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EXCEL - IDEA: XBRL DOCUMENT - Shiner International, Inc. | Financial_Report.xls |
EX-31.2 - Shiner International, Inc. | v240064_ex31-2.htm |
EX-32.2 - Shiner International, Inc. | v240064_ex32-2.htm |
EX-31.1 - Shiner International, Inc. | v240064_ex31-1.htm |
EX-32.1 - Shiner International, Inc. | v240064_ex32-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
o
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Quarterly report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the quarterly period ended September 30, 2011
o
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Transition report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934
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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
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(IRS Employer
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of incorporation or organization)
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Identification No.)
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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.
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 o 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
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Accelerated filer o
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Non-accelerated filer o
|
Smaller reporting company o
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(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 o
On November 11, 2011, 27,541,491 shares of the registrant's common stock were outstanding.
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
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|||
Item 1.
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Financial Statements
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3
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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24
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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30
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Item 4.
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Controls and Procedures
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30
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PART II – OTHER INFORMATION
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Item 1.
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Legal Proceedings
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31
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Item 1A.
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Risk Factors
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31
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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31
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Item 3.
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Defaults Upon Senior Securities
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31
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Item 4.
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(Removed and Reserved)
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31
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Item 5.
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Other Information
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31
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Item 6.
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Exhibits
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32
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2
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
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September 30,
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December 31,
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||||||
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2011
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2010
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||||||
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(unaudited)
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|||||||
ASSETS
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||||||||
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||||||||
CURRENT ASSETS:
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||||||||
Cash & cash equivalents
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$ | 1,787,521 | $ | 8,622,035 | ||||
Accounts receivable, net of allowance for doubtful accounts of $278,601 and $262,502
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6,738,138 | 10,005,572 | ||||||
Advances to suppliers
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10,693,492 | 3,462,074 | ||||||
Notes receivable
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7,820 | 26,056 | ||||||
Inventory, net
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10,275,624 | 7,355,601 | ||||||
Prepaid expenses & other current assets
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921,689 | 610,066 | ||||||
Total current assets
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30,424,284 | 30,081,404 | ||||||
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||||||||
Property and equipment, net
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27,634,959 | 19,399,717 | ||||||
Construction in progress
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10,004,443 | 4,017,721 | ||||||
Advance for the purchase of equipment
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589,851 | 1,356,989 | ||||||
Intangible assets, net
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5,204,089 | 1,061,855 | ||||||
TOTAL ASSETS
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$ | 73,857,626 | $ | 55,917,686 | ||||
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LIABILITIES AND STOCKHOLDERS' EQUITY
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||||||||
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||||||||
CURRENT LIABILITIES:
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||||||||
Accounts payable
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$ | 6,066,730 | $ | 5,350,064 | ||||
Other payables
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5,350,146 | 4,655,300 | ||||||
Unearned revenue
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1,518,398 | 295,609 | ||||||
Accrued payroll
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153,841 | 141,884 | ||||||
Short-term loans
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7,820,000 | 6,826,500 | ||||||
Total current liabilities
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20,909,115 | 17,269,357 | ||||||
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||||||||
Long-term loans
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9,243,240 | - | ||||||
Total Liabilities
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30,152,355 | 17,269,357 | ||||||
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||||||||
Commitments and contingencies
|
||||||||
|
||||||||
EQUITY:
|
||||||||
Shiner stockholders' equity:
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||||||||
Common stock, par value $0.001; 75,000,000 shares authorized, 27,603,336 shares issued and 27,541,491 shares outstanding at September 30, 2011 and December 31, 2010
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27,603 | 27,603 | ||||||
Additional paid-in capital
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14,323,569 | 14,321,484 | ||||||
Treasury stock (61,845 shares)
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(58,036 | ) | (58,036 | ) | ||||
Other comprehensive income
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5,174,239 | 4,060,637 | ||||||
Statutory reserve
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3,266,583 | 2,905,861 | ||||||
Retained earnings
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19,180,273 | 17,353,554 | ||||||
Total Shiner stockholders' equity
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41,914,231 | 38,611,103 | ||||||
Noncontrolling interest
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1,791,040 | 37,226 | ||||||
Total equity
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43,705,271 | 38,648,329 | ||||||
TOTAL LIABILITIES AND EQUITY
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$ | 73,857,626 | $ | 55,917,686 |
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)
|
Three Months Ended
September 30,
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Nine Months Ended
September 30,
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||||||||||||||
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2011
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2010
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2011
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2010
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||||||||||||
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(unaudited)
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(unaudited)
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(unaudited)
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(unaudited)
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||||||||||||
Net Revenue
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$ | 18,611,849 | $ | 15,525,211 | $ | 52,385,921 | $ | 40,325,828 | ||||||||
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||||||||||||||||
Cost of goods sold
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16,490,987 | 12,094,836 | 45,378,458 | 32,765,876 | ||||||||||||
Gross profit
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2,120,862 | 3,430,375 | 7,007,463 | 7,559,952 | ||||||||||||
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Operating expenses
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||||||||||||||||
Selling
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688,448 | 464,852 | 1,682,076 | 1,332,517 | ||||||||||||
General and administrative
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1,103,239 | 1,339,384 | 2,486,638 | 2,566,973 | ||||||||||||
Total operating expenses
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1,791,687 | 1,804,236 | 4,168,714 | 3,899,490 | ||||||||||||
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Income from operations
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329,175 | 1,626,139 | 2,838,749 | 3,660,462 | ||||||||||||
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Non-operating income (expense):
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||||||||||||||||
Other income, net
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545,417 | 97,337 | 617,250 | 361,948 | ||||||||||||
Interest income
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2,453 | 3,266 | 10,917 | 9,182 | ||||||||||||
Interest expense
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(275,395 | ) | (64,604 | ) | (689,675 | ) | (161,948 | ) | ||||||||
Exchange gain (loss)
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1,283 | (46,810 | ) | 61,996 | (76,530 | ) | ||||||||||
Total non-operating income (expense)
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273,758 | (10,811 | ) | 488 | 132,652 | |||||||||||
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||||||||||||||||
Income before income tax
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602,933 | 1,615,328 | 2,839,237 | 3,793,114 | ||||||||||||
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Income tax expense
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219,894 | 312,191 | 653,132 | 628,725 | ||||||||||||
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Net income
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383,039 | 1,303,137 | 2,186,105 | 3,164,389 | ||||||||||||
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Net loss attributed to noncontrolling interest
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27 | 3,774 | 1,336 | 3,774 | ||||||||||||
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Net income attributed to Shiner
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$ | 383,066 | $ | 1,306,911 | $ | 2,187,441 | $ | 3,168,163 | ||||||||
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Comprehensive income
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||||||||||||||||
Net income
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$ | 383,039 | $ | 1,303,137 | $ | 2,186,105 | $ | 3,164,389 | ||||||||
Foreign currency translation gain
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440,458 | 533,225 | 1,143,003 | 645,623 | ||||||||||||
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Comprehensive income
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$ | 823,497 | $ | 1,836,362 | $ | 3,329,108 | $ | 3,810,012 | ||||||||
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Weighted average shares outstanding :
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||||||||||||||||
Basic
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27,541,491 | 24,618,590 | 27,541,491 | 24,598,411 | ||||||||||||
Diluted
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27,541,491 | 24,618,590 | 27,541,491 | 24,598,411 | ||||||||||||
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Earnings per share attributed to Shiner common stockholders
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||||||||||||||||
Basic
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$ | 0.01 | $ | 0.05 | $ | 0.08 | $ | 0.13 | ||||||||
Diluted
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$ | 0.01 | $ | 0.05 | $ | 0.08 | $ | 0.13 |
The accompanying notes are an integral part of these consolidated financial statements.
