Attached files
file | filename |
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EX-31.1 - EXHIBIT 31.1 - Shiner International, Inc. | exhibit31-1.htm |
EX-32.1 - EXHIBIT 32.1 - Shiner International, Inc. | exhibit32-1.htm |
EXCEL - IDEA: XBRL DOCUMENT - Shiner International, Inc. | Financial_Report.xls |
EX-32.2 - EXHIBIT 32.2 - Shiner International, Inc. | exhibit32-2.htm |
EX-31.2 - EXHIBIT 31.2 - Shiner International, Inc. | exhibit31-2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-Q
[X] Quarterly report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2014
[_] Transition report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _______ to _______.
001-33960
(Commission file number)
SHINER INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Nevada | 98-0507398 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
19/F, Didu Building, Pearl River Plaza,
No. 2
North Longkun Road Haikou,
Hainan Province
China 570125
(Address of principal executive offices)
011-86-898-68581104
(Issuers telephone
number)
N/A
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes [X] No [_]
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 [_] | Accelerated filer [_] |
Non-accelerated filer [_] | Smaller reporting company [X] |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]
The number of shares outstanding of each of the issuers classes of common stock, as of September 11, 2014 is as follows:
Class of Securities | Shares Outstanding |
Common Stock, $0.001 par value | 27,541,491 |
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION | ||
Item 1. | Financial Statements | 1 |
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations | 21 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 29 |
Item 4. | Controls and Procedures | 29 |
PART II OTHER INFORMATION | ||
Item 1. | Legal Proceedings | 29 |
Item 1A. | Risk Factors | 29 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 29 |
Item 3. | Defaults Upon Senior Securities | 30 |
Item 4. | Mine Safety Disclosures | 30 |
Item 5. | Other Information | 30 |
Item 6. | Exhibits | 30 |
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES |
CONSOLIDATED FINANCIAL STATEMENTS |
THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2013 |
Page(s) | |
Financial Statements | |
Consolidated Balance Sheets | 2 |
Consolidated Statements of Operations and Other Comprehensive Income (Loss) | 4 |
Consolidated Statements of Cash Flows | 6 |
Notes to Consolidated Financial Statements | 8 - 20 |
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES |
CONSOLIDATED BALANCE SHEETS |
|
June 30, | December 31, | ||||
|
2014 | 2013 | ||||
|
(Unaudited) | |||||
ASSETS |
||||||
CURRENT ASSETS: |
||||||
Cash and equivalents |
$ | 6,717,924 | $ | 9,135,988 | ||
Restricted cash |
2,325,129 | 2,404,734 | ||||
Accounts receivable, net of allowance for doubtful accounts of $1,294,461 and $960,182 at June 30, 2014 and December 31, 2013 |
10,954,760 | 10,414,541 | ||||
Other receivables |
23,656,772 | 3,333,233 | ||||
Advances to suppliers |
18,229,257 | 26,453,255 | ||||
Notes receivable |
462,840 | 652,733 | ||||
Inventory, net |
14,024,601 | 10,620,622 | ||||
Prepaid expenses and other current assets |
338,818 | 202,896 | ||||
|
||||||
Total current assets |
76,710,101 | 63,218,002 | ||||
|
||||||
Property and equipment, net |
27,654,812 | 28,094,154 | ||||
Construction in progress |
4,551,398 | 6,251,585 | ||||
Advance for purchase of equipment |
253,946 | 226,506 | ||||
Other non-current receivables |
18,740,599 | - | ||||
Intangible assets, net |
1,061,057 | 1,081,398 | ||||
|
||||||
TOTAL ASSETS |
$ | 128,971,913 | $ | 98,871,645 | ||
|
||||||
LIABILITIES AND EQUITY |
||||||
|
||||||
CURRENT LIABILITIES: |
||||||
|
||||||
Accounts payable |
$ | 16,597,409 | $ | 12,003,387 | ||
Other payables |
17,765,065 | 11,409,170 | ||||
Unearned revenue |
2,056,796 | 4,565,107 | ||||
Accrued payroll |
125,023 | 122,309 | ||||
Short-term loans |
33,500,067 | 28,862,794 | ||||
|
||||||
Total current liabilities |
70,044,360 | 56,962,767 | ||||
|
||||||
Long-term loans |
27,932,800 | 9,822,000 | ||||
|
||||||
Total liabilities |
97,977,160 | 66,784,767 | ||||
|
||||||
Commitments and contingencies |
- 2 -
EQUITY: |
||||||
Shiner stockholders' equity: |
||||||
Common stock, par value $0.001; 75,000,000 shares authorized, |
||||||
27,603,336 shares issued and 27,541,491 shares outstanding |
27,603 | 27,603 | ||||
Additional paid-in capital |
14,336,456 | 14,336,456 | ||||
Treasury stock (61,845 shares) |
(58,036 | ) | (58,036 | ) | ||
Other comprehensive income |
6,551,848 | 6,810,734 | ||||
Statutory reserve |
3,742,080 | 3,644,905 | ||||
Retained earnings |
6,682,922 | 7,613,273 | ||||
|
||||||
Total Shiner stockholders' equity |
31,282,873 | 32,374,935 | ||||
|
||||||
Noncontrolling interest |
(288,120 | ) | (288,057 | ) | ||
|
||||||
Total equity |
30,994,753 | 32,086,878 | ||||
|
||||||
TOTAL LIABILITIES AND EQUITY |
$ | 128,971,913 | $ | 98,871,645 |
The accompanying notes are an integral part of these consolidated financial statements.
- 3 -
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS) |
(Unaudited) |
|
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
|
2014 | 2013 | 2014 | 2013 | ||||||||
|
||||||||||||
Net revenue |
$ | 24,199,071 | $ | 17,950,297 | $ | 49,463,851 | $ | 31,793,826 | ||||
Cost of goods sold |
22,801,060 | 16,127,248 | 43,846,910 | 29,057,338 | ||||||||
Gross profit |
1,398,011 | 1,823,049 | 5,616,941 | 2,736,488 | ||||||||
Operating expenses: |
||||||||||||
Selling |
1,308,378 | 769,904 | 2,273,683 | 1,435,329 | ||||||||
General and administrative |
2,256,241 | 1,497,585 | 3,572,599 | 2,928,678 | ||||||||
Total operating expenses |
3,564,619 | 2,267,489 | 5,846,282 | 4,364,007 | ||||||||
|
||||||||||||
Loss from operations |
(2,166,608 | ) | (444,440 | ) | (229,341 | ) | (1,627,519 | ) | ||||
Non-operating income (expense): |
||||||||||||
Other income, net |
1,365,602 | 3,572,108 | 659,424 | 4,579,548 | ||||||||
Interest income |
797,413 | 14,411 | 804,064 | 75,761 | ||||||||
Interest expense |
(1,214,307 | ) | (512,850 | ) | (1,752,349 | ) | (887,006 | ) | ||||
Exchange gain (loss) |
629 | (41,011 | ) | (3,401 | ) | (79,071 | ) | |||||
Total non-operating income (expense) |
949,337 | 3,032,658 | (292,262 | ) | 3,689,232 | |||||||
|
||||||||||||
Income (loss) before income tax |
(1,217,271 | ) | 2,588,218 | (521,603 | ) | 2,061,713 | ||||||
|
||||||||||||
Income tax expense |
20,587 | 284,684 | 313,929 | 284,684 | ||||||||
|
||||||||||||
Net income (loss) |
(1,237,858 | ) | 2,303,534 | (835,532 | ) | 1,777,029 | ||||||
Net (income) loss attributed to noncontrolling interest |
(5,555 | ) | 7,137 | (2,356 | ) | 7,152 | ||||||
Net income (loss) attributed to Shiner |
$ | (1,232,303 | ) | $ | 2,296,397 | $ | (833,176 | ) | $ | 1,769,877 | ||
Comprehensive income (loss): |
||||||||||||
Net income (loss) |
$ | (1,237,858 | ) | $ | 2,303,534 | $ | (835,532 | ) | $ | 1,777,029 | ||
Foreign currency translation gain (loss) |
30,479 | 517,918 | (258,949 | ) | 706,709 | |||||||
Comprehensive income (loss): |
$ | (1,207,379 | ) | $ | 2,821,452 | $ | (1,094,481 | ) | $ | 2,483,738 | ||
Weighted average shares outstanding: |
||||||||||||
Basic |
27,541,491 | 27,541,491 | 27,541,491 | 27,541,491 | ||||||||
Diluted |
27,541,491 | 27,541,491 | 27,541,491 | 27,541,491 | ||||||||
Earnings (loss) per share attributed to Shiner common stockholders: |
||||||||||||
Basic |
$ | (0.04 | ) | $ | 0.08 | $ | (0.03 | ) | $ | 0.06 | ||
Diluted |
$ | (0.04 | ) | $ | 0.08 | $ | (0.03 | ) | $ | 0.06 |
The accompanying notes are an integral part of these consolidated financial statements.
