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| BEST > SEC Filings for BEST > Form 10-Q on 14-Aug-2009 | All Recent SEC Filings |
14-Aug-2009
Quarterly Report
Overview
We develop, manufacture and distribute packaging film and color printed packaging through our operating subsidiaries. Our products include coated film, shrink-wrap film, common film, anti-counterfeit laser holographic film and color printed packaging materials. All of our operations are based in the PRC and each of our subsidiaries was formed under the laws of the PRC.
We currently conduct our business through the following four operating subsidiaries in the PRC:
· Shiner Industrial located in Haikou, Hainan Province;
· Shiny-day also located in Haikou, Hainan Province;
· Zhuhai located in Zhuhai, Guangdong Province; and
· Modern located in Haikou, Hainan Province.
We operate in several markets within the packaging film segment: BOPP based film, coated film, anti-counterfeit film and color printed packaging. For the six months ended June 30, 2009, color printed packaging products made up 8.6% of our revenue, BOPP tobacco film made up 43.7% of our revenue, coated film accounted for 27.4% of our revenue and anti-counterfeit film sales equaled 20.3% of our revenue.
Our current production capacity consists of:
· Five coated film lines with total capacity of 15,000 tons per year;
· One BOPP tobacco film production line with total capacity of 3,500 tons per year;
· One BOPP film production line with capacity of 7,000 tons per year;
· Three color printing lines; and
· Four anti-counterfeit film lines, with a total capacity of 2,500 tons per year.
We are targeting growth through four main channels: (i) the continuation of our efforts to gain international market share in coated film through better pricing and excellent after-sale service; (ii) the expansion of our sales in anti-counterfeit film, especially to high-end brand spirits and cigarette manufacturers; (iii) the development of "next generation" films, and (iv) the possible acquisition of an anti-counterfeit technology company.
Results of Operations
Three Months Ended June 30, 2009 Compared to the Three Months Ended June 30,
2008
Three Months Ended
June 30, $ %
2009 2008 Change Change
Revenues $ 8,006,378 $ 14,160,149 $ (6,153,771 ) (43.5 )
Cost of goods sold 6,900,881 11,339,794 (4,438,913 ) (39.1 )
Gross profit 1,105,497 2,820,355 (1,714,858 ) (60.8 )
Selling, general and administrative expenses 1,313,604 992,115 321,489 32.4
Interest expense 42,240 1,879 40,361 2,148.0
Other income 15,394 49,872 (34,478 ) (69.1 )
Income tax expense (benefit) 44,180 162,425 (118,245 ) (72.8 )
Net income (loss) (276,416 ) 1,826,265 (2,102,681 ) (115.1 )
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Revenues
Our revenues for the three months ended June 30, 2009 decreased 43.5% or $6,153,771 compared to the same period in 2008. The decrease in revenues resulted from a 35.5% or $3,986,428 decrease in our packaging segment (that includes a 39.4% or 2,102,719 decrease in tobacco BOPP sales, a 33.7% or 1,105,088 decrease in coated film sales, and a 29.6% or 778,621 decrease in the sales of anti-counterfeit film sales), and a 74.3% or 2,167,343 decrease in color printing sales. The decrease in revenue is also coupled with a decrease in the selling price of our packaging and color printing products. The decrease in sales was attributable in large part to the global economic crisis and the melamine milk scare that began in late 2008.
International sales for the three months ended June 30, 2009 totaled $2,629,725 accounting for 32.8% of total revenues in comparison to $2,527,557 or 17.9% for the three months ended June 30, 2008. A 4.0% or $102,168 increase in international sales was primarily due to a 3% increase in anti-counterfeit film sales and a 1.6% increase in coated film.