4
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Nine Months Ended
September 30,
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|||||||
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2011
|
2010
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||||||
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(unaudited)
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(unaudited)
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||||||
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||||||||
CASH FLOWS FROM OPERATING ACTIVITIES:
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||||||||
Net income
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$ | 2,186,105 | $ | 3,164,389 | ||||
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||
Depreciation
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1,721,406 | 1,206,248 | ||||||
Amortization
|
54,460 | 103,223 | ||||||
Stock compensation expense
|
2,085 | 18,954 | ||||||
Change in working capital components:
|
||||||||
Accounts receivable
|
3,669,116 | (3,286,332 | ) | |||||
Inventory
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(2,372,742 | ) | (76,703 | ) | ||||
Advances to suppliers
|
(7,106,058 | ) | (1,501,433 | ) | ||||
Other assets
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(267,767 | ) | (57,240 | ) | ||||
Accounts payable
|
726,024 | 2,263,107 | ||||||
Unearned revenue
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1,206,913 | 84,449 | ||||||
Other payables
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206,121 | 149,490 | ||||||
Accrued payroll
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(3,794 | ) | 6,527 | |||||
|
||||||||
Net cash provided by operating activities
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21,869 | 2,074,679 | ||||||
|
||||||||
CASH FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Payment (issuance) of notes receivable
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34,594 | (235,068 | ) | |||||
Purchase of Shimmer Sun Ltd.
|
(3,200,000 | ) | - | |||||
Cash acquired in acquisition of Shimmer Sun Ltd. | 248,743 | - | ||||||
Payments for property and equipment
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(9,034,984 | ) | (246,489 | ) | ||||
Payments for construction in progress
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(5,040,177 | ) | (3,991,538 | ) | ||||
(Increase)/decrease in restricted cash
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- | 735,454 | ||||||
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||||||||
Net cash used in investing activities
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(16,991,824 | ) | (3,737,641 | ) | ||||
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||||||||
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Repayment of short-term loans
|
(7,020,000 | ) | - | |||||
Proceeds from short-term loans
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7,800,000 | 1,471,000 | ||||||
Proceeds from long-term loans
|
9,219,600 | - | ||||||
Contribution from non-controlling interest
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- | 44,670 | ||||||
|
||||||||
Net cash provided by financing activities
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9,999,600 | 1,515,670 | ||||||
|
||||||||
Effect of exchange rate changes on cash and cash equivalents
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135,841 | 100,958 | ||||||
|
||||||||
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS
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(6,834,514 | ) | (46,334 | ) | ||||
|
||||||||
CASH & CASH EQUIVALENTS, BEGINNING BALANCE
|
8,622,035 | 3,059,796 | ||||||
|
||||||||
CASH & CASH EQUIVALENTS, ENDING BALANCE
|
$ | 1,787,521 | $ | 3,013,462 | ||||
|
||||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
Interest paid
|
$ | 623,826 | $ | 161,948 | ||||
Income taxes paid
|
$ | 621,980 | $ | 449,165 | ||||
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
|
||||||||
Issued 100,000 shares for capital rasing services
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$ | - | $ | 88,000 |
The accompanying notes are an integral part of these consolidated financial statements.
5
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010 (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 nine months ended September 30, 2011, are not necessarily indicative of the results to be expected for the year ending December 31, 2011.
Organization and Line of Business
Shiner was incorporated in the State of Nevada on November 12, 2003. The Company, through its subsidiaries is engaged in the manufacture of 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 the following industries: food, tobacco, chemical, agribusiness, medical, pharmaceutical, personal care, electronics, automotive, construction, graphics, music and video publishing and other consumer goods.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Shiner and its subsidiaries as follows:
Place
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Percentage
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|||||
Subsidiary
|
Incorporated
|
Owned
|
Parent
|
|||
Shiner International, Inc.
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Nevada, USA
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None
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||||
Shiner Industrial Co.
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China
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100%
|
Shiner International, Inc.
|
|||
Shiny Day
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China
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100%
|
Shiner International, Inc.
|
|||
Modern Hi-Tech
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China
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100%
|
Shiny Day
|
|||
Zhuhai
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China
|
100%
|
Shiny Day
|
|||
Neng Film
|
China
|
70%
|
Shiner International, Inc.
|
|||
Shimmer Sun Ltd.
|
China
|
100%
|
Shiner International, Inc.
|
|||
Jingyue
|
China
|
100%
|
Shimmer Sun Ltd.
|
|||
Shunhao
|
China
|
100%
|
Jingyue
|
|||
Yongxin
|
China
|
100%
|
Shunhao
|
|||
Ningbo
|
China
|
65%
|
Yongxin
|
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 the remaining 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.
6
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010 (unaudited)
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 during the nine months ended September 30, 2011. The acquisition gives Shiner a 65% controlling interest in Shimmer's subsidiary company, 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 account 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
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 Cash Equivalents
Cash and cash 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.
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.
7
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010 (unaudited)
Advances to Suppliers
In order 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 and the balances were $10,693,492 and $3,462,074 as of September 30, 2011 and December 31, 2010, respectively. 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 on 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 September 30, 2011 and December 31, 2010:
September 30,
|
December 31,
|
|||||||
2011
|
2010
|
|||||||
(Audited)
|
||||||||
Operating equipment
|
$ | 13,687,527 | $ | 13,028,014 | ||||
Vehicles
|
197,678 | 162,799 | ||||||
Office equipment
|
477,093 | 189,301 | ||||||
Buildings
|
18,803,898 | 9,597,807 | ||||||
Building and equipment improvements
|
571,365 | 667,050 | ||||||
33,737,561 | 23,644,971 | |||||||
Less accumulated depreciation
|
(6,102,602 | ) | (4,245,254 | ) | ||||
$ | 27,634,959 | $ | 19,399,717 |
8
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010 (unaudited)
Construction in Progress and Government Grants
Construction in progress mainly consists of amounts expended to build a new manufacturing workshop in Hainan and the constructing of a new product line for a BOPP tobacco line. The costs incurred and capitalized as construction in progress at September 30, 2011 are $10.0 million, 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 approximately $25.1 million. In October 2009, the Company received a government grant for this project of approximately $4.3 million 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 September 30, 2011 and December 31, 2010, the $4.3 million government grant was recorded in “Other payables” on the accompanying consolidated financial statements. If the government determines that the funds have been 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 September 30, 2011 and December 31, 2010, there was no significant impairment of its long-lived assets.
Intangible Assets
Intangible assets consist of rights to use three plots of land in Haikou City 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 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 assets, other long-lived assets, and goodwill 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.
Fair Value of Financial Instruments
For certain of the Company’s financial instruments, including cash and cash 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 of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value 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.
|
9
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010 (unaudited)
·
|
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 fair value 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 September 30, 2011 and December 31, 2010 (audited), the Company did not identify any assets and liabilities that are required to be presented on the balance sheet at fair value.
Revenue Recognition
The Company’s revenue recognition policies comply with SEC Staff Accounting Bulletin 104 (codified in FASB ASC Topic 480). 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 People’s Republic of China (“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.