- 4 -
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
SIX MONTHS ENDED JUNE 30, 2014 AND 2013 |
(Unaudited) |
|
2014 | 2013 | ||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||
Net (loss) income |
$ | (835,532 | ) | $ | 1,777,029 | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||
Depreciation |
2,203,319 | 1,627,172 | ||||
Amortization |
11,782 | 11,594 | ||||
Decrease in restricted cash |
1,037,457 | - | ||||
Change in working capital components: |
||||||
Accounts receivable |
(624,460 | ) | (2,096,694 | ) | ||
Other receivables |
(1,008,574 | ) | - | |||
Inventory |
(3,496,914 | ) | (3,978,392 | ) | ||
Notes receivable |
185,164 | - | ||||
Advances to suppliers |
8,033,662 | 1,923,549 | ||||
Other assets |
(77,871 | ) | - | |||
Prepaid expenses and other current assets |
- | (1,019,674 | ) | |||
Accounts payable |
4,700,616 | 1,602,247 | ||||
Unearned revenue |
(2,478,145 | ) | (617,857 | ) | ||
Other payables |
6,460,558 | 76,624 | ||||
Accrued payroll |
3,694 | (92 | ) | |||
Net cash provided by (used in) operating activities |
14,114,756 | (694,494 | ) | |||
|
||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||
Cash from the sale of assets |
- | 122,255 | ||||
Issuance of notes receivable |
- | (54,690 | ) | |||
Proceeds from notes receivable |
- | 545,241 | ||||
Payments for property and equipment |
(361,253 | ) | (48,258 | ) | ||
Issuance of other receivables |
(38,233,235 | ) | - | |||
Net cash provided by (used in) investing activities |
(38,594,488 | ) | 564,548 | |||
|
||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||
Repayment of short-term loans |
(22,846,102 | ) | (16,580,059 | ) | ||
Proceeds from short-term loans |
27,724,571 | 19,295,912 | ||||
Repayment of long-term loans |
(1,302,400 | ) | - | |||
Proceeds from long-term loans |
19,536,000 | - | ||||
Increase in restricted cash |
(976,800 | ) | (1,549,556 | ) | ||
Net cash provided by financing activities |
22,135,269 | 1,166,297 |
- 5 -
Effect of exchange rate changes on cash and cash equivalents |
(73,601 | ) | 111,511 | |||
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS |
(2,418,064 | ) | 1,147,862 | |||
|
||||||
CASH AND EQUIVALENTS, BEGINNING BALANCE |
9,135,988 | 4,233,183 | ||||
|
||||||
CASH AND EQUIVALENTS, ENDING BALANCE |
$ | 6,717,924 | $ | 5,381,045 | ||
|
||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
||||||
Interest paid |
$ | 1,086,009 | $ | 757,239 | ||
Income taxes paid |
$ | 62,785 | $ | - |
The accompanying notes are an integral part of these consolidated financial statements.
- 6 -
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
JUNE 30, 2014 AND 2013 (Unaudited) |
Note 1 - Organization and Basis of Presentation
The unaudited consolidated financial statements were prepared by Shiner International, Inc. (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 Companys Annual Report on Form 10-K filed with the SEC on April 3, 2014. The results for the six months ended June 30, 2014, are not necessarily indicative of the results to be expected for the year ending December 31, 2014.
Organization and Line of Business
The Company was incorporated in the State of Nevada on November 12, 2003. The Company, through its subsidiaries manufactures Biaxially Oriented Polypropylene (BOPP) tobacco film, coated films, color printing products, advanced film, and water based coatings selling to customers throughout the Peoples Republic of China (China or PRC), 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. Except as otherwise indicated by the context, all references in this report to Shiner, Company, we, us or our are to Shiner International, Inc. and its direct and indirect subsidiaries: (i) Hainan Shiner Industrial Co., Ltd., or Hainan Shiner, (ii) Hainan Shiny-Day Color Printing Packaging Co., Ltd., or Shiny-Day, (iii) Hainan Modern Hi-Tech Industrial Co., Ltd., or Hainan Modern, (iv) Zhuhai Modern Huanuo Packaging Material Co., Ltd., or Zhuhai Modern, (v) Shimmer Sun Ltd., or Shimmer Sun, (vi) Hainan Jingyue New Material Co., Ltd., or Jingyue, (vii) Hainan Shunhao New Material Co., Ltd., or Shunhao, (viii) Hainan Yongxin Environmental Co., Ltd., or Yongxin, and (ix) Ningbo Neisuoer Latex Co., Ltd., or Ningbo.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Shiner and its subsidiaries as follows:
Subsidiary |
Place Incorporated |
Percentage Owned |
Parent |
Shiner International, Inc. | Nevada, USA | None | |
Hainan Shiner | China | 100% | Shiner International, Inc. |
Shiny-Day | China | 100% | Shiner International, Inc. |
Hainan Modern | China | 100% | Shiny-Day |
Zhuhai Modern | China | 100% | Shiny-Day |
Shimmer Sun | China | 100% | Shiner International, Inc. |
Jingyue | China | 100% | Shimmer Sun |
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 Companys 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 May 2, 2011, Shiner acquired 100% of the stock of Shimmer Sun Ltd. (Shimmer Sun) for $3.2 million. The Company paid $1.3 million in cash and the remaining $1.9 million was recorded as other payables which was paid by September 30, 2011. The acquisition gave Shiner a 65% controlling interest in Shimmer Suns subsidiary, Ningbo. The transaction was accounted for under the acquisition method of accounting, with the purchase price allocated based on the fair value (FV) 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 non-controlling 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 parents 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.
- 7 -
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
JUNE 30, 2014 AND 2013 (Unaudited) |
The net income attributed to the NCI is separately designated in the accompanying consolidated statements of operations and other comprehensive income (loss). Losses attributable to the NCI in a subsidiary may exceed the NCIs interests in the subsidiarys equity. The excess attributable to the NCI is attributed to those interests. The NCI shall continue to attribute its share of losses even if that attribution results in a deficit NCI balance.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Shiner International, Inc. and its subsidiaries. All significant intercompany transactions and balances were eliminated in consolidation.
Foreign Currency Translation
The accounts of the Companys Chinese subsidiaries are maintained in RMB and the accounts of the US parent company are maintained in 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. According to ASC 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 consolidated statement of operations and other comprehensive income (loss).
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 Equivalents
Cash and equivalents include cash on hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.
Restricted Cash
Restricted cash consists of monies restricted by the Companys lenders related to its outstanding debt obligations.
Accounts Receivable, net
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.
Other Receivables
Other receivables consist of amounts due from customers that are non-interest bearing and payable upon demand and amounts due from other unrelated third parties that bear interest and have specific repayment dates - (See Note 3).
- 8 -
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
JUNE 30, 2014 AND 2013 (Unaudited) |
Advances to Suppliers
To ensure 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 no reserve was necessary for advances to suppliers. The advances to suppliers are interest free and unsecured.
Notes Receivable
Notes receivable consist of bank notes received from customers as payment of their accounts receivable. The notes are guaranteed by banks and bear no interest. The notes are generally due within twelve months from the date of issuance.
Inventory, net
Inventory is valued at the lower of the inventorys 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.
Property and Equipment, net
Property and equipment are stated at cost. Expenditures for maintenance and repairs are expensed 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 |
Construction in Progress and Government Grants
Construction in progress mainly consists of amounts expended to build a manufacturing workshop in Hainan, including a product line for a BOPP tobacco line. The costs incurred and capitalized as construction in progress at June 30, 2014 and December 31, 2013 include facility and equipment. Once the project is completed, it will be transferred from Construction in progress to Property and equipment. The total cost of the new Hainan manufacturing workshop and the BOPP tobacco line is expected to be $25.1 million. The first phase of the project was completed during 2010.
In October 2009, the Company received a government grant for the above project of RMB29.1 million (or $4.3 million based on the exchange rate at December 31, 2009) from the Hainan Province Finance Bureau (HPFB). The Company is required to provide detailed expenses of the construction project to the HPFB. At the end of the project, the government will determine if the funds were used in accordance with the grant. At June 30, 2014 and December 31, 2013 respectively, RMB22.3million ($3.6 million based on the exchange rate at June 30, 2014) and RMB23.8 million ($3.9 million (audited) based on the exchange rate at December 31, 2013) was recorded in Other payables on the accompanying consolidated financial statements (Note 7). The government grant is being amortized into other income over the useful life of the asset on the same basis used to depreciate the asset. For the six months ended June 30, 2014 and 2013, the Company amortized $236,874 and $232,364, respectively, into Other income.
In December 2011, the Company received a government grant of RMB14.0 million (or $2.2 million based on the exchange rate as of December 31, 2011) from the Haikou Finance Bureau (HFB) for the adjustment and expansion of our operations and related capital expenditures for construction and equipment purchases. The Company is required to provide detailed expenses of the construction project to HFB. At the end of the project, the government will determine if the funds were used in accordance with the grant. At June 30, 2014 and December 31, 2013, respectively, RMB10.7 million ($1.7 million based on the exchange rate at June 30, 2014) and RMB11.4 million ($1.9 million (audited) based on the exchange rate at December 31, 2013) was recorded in Other payables on the accompanying consolidated financial statements (Note 7). The government grant is being amortized into other income over the useful life of the asset on the same basis used to depreciate the asset. For the six months ended June 30, 2014 and 2013, the Company amortized $113,960 and $111,790, respectively, into Other income.
