentages among our different product lines and therefore, any increase or decrease in our raw material costs would be expected to have a similar impact to our different product lines’ profitability.

 

The packaging industry standards mandate the use of non-benzene based packaging products for food packaging. To be environmentally friendly and to improve work conditions in our factory, Shiner switched to non-benzene based ink products, which increased raw material costs This change also contributed to our compliance with the food safety laws, as our food packaging operations are conducted in the same facility. We had favorable feedback from all of our customers at the time.

 

Gross Profit

 

Our gross profit for the three months ended June 30, 2012 was $0.5 million, representing a profit margin of 3.0%, a decrease of 11.1% from 14.1% for the corresponding period in 2011. The decrease in profit margin was primarily a consequence of an increase in labor costs and depreciation of the new property.

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Selling, General and Administrative Expenses

 

Our selling, general and administrative expenses for the three months ended June 30, 2012 increased by 61.6%, or $0.74 million, to $1.96 million in 2012 compared to $1.22 million for the corresponding period in 2011. General and administrative (“G&A”) expenses include rent, management and staff salaries, insurance, marketing, accounting, legal, and research and development expenses (“R&D expenses”). Although we have strict standards to control our G&A expenses, we have increased our R&D expenditures as compared to 2011. The increase in selling, general and administrative expenses was mainly due to a $0.2 million increase in R&D expense and a $0.2 million increase in for marketing expense.

 

Interest Expense, net

 

Interest expense increased by 16.5%, or $44,493, to $313,631 in the three months ended June 30, 2012 compared to $269,138 in the same period of 2011, primarily due to additional short-term and long-term loans.

 

Other Income

 

Other income increased by $417,490 or 340.0% to $294,712 for the three months ended June 30, 2012 compared to an expense of $122,778 in the same period of 2011. During the three months ended June 30, 2012, we received $0.3 million in subsidy income from Chinese governmental agencies for research and development projects.

 

Income Tax Expense

 

For the three months ended June 30, 2012, we recorded a tax benefit of $63,222 compared to a provision of $222,402 for the same period of 2011. Our effective tax rates for 2012 and 2011 were 0.01% and 22%, respectively. The increase in the effective tax rate is due to losses incurred by certain subsidiaries where the loss was not able to offset income generated by other subsidiaries.

 

Net Income

 

The decrease in our net income for the three months ended June 30, 2012 compared to the same period of 2011 was mainly due to increased labor costs, depreciation of the new property.

 

Comparison of the Six months Ended June 30, 2012 and 2011

 

   For the six months ended June 30,   $   % 
   2012   2011   Change   Change 
Revenues  $33,771,509    33,774,072   $(2,563)   0.0%
Cost of goods sold   31,112,559    28,887,471    2,225,088    7.7%
Gross profit   2,658,950    4,886,601    (2,227,651)   -45.6%
Selling, general and administrative expenses   4,265,476    2,377,027    1,888,449    79.4%
Interest expense, net of interest income   593,471    405,816    187,655    46.2%
Other income (expense), net   193,529    71,833    121,696    169.4%
Exchange gain (loss)   (9,648)   60,713    (70,361)   -115.9%
Income tax expense   15,721    433,238    (417,517)   -96.4%
Net loss attributed to noncontrolling interest   63,027    1,309    61,718    4714.9%
Net income (loss) attributed to Shiner  $(1,968,810)  $1,804,375   $(3,773,185)   -209.1%

 

Revenues

 

Revenues for the six months ended June 30, 2012 remained substantially the same as the revenues for the corresponding period of 2011. For the six months ended June 30, 2012, there was a $5.5 increase in sales from advanced film, tobacco film and water-based latex, which, however, was offset by significant decrease in sales from coated film (33.2% decrease) and color printing (54.7% decrease) as compared to the sales for the corresponding period of 2011. For the six month ended June 30, 2012 as compared to the corresponding period in 2011, revenue from advanced film increased $0.5 million (or 19.1%) to $3.5 million, up from $3.0 million, revenue from BOPP tobacco increased $4.9 million (or 31.5%) to $20.6 million from $15.7 million, and revenue from water based latex increased $0.1 million (or 68.8%) to $0.3 million from $0.3 million. For the six month ended June 30, 2012 as compared to the corresponding period in 2011, revenue from coated film decreased $3.9 million (or 33.2%) to $7.9 million from $11.8 million, and revenue from color printing decreased $1.7 million (or 54.7%) to $1.4 million from $3.1 million.