Sales returns and allowances was $0 for the nine months ended September 30, 2011 and 2010. The Company does not provide unconditional right of return, price protection or any other concessions to its dealers or other customers.
Other Income
The other income and (expenses) for the three and nine months ended September 30, 2011 is $545,417 and $617,250, respectively, and $97,337 and $361,948, respectively, for the three and nine months ended September 30, 2010. The Company recognizes other income in the period the Company has earned the revenue and collectability is reasonably assured. Other income 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 nine months ended September 30, 2011 and 2010, were not significant.
Research and Development
The Company expenses its research and development costs as incurred. Research and development costs included in general and administrative expenses for the three and nine months ended September 30, 2011 were $464,445 and $964,080, respectively, and $725,839 and $1,211,626 for the three and nine months ended September 30 2010, respectively.
10
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010 (unaudited)
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 60,000 options outstanding as of September 30, 2011.
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. The adoption had no effect on the Company’s consolidated financial statements.
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 is based upon the weighted average number of common shares outstanding. Diluted earnings per share 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 60,000 options and 521,664 warrants outstanding as of September 30, 2011 with weighted-average exercise prices of $1.25 and $1.70, respectively. There were 190,000 options and 970,050 warrants outstanding as of September 30, 2010 with weighted-average exercise prices of $2.73 and $6.00, respectively. The following is a reconciliation of the number of shares (denominator) used in the basic and diluted earnings per share computations for the three and nine months ended September 30, 2011 and 2010:
Three Months Ended September 30,
|
||||||||||||||||
2011
|
2010
|
|||||||||||||||
Per Share
|
Per Share
|
|||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||
Basic earnings per share
|
27,541,491 | $ | 0.01 | 24,618,590 | $ | 0.05 | ||||||||||
Effect of dilutive stock options
|
||||||||||||||||
and warrants
|
- | - | - | - | ||||||||||||
Diluted earnings per share
|
27,541,491 | $ | 0.01 | 24,618,590 | $ | 0.05 |
Nine Months Ended September 30,
|
||||||||||||||||
2011
|
2010
|
|||||||||||||||
Per Share
|
Per Share
|
|||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||
Basic earnings per share
|
27,541,491 | $ | 0.08 | 24,598,411 | $ | 0.13 | ||||||||||
Effect of dilutive stock options
|
||||||||||||||||
and warrants
|
- | - | - | |||||||||||||
Diluted earnings per share
|
27,541,491 | $ | 0.08 | 24,598,411 | $ | 0.13 |
11
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010 (unaudited)
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 $5,174,239 and $4,060,637 (audited) at September 30, 2011 and December 31, 2010, 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 13.
Dividends
The Company's Chinese subsidiaries have restrictions on the payment of dividends to the Company. China has adopted 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.
12
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010 (unaudited)
Recent Accounting Pronouncements
In September 2011, the FASB issued amended accounting guidance related to goodwill impairment testing. The new guidance provides the option to perform a qualitative assessment by applying a more likely than not scenario to determine whether the fair value of a reporting unit is less than its carrying amount, which may then allow a company to skip the annual two-step quantitative goodwill impairment test depending on the determination. The amended guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Earlier adoption is permitted. Management does not expect the adoption of the amended guidance to have a material impact on the Company’s consolidated financial statements.
Inventory at September 30, 2011 and December 31, 2010 consisted of the following:
September 30,
|
December 31,
|
|||||||
2011
|
2010
|
|||||||
(Audited)
|
||||||||
Raw Material
|
$ | 3,308,703 | $ | 3,099,222 | ||||
Work in process
|
1,903,321 | 842,793 | ||||||
Finished goods
|
5,231,508 | 3,547,916 | ||||||
10,443,532 | 7,489,931 | |||||||
Less: Obsolescence Reserve
|
(167,908 | ) | (134,330 | ) | ||||
$ | 10,275,624 | $ | 7,355,601 |
Note 4 - Intangible Assets
Intangible assets at September 30, 2011 and December 31, 2010 consisted of the following:
September 30,
|
December 31,
|
|||||||
2011
|
2010
|
|||||||
(Audited)
|
||||||||
Purchased Intangibles
|
$ | 4,119,981 | $ | - | ||||
Right to use land
|
1,146,835 | 1,112,371 | ||||||
Less: Accumulated amortization
|
(62,727 | ) | (50,516 | ) | ||||
Intangible assets, net
|
$ | 5,204,089 | $ | 1,061,855 |
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.
13
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010 (unaudited)
Note 5 – Other Payables
Other payables consist of the following at September 30, 2011 and December 31, 2010:
September 30,
|
December 31,
|
|||||||
2011
|
2010
|
|||||||
(Audited)
|
||||||||
Special purpose fund for Shi Zi Ling workshop
|
$ | 4,529,344 | $ | 4,414,470 | ||||
Miscellaneous
|
820,802 | 240,830 | ||||||
$ | 5,350,146 | $ | 4,655,300 |
The $4,529,344 payable is the liability recorded pursuant to the funds received as part of a government grant. See “Construction in Progress and Government Grants in Note 2.
14
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010 (unaudited)
Note 6 - Loans
Short-term loans at September 30, 2011 and December 31, 2010 consisted of the following:
September 30,
|
December 31,
|
|||||||
2011
|
2010
|
|||||||
(Audited)
|
||||||||
The term of the loan is from December 20, 2010 to December 19, 2011, with an interest rate of 5.56% at December 31, 2010. The loan was collateralized by buildings and equipment
|
$ | - | $ | 1,972,100 | ||||
- | 455,100 | |||||||
The term of the loan is from September 20, 2010 to September 19, 2011, with an interest rate of 5.56% at December 31, 2010. The loan was collateralized by buildings and equipment
|
- | 606,800 | ||||||
The term of the loan is from July 21, 2010 to July 20, 2011, with an interest rate of 5.56% at December 31, 2010. The loan was collateralized by buildings and equipment
|
- | 758,500 | ||||||
The term of the loan is from June 24,2010 to June 24, 2011, with an interest rate of 5.56% at December 31, 2010. The loan was collateralized by buildings and equipment
|
- | 1,517,000 | ||||||
The term of the loan is from May 07, 2010 to May 6, 2011, with an interest rate of 5.841% at December 31, 2010. The loan was collateralized by buildings and equipment
|
- | 1,517,000 | ||||||
The term of the loan is from December 20, 2010 to December 19, 2011, with an interest rate of 5.56% at September 30, 2011. The loan is collateralized by equipment
|
2,033,200 | - | ||||||
The term of the loan is from February 28, 2011 to February 28, 2012, with an interest rate of 6.06% at September 30, 2011. The loan is collateralized by equipment
|
4,222,800 | - | ||||||
The term of the loan is from June 30, 2011 to June 30, 2012, with an interest rate of 8.203% at September 30, 2011. The loan is collateralized by buildings and equipment
|
1,564,000 | - | ||||||
$ | 7,820,000 | $ | 6,826,500 |
15
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010 (unaudited)
Long-term loans at September 30, 2011 consisted of the following:
September 30,
|
||||
2011
|
||||
The term of the loan is from January 24, 2011 to January 24,2018, with an interest rate of 6.60% at September 30, 2011. The loan is collateralized by buildings and land use rights
|
$ | 2,502,400 | ||
The term of the loan is from February 10, 2011 to February 10, 2018, with an interest rate of 6.60% at September 30, 2011. The loan is collateralized by buildings and land use rights
|
2,815,200 | |||
The term of the loan is from February 16, 2011 to February 16, 2018, with an interest rate of 6.60% at September 30, 2011. The loan is collateralized by buildings and land use rights
|
2,267,800 | |||
The term of the loan is from February 17, 2011 to February 17, 2018, with an interest rate of 6.60% at September 30, 2011. The loan is collateralized by buildings and land use rights
|
1,235,560 | |||
The term of the loan is from March 25, 2011 to March 25, 2018, with an interest rate of 6.60% at September 30, 2011. The loan is collateralized by buildings and land use rights
|
422,280 | |||
$ | 9,243,240 |
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 seven-year 70 million RMB, or approximately $10.8 million, secured revolving credit facility. Hainan Shiner may not make any draw downs under this facility after December 31, 2011. 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 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.