In January 2012, the Company received a government grant of RMB1.8 million (or $0.3 million based on the exchange rate as of January 31, 2012) from the HFB for the adjustment and expansion of our operation and related capital expenditures for construction and equipment purchase. The Company is required to provide detailed expenses of the construction project to the HFB. At the end of the project, the government will determine if the funds were used in accordance with the grant. At June 30, 2014 and December 31, 2013, the grant was recorded in Other payables on the accompanying consolidated financial statements (Note 7). If the government determines the funds were used for their intended purpose, 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.
The decrease in construction in progress from December 31, 2013 to June 30, 2014 is due to certain projects being completed and transferred to property and equipment.
- 9 -
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
JUNE 30, 2014 AND 2013 (Unaudited) |
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 Topic 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 FV of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that FVs are reduced to recognize the cost of disposal. Based on its review, the Company believes that as of June 30, 2014 and December 31, 2013 (audited), respectively, 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 granted by the Municipal Administration of China for state-owned land. For two of these plots, the Companys rights run through January 2059 and, for the third, through October 2060. The Company also acquired a patent with the acquisition of Shimmer Sun that is being amortized over 10 years. The Company evaluates intangible assets for impairment, at least on an annual basis and whenever events or changes in circumstances indicate the carrying value may not be recoverable from its estimated future cash flows. Recoverability of intangible and other long-lived assets is measured by comparing their net book value to the related projected undiscounted cash flows from these assets, considering a number of factors including past operating results, budgets, economic projections, market trends and product development cycles. If the net book value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired, and a second test is performed to measure the amount of impairment loss. No impairment adjustment was required at June 30, 2014 or December 31, 2013 (audited).
Fair Value of Financial Instruments
For certain of the Companys financial instruments, including cash and equivalents, restricted cash, accounts receivable, advances to suppliers, accounts payable, accrued liabilities and short-term debt, the carrying amounts approximate their FVs 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 FVs based on current rates of interest for instruments with similar characteristics.
ASC Topic 820, Fair Value Measurements and Disclosures, requires disclosure of the FV of financial instruments held by the Company. ASC Topic 825, Financial Instruments, defines FV, and establishes a three-level valuation hierarchy for disclosures of FV measurement that enhances disclosure requirements for FV measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their FVs 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.
- Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in inactive markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
- Level 3 inputs to the valuation methodology us one or more unobservable inputs which are significant to the FV measurement.
The Company analyzes all financial instruments with features of both liabilities and equity under ASC Topic 480, Distinguishing Liabilities from Equity, and ASC Topic 815, Derivatives and Hedging. As of June 30, 2014 and December 31, 2013 (audited), respectively, the Company did not identify any assets and liabilities required to be presented on the balance sheet at FV.
Revenue Recognition
The Companys revenue recognition policies comply with ASC Topic 605, Revenue Recognition. 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.
- 10 -
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
JUNE 30, 2014 AND 2013 (Unaudited) |
Sales revenue consists of the invoiced value of goods, which is net of value-added tax (VAT). All of the Companys products sold in the PRC are subject to Chinese VAT of 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing their end product. The Company recorded VAT payable and VAT receivable net of payments in the financial statements. The VAT tax return is filed offsetting the payables against the receivables. Sales and purchases are recorded net of VAT collected and paid. VAT taxes are not affected by the income tax holiday.
Sales returns and allowances was $0 for the three and six months ended June 30, 2014 and 2013. The Company does not provide unconditional right of return, price protection or any other concessions to its dealers or other customers.
Other Income
The Company recognizes other income in the period it has earned the revenue and collectability is reasonably assured. Other income for the three and six months ended June 30, 2014 and 2013 consists primarily of subsidy income 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 income over the useful life of the asset for which the subsidy was received.
Advertising Costs
The Company expenses the cost of advertising as incurred. Advertising costs for the three and six months ended June 30, 2014 and 2013 were not significant.
Research and Development
The Company expenses its research and development (R&D) costs as incurred. R&D costs included in general and administrative expenses for the three and six months ended June 30, 2014 were $756,381 and $818,026, respectively and $921,262 and $1,575,906 for the three and six months ended June 30, 2013, respectively.
Stock-Based Compensation
The Company records stock-based compensation in accordance with ASC Topic 718, Compensation Stock Compensation. ASC Topic 718 requires companies to measure compensation cost for stock-based employee compensation at FV at the grant date and recognize the expense over the employees requisite service period. The Company recognizes in the consolidated statement of operations and other comprehensive income the grant-date FV of stock options and other equity-based compensation issued to employees and non-employees. There were 60,000 options outstanding as of June 30, 2014 and December 31, 2013.
Income Taxes
The Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes. ASC Topic 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 Topic 740, a tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is more than 50% likely of being realized on examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded.
Basic and Diluted Earnings (Loss) Per Share
Earnings (loss) per share is calculated in accordance with ASC Topic 260, Earnings Per Share. Basic earnings per share (EPS) is based on the weighted average number of common shares outstanding. Diluted EPS is based on the assumption that all dilutive convertible shares and stock warrants were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. There were 60,000 options and 0 warrants outstanding as of June 30, 2014 with weighted-average exercise prices of $0.85 and $0, respectively. All options and warrants were excluded from the diluted loss per share for 2013 due to the dilutive effect.
- 11 -
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
JUNE 30, 2014 AND 2013 (Unaudited) |
Foreign Currency Transactions and Comprehensive Income
US GAAP requires recognized revenue, expenses, gains and losses to 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 Companys Chinese subsidiaries is the RMB. Translation gains of $6,551,848 and $6,810,374 at June 30, 2014 and December 31, 2013 (audited), 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 Companys operations are calculated based on 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 companys management organizes segments within the company for making operating decisions and assessing performance. The Company 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 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 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.
Reclassifications
Certain prior period amounts were reclassified to conform to the manner of presentation in the current period. These reclassifications had no effect on the net loss or stockholders equity.
Note 3 Other Receivables
Other receivables at June 30, 2014 and December 31, 2013 consisted of the following:
|
June 30, | December 31, | ||||
|
2014 | 2013 | ||||
|
(Audited) | |||||
Due from various unrelated customers, non-interest bearing and due upon demand |
$ | 4,152,629 | $ | 3,333,233 | ||
Due from Hainan Jinhong, with interest at 5%, due April 30, 2015; guaranteed by the borrower and another company |
4,593,825 | - | ||||
Due from Hainan Modern Construction Company, with interest at 10%, due April 30, 2015, guaranteed by the borrower and another company |
7,975,464 | - | ||||
Due from Dingfeng, with interest at 5%, due April 30, 2015, guaranteed by the borrower and another company |
6,934,854 | - | ||||
Due from Rixin Hotel Management, with interest at 12%, due April 21, 2017, guaranteed by the borrower and another company |
3,248,000 | - | ||||
Due from Rixin Hotel Management, with interest at 12%, due April 21, 2017, guaranteed by the borrower and another company |
15,492,599 | - | ||||
|
||||||
Total other receivables |
42,397,371 | 3,333,233 | ||||
|
||||||
Current portion |
23,656,772 | 3,333,233 | ||||
|
||||||
Non-current portion |
$ | 18,740,599 | $ | - |
- 12 -
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
JUNE 30, 2014 AND 2013 (Unaudited) |
Note 4 Inventory, net
Inventory at June 30, 2014 and December 31, 2013 consisted of the following:
June 30, | December 31, | |||||
2014 | 2013 | |||||
(Audited) | ||||||
Raw materials | $ | 4,428,230 | $ | 4,280,055 | ||
Work in process | 2,015,734 | 1,258,527 | ||||
Finished goods | 8,411,200 | 5,936,008 | ||||
14,855,164 | 11,474,590 | |||||
Less: Obsolescence reserve | (830,563 | ) | (853,968 | ) | ||
Inventory, net | $ | 14,024,601 | $ | 10,620,622 |
Note 5 Property and Equipment, net
Property and equipment at June 30, 2014 and December 31, 2013 consisted of the following:
June 30, | December 31, | |||||
2014 | 2013 | |||||
(Audited) | ||||||
Operating equipment | $ | 25,714,541 | $ | 24,202,642 | ||
Vehicles | 690,714 | 711,197 | ||||
Office equipment | 185,003 | 249,203 | ||||
Buildings | 12,677,465 | 12,778,948 | ||||
39,267,723 | 37,941,990 | |||||
Less accumulated depreciation | (11,612,911 | ) | (9,847,836 | ) | ||
Property and equipment, net | $ | 27,654,812 | $ | 28,094,154 |
Note 6 - Intangible Assets, net
Intangible assets at June 30, 2014 and December 31, 2013 consisted of rights to use land as follows:
June 30, | December 31, | |||||
2014 | 2013 | |||||
(Audited) | ||||||
Right to use land | $ | 1,190,831 | $ | 1,200,364 | ||
Less: Accumulated amortization | (129,774 | ) | (118,966 | ) | ||
Intangible assets, net | $ | 1,061,057 | $ | 1,081,398 |
- 13 -
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
JUNE 30, 2014 AND 2013 (Unaudited) |
Pursuant to the regulations, the PRC government owns all land. The Company has recognized the amounts paid for the acquisition of rights to use the land as an intangible asset and amortizes such rights over the period the Company has use of the land, which range from 54 to 57 years.