Cost of Goods Sold
Cost of goods sold during the three months ended June 30, 2009 was $6,900,881 or 86.2% of revenues as compared to $11,339,794 or 80.1% of revenues during the three months ended June 30, 2008. Cost of goods sold for our packaging segment as a percentage of packaging revenue and cost of goods sold for our color printing segments as a percentage of color printing revenue were 85.1% and 97.3%, respectively, for the three months ended June 30, 2009 as compared to 77.7% and 89.5%, respectively, for the same period in 2008. The decrease in cost of goods sold was directly related to the decrease in revenue. The increase in cost of goods sold as a percentage of revenue was due to lower selling prices for our products as a result of current market conditions and the increase in depreciation expense as a result of adding a new production line.
Gross Profit
Our gross profit for the three months ended June 30, 2009 was $1,105,497, representing a gross margin of 13.8%, a decrease of 6.1% from the gross margin of 19.9% for the three months ended June 30, 2008. The decrease in gross margin is a direct consequence of a decrease in the selling prices of our products and the increase in depreciation expense as a result of adding a new production line.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses increased by 32.4% or $321,489 to $1,313,604 for the three months ended June 30, 2009 compared to $992,115 for the three months ended June 30, 2008. General and administrative expenses include rent, management and staff salaries, general insurance, marketing, accounting and legal expenses. Selling expenses for the three months ended June 30, 2009 increased by 26.3% to $496,853 compared to $393,461 for the same period in 2008 due to an increase in marketing expense of $150,308; offset by a decrease in transportation expense of $78,325. General and administrative expenses for the three months ended June 30, 2009 increased by 36.4% to $816,751 compared to $598,654 for the same period in 2008 due to an increase in the provision for inventory impairment of $204,900.
Interest Expense
Interest expense in the three months ended June 30, 2009 increased by 2,148.0% to $42,240 compared to $1,879 for the same period in 2008. This increase is mainly attributable to the increase in our outstanding short-term debt and notes payable.
Other Income (Expense)
The decrease in other income was due in large part to a decrease in waste materials that can be sold.
Income Tax Expense
For the three months ended June 30, 2009 we recorded a tax provision of $44,180 which is a reduction in the net operation loss carryback we recognized during the three months ended March 31, 2009.
Net Income
The decrease in our net income (loss) for the three months ended June 30, 2009 as compared to the same period for 2008 was the result of lower sales, decreased margins on those sales and higher interest costs.
Six Months Ended June 30, 2009 Compared to the Six Months Ended June 30, 2008
Six Months Ended
June 30, $ %
2009 2008 Change Change
Revenues $ 15,076,786 $ 25,438,086 $ (10,361,300 ) (40.7 )
Cost of goods sold 13,499,804 20,079,584 (6,579,780 ) (32.8 )
Gross profit 1,576,982 5,358,502 (3,781,520 ) (70.6 )
Selling, general and administrative expenses 2,115,373 1,825,420 289,953 15.9
Interest expense 88,289 18,711 69,578 371.9
Other income 26,267 125,032 (98,765 ) (79.0 )
Income tax expense (benefit) (37,703 ) 321,479 (359,182 ) (111.7 )
Net income (loss) (551,429 ) 3,390,148 (3,941,577 ) (116.3 )
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Revenues
Our revenues for the six months ended June 30, 2009 decreased 40.7% or $10,361,300 compared to the same period in 2008. The decrease in revenues resulted from a 30.1% or $5,918,526 decrease in our packaging segment (that includes a 26.2% or 2,338,863 decrease in tobacco BOPP sales, a 30.4% or $1,802,357 decrease in coated film sales, and a 36.7% or 1,777,306 decrease in the sales of anti-counterfeit film sales), and a 77.4% or 4,442,774 decrease in color printing sales. The decrease in revenue is also coupled with a decrease in the selling price of our packaging and color printing products. The decrease in sales was attributable in large part to the global economic crisis and the melamine milk scare that began in late 2008.
International sales for the six months ended June 30, 2009 totaled $4,460,902 accounting for 29.6% of total revenues in comparison to $5,068,556 or 19.9% for the six months ended June 30, 2008. A 12.0% or $607,654 decrease in international sales was primarily due to a 23.0% decrease in anti-counterfeit film sales.