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.
During the nine months ended September 30, 2011, the Company drew down approximately $9.2 million and at September 30, 2011, there is approximately $1.6 million available credit for future draw downs.
16
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010 (unaudited)
Note 7 – Purchase of Shimmer Sun Ltd
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 has a payable of $1.9 million to the former shareholder which is recorded in “other payables” on the accompanying consolidated balance sheets. The acquisition, through Shimmer’s wholly owned subsidiaries, gives Shiner a 65% controlling interest in Shimmer's subsidiary, Ningbo. The Company acquired Shimmer as part of its overall strategy of seeking opportunities for vertical integration.
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 acquisition-date fair value of the total consideration was $3.2 million, which was allocated as follows:
Cash & cash equivalents
|
$ | 248,743 | ||
Accounts receivable
|
104,714 | |||
Advances to suppliers
|
1,876 | |||
Notes receivable
|
15,211 | |||
Inventory
|
304,707 | |||
Prepaid expenses & other current assets
|
108,061 | |||
Property and equipment, net
|
293,741 | |||
Intangible assets
|
4,075,199 | |||
Accounts payable
|
(46,338 | ) | ||
Other payables
|
(168,258 | ) | ||
Unearned revenue
|
(3,525 | ) | ||
Accrued payroll
|
(11,054 | ) | ||
Noncontrolling interest
|
(1,723,077 | ) | ||
$ | 3,200,000 |
The intangible asset arising from the purchase of the subsidiary is a preliminary allocation that is subject to change upon the completion of a formal appraisal.
The operating results of Shimmer and its subsidiaries are included in the accompanying consolidated statements of operations from the acquisition date. Shimmer’s operating results from the acquisition date to September 30, 2011 are as follows:
Revenue
|
$ | 599,767 | ||
Cost of goods sold
|
476,355 | |||
Gross profit
|
123,412 | |||
Operating expenses
|
87,319 | |||
Income from operations
|
36,093 | |||
Net income
|
$ | 22,781 |
The pro forma financial information presented below show the consolidated operations of the Company as if the Shimmer acquisition had occurred as of January 1, 2010:
Nine Months Ended
September 30,
|
||||||||
2011
|
2010
|
|||||||
Revenues
|
$ | 52,754,202 | $ | 41,838,563 | ||||
Gross profit
|
7,130,194 | 7,967,673 | ||||||
Income from operations
|
2,967,883 | 3,867,157 | ||||||
Provision for income taxes
|
657,290 | 664,121 | ||||||
Net income
|
2,249,325 | 3,332,516 | ||||||
Basic earnings (loss) per share
|
$ | 0.08 | $ | 0.14 |
17
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010 (unaudited)
Note 8 - Stock Options and Warrants
Stock Options
The following is a summary of the Company’s stock option activity for the nine months ended September 30, 2011:
Weighted
|
||||||||||||
Average
|
Aggregate
|
|||||||||||
Options
|
Exercise Price
|
Intrinsic
|
||||||||||
Outstanding
|
Price
|
Value
|
||||||||||
Outstanding at December 31, 2010
|
60,000 | $ | 1.25 | |||||||||
Granted
|
- | - | ||||||||||
Canceled
|
- | - | ||||||||||
Exercised
|
- | - | ||||||||||
Outstanding at September 30, 2011
|
60,000 | $ | 1.25 | $ | - | |||||||
Exercisable at September 30, 2011
|
50,000 | $ | 1.25 | $ | - |
The number and weighted average exercise prices of all options outstanding as of September 30, 2011, are as follows:
Options Outstanding
|
||||||||||||||
Weighted
|
||||||||||||||
Weighted
|
Average
|
|||||||||||||
Number
|
Average
|
Remaining
|
||||||||||||
Range of
|
Outstanding
|
Exercise
|
Contractual Life
|
|||||||||||
Exercise Price
|
September 30, 2011
|
Price
|
(Years)
|
|||||||||||
$ | 1.25 | 60,000 | $ | 1.25 | 1.68 | |||||||||
60,000 |
The number and weighted average exercise prices of all options exercisable as of September 30, 2011, are as follows:
Options Exercisable
|
||||||||||||||
Weighted
|
||||||||||||||
Weighted
|
Average
|
|||||||||||||
Number
|
Average
|
Remaining
|
||||||||||||
Range of
|
Outstanding
|
Exercise
|
Contractual Life
|
|||||||||||
Exercise Price
|
September 30, 2011
|
Price
|
(Years)
|
|||||||||||
$ | 1.25 | 50,000 | $ | 1.25 | 1.48 | |||||||||
50,000 |
18
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010 (unaudited)
The compensation expense for the unvested options as of September 30, 2011, was $695, which will be recognized through December 31, 2011.
Warrants
The following is a summary of the Company’s warrant activity for the nine months ended September 30, 2011:
Weighted
|
||||||||||
Weighted
|
Average
|
|||||||||
Average
|
Remaining
|
|||||||||
Warrants
|
Exercise Price
|
Contractual Life
|
||||||||
Outstanding
|
Price
|
(Years)
|
||||||||
Outstanding at December 31, 2010
|
521,664 | $ | 1.70 | |||||||
Granted
|
- | - | ||||||||
Canceled
|
- | - | ||||||||
Exercised
|
- | - | ||||||||
Outstanding at September 30, 2011
|
521,664 | $ | 1.70 |
1.49
|
||||||
Exercisable at September 30, 2011
|
521,664 | $ | 1.70 |
1.49
|
The expense for employee common welfare was $41,544 and $133,859 for the three and nine months ended September 30, 2011 and $22,723 and $60,535 for the three and nine months ended September 30, 2010, respectively. The Company did not record a welfare payable as of September 30, 2011 or December 31, 2010. The Chinese government abolished the 14% welfare plan policy in 2007. The Company is not required to establish welfare and common welfare reserves.
Note 10 - 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.
|
19
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010 (unaudited)
The Company appropriated $360,722 and $36,698 as reserve for the statutory surplus reserve and statutory common welfare fund for the nine months ended September 30, 2011 and 2010, respectively.
Note 11 - Current Vulnerability Due to Certain Concentrations
There were no customers that exceeded 10% of the Company’s sales for the three and nine months ended September 30, 2011. One customer accounted for 14% and 11% of the Company’s sales for the three and nine months ended September 30, 2010, respectively.
There was no vendor which accounted for 10% or more of the Company’s raw material purchases for the three and nine months ended September 30, 2011 and 2010.
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 12 - Contingent Liabilities
At September 30, 2011, the Company is contingently liable to banks for discounted notes receivable and to vendors for endorsed notes receivable of $524,264.