Note 7 Other Payables
Other payables at June 30, 2014 and December 31, 2013 consisted of the following:
June 30, | December 31, | |||||
2014 | 2013 | |||||
(Audited) | ||||||
Government grant for Shi Zi Ling workshop | $ | 3,623,144 | $ | 3,890,331 | ||
Government grant for structure and equipment | 1,743,093 | 1,903,008 | ||||
Government grant for expansion and equipment | 289,884 | 288,278 | ||||
Taxes Payable | 729,159 | 1,386,592 | ||||
Customer deposits | 7,668,983 | - | ||||
Miscellaneous payables | 3,710,802 | 3,940,961 | ||||
Other payables | $ | 17,765,065 | $ | 11,409,170 |
The $3,623,144, $1,743,093 and $289,884 payables at June 30, 2014 are liabilities recorded pursuant to the funds received as part of government grants. See Construction in Progress and Government Grants in Note 2. Customer deposits are amounts received from customers for the purchase of products to be delivered in the future.
Note 8 - Short-term Loans
Short-term loans at June 30, 2014 and December 31, 2013 consisted of the following:
|
June 30, | December 31, | ||||
|
2014 | 2013 | ||||
|
(Audited) | |||||
Due May 31, 2014, with interest of 6.6% |
$ | - | $ | 6,548,000 | ||
Due September 17, 2014, with interest of 6.60% |
2,436,000 | 2,455,500 | ||||
Due September 24, 2014, with interest of 6.6% |
4,060,000 | 4,092,500 | ||||
Due June 9, 2014, with interest of 6.6% |
- | 1,637,000 | ||||
Due November 27, 2014, with interest of 6.6% |
3,248,000 | 3,274,000 | ||||
Due December 12, 2014, with interest of 7.5% |
- | 4,583,600 | ||||
Due November 27, 2014, with interest of 6.6% |
- | 842,400 | ||||
Due November 27, 2014, with interest of 6.6% |
- | 1,473,300 | ||||
Due September 20, 2014, with interest of 7.0% |
2,436,000 | - | ||||
Due September 25, 2014, with interest of 7.0% |
2,111,200 | - | ||||
Due September 28, 2014, with interest of 6.16% |
1,624,000 | - | ||||
Due March 28, 2015, with interest of 6.0% |
1,624,000 | - | ||||
Due March 28, 2015, with interest of 6.6% |
3,248,000 | - | ||||
Due December 30, 2014, with interest of 7.5% |
1,948,800 | - | ||||
Due April 25, 2015 with interest of 6.6% |
3,248,000 | - | ||||
Due May 30, 2015 with interest of 6.6% |
1,624,000 | - | ||||
Due June 25, 2015 with interest of 6.6% |
1,624,000 | - | ||||
Various bank acceptance bills payable on various dates through December 26, 2014 |
4,268,067 | 3,956,494 | ||||
|
$ | 33,500,067 | $ | 28,862,794 |
- 14 -
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
JUNE 30, 2014 AND 2013 (Unaudited) |
All short-term loans are collateralized by Company buildings and equipment.
Note 9 - Long-term Loans
Long-term loans at June 30, 2014 and December 31, 2013 consisted of the following:
December 31, | ||||||
June 30, | 2013 | |||||
2014 | (Audited) | |||||
Due January 24, 2018, with interest of 6.60% | $ | 974,400 | $ | 982,200 | ||
Due February 10, 2018, with interest of 6.60% | 2,923,200 | 2,946,600 | ||||
Due February 16, 2018, with interest of 6.60% | 1,055,600 | 2,373,650 | ||||
Due February 17, 2018, with interest of 6.60% | 1,282,960 | 1,293,230 | ||||
Due March 25, 2018, with interest of 6.60% | 438,480 | 441,990 | ||||
Due November 30, 2018, with interest of 6.60% | 162,400 | 163,700 | ||||
Due December 23, 2018, with interest of 6.60% | 519,680 | 523,840 | ||||
Due January 18, 2018, with interest of 6.60% | 1,088,080 | 1,096,790 | ||||
Credit line due April 18, 2017, with interest of 7.35% (see Note 3) | 19,488,000 | - | ||||
$ | 27,932,800 | $ | 9,822,000 |
All long-term loans are collateralized by Company buildings and land use rights. The credit line due April 18, 2017 is also collateralized by all the capital stock of Hainan Shiner, the Company's primary operating subsidiary. Aggregate future maturities of long-term loans at June 30, 2014 are as follows:
Year ending June 30, | |||
2015 | $ | - | |
2016 | - | ||
2017 | 19,488,000 | ||
2018 | 8,444,800 | ||
$ | 27,932,800 |
- 15 -
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
JUNE 30, 2014 AND 2013 (Unaudited) |
The weighted average interest rate on long-term loans is 7.12%.
On August 2, 2010, Hainan Shiner entered into a credit facility with the Hainan Branch of the Bank of China. It is a secured revolving credit facility of RMB70 million (or $11.1 million based on the exchange rate on December 31, 2010) for seven years. Under the credit facility, Hainan Shiner may only use the loan proceeds to improve the technology of its BOPP film and to purchase certain equipment necessary for this improvement. Proceeds under the facility not used for these purposes would be subject to a misappropriation penalty interest rate that is 100% of the current interest rate on the loan.
The initial interest rate on each withdrawal from the facility is 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 is paid on an overdue loan under this credit facility at 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 use rights, buildings, and property as collateral under this facility.
The credit facility includes covenants that prohibit Hainan Shiner from making distributions to the Company, its sole shareholder, if (a) its after-tax net income for the fiscal year is zero or negative, (b) its after-tax net income is insufficient to make up its accumulated loss, (c) its income before tax is not utilized in paying off the capital, interest and expense of the lender, or (d) its income before tax is insufficient to pay the capital, interest and expense of the lender.
As of June 30 2014, the Company drew down the entire RMB70 million credit facility.
The Company also has a RMB120 million (approximately $19.5 million) credit facility that it drew down in its entirety on April 17, 2014. The credit facility is collateralized by the stock of Hainan Shiner, bears interest at 7.35% per annum and is due on April 17, 2017. Under the terms of the credit facility agreement, the proceeds of the funds borrowed under this credit facility are to be used solely for the construction of an office building and research facility at the Hainan Xiandai Packaging Industrial Park and for the purchase of research and development equipment, however, the Company has loaned the proceeds of the credit facility to unrelated third parties who have no collateral on such loans other than a guarantee from each of the borrowers and an unrelated fourth party (See Note 3). The Company has not yet obtained written authorization for such alternate use of the proceeds but the lender has not signaled that it will recall the loan.
Note 10 - Stock Options
The following is a summary of the Companys stock option activity for the six months ended June 30, 2014:
Weighted | |||||||||
Average | |||||||||
Exercise | Aggregate | ||||||||
Options | Price | Intrinsic | |||||||
Outstanding | Price | Value | |||||||
Outstanding at December 31, 2013 | 90,000 | $ | 0.95 | $ | - | ||||
Granted | - | ||||||||
Canceled/ Expired | (30,000 | ) | $ | 1.25 | |||||
Exercised | - | ||||||||
Outstanding at June 30, 2014 | 60,000 | $ | 0.80 | $ | - | ||||
Exercisable at June 30, 2014 | 60,000 | $ | 0.80 | $ | - |
The number and weighted average exercise prices of all options outstanding as of June 30, 2014, are as follows:
Options Outstanding | |||||||||
Weighted | |||||||||
Average | |||||||||
Weighted | Remaining | ||||||||
Number | Average | Contractual | |||||||
Range of | Outstanding | Exercise | Life | ||||||
Exercise Price | June 30, 2014 | Price | (Years) | ||||||
$ 0.80 | 60,000 | $ 0.80 | 2.44 | ||||||
60,000 |
The number and weighted average exercise prices of all options exercisable as of June 30, 2014, are as follows:
- 16 -
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
JUNE 30, 2014 AND 2013 (Unaudited) |
Options Exercisable | |||||||||
Weighted | |||||||||
Average | |||||||||
Weighted | Remaining | ||||||||
Number | Average | Contractual | |||||||
Range of | Outstanding | Exercise | Life | ||||||
Exercise Price | June 30, 2014 | Price | (Years) | ||||||
$ 0.80 | 60,000 | $ 0.80 | 2.44 | ||||||
60,000 |
Note 11 - Employee Welfare Plans
The expense for employee common welfare was $37,834 and $62,136 for the three and six months ended June 30, 2014, respectively and $15,117 and $36,323 for the three and six months ended June 30, 2013, respectively.