 

25
 

For the six months ended in June 30, 2012, the division between our domestic and international sales remained substantially stable as compared to the corresponding period in 2011. For the sixe months ended in June 30, 2012 and June 30, 2011, sales generated domestically accounted for 82.8% and 83.6%, respectively, of our total revenues for that period, and sales generated internationally from selling our advanced film, coated film, and color printing accounted for 17.2% and 16.4%, respectively, of our total revenues for that period.

 

 

Cost of Goods Sold

 

For the six months ended June 30, 2012 as compared to the corresponding period in 2011, COGS increased $2.2 million (or 7.7%) from $28.9 million to $31.1 million. The COGS for the six months ended June 30, 2012 and 2011 accounted for 92.1% and 85.5% of our revenues for the corresponding period, respectively. As explained above, the increase in COGS was primarily caused by an increase in raw material costs due to petroleum price fluctuations, cost of labor, and the amortization of the added depreciation of Phase I of the Hainan manufacturing facility into the cost of goods sold.

 

 

Gross Profit

 

Our gross profit for the six months ended June 30, 2012 was $2.7 million, representing a profit margin of 7.9%, a decrease of 6.6% from 14.5% for the corresponding period in 2011. The decrease in profit margin was primarily a consequence of an increase our COGS as a result of increase in raw material costs, labor costs and depreciation of the new property.

 

Selling, General and Administrative Expenses

 

For the six months ended June 30, 2012, our selling, G&A expenses increased by $1.9 million (or 79.4%) to $4.3 million compared to $2.4 million for the corresponding period in 2011. G&A expenses include rent, management and staff salaries, insurance, marketing, accounting, legal, and R&D expenses. Although we have strict standards to control our G&A expenses, we have increased our R&D expenditures as compared to 2011. The increase in selling, general and administrative expenses was mainly due to an increase of $0.8 million in R&D expenses and an increase of $0.6 million in marketing expenses.

 

Interest Expense, net

 

Interest expense increased by $187,655 (or 46.2%) to $593,471 for the six months ended June 30, 2012 as compared to $405,816 for the same period in 2011, primarily due to additional short-term and long-term loans.

 

Other Income

 

Other income increased by $121,696 (or 169.4%) to 193,529 for the six months ended June 30, 2012 as compared to income of $71,833 for the same period in 2011. The increase was primarily attributable to the $0.2 million in subsidy income that we received from Chinese governmental agencies in the second quarter of 2012 for research and development projects.

 

26
 

Income Tax Expense

 

For the six months ended June 30, 2012, we recorded a tax provision of $15,721 as compared to $433,238 for the same period in 2011. Our effective tax rates for 2012 and 2011 were 0.01% and 19%, respectively. The decrease in the effective tax rate was due to losses incurred by certain subsidiaries.

 

Net Income

 

We suffered a net loss of $1,435,290 for the six months ended June 30, 2012, representing a decrease of $2,242,303 (or 278%) from a net income of $806,372 for the corresponding period in 2011. The decrease in our net income for the six months ended June 30, 2012 compared to the same period of 2011 was mainly due to a significant decrease in revenue and increases in GOGS and selling, general and administrative expenses, which was partially offset by an increase in other income, as explained elsewhere in this report.

 

Liquidity and Capital Resources

 

At June 30, 2012, we had $3.4 million in cash and equivalents on hand, compared to $2.8 million at December 31, 2011, and we had working capital of $6.9 million and $7.7 million at June 30, 2012 and December 31, 2011, respectively.  The decrease in working capital is primarily due to the use of current assets such as cash, other payables and short-term loans to purchase property and equipment. Our principal demands for liquidity are: increasing capacity, purchasing raw materials, sales distribution and the possible acquisition of new subsidiaries in our industry, as well as other demands for general corporate purposes.