Note 13 – Segment Information
The Company reclassified its business segment information at the end of 2010 to more closely align its financial reporting with its business structure. Prior period amounts were restated to conform to the current presentation. We 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 and the barrier property better; therefore, 55% 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 nine months ended September 30, 2011 and 2010:
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
Revenues from unrelated entities
|
||||||||||||||||
BOPP tobacco film
|
$ | 7,144,354 | $ | 3,703,172 | $ | 22,829,240 | $ | 11,877,667 | ||||||||
Water-based latex
|
119,636 | - | 293,073 | - | ||||||||||||
Coated film
|
6,931,047 | 6,495,045 | 18,749,972 | 16,284,698 | ||||||||||||
Color printed packaging
|
1,428,615 | 810,715 | 4,557,557 | 2,540,403 | ||||||||||||
Advanced film
|
2,988,197 | 4,516,279 | 5,956,079 | 9,623,060 | ||||||||||||
$ | 18,611,849 | $ | 15,525,211 | $ | 52,385,921 | $ | 40,325,828 | |||||||||
Intersegment revenues
|
||||||||||||||||
BOPP tobacco film
|
$ | 3,843,162 | $ | 2,865,443 | $ | 7,720,336 | $ | 9,561,454 | ||||||||
Water-based latex
|
440,243 | - | 659,140 | - | ||||||||||||
Coated film
|
522,237 | 678,161 | 2,292,834 | 3,235,672 | ||||||||||||
Color printed packaging
|
255,043 | 739,413 | 1,204,568 | 2,358,600 | ||||||||||||
Advanced film
|
- | - | - | - | ||||||||||||
$ | 5,060,685 | $ | 4,283,017 | $ | 11,876,878 | $ | 15,155,726 | |||||||||
Total Revenues
|
||||||||||||||||
BOPP tobacco film
|
$ | 10,987,516 | $ | 6,568,615 | $ | 30,549,576 | $ | 21,439,121 | ||||||||
Water-based latex
|
559,879 | - | 952,212 | - | ||||||||||||
Coated film
|
7,453,284 | 7,173,206 | 21,042,806 | 19,520,370 | ||||||||||||
Color printed packaging
|
1,683,658 | 1,550,128 | 5,762,125 | 4,899,003 | ||||||||||||
Advanced film
|
2,988,197 | 4,516,281 | 5,956,079 | 9,623,062 | ||||||||||||
Less Intersegment revenues
|
(5,060,685 | ) | (4,283,019 | ) | (11,876,877 | ) | (15,155,728 | ) | ||||||||
$ | 18,611,849 | $ | 15,525,211 | $ | 52,385,921 | $ | 40,325,828 | |||||||||
Income (loss) from operations
|
||||||||||||||||
BOPP tobacco film
|
$ | 667,999 | $ | 692,674 | $ | 2,879,859 | $ | 2,009,826 | ||||||||
Water-based latex
|
97,523 | - | 109,079 | - | ||||||||||||
Coated film
|
(217,401 | ) | 494,015 | 440,344 | 668,117 | |||||||||||
Color printed packaging
|
(54,347 | ) | (111,251 | ) | (344,441 | ) | (365,109 | ) | ||||||||
Advanced film
|
(44,761 | ) | 640,483 | 35,832 | 1,452,431 | |||||||||||
Holding Company
|
(119,838 | ) | (89,782 | ) | (281,924 | ) | (104,803 | ) | ||||||||
$ | 329,175 | $ | 1,626,139 | $ | 2,838,749 | $ | 3,660,462 | |||||||||
Interest income
|
||||||||||||||||
BOPP tobacco film
|
$ | (50 | ) | $ | 508 | $ | 3,860 | $ | 2,347 | |||||||
Water-based latex
|
(1,037 | ) | - | 50 | - | |||||||||||
Coated film
|
1,390 | 1,016 | 3,261 | 3,218 | ||||||||||||
Color printed packaging
|
8 | 383 | 742 | 502 | ||||||||||||
Advanced film
|
195 | 752 | 1,012 | 1,901 | ||||||||||||
Holding Company
|
1,947 | 607 | 1,992 | 1,214 | ||||||||||||
$ | 2,453 | $ | 3,266 | $ | 10,917 | $ | 9,182 | |||||||||
Interest Expense
|
||||||||||||||||
BOPP tobacco film
|
$ | 108,225 | $ | 16,522 | $ | 431,125 | $ | 47,701 | ||||||||
Water-based latex
|
- | - | - | |||||||||||||
Coated film
|
105,201 | 29,421 | 163,108 | 75,601 | ||||||||||||
Color printed packaging
|
27,613 | - | 44,518 | - | ||||||||||||
Advanced film
|
34,355 | 18,662 | 50,923 | 38,646 | ||||||||||||
Holding Company
|
- | - | - | |||||||||||||
$ | 275,395 | $ | 64,605 | $ | 689,675 | $ | 161,948 | |||||||||
Income tax expense (benefit)
|
||||||||||||||||
BOPP tobacco film
|
$ | (46,954 | ) | $ | 124,916 | $ | 276,591 | $ | 305,935 | |||||||
Water-based latex
|
9,382 | - | 11,836 | - | ||||||||||||
Coated film
|
182,634 | 77,774 | 278,084 | 101,701 | ||||||||||||
Color printed packaging
|
- | - | - | - | ||||||||||||
Advanced film
|
74,832 | 109,501 | 86,621 | 221,089 | ||||||||||||
Holding Company
|
- | - | - | |||||||||||||
$ | 219,894 | $ | 312,191 | $ | 653,132 | $ | 628,725 | |||||||||
Net Income (loss)
|
||||||||||||||||
BOPP tobacco film
|
$ | 514,511 | $ | 637,015 | $ | 2,219,046 | $ | 1,743,808 | ||||||||
Water-based latex
|
74,834 | - | 83,726 | - | ||||||||||||
Coated film
|
(10,593 | ) | 410,142 | 495,222 | 610,941 | |||||||||||
Color printed packaging
|
(81,138 | ) | (233,134 | ) | (387,403 | ) | (346,370 | ) | ||||||||
Advanced film
|
5,987 | 582,158 | 57,832 | 1,263,683 | ||||||||||||
Holding Company
|
(120,535 | ) | (89,270 | ) | (280,982 | ) | (103,899 | ) | ||||||||
$ | 383,066 | $ | 1,306,911 | $ | 2,187,441 | $ | 3,168,163 | |||||||||
Provision for depreciation
|
||||||||||||||||
BOPP tobacco film
|
$ | 190,909 | $ | 78,732 | $ | 687,538 | $ | 293,099 | ||||||||
Water-based latex
|
29,691 | - | 31,743 | - | ||||||||||||
Coated film
|
210,118 | 154,168 | 632,198 | 471,770 | ||||||||||||
Color printed packaging
|
51,135 | 66,008 | 172,550 | 198,024 | ||||||||||||
Advanced film
|
88,367 | 105,844 | 197,377 | 243,355 | ||||||||||||
Holding Company
|
- | - | - | - | ||||||||||||
$ | 570,220 | $ | 404,752 | $ | 1,721,406 | $ | 1,206,248 | |||||||||
As of
|
As of
|
|||||||||||||||
September 30,
|
December 31,
|
|||||||||||||||
2011 | 2010 | |||||||||||||||
Total Assets
|
||||||||||||||||
BOPP tobacco film
|
$ | 24,182,189 | $ | 14,680,846 | ||||||||||||
Water-based latex
|
785,765 | - | ||||||||||||||
Coated film
|
22,411,015 | 24,720,052 | ||||||||||||||
Color printed packaging
|
6,045,493 | 4,805,203 | ||||||||||||||
Advanced film
|
7,256,864 | 10,141,213 | ||||||||||||||
Holding Company
|
13,176,300 | 1,570,372 | ||||||||||||||
$ | 73,857,626 | $ | 55,917,686 |
20
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010 (unaudited)
Note 14 - Geographical Sales
The geographical distribution of Shiner’s revenue for the three and nine months ended September 30, 2011 and 2010 is as follows:
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
Geographical Areas
|
2011
|
2010
|
2011
|
2010
|
||||||||||||
Chinese Main Land
|
$ | 15,221,398 | $ | 12,639,562 | $ | 43,440,964 | $ | 32,368,529 | ||||||||
Asia (outside Mainland China)
|
1,551,359 | 805,259 | 4,126,027 | 3,053,617 | ||||||||||||
Africa
|
149,132 | 190 | 291,304 | 68,012 | ||||||||||||
Middle East
|
446,836 | 572,654 | 1,400,584 | 1,361,467 | ||||||||||||
Australia
|
787,228 | 722,249 | 1,768,140 | 1,821,886 | ||||||||||||
North America
|
318,215 | 610,068 | 1,199,887 | 1,309,612 | ||||||||||||
South America
|
296 | 24,345 | 21,630 | 50,503 | ||||||||||||
Europe
|
137,385 | 150,884 | 137,385 | 292,202 | ||||||||||||
$ | 18,611,849 | $ | 15,525,211 | $ | 52,385,921 | $ | 40,325,828 |
21
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’s amended annual report on Form 10-K filed on August 8, 2011.