Note 12 - 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 Companys registered capital; | |
iii. |
Allocations of 5% to 10% of income after tax, as determined under PRC accounting rules and regulations, to the Companys statutory common welfare fund, which is established for the purpose of providing employee facilities and other collective benefits to the Companys employees; and | |
iv. |
Allocations to the discretionary surplus reserve, if approved in the stockholders general meeting. |
The Company appropriated $97,175 and $0 as reserve for the statutory surplus reserve and statutory common welfare fund for the six months ended June 30, 2014 and 2013, respectively.
Note 13 - Current Vulnerability Due to Certain Concentrations
There were no customers that exceeded 10% of the Companys sales for the three and six months ended June 30, 2014 or 2013. One vendor provided 9% of the Companys raw materials for the six months ended June 30, 2014, as compared to one vendor that provided 16% of the Companys raw material purchases for the six months ended June 30, 2013. At June 30, 2014, the Company owed this vendor $1,059,514.
The Companys operations are carried out in the PRC. Accordingly, the Companys 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 PRCs economy. The Companys 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 14 Commitments and Contingencies
At June 30, 2014, the Company was contingently liable to banks for discounted notes receivable and to vendors for endorsed notes receivable of $906,275.
Note 15 Segment Information
The Company has five segments: BOPP tobacco films, water-based latex, coated film, color printed packaging and advanced film. The water-based latex is one of the raw materials used in coated film to make the packaging more environmental friendly and the barrier property better. Approximately 60% of the water-base latex products manufactured by Ningbo are sold to Hainan Shiner, Shiny-Day and Zhuhai Modern.
- 17 -
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
JUNE 30, 2014 AND 2013 (Unaudited) |
The following tables summarize the Companys segment information for the three and six months ended June 30, 2014 and 2013:
|
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
|
2014 | 2013 | 2014 | 2013 | ||||||||
|
||||||||||||
Revenues from unrelated entities |
||||||||||||
Tobacco film |
$ | 11,188,530 | $ | 10,121,060 | $ | 28,656,876 | $ | 17,509,118 | ||||
Water-based latex |
124,226 | 200,231 | 229,520 | 399,415 | ||||||||
Coated film |
9,871,403 | 4,684,105 | 14,800,555 | 8,202,994 | ||||||||
Color printing |
1,333,269 | 1,211,045 | 2,696,174 | 2,162,528 | ||||||||
Advanced film |
1,681,643 | 1,733,856 | 3,080,726 | 3,519,771 | ||||||||
|
$ | 24,199,071 | $ | 17,950,297 | $ | 49,463,851 | $ | 31,793,826 | ||||
|
||||||||||||
Intersegment revenues |
||||||||||||
Tobacco film |
$ | 585,837 | $ | 2,321,553 | $ | 894,264 | $ | 3,334,740 | ||||
Water-based latex |
(187 | ) | 263 | 43,413 | 42,720 | |||||||
Coated film |
410,183 | 1,019,630 | 507,027 | 1,502,205 | ||||||||
Color printing |
65,587 | 281,384 | 92,364 | 411,869 | ||||||||
Advanced film |
78,049 | 356,143 | 105,537 | 601,061 | ||||||||
|
$ | 1,139,469 | $ | 3,978,973 | $ | 1,642,605 | $ | 5,892,595 | ||||
|
||||||||||||
Total revenues |
||||||||||||
Tobacco film |
$ | 11,774,367 | $ | 12,442,613 | $ | 29,551,140 | $ | 20,843,858 | ||||
Water-based latex |
124,039 | 200,494 | 272,933 | 442,135 | ||||||||
Coated film |
10,281,586 | 5,703,735 | 15,307,582 | 9,705,199 | ||||||||
Color printing |
1,398,856 | 1,492,429 | 2,788,538 | 2,574,397 | ||||||||
Advanced film |
1,759,692 | 2,089,999 | 3,186,263 | 4,120,832 | ||||||||
Less Intersegment revenues |
(1,139,469 | ) | (3,978,973 | ) | (1,642,605 | ) | (5,892,595 | ) | ||||
|
$ | 24,199,071 | $ | 17,950,297 | $ | 49,463,851 | $ | 31,793,826 | ||||
|
||||||||||||
Loss from operations |
||||||||||||
Tobacco film |
$ | (1,724,888 | ) | $ | (373,976 | ) | $ | 806,218 | $ | (1,043,068 | ) | |
Water-based latex |
30,421 | 56,713 | 53,436 | 109,220 | ||||||||
Coated film |
(280,998 | ) | 87,154 | (292,274 | ) | (259,043 | ) | |||||
Color printing |
(238,925 | ) | (29,130 | ) | (611,941 | ) | (106,995 | ) | ||||
Advanced film |
(105,606 | ) | (160,195 | ) | (134,740 | ) | (267,821 | ) | ||||
Holding Company |
153,388 | (25,006 | ) | (50,040 | ) | (59,812 | ) | |||||
|
$ | (2,166,608 | ) | $ | (444,440 | ) | $ | (229,341 | ) | $ | (1,627,519 | ) |
|
||||||||||||
Interest income |
||||||||||||
Tobacco film |
$ | 402,643 | $ | 8,982 | $ | 407,087 | $ | 41,722 | ||||
Water-based latex |
3,549 | 69 | 3,579 | 952 | ||||||||
Coated film |
229,414 | 3,952 | 230,809 | 19,547 | ||||||||
Color printing |
41,660 | 936 | 42,046 | 5,153 | ||||||||
Advanced film |
47,647 | 472 | 48,043 | 8,387 | ||||||||
Holding Company |
72,500 | - | 72,500 | - | ||||||||
|
$ | 797,413 | $ | 14,411 | $ | 804,064 | $ | 75,761 |
- 18 -
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
JUNE 30, 2014 AND 2013 (Unaudited) |
Interest expense |
||||||||||||
Tobacco film |
$ | 733,960 | $ | 309,454 | $ | 1,059,368 | $ | 535,143 | ||||
Water-based latex |
7,635 | 3,218 | 11,020 | 5,566 | ||||||||
Coated film |
291,129 | 122,746 | 420,204 | 212,267 | ||||||||
Color printing |
58,903 | 24,835 | 85,019 | 42,948 | ||||||||
Advanced film |
123,240 | 51,960 | 177,878 | 89,856 | ||||||||
Holding Company |
(560 | ) | 637 | (1,140 | ) | 1,226 | ||||||
|
$ | 1,214,307 | $ | 512,850 | $ | 1,752,349 | $ | 887,006 | ||||
|
||||||||||||
Income tax expense |
||||||||||||
Tobacco film |
$ | (25,987 | ) | $ | 158,886 | $ | 168,789 | $ | 158,886 | |||
Coated film |
43,360 | 89,848 | 120,134 | 89,848 | ||||||||
Advanced film |
3,214 | 35,950 | 25,006 | 35,950 | ||||||||
|
$ | 20,587 | $ | 284,684 | $ | 313,929 | $ | 284,684 | ||||
|
||||||||||||
Net income (loss) |
||||||||||||
Tobacco film |
$ | (848,051 | ) | $ | 1,109,585 | $ | 144,984 | $ | 757,380 | |||
Water-based latex |
26,336 | 53,562 | 45,996 | 104,605 | ||||||||
Coated film |
(158,482 | ) | 1,008,392 | (131,094 | ) | 893,102 | ||||||
Color printing |
(256,169 | ) | (53,029 | ) | (654,914 | ) | (144,790 | ) | ||||
Advanced film |
(155,440 | ) | 210,667 | (191,604 | ) | 227,770 | ||||||
Holding Company |
153,948 | (25,643 | ) | (48,900 | ) | (61,038 | ) | |||||
|
$ | (1,237,858 | ) | $ | 2,303,534 | $ | (835,532 | ) | $ | 1,777,029 | ||
|
||||||||||||
Provision for depreciation |
||||||||||||
Tobacco film |
$ | 771,702 | $ | 472,691 | $ | 1,327,353 | $ | 977,146 | ||||
Water-based latex |
9,988 | 9,623 | 20,061 | 19,943 | ||||||||
Coated film |
306,101 | 187,495 | 526,502 | 387,590 | ||||||||
Color printing |
61,933 | 37,936 | 106,527 | 78,421 | ||||||||
Advanced film |
129,577 | 79,369 | 222,876 | 164,072 | ||||||||
|
$ | 1,279,301 | $ | 787,114 | $ | 2,203,319 | $ | 1,627,172 | ||||
|
||||||||||||
|
As of | As of | ||||||||||
|
June 30, | December 31, | ||||||||||
Total Assets |
2014 | 2013 | ||||||||||
Tobacco film |
$ | 71,080,213 | $ | 52,780,171 | ||||||||
Water-based latex |
657,568 | 657,568 | ||||||||||
Coated film |
28,194,316 | 20,935,514 | ||||||||||
Color printing |
5,704,531 | 4,235,864 | ||||||||||
Advanced film |
11,935,067 | 8,862,310 | ||||||||||
Holding Company |
11,400,218 | 11,400,218 | ||||||||||
|
$ | 128,971,913 | $ | 98,871,645 |
Note 16 - Geographical Sales
The geographical distribution of Shiners revenue for the three and six months ended June 30, 2014 and 2013 is as follows:
Geographical Areas | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||
Chinese Main Land | $ | 21,359,561 | $ | 15,039,914 | $ | 44,421,537 | $ | 25,724,940 | ||||
Asia (outside Mainland China) | 1,237,207 | 1,457,552 | 2,436,089 | 2,976,198 | ||||||||
Australia | 780,203 | 813,377 | 1,436,052 | 1,856,941 | ||||||||
North America | 298,005 | 482,795 | 484,369 | 794,045 | ||||||||
Middle East | 134,309 | 51,494 | 252,725 | 159,154 | ||||||||
Europe | 389,971 | 73,382 | 389,971 | 184,173 | ||||||||
South America | (185 | ) | 31,783 | 43,108 | 98,375 | |||||||
$ | 24,199,071 | $ | 17,950,297 | $ | 49,463,851 | $ | 31,793,826 |
- 19 -
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
JUNE 30, 2014 AND 2013 (Unaudited) |
Note 17 Subsequent Event
On July 18, 2014, Typhoon Rammasun, made landfall in Hainan, China, the base of the Company's operations, at maximum sustained winds of 155 miles per hour. The most powerful storm to hit the region in four decades, Typhoon Rammasun affected more than 3.25 million people in 216 townships, and caused direct economic losses of over RMB10.8 billion ($1.7 billion). As a result of the typhoon, the Company experienced some damage to its plant, inventory and other tangible assets. However, the damages are expected to be covered by insurance. The Company believes it will not be significantly affected by the typhoon's impact on its customers and supply chain.