 

Cash Flows

 

Below is a summary of the cash flows for the six months ended June 30, 2012 and 2011:

 

   2012   2011 
Net cash used in operating activities  $(5,552,021)  $(1,048,464)
Net cash used in investing activities   (1,847,774)   (13,858,911)
Net cash provided by financing activities   7,977,939    9,800,890 
Effect of exchange rate changes on cash and equivalents   25,348    14,533 
Net (decrease)/increase in cash and equivalents   603,492    (5,091,952)
Cash and cash equivalents at beginning of the period   2,831,808    8,622,034 
Cash and cash equivalents at end of the period  $3,435,300   $3,530,093 

 

Operating Activities

 

Net cash flows used in operating activities for the six months ended June 30, 2012 was $5.6 million, an increase of $4.6 million (or 430%), as compared to net cash flow used in operating activities of $1.1 million for the corresponding period in 2011. The significant increase in the use of cash in operating activities during the six months ended June 30, 2012 as compared to the corresponding period in 2011 was comprised primarily of a decrease in revenue of $3.8 million (or 213%) and adjustments as a result of changes in working capital components. The changes in working capital components that primarily contributed to the increase in cash flow used in operating activities for the six months ended June 30, 2012 were a decrease in accounts receivable of $2.7 million (or 91%), an increase in accounts payable and accrued expenses of $1.8 million (or 942%), a decrease in unearned revenue of $1.0 million (or 70%), and an increase in other payable of $1.6 million (or 116%), which was partially offset by a decrease in advances to suppliers of $3.9 million (or 66%) and the absence of VAT receivable (or a decrease of $1.6 million). The decrease in our cash flow used in operating activities was largely due to the decrease in our revenues during the 6 months ended June 30, 2012 as compared to the corresponding period in 2011.  

27
 

 

 

Investing Activities

 

Net cash flows used in investing activities for the six months ended June 30, 2012 was $1.9 million, an decrease of $12.0 million (or 86.7%), as compared to net cash flow used in investing activities of $13.9 million for the corresponding period in 2011. During the six months ended June 30, 2011, we invested $1.3 million in acquiring Shimmer Sun, and $8.8 in purchasing property and equipment. During the six months ended June 30, 2012, we did not acquire any subsidiary and we only used $1.7 million for the acquisition of property and equipment. The property and equipment were purchased for the construction of a new BOPP film production line and a fully automated plant equipped with state-of-the-art production machinery. We commenced construction of the project in 2010.

 

Financing Activities

 

Net cash provided by financing activities for the six months ended June 30, 2012 was $8.0 million, a decrease of $1.8 million (or 18.6%), as compared to the corresponding period in 2011. During the six months ended June 30, 2012 as compared to the corresponding period in 2011, we decreased our net cash provided by financing activities by repaying $11.7 million of short term loans, an increase of $4.8 million (or 69.4%) from $6.9 million, and decreasing our proceeds from our long term loans from $9.0 million to $1.1 million, a decrease of $8.0 million (or 88.3%). The foregoing decrease in net cash provided by financing activities was partially offset by our increase in proceeds from short-term loans to $18.6 million, an increase of $10.9 million (or 143%) from 7.7$ million.

 

Assets

 

Our total assets as of June 30, 2012 was $82.5 million, an increase of $4.7 million (or 6.1%), as compared to our total assets of $77.7 as of December 31, 2011. The increase was primarily due to the increase of $2.1 million (or 20.7%) in our advance to suppliers and an increase of $2.3 million (or 22.9%) in our inventory due to higher costs of raw material. As of June 30, 2012, our accounts receivable decreased slightly by $0.2 million (or 2.9%) as compared with December 31, 2011. We intend to continue our efforts to maintain accounts receivable at reasonable levels in relation to our sales.

 

Liabilities

 

Our current liabilities increased by $5.3 million during the six months ended June 30, 2012, principally due to the increase in short-term loan from $10.7 million as of December 31, 2011 to $17.7 million, an increase of $7.0 million (or 65.4%), which was partially offset by the decrease in accounts payable of $1.9 million (or 37.1%) from $5.1 million to $3.2 million.