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 International, Inc., a Nevada corporation, and its wholly-owned subsidiaries, Hainan Shiner Industrial Co., Ltd., or “Hainan Shiner,” a PRC company, and Shimmer Sun Ltd., or “Shimmer Sun,” a PRC company; it’s 70% majority-owned subsidiary, Shanghai Juneng Functional Film Company, Ltd. or “Shanghai Juneng,” a PRC company; Shiner Industrial’s wholly-owned subsidiaries, Hainan Shiny-Day Color Printing Packaging Co., Ltd., or “Shiny-Day,” a PRC company, Hainan Modern Hi-Tech Industrial Co., Ltd., or “Hainan Modern,” a PRC company, and Zhuhai Modern Huanuo Packaging Material Co., Ltd., or “Zhuhai Modern”, a PRC company; and Shimmer Sun's 65% majority-owned subsidiary company, Ningbo Neisuoer Latex Co., Ltd., or "Ningbo," a PRC company.
|
●
|
“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; one BOPP tobacco film production line with a total capacity of 3,500 tons a year; one BOPP film production line with a total 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.
Percent of Total Revenue | ||||||||
Product
|
2011 | 2010 | ||||||
BOPP tobacco film
|
43 | % | 30 | % | ||||
Water-based latex
|
1 | % | 0 | % | ||||
Coated film
|
36 | % | 40 | % | ||||
Color printed packaging
|
9 | % | 6 | % | ||||
Advanced film
|
11 | % | 24 | % |
During the nine months ended September 30, 2011, each of our business segments contributed 43%, 1%, 36%, 9% and 11%, respectively, of our total revenue, compared to 30%, 0%, 40%, 6% and 24%, respectively, for the comparable 2010 period. International sales for the nine months ended September 30, 2011 were $8.9 million, or 17.1%, of our total revenues in 2011 and were a $1 million or 12.4% increase from the $7.9 million in international sales for the nine months ended September 30, 2010.
We have 16 patents by the State Intellectual Property Office of China and have 10 patent applications relating to our products and manufacturing processes pending. Although our patents and processes provide us with a competitive advantage, we do not believe the loss of any single patent would have a material adverse effect on our business as a whole.
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 accessible at www.shinerinc.com.
Results of Operations
Comparison of the Three Months Ended September 30, 2011 and 2010
Three Months Ended
September 30,
|
$ | % | ||||||||||||||
2011
|
2010
|
Change
|
Change
|
|||||||||||||
Revenues
|
$ | 18,611,849 | $ | 15,525,211 | $ | 3,086,638 | 19.9 | % | ||||||||
Cost of goods sold
|
16,490,987 | 12,094,836 | 4,396,151 | 36.3 | % | |||||||||||
Gross profit
|
2,120,862 | 3,430,375 | (1,309,513 | ) | -38.2 | % | ||||||||||
Selling, general and administrative expenses
|
1,791,687 | 1,804,236 | (12,549 | ) | -0.7 | % | ||||||||||
Interest expense, net of interest income
|
272,942 | 61,338 | 211,604 | 345.0 | % | |||||||||||
Other income (expense), net
|
545,417 | 97,337 | 448,080 | 460.3 | % | |||||||||||
Exchange gain (loss)
|
1,283 | (46,810 | ) | 48,093 | -102.7 | % | ||||||||||
Income tax expense
|
219,894 | 312,191 | (92,297 | ) | -29.6 | % | ||||||||||
Net loss attributed to noncontrolling interest | 1,336 | 3,774 | (2,438 | ) | -64.6 | % | ||||||||||
Net income attributed to Shiner
|
$ | 383,066 | $ | 1,306,911 | $ | (923,845 | ) | -70.7 | % |
23
Revenues
Revenues for the three months ended September 30, 2011 increased 19.9%, or $3.1 million, to $18.6 million compared to $15.5 million in the comparable period of 2010. The increase was mainly a result of increased sales of the BOPP tobacco films, coating films and color printing products. BOPP tobacco revenue increased 92.9%, or $3.4 million, in the three months ended September 30, 2011 to $7.1 million from $3.7 million in the comparable period of 2010. Coated film revenue increased 6.7%, or $0.4 million, to 6.9 million in the three months ended September 30, 2011 from $6.5 million in the comparable period of 2010. Our new product, water-based latex revenue, was $0.1 million for the three months ended September 30, 2011. Our color printing product revenue increased 76.2%, or $0.6 million, to $1.4 million in the three months ended September 30, 2011 from $0.8 million in of the comparable period of 2010. Our advanced films revenues decreased 33.8%, or $1.5 million, to $3.0 million in the three months ended September 30, 2011 from $4.5 million in the comparable period of 2010.
The increase in revenue was primarily caused by an increase in domestic product volume. Approximately 81.8%, or $15.2 million, of our total sales in the three months ended September 30, 2011 were made to Chinese companies. In the third quarter of 2010, approximately 80.9%, or $12.2 million, of our total sales were made domestically. The Company provides coated film to its largest customer which manufactures snack cakes and our remaining top three customers are tobacco manufacturers who use our BOPP tobacco film.
International sales for the three months ended September 30, 2011 were $3.4 million, or 18.2%, of our total revenues in 2011 and represented a $0.5 million or 17.5% increase from the $2.9 million in international sales in the third quarter of 2010.
Our five largest customers accounted for 7%, 4%, 3%, 3% and 3% of our revenue, respectively, for the three months ended September 30, 2011 and 14%, 7%, 6%, 6% and 4% of our revenue, respectively, for the three months ended September 30, 2010.