- 20 -
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as "believe," "expect," "anticipate," "project," "target," "plan," "optimistic," "intend," "aim," "will" or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; and any statements regarding future economic conditions or performance, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements. Potential risks and uncertainties include, among other things, the factors discussed in Item 1A, "Risk Factors" included in the Company annual report on Form 10-K filed on April 3, 2014.
Because the factors discussed in this report could cause our 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 direct and indirect subsidiaries: (i) Hainan Shiner Industrial Co., Ltd., or Hainan Shiner, (ii) Hainan Shiny-Day Color Printing Packaging Co., Ltd., or Shiny-Day, (iii) Hainan Modern Hi-Tech Industrial Co., Ltd., or Hainan Modern, (iv) Zhuhai Modern Huanuo Packaging Material Co., Ltd., or Zhuhai Modern, (v) Shimmer Sun Ltd., or Shimmer Sun, (vi) Hainan Jingyue New Material Co., Ltd., or Jingyue, (vii) Hainan Shunhao New Material Co., Ltd., or Shunhao, (viii) Hainan Yongxin Environmental Co., Ltd., or Yongxin, and (ix) Ningbo Neisuoer Latex Co., Ltd., or "Ningbo".
- SEC are to the United States Securities and Exchange Commission;
- Securities Act are to the Securities Act of 1933, as amended; and Exchange Act are to the Securities Exchange Act of 1934, as amended;
- RMB are to Renminbi, the legal currency of China; and US dollar, USD, and $ are to the legal currency of the United States; and
- China, Chinese and PRC are to the Peoples Republic of China.
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, and Ningbo we manufacture and sell packaging and anti-counterfeit plastic film to manufacturers and producers in China. We sell 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 capacity of 15,000 tons a year; two BOPP tobacco film production lines with a capacity of 13,500 tons a year; one BOPP film production line with a capacity of 7,000 tons a year; three color printing lines; four anti-counterfeit film lines with a capacity of 2,500 tons a year; and two water-based latex reaction kettles with a capacity of 3,000 tons a year.
The table below shows the percentage of revenue by each of our business segments for the three and six months ended June 30, 2014 and 2013:
- 21 -
|
Percent of Revenue | Percent of Revenue | ||||||||||
|
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
|
2014 | 2013 | 2014 | 2013 | ||||||||
|
||||||||||||
BOPP tobacco film |
44.4% | 56.4% | 55.6% | 55.0% | ||||||||
Water-based latex |
0.5% | 1.1% | 0.5% | 1.3% | ||||||||
Coated film |
42.2% | 26.1% | 31.6% | 25.8% | ||||||||
Color printing |
5.7% | 6.7% | 5.7% | 6.8% | ||||||||
Advanced film |
7.2% | 9.7% | 6.6% | 11.1% | ||||||||
|
100.0% | 100.0% | 100.0% | 100.0% |
We have 26 patents issued by the State Intellectual Property Office of China and have 78 patent applications relating to our products and manufacturing processes pending. Although our patents and processes provide us a competitive advantage, we do not believe the loss of any single patent would have a material adverse effect on our business.
Our principal executive offices are located at 19th Floor, Didu Building, Pearl River Plaza, No. 2 North Longkun Road, Haikou, Hainan Province, China 570125. Our telephone number is +86-898-68581104 and our website is www.shinerinc.com
Principal Factors Affecting Our Financial Performance
We believe that the following factors will continue to affect our financial performance:
-
Global Economic Fragility The ongoing turmoil in the global economy may have an impact on our business and our financial condition, and we may face challenges if economic conditions do not improve. These economic conditions impact levels of consumer spending, which have deteriorated and may remain depressed for the foreseeable future. If demand for our products fluctuates as a result of these economic conditions or otherwise, our revenue and gross margin could be harmed.
-
Fuel Prices Significant fluctuations in fuel prices could have both a positive and negative effect on our business and operations. Significant fluctuations in world fuel prices could significantly increase the price of shipping or transporting our products which we may not be able to pass on to our customers.
Recent Developments
On July 18, 2014, Typhoon Rammasun, made landfall in Hainan, China, the base of our operations, at maximum sustained winds of 155 miles per hour. The most powerful storm to hit the region in four decades, Typhoon Rammasun affected more than 3.25 million people in 216 townships, and caused direct economic losses of over RMB10.8 billion ($1.7 billion). As a result of the typhoon, we experienced some damage to our plant, inventory and other tangible assets. However, the damages are expected to be covered by insurance. We believe we will not be significantly affected by the typhoon's impact on our customers and supply chain.
Results of Operations
The following summary of our results of operations should be read in conjunction with our financial statements and the notes thereto for the three-month periods ended June 30, 2014 and 2013 included herein. The following tables set forth key components of our results of operations for the periods indicated, both in dollars and as a percentage of sales revenue and key components of our revenue for the periods indicated in dollars and percentages.
Comparison of Three Months Ended June 30, 2014 and 2013
The following table summarizes the results of our operations during the three-month periods ended June 30, 2014 and 2013 and provides information regarding the dollar and percentage increase or (decrease) in such periods:
- 22 -
|
Three Months Ended June 30, | $ | % | |||||||||
|
2014 | 2013 | Change | Change | ||||||||
|
||||||||||||
Revenues |
$ | 24,199,071 | $ | 17,950,297 | $ | 6,248,774 | 34.8% | |||||
Cost of goods sold |
22,801,060 | 16,127,248 | 6,673,812 | 41.4% | ||||||||
Gross profit |
1,398,011 | 1,823,049 | (425,038 | ) | -23.3% | |||||||
Selling, general and administrative expenses |
3,564,619 | 2,267,489 | 1,297,130 | 57.2% | ||||||||
Interest expense, net of interest income |
416,894 | 498,439 | (81,545 | ) | -16.4% | |||||||
Other income (expense), net |
1,365,602 | 3,572,108 | (2,206,506 | ) | -62% | |||||||
Exchange gain (loss) |
629 | (41,011 | ) | 41,640 | -101.5% | |||||||
Income tax expense |
20,587 | 284,684 | (264,097 | ) | 100.0% | |||||||
Net income attributed to noncontrolling interest |
5,555 | 7,137 | (1,582 | ) | -22% | |||||||
Net loss attributed to Shiner |
$ | (1,232,303 | ) | $ | 2,296,397 | $ | (3,528,700 | ) | -153.7% |
Revenues
Revenues for the three months ended June 30, 2014 increased $6.2 million (or 34.8%), to $24.2 million, compared to $17.9million in the 2013 period. The increase was primarily attributable to increased revenues generated from the sale of coated film, BOPP tobacco, coated film, and color printing, which, was partially offset by a small decrease in revenues generated from the advanced film and sale of water-based index. In the second quarter of 2014, revenue from coated film increased $5.2 million (or 110.7%) to $9.9 million, up from $4.7 million; revenue from BOPP tobacco increased $1.1 million (or 10.5%) to $11.2 million, up from $10.1 million; revenue from color printing increased $0.1 (10.1%) million to $1.3 million, up from $1.2 million; revenue from water-based latex decreased $0.12 million (or 38.0%) to $0.1 million, from $0.2 million; and revenue from advanced film decreased $0.52 million (or 3.0%) to $1.73 million, from $1.68 million. In the second quarter of 2014, our domestic (China Mainland) sales increased as a percentage of total sales from 83.8% in the second quarter of 2013 to 87.9% in the second quarter of 2014.