 

On August 2, 2010, Hainan Shiner, our wholly owned subsidiary, entered into a credit facility with the Hainan Branch of the Bank of China.  The credit facility is comprised of a seven-year 70 million RMB, or approximately $11.1 million, secured revolving credit facility.  Hainan Shiner may not make any draw downs under this facility after June 30, 2012.  On each of January 24, February 10, February 16, February 17, March 25, November 30, December 23, 2011 and March 19, 2012, Hainan Shiner made withdrawals on the credit facility of approximately $2.5 million, $2.6 million, $2.2 million, $1.2 million, $0.4 million, $0.2 million, $0.5 million and $1.1 million, respectively. Hainan Shiner may only use the loan proceeds to improve the technology of its BOPP film and to purchase certain equipment necessary for these improvements.  Proceeds under the facility not used for these purposes may be subject to a misappropriation penalty interest rate of 100% of the current interest rate on the loan.

 

The initial interest rate on each withdrawal from the facility will be the 5-year benchmark lending rate announced by the People’s Bank of China on the date of such withdrawal, and is subject to adjustment every 12 months based upon this benchmark.  Additional interest will be paid on any overdue loan under this credit facility of 50% of the current interest rate on the loan. Hainan Shiner and certain of its affiliates, including the Company, provided guarantees and certain land, buildings, and property as collateral under this facility.

 

The credit facility includes financial covenants that prohibit Hainan Shiner from making distributions to its sole shareholder if (a) its after-tax net income for the fiscal year is zero or negative, (b) its after-tax net income is insufficient to make up its accumulated loss for the last several fiscal years, (c) its income before tax is not utilized in paying off the capital, interest and expense of the lender, or (d) the income before tax is insufficient to pay the capital, interest and expense of the lender.

 

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During the six months ended June 30, 2012, we paid approximately $11.7 million of our short-term loans and borrowed an additional $18.6 million in short-term loans. These loans are due between June 30, 2012 and February 2013. We intend to meet our liquidity requirements, including capital expenditures related to the purchase of equipment, purchase of raw materials, and the expansion of our business, through cash flow provided by operations, and our current credit facility.

 

Critical Accounting Policies

 

Accounts Receivable

 

The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis.

 

Inventory

 

Inventory is valued at the lower of cost (determined on a weighted average basis) or market. Management compares the cost of inventory with this market value and allowance is made to write down inventory to market value, if lower.

 

Revenue Recognition

 

The Company’s revenue recognition policies are in compliance with SEC Staff Accounting Bulletin (“SAB”) 104. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.

 

Sales revenue consists of the invoiced value of goods, which is net of value-added tax (“VAT”). All of the Company’s products are sold in the PRC and are subject to Chinese VAT of 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing their end product. The Company recorded VAT payable and VAT receivable net of payments in the financial statements. The VAT tax return is filed offsetting the payables against the receivables.

 

Sales and purchases are recorded net of VAT collected and paid. VAT taxes are not affected by the income tax holiday.

 

Stock-Based Compensation

 

The Company records stock-based compensation in accordance with ASC Topic 718, “Compensation – Stock Compensation.” ASC 718 requires companies to measure compensation cost for stock-based employee compensation at fair value at the grant date and recognize the expense over the employee’s requisite service period. The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees. There were 90,000 options outstanding as of June 30, 2012.

 

Income Taxes

 

The Company accounts for income taxes in accordance with ASC Topic 740, “Income Taxes.” ASC 740 requires a company to use the asset and liability method of accounting for income taxes, whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all of, the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

29
 

Under ASC 740, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The adoption had no effect on the Company’s consolidated financial statements.

 

Basic and Diluted Earnings Per Share

 

Earnings per share (“EPS”) is calculated in accordance with the ASC Topic 260, “Earnings Per Share.” Basic EPS is based upon the weighted average number of common shares outstanding. Diluted EPS is based on the assumption that all dilutive convertible shares and stock warrants were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. There were 90,000 options and 521,664 warrants outstanding as of June 30, 2012. All options and warrants were excluded from the diluted loss per share calculation due to their anti-dilutive effect since the exercise prices are greater than the average stock price.