Cost of Goods Sold
Cost of goods sold increased $4.4 million, or 36.3%, from $12.1 million for the three months ended September 30, 2010 to $16.5 million in the three months ended September 30, 2011. The cost of goods sold was 88.6 % and 77.9% of our revenue in the third quarters of 2011 and 2010, respectively. The principal cost component of our cost of goods sold is raw materials cost which includes petroleum. The increase in cost of goods sold year to year was primarily caused by an increase in raw material costs due to petroleum price fluctuations. We estimate that 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 cost of goods sold 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 requirements for the food industry mandate the use of non-benzene based products. In an effort to be environmentally friendly and to improve work conditions in our factory, Shiner switched to non-benzene based ink products in a corporate effort to be green. 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 a favorable response from all of our customers at the time.
The percentage increase in our cost of goods sold for the three months ended September 30, 2011 was influenced by a 70% increase in raw material costs due to petroleum price fluctuations; a 30% 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.
24
Gross Profit
Our gross profit for the three months ended September 30, 2011 was $2.1 million, a gross margin of 11.4%, a decrease of 10.7% from the gross margin of 22.1% for the three months ended September 30, 2010. The decrease in gross margin was primarily a consequence of an increase in overhead unit rates as a result of increased labor costs and depreciation of the new property.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses decreased by 0.7%, or $12,549, to $1.8 million for the three months ended September 30, 2011 compared to $1.8 million in the comparable period of 2010. The decrease in selling, general and administrative expenses was not significant.
Interest Expense, net
Interest expense, net for the three months ended September 30, 2011 increased by 345%, or $211,604, to $272,942 compared to $61,338 in the comparable period of 2010. We obtained additional short-term and long term loans in the three months ended September 30, 2011 compared with the comparable period in 2010.
Other Income
Other income increased by $448,080 or 460.3% to $545,417 for the three months ended September 30, 2011 compared to income of $97,337 in the comparable period of 2010. During the three months ended September 30, 2011, we received approximately $604,000 in subsidy income from Chinese Governmental Agencies for developing technology and research and development projects. We did not have these subsidies during the same period of 2010. During the three months ended September 30, 2010, we received approximately $73,465 from a former landlord for vacating leased space, which was paid in full during 2010.
Income Tax Expense
For the three months ended September 30, 2011, we recorded a tax provision of $219,894 compared to $312,191 in the comparable period of 2010. Our effective tax rates for the three months ended September 30, 2011 and 2010 were 36% and 19%, respectively.
Net Income
The decrease in our net income for the three months ended September 30, 2011 compared to the net income in the comparable period of 2010 was mainly due to increased labor costs, depreciation of the new property, no other income from a former landlord offset by an increase in subsidy income.
Comparison of the Nine Months Ended September 30, 2011 and 2010
Nine Months Ended
September 30,
|
$ | % | ||||||||||||||
2011
|
2010
|
Change
|
Change
|
|||||||||||||
Revenues
|
$ | 52,385,921 | $ | 40,325,828 | $ | 12,060,093 | 29.9 | % | ||||||||
Cost of goods sold
|
45,378,458 | 32,765,876 | 12,612,582 | 38.5 | % | |||||||||||
Gross profit
|
7,007,463 | 7,559,952 | (552,489 | ) | -7.3 | % | ||||||||||
Selling, general and administrative expenses
|
4,168,714 | 3,899,490 | 269,224 | 6.9 | % | |||||||||||
Interest expense, net of interest income
|
678,758 | 152,766 | 525,992 | 344.3 | % | |||||||||||
Other income, net
|
617,250 | 361,948 | 255,302 | 70.5 | % | |||||||||||
Exchange gain (loss)
|
61,996 | (76,530 | ) | 138,526 | -181.0 | % | ||||||||||
Income tax expense
|
653,132 | 628,725 | 24,407 | 3.9 | % | |||||||||||
Net loss attributed to noncontrolling interest | 27 | 3,774 | (3,747 | ) | -99.3 | % | ||||||||||
Net income attributed to Shiner
|
$ | 2,187,441 | $ | 3,168,163 | $ | (980,722 | ) | -31.0 | % |
25
Revenues
Revenues for the nine months ended September 30, 2011 increased 29.9%, or $12.1 million, to $52.4 million compared to $40.3 million in the comparable period of 2010. This increase was mainly a result of increased sales in the domestic market. BOPP tobacco revenue increased 92.2%, or $11.0 million, in the nine months ended September 30, 2011 to $22.9 million from $11.9 million in the comparable period of 2010. Coated film revenue increased 15.1%, or $2.4 million, to $18.8 million in the nine months ended September 30, 2011 from $16.3 million in the comparable period of 2010. Our water-base latex revenue is $0.3 million for the nine months ended September 30, 2011. Our color printing product revenue increased 79.4%, or $2.0 million, to $4.5 million in the nine months ended September 30, 2011 from $2.5 million in the comparable period of 2010. Our advanced film revenues decreased 38.1%, or $3.7 million, to $5.9 million in the nine months ended September 30, 2011 from $9.6 million in the comparable period of 2010.
The increase in revenue was primarily caused by an increase in domestic product volume. 82.9%, or $43.4 million, of our total sales in the nine months ended September 30, 2011 was made to Chinese companies. In the first nine months of 2010, approximately 80.0%, or $32 million, of our total sales were made domestically. The Company provides coated film to its largest customer who manufactures snack cakes and its remaining top 3 customers are tobacco manufacturers which use our BOPP tobacco film.
Internationally, we sell only three lines of products: anti-counterfeit film, coated film, and color printing. International sales for the nine months ended September 30, 2011 were $8.9 million, or 17.1%, of our total revenues in 2011 and represented a $0.9 million or 12.4% increase from the $8 million in international sales in 2010. The decrease was not significant. All international sales are indirect using a network of distributors and converters.
Our five largest customers accounted for 7%, 4%, 3%, 3% and 3% of our revenue for the nine months ended September 30, 2011 and 11%, 9%, 7%, 5% and 4% of our revenue for the nine months ended September 30, 2010.
Cost of Goods Sold
Cost of goods sold increased $12.6 million, or 38.5%, from $32.8 million for the nine months ended September 30, 2010 to $45.4 million in the first nine months of 2011. The cost of goods sold was 86.6% and 81.3% of our revenue in the first nine months of 2011 and 2010, respectively. The principal cost component of our cost of goods sold is raw materials which includes petroleum. The increase in cost of goods sold year to year was primarily caused by an increase in raw material costs due to petroleum price fluctuations. We estimate that 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 is not a significant difference in the cost of goods sold percentages among our different product lines and therefore, any increase or decrease in our raw material costs has similar impact to our different product lines’ profitability.
The percentage increase in our cost of goods sold for the nine months ended September 30, 2011 was influenced by a 72.0% increase in raw material costs due to petroleum price fluctuations; a 28.0% increase in the cost of labor; and the amortization of the added depreciation of new property into the cost of goods sold.
Gross Profit
Our gross profit for the nine months ended September 30, 2011 was $7.0 million, a gross margin of 13.4%, a decrease of 5.3% from the gross margin of 18.7% for the nine months ended September 30, 2010. The decrease in gross margin was a consequence of an increase in overhead unit rates as a result of increased labor costs and depreciation of the new property.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses increased by 6.9%, or $0.3 million, to $4.2 million for the nine months ended September 30, 2011 compared to $3.9 million in the comparable period of 2010. General and administrative expenses include rent, management and staff salaries, insurance, marketing, accounting, legal, and research and development expenses. Although we have strict standards to control our general and administrative expenses, we have increased our research and development expenditures as compared to the comparable period last year. Research and development expenses decreased $247,546 or 20.4%, to $1.0 million for the nine months ended September 30 2011, from $1.2 million in the comparable period of 2010.