Cost of Goods Sold
For the three months ended June 30, 2014, cost of goods sold ("COGS") increased $6.7 million (or 41.4%), from $16.1 million in the 2013 to $22.8 million. COGS for the second quarters of 2014 and 2013 were 94.2% and 89.8% of our revenues, respectively. The increase in COGS as a percentage of revenues for the second quarter 2013 to the second quarter 2014 was a result of the sale of some raw materials at negative margins.
Gross Profit
Our gross profit for the three months ended June 30, 2014 was $1.4 million, with a profit margin of 5.8%, a 4.4% decrease from 10.2% in the second quarter of 2013. The increase in gross profit for the second quarter 2013 to the second quarter 2014 was a result of the sale of some raw materials at negative margins.
Selling, General and Administrative (SG&A) Expenses
For the three months ended June 30, 2014, our SG&A expenses increased by $1.3 million (or 57.2%) to $3.6 million, compared to $2.3 million in the 2013 period. SG&A expenses include rent, management and staff salaries, insurance, marketing, accounting, legal, and research and development (R&D) expenses. The increase in SG&A expenses was mainly due to an increase in marketing expenses.
Interest Expense, net
For the three months ended June 30, 2014, interest expense, net decreased by $81,545 (or 16.4%) to $416,894, compared to $498,439 in the 2013 period, primarily due to interest income earned from other receivables that increased significantly during the three months ended June 30, 2014. We were able to borrow RMB120,000,000, or approximately $19,488,000, at 7.35% interest during the quarter ended June 30, 2014 and lend the money to unrelated third parties at interest rates ranging from 12% to 16%.
- 23 -
Other Income, net
For the three months ended June 30, 2014, there was other income of $1.4 million representing a decrease of $2.2 million (or 62.0%), compared to other income of $3.5 million for the same period in 2013. In the second quarter of 2013, we recognized approximately $3.2 million as a gain from the sale of a patent.
Income Tax Expense (Benefit)
For the three months ended June 30, 2014, we recorded a tax provision of $20,587 compared to a tax provision of $284,684 in the 2013 period. Our effective tax rates for the second quarters of 2014 and 2013 were (1.7%) and 11.0%, respectively. There was a tax expense in 2014 even though we reported a loss for the quarter due to losses incurred by certain subsidiaries where the loss was not able to offset income generated by other subsidiaries.
Net Income (Loss)
For the three months ended June 30, 2014, we generated a net loss of $1.2 million, representing a decrease of $3.5 million (or 153.7%) from a net income of $2.3 million during the 2013 period. The change in net loss is due to the factors explained above.
Comparison of Six Months Ended June 30, 2014 and 2013
The following table summarizes the results of our operations during the six-month periods ended June 30, 2014 and 2013 and provides information regarding the dollar and percentage increase or (decrease) in such periods:
|
Six Months Ended June 30, | $ | % | |||||||||
|
2014 | 2013 | Change | Change | ||||||||
Revenues |
$ | 49,463,851 | $ | 31,793,826 | $ | 17,670,025 | 55.6% | |||||
Cost of goods sold |
43,846,910 | 29,057,338 | 14,789,572 | 50.9% | ||||||||
Gross profit |
5,616,941 | 2,736,488 | 2,880,453 | 105.3% | ||||||||
Selling, general and administrative expenses |
5,846,282 | 4,364,007 | 1,482,275 | 34.0% | ||||||||
Interest expense, net of interest income |
948,285 | 811,245 | 137,040 | 16.9% | ||||||||
Other income (expense), net |
659,424 | 4,579,548 | (3,920,124 | ) | -86% | |||||||
Exchange gain (loss) |
(3,401 | ) | (79,071 | ) | 75,670 | -95.7% | ||||||
Income tax expense |
313,929 | 284,684 | 29,245 | 100.0% | ||||||||
Net loss attributed to noncontrolling interest |
(2,356 | ) | 7,152 | (9,508 | ) | -133% | ||||||
Net loss attributed to Shiner |
$ | (833,176 | ) | $ | 1,769,877 | $ | (2,603,053 | ) | -147.1% |
Revenues
Revenues for the six months ended June 30, 2014 increased $17.7 million (or 55.6%), to $49.59 million, compared to $31.8 million in the 2013 period. The increase was primarily attributable to increased revenues generated from the sale of BOPP tobacco, coated film, and color printing, which, was partially offset by a decrease in revenues generated from the sale of advanced film and water-based index. In the six months ended June 30, 2014, revenue from BOPP tobacco increased $11.1million (or 63.7%) to $28.7 million, up from $17.5 million ; revenue from coated film increased $6.6 million (or 80.4%) to $14.8 million, up from $8.2 million; revenue from color printing increased $0.5 million (or 24.7%) to $2.7 million, up from $2.2 million; revenue from water-based latex decreased $0.2 million (or 42.5%) to $0.2 million, from $0.4 million; and revenue from advanced film decreased $0.4 million (or 12.5%) to $3.0 million, from $3.5 million. In the first six months of 2014, our domestic (China Mainland) sales increased as a percentage of total sales from 80.9% in the first six months of 2013 to 89.3% in the first six months of 2014.
Cost of Goods Sold
For the six months ended June 30, 2014, COGS increased $14.8 million (or 50.9%), from $29.1 million in the 2013 to $43.8 million in the 2014 period. COGS for the six months ended June 30, 2014 and 2013 were 88.6% and 91.4% of our revenues, respectively. The decrease in COGS as a percentage of revenues for the six months ended June 30, 2013 to the six months ended June 30, 2014 was a result of high sales volume to absorb the fixed production costs.
- 24 -
Gross Profit
Our gross profit for the six months ended June 30, 2014 was $5.6 million, with a profit margin of 11.4%, a 2.7% increase from 8.6% in the six months ended June 30, 2013. The increase in gross profit was a result of high sales volume to absorb the fixed production costs.
Selling, General and Administrative (SG&A) Expenses
For the six months ended June 30, 2014, our SG&A expenses increased by $1.5 million (or 34.0%) to $5.8 million, compared to $4.3 million in the 2013 period. SG&A expenses include rent, management and staff salaries, insurance, marketing, accounting, legal, and R&D expenses. The increase in SG&A expenses was mainly due to an increase in R&D and marketing expenses.
Interest Expense, net
For the six months ended June 30, 2014, interest expense, net increased by $137,040 (or 16.9%) to $948,285, compared to $811,245 in the 2013 period, primarily due to the increase in the amount of short-term and long-term loans outstanding offset by interest income generated from the other receivables that increased significantly during the quarter ended June 30, 2014.
Other Income, net
For the six months ended June 30, 2014, there was other income of $0.9 million representing a decrease of $3.9 million, compared to other income of $4.6 million for the same period in 2013. In the second quarter of 2013, we recognized approximately $3.2 million as a gain from the sale of a patent. We were able to borrowing RMB 120,000,000 or approximately $19,488,000 at 7.35% interest during the quarter ended June 30, 2014 and lend the money to unrelated third parties at interest rates from 12% to 16%.
Income Tax Expense (Benefit)
For the six months ended June 30, 2014, we recorded a tax provision of $313,929 compared to a tax provision of $284,684 in the 2013 period. Our effective tax rates for the first six months of 2014 and 2013 were (60.2%) and 13.8%, respectively. There was a tax expense in 2014 even though we reported a loss for the six months due to losses incurred by certain subsidiaries where the loss was not able to offset income generated by other subsidiaries.
Net Income (Loss)
For the six months ended June 30, 2014, we generated a net loss of $0.8 million, representing a decrease of $2.6 million (or 147.1%) from a net income of $1.8 million during the 2013 period. The change in net loss is due to the factors explained above.
Liquidity and Capital Resources
At June 30, 2014, we had $6.7 million in cash and equivalents on hand, compared to $9.1 million at December 31, 2013. We had working capital of $6.7 million at June 30, 2014, compared to $6.2 million at December 31, 2013. 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.
Below is a tabular summary of our cash flows for the six months ended June 30, 2014, and 2013:
2014 | 2013 | |||||
Net cash provided by (used in) operating activities | $ | 14,114,756 | $ | (694,494 | ) | |
Net cash provided by (used in) investing activities | (38,594,488 | ) | 564,548 | |||
Net cash provided by financing activities | 22,135,269 | 1,166,297 | ||||
Effect of exchange rate changes on cash and equivalents | (73,601 | ) | 111,511 | |||
Net (decrease) increase in cash and equivalents | (2,418,064 | ) | 1,147,862 | |||
Cash and equivalents at beginning of period | 9,135,988 | 4,233,183 | ||||
Cash and equivalents at end of period | $ | 6,717,924 | $ | 5,381,045 |
- 25 -
Operating Activities
Net cash flow provided by operating activities during the six months ended June 30, 2014 was $14.1 million, an increase of $14.8 million, compared to cash used of $0.7 million in the 2013 period. The increase in cash provided by operating activities during the six months ended June 30, 2014 was primarily attributable to an increase in other receivables, other payables and advances to suppliers, offset by a decrease in other receivable.