 

Recent Accounting Pronouncements

 

In May 2011, the FASB issued ASU 2011-04 which was issued to provide a consistent definition of fair value (“FV”) and ensure that the FV measurement and disclosure requirements are similar between U.S. GAAP and IFRS. ASU 2011-04 changes certain FV measurement principles and enhances the disclosure requirements particularly for Level 3 FV measurements.  This guidance is effective for us beginning on January 1, 2012.  The adoption of ASU 2011-04 did not have a significant impact our consolidated financial statements.

 

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income. ASU 2011-05 revises the manner in which entities present comprehensive income in their financial statements. The new guidance removes the presentation options in Accounting Standards Codification (ASC) 220, Comprehensive Income, and requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The ASU does not change the items that must be reported in other comprehensive income. In December 2011, the FASB issued ASU 2011-12 which defers the requirement in ASU 2011-05 that companies present reclassification adjustments for each component of accumulated other comprehensive income in both net income and other comprehensive income on the face of the financial statements. ASU 2011-05 is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2011, with early adoption permitted. The adoption of ASU 2011-05, as amended by ASU 2011-12, did not have a significant impact our consolidated financial statements.

 

In September 2011, the FASB issued ASU 2011-08 which provides an entity the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test for goodwill impairment.  If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the FVof a reporting unit is less than its carrying amount, the quantitative impairment test is required.  Otherwise, no further testing is required. The revised standard is effective for us for our annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  The adoption of ASU 2011-08 did not have a significant impact our consolidated financial statements.

 

In July, 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment.  The ASU provides entities with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired.  If an entity concludes that it is more than 50% likely that an indefinite-lived intangible asset is not impaired, no further analysis is required.  However, if an entity concludes otherwise, it would be required to determine the FV of the indefinite-lived intangible asset to measure the amount of actual impairment, if any, as currently required under US GAAP. The ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.  Early adoption is permitted. The adoption of this pronouncement will not have a material impact on our financial statements.

 

30
 

Seasonality of our Sales

 

The first quarter of the calendar year is typically the slowest season of the year for us due to the Chinese New Year holiday. During this period, accounts receivable collection tends to be very slow and we also need to purchase raw material to prepare for upcoming busier seasons.

 

Off-balance sheet arrangements

 

As of June 30, 2012, we did not have any off-balance sheet arrangements.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

  

As required by Rule 13a-15(e), our management has carried out an evaluation, with the participation and under the supervision of our Chief Executive Officer, Mr. Qingtao Xing and our Interim Chief Financial Officer, Xuezhu Xu, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2012. Based upon this evaluation, Mr. Xing and Mr. Xu, determined that, as of June 30, 2012, and as of the date of this report, our disclosure controls and procedures were effective.

 

Changes in Internal Controls over Financial Reporting

 

There were no changes in our internal controls over financial reporting during the second quarter of fiscal 2012 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

 

 

PART II.  OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results.

 

Item 1A. Risk Factors.

 

There are no material changes from the risk factors previously disclosed in Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2011.

 

31
 

 

 

Item 2. Unregistered Sales of Equity Securities and Use Of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

Exhibit   Description of Exhibit  
       
31.1   Certification of our Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended, filed herewith  
       
31.2   Certification of our Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended, filed herewith  
       
32.1   Certification of our Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith  
       
32.2   Certification of our Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith  
       
101.INS  

XBRL Instance Document*

 

101.SCH  

XBRL Schema Document*

 

101.CAL  

XBRL Calculation Linkbase Document*

 

101.DEF  

XBRL Definition Linkbase Document*

 

101.LAB  

XBRL Label Linkbase Document*

 

101.PRE   XBRL Presentation Linkbase Document*
         

 

* to be filed with an amendment to this report.

 

32
 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  Shiner International, Inc.
   
August 15, 2012 By: /s/ Qingtao Xing
  Name: Qingtao Xing
 

Title: President and Chief Executive Officer

(Principal Executive Officer)

   
  Shiner International, Inc.
   
August 15, 2012 By: /s/ Xuezhu Xu
  Name: Xuezhu Xu
 

Title: Interim Chief  Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

 

 

33

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