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Interest Expense, net
Interest expense, net for the nine months ended September 30, 2011 increased by 344.3%, or $525,992, to $678,758 compared to $152,766 in 2010. We obtained additional short-term and long-term loans in the nine months ended September 30, 2011 compared with the comparable period in 2010.
Other Income
Other income increased by $255,302 or 70.5% to $617,250 for the nine months ended September 30, 2011 compared to $361,948 in the comparable period of 2010. During the nine months ended September 30, 2011, we received approximately $759,000 in subsidy income from Chinese Governmental Agencies for developing technology and research and development projects. We did not have these subsidies during the same period of 2010. During the nine months ended September 30, 2010, we received $220,155 from a former landlord for vacating leased space, which was paid in full during 2010.
Income Tax Expense
For the nine months ended September 30, 2011, we recorded a tax provision of $653,132 compared to $628,725 in 2010. Our effective tax rates for the nine months ended September 30, 2011 and 2010 were 23% and 17%, respectively.
Net Income
The decrease in our net income for the nine months ended September 30, 2011 compared to the net income in the comparable period of 2010 was mainly due to increased labor costs, depreciation of new property, no other income from a former landlord offset by the increase in subsidy income.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of September 30, 2011 that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our interests.
Liquidity and Capital Resources
At September 30, 2011, we had $1.8 million in cash and cash equivalents on hand, compared to $8.6 million at December 31, 2010, and we had working capital of $9.5 million, a decrease of $3.3 million from December 31, 2010. 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 non-current assets. 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 general corporate purposes. The following table summarizes the key cash flow metrics from our condensed consolidated statements of cash flows for the nine months ended September 30, 2011 and 2010.
Cash Flows (Unaudited)
Nine months ended
September 30,
|
||||||||
2011
|
2010
|
|||||||
Net cash provided by operating activities
|
$ | 21,869 | $ | 2,074,679 | ||||
Net cash used in investing activities
|
(16,991,824 | ) | (3,737,641 | ) | ||||
Net cash provided by financing activities
|
9,999,600 | 1,515,670 | ||||||
Effect of exchange rate changes on cash and cash equivalents
|
135,841 | 100,958 | ||||||
Net (decrease)/increase in cash and cash equivalents
|
(6,834,514 | ) | (46,334 | ) | ||||
Cash and cash equivalents at beginning of the period
|
8,622,035 | 3,059,796 | ||||||
Cash and cash equivalents at end of the period
|
$ | 1,787,521 | $ | 3,013,462 |
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Operating Activities
Net cash flows provided by operating activities for the nine months ended September 30, 2011 was $21.9 thousand, which was comprised primarily of net income of $2.2 million and a depreciation expense of $1.7 million, offset by an increase in working capital components of $3.9 million.
Investing Activities
We used $17.0 million from our investing activities during the nine months ended September 30, 2011 primarily for the acquisition of property and equipment including construction in progress and the purchase of Shimmer Sun Ltd. for $3,200,000. We are building a new tobacco film production line that we expect to be completed in the third quarter of 2011. The new line will be a BOPP film production line in a fully automated plant equipped with state-of-the-art production machinery. The total cost of this new facility is expected to be approximately $12.0 million. We have an RMB 70 million ($10.8 million) credit facility that we can draw down upon to pay for the cost of the building (see discussion under “Liabilities” below).
Financing Activities
Net cash provided by financing activities was $10.0 million from the issuance of short and long-term loans. $7.0 million was paid to terminate short term loans offset by $17.0 million provided by the issuance of short-term loans and long-term loans under the credit facility bearing interest rates between 5.56% and 8.20%.
Assets
As of September 30, 2011, our accounts receivable decreased by $3.3 million compared with the balance as of December 31, 2010. The decrease in accounts receivable during the nine months ended September 30, 2011 was due primarily to our collection of accounts receivable. We intend to continue our efforts to maintain accounts receivable at reasonable levels in relation to our sales.
Liabilities
Our accounts payable increased by $0.7 million during the nine months ended September 30, 2011. The increase in accounts payable during the nine months ended September 30, 2011 was due primarily to increased sales. As the market demand increased, we purchased more raw materials for production.
We entered into a formal agreement with a vendor whereby we agreed to purchase new equipment for approximately $13.2 million. We already paid approximately $10.0 million toward the purchase of this equipment and issued a letter of credit for the remaining amount. The equipment was installed in the third quarter of 2011, and be operational in the fourth quarter of 2011.
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 $10.8 million, secured revolving credit facility. Hainan Shiner may not make any draw downs under this facility after December 31, 2011. On each of January 24, 2011, February 10, 2011, February 16, 2011, February 17, 2011, and March 25, 2011, Hainan Shiner made withdrawals on the credit facility of approximately $2.5 million, $2.6 million, $2.2 million, $1.2 million, and approximately $0.4, respectively. We have approximately $1.7 million of available credit. 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.
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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.
During the nine months ended September 30, 2011, we paid approximately $7.0 million of our short-term loans and borrowed an additional $7.8 million in short-term loans. These loans will come due between December 19, 2011 and June 30, 2012. 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
There were no changes in our critical accounting policies from those disclosed under Item 7, “Management's Discussion and Analysis of Results of Operations and Financial Condition” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, as amended.
Recent Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board (FASB) issued amended accounting guidance related to goodwill impairment testing. The new guidance provides the option to perform a qualitative assessment by applying a more likely than not scenario to determine whether the fair value of a reporting unit is less than its carrying amount, which may then allow a company to skip the annual two-step quantitative goodwill impairment test depending on the determination. The amended guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Earlier adoption is permitted. Management does not expect the adoption of the amended guidance to have a material impact on the Company’s consolidated financial statements.
Seasonality of our Sales
The first quarter of the calendar year is typically the slowest season of the year due to the Chinese New Year holiday. During this period, accounts receivable collection is very slow and we also need to prepare for upcoming busier seasons by making payments for inventory.
Inflation
Inflation does not materially affect our business or the results of our operations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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Not applicable.
Item 4.
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Controls and Procedures
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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.
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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 September 30, 2011. Based upon, and as of the date of this evaluation, Mr. Xing and Mr. Xu, determined that, as of September 30, 2011, 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 third quarter of fiscal 2011 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
Item 1.
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Legal Proceedings
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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.
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Risk Factors.
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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, 2010.
Item 2.
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Unregistered Sales of Equity Securities and Use Of Proceeds.
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None.
Item 3.
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Defaults Upon Senior Securities.
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None.
Item 4.
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(Removed and Reserved).
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Item 5.
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Other Information
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We have no information to disclose that was required to be in a report on Form 8-K during the period covered by this report, but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.
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Item 6.
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Exhibits
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Exhibit
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Description of Exhibit
|
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31.1
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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
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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
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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
|
|
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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.
|
|
November 14, 2011
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By: /s/ Qingtao Xing
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Name: Qingtao Xing
|
|
Title: President and Chief Executive Officer
(Principal Executive Officer)
|
|
Shiner International, Inc.
|
|
November 14, 2011
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By: /s/ Xuezhu Xu
|
Name: Xuezhu Xu
|
|
Title: Interim Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
|
32