Investing Activities
Net cash flows used in investing activities during the six months ended June 30, 2014 was $38.5 million, an increase of $39.1 million, compared cash provided by investing activities of $0.6 million in the 2013 period. During the 2014 period, we purchased equipment of $0.4 million and issued other receivables of $38.2 million to unrelated third parties. In the 2013 period there was cash provided by the issuance of notes receivable of $0.5 million, offset by cash used in construction in progress of $0.4 million.
Financing Activities
Net cash provided by financing activities for the six months ended June 30, 2014 was $22.1 million, an increase of $20.9 million, compared to $1.2 million in the 2013 period. During the 2014 period, we increased our net cash provided by financing activities by repaying $22.8million of short-term loans, an increase of $6.3 million from $16.6 million in the 2013 period, by repaying $1.3 million of long-term loans, an increase of $1.3 million from $0 in the 2013 period and increased our proceeds from our short term loans from $19.3 million during the 2013 period to $27.7 million in 2014 and increased our proceeds from our long term loans from $0 during the 2013 period to $19.5 million in the 2014 period.
Assets
Our total assets as of June 30, 2014 were $128.9 million, an increase of $30.1 million, compared to $98.9 million as of December 31, 2013. The increase was primarily due to the increase of accounts receivable of $0.5 million, other receivables of $20.3 million, inventory of $3.4 million, prepaid expenses of $0.1 million, advance for purchase of equipment of $27,440 and other non-current receivable of $18.7 million, offset by a decrease in cash of $2.4 million, restricted cash of $79,605, advances to suppliers of $8.2 million, property and equipment, net of $0.4 million, notes receivable of $0.2 million, construction in progress of $1.7 million and intangibles, net of $20,341. We intend to continue our efforts to maintain accounts receivable at reasonable levels in relation to our sales.
Liabilities
Our current liabilities increased by $13.1 million as of June 30, 2014, compared to December 31, 2013, principally due to an increase in short-term loans of $4.6 million, in other payables of $6.4 and accounts payable of $4.6 million, offset by a decrease in unearned revenues of $2.5 million.
Loan Commitments
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 RMB70 million, or $11.1 million, secured revolving credit facility. On each of January 24, February 10, February 16, February 17, March 25, November 30, December 23, 2011 and March 19, 2012, Hainan Shiner made withdrawals on the credit facility of $2.5 million, $2.6 million, $2.2 million, $1.2 million, $0.4 million, $0.2 million, $0.5 million and $1.1 million, respectively. Hainan Shiner may only use the loan proceeds to improve the technology of its BOPP film and to purchase certain equipment necessary for these improvements. Proceeds under the facility not used for these purposes may be subject to a misappropriation penalty interest rate of 100% of the current interest rate (6.6% at June 30, 2014) on the loan. No payments made toward principal during the first two quarters of 2014.
The initial interest rate on each withdrawal from the facility is the 5-year benchmark lending rate announced by the Peoples Bank of China on the date of such withdrawal, and is subject to adjustment every 12 months based upon this benchmark. Additional interest is 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 use rights, buildings, and property as collateral under this facility.
The credit facility includes financial covenants that prohibit Hainan Shiner from making distributions to its sole shareholder if (a) its after-tax net income for the fiscal year is zero or negative, (b) its after-tax net income is insufficient to make up its accumulated loss for the last several fiscal years, (c) its income before tax is not utilized in paying off the capital, interest and expense of the lender, or (d) the income before tax is insufficient to pay the capital, interest and expense of the lender.
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The Company also has a RMB120 million (approximately $19.5 million) credit facility that it drew down in its entirety on April 17, 2014. The credit facility is collateralized by the stock of Hainan Shiner, bears interest at 7.35% per annum and is due on April 17, 2017. Under the terms of the credit facility agreement, the proceeds of the funds borrowed under this credit facility are to be used solely for the construction of an office building and research facility at the Hainan Xiandai Packaging Industrial Park and for the purchase of research and development equipment, however, the Company has loaned the proceeds of the credit facility to unrelated third parties who have no collateral on such loans other than a written guarantee from each of the borrowers and an unrelated fourth party. The Company has not yet obtained written authorization for such alternate use of the proceeds but the lender has not signaled that it will recall the loan.
During the six months ended June 30, 2014, we paid $22.8 million of our short-term loans and borrowed an additional $27.7 million in short-term loans. The current outstanding short-term loans are due through June 2015. 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 facilities. During the six months ended June 30, 2014, we borrowed an additional $19.5 million that is due in April 2017 and is collateralized with the stock of our operating subsidiary, Hainan Shiner, our buildings and our land use rights.
Except as set forth above, as at June 30, 2014, the Company is in compliance with all its obligations under the foregoing loan commitments.
Obligations under Material Contracts
We have no material payment obligations other than the loan commitments disclosed above.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (US GAAP) requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial conditions and results of operations and require managements difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from managements current judgments.
Accounts Receivable
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis.
Inventory, net
Inventory is valued at the lower of cost (determined on a weighted average basis) or market. Management compares the cost of inventory with this market value and allowance is made to write down inventory to market value, if lower.
Revenue Recognition
The Companys revenue recognition policies comply with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 605, Revenue Recognition. 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 Companys products are sold in the PRC and are subject to Chinese VAT of 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing their end product. The Company recorded VAT payable and VAT receivable net of payments in the financial statements. The VAT tax return is filed offsetting the payables against the receivables.
Sales and purchases are recorded net of VAT collected and paid. VAT taxes are not affected by the income tax holiday.
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Stock-Based Compensation
The Company records stock-based compensation in accordance with ASC Topic 718, Compensation Stock Compensation. ASC Topic 718 requires companies to measure compensation cost for stock-based employee compensation at fair value (FV) at the grant date and recognize the expense over the employees requisite service period. The Company recognizes in the statement of operations the grant-date FV of stock options and other equity-based compensation issued to employees and non-employees.
Income Taxes
The Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes. ASC Topic 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 Topic 740, a tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded. The adoption had no effect on the Companys consolidated financial statements.
Basic and Diluted Earnings Per Share
Earnings per share (EPS) is calculated in accordance with the ASC Topic 260, Earnings Per Share. Basic EPS is based upon the weighted average number of common shares outstanding. Diluted EPS is based on the assumption that all dilutive convertible shares and stock warrants were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.
Recent Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360)." ASU 2014-08 amends the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations or that have a major effect on the Company's operations and financial results should be presented as discontinued operations. This new accounting guidance is effective for annual periods beginning after December 15, 2014. The Company is currently evaluating the impact of adopting ASU 2014-08 on the Company's results of operations or financial condition.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). Early adoption is not permitted. The Company is currently evaluating the impact of the pending adoption of ASU 2014-09 on its consolidated financial statements and has not yet determined the method by which it will adopt the standard beginning January 1, 2017.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.
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Seasonality of Our Sales
The first quarter of the calendar year is typically the slowest season of the year for us due to the Chinese New Year holiday. During this period, accounts receivable collection tends to be very slow and we also need to purchase raw materials to prepare for upcoming busier seasons.
Inflation
Inflation does not materially affect our business or the results of our operations.
Off-Balance Sheet Arrangements
As of June 30, 2014, we did not have any off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15(e), our management has carried out an evaluation, with the participation and under the supervision of our Chief Executive Officer, Mr. Qingtao Xing and our Interim Chief Financial Officer, Xuezhu Xu, of the effectiveness of the design and operation of our disclosure controls and procedures, as of June 30, 2014. Based upon, and as of the date of this evaluation, Mr. Xing and Mr. Xu, determined that, as of June 30, 2014, 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 three months ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results.
ITEM 1A. RISK FACTORS
There are no material changes from the risk factors previously disclosed in Item 1A Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2013.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
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.
ITEM 6. EXHIBITS
Exhibit | Description of Exhibit |
31.1 | |
31.2 | |
32.1 | |
32.2 | |
101* |
Interactive data files pursuant to Rule 405 of Regulation S-T |
______________________ | |
* |
Filed with this Form 10-Q for Shiner International, Inc. Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or for purposes of Section 18 of the Securities Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
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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. | |
September 15, 2014 | By: /s/ Qingtao Xing |
Name: Qingtao Xing | |
Title: President and Chief Executive Officer | |
(Principal Executive Officer) | |
September 15, 2014 | By: /s/ Xuezhu Xu |
Name: Xuezhu Xu | |
Title: Interim Chief Financial Officer | |
(Principal Financial and Accounting Officer) |