Cost of Goods Sold
Cost of goods sold during the six months ended June 30, 2009 was $13,499,804 or 89.5% of revenues as compared to $20,079,584 or 78.9% of revenues during the six months ended June 30, 2008. Cost of goods sold for our packaging segment as a percentage of packaging revenue and cost of goods sold for our color printing segments as a percentage of color printing revenue were 88.1% and 104.9%, respectively, for the six months ended June 30, 2009 as compared to 76.4% and 87.5%, respectively, for the same period in 2008 The decrease in cost of goods sold was directly related to the decrease in revenue. The increase in cost of goods sold as a percentage of revenue was due to lower selling prices for our products as a result of current market conditions and the increase in depreciation expense as a result of adding a new production line.
Gross Profit
Our gross profit for the six months ended June 30, 2009 was $1,576,982, representing a gross margin of 10.5%, a decrease of 10.6% from the gross margin of 21.1% for the six months ended June 30, 2008. The decrease in gross margin is a direct consequence of a decrease in the selling prices of our products and the increase in depreciation expense as a result of adding a new production line.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses increased by 15.9% or $289,953 to $2,115,373 for the six months ended June 30, 2009 compared to $1,825,420 for the six months ended June 30, 2008. General and administrative expenses include rent, management and staff salaries, general insurance, marketing, accounting and legal expenses. Selling expenses for the six months ended June 30, 2009 increased by 10.0% to $774,704 compared to $704,380 for the same period in 2008 due to an increase in marketing expense of $235,635; offset by a decrease in transportation expense of $170,766. General and administrative expenses for the six months ended June 30, 2009 increased by 19.6% to $1,340,669 compared to $1,121,040 for the same period in 2008 due to an increase in the provision for inventory impairment of $204,990.
Interest Expense
Interest expense in the six months ended June 30, 2009 increased by 371.9% to $88,289 compared to $18,711 for the same period in 2008. This increase is mainly attributable to the increase in our outstanding short-term debt and notes payable.
Other Income (Expense)
The decrease in other income was due in large part to a decrease in waste materials that can be sold.
Income Tax Expense
For the six months ended June 30, 2009 we recorded a tax benefit due to the net loss incurred. Our effective tax rate for the six months ended June 30, 2008 was 8.7%. Since we operate in a privileged economic zone, we will continue to enjoy certain tax privileges as a result of a reduced rate.
Net Income
The decrease in our net income (loss) for the six months ended June 30, 2009 as compared to the same period for 2008 was the result of lower sales, decreased margins on those sales and higher interest costs and general and administrative expenses.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements during the six months ended June 30, 2009 that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our interests.
Liquidity and Capital Resources
Cash Flows
At June 30, 2009, we had $2,459,671 in cash and cash equivalents on hand. Our principal demands for liquidity are increasing capacity, purchasing raw materials, sales distribution and the possible acquisition of new subsidiaries in our industry as opportunities present themselves, as well as general corporate purposes. As of June 30, 2009, we had four short-term loans for a total of $3,223,000, with interest between 5.31% and 5.69%. The loans are due between July 9, 2009 and June 29, 2010 and are collateralized by time deposits or by buildings and equipment. Also as of June 30, 2009, we had two notes payable for a total of $1,111,314, with interest of 0%. The notes are due on August 26, 2009 and October 2, 2009 and are collateralized by accounts and notes receivable. As of June 30, 2009, we had working capital of $14,174,402, a decrease of $1,912,159 from December 31, 2008. We anticipate we will have adequate working capital to fund our operations and growth in the foreseeable future.
On October 22, 2007, we completed a private placement offering pursuant to which we sold an aggregate of 3,500,000 units at an offering price of $3.00 per unit for aggregate gross proceeds of $10,500,000. Each unit consisted of one share of our common stock, par value $.001 per share, and a three year warrant to purchase 15% of one share of common stock at an exercise price of $6.00 per share. Accordingly, we issued an aggregate of 3,500,000 shares of common stock and warrants to purchase 525,000 shares of our common stock to the 76 accredited investors who participated in this offering. In addition, we compensated four finders that assisted in the sale of securities in this private placement offering by (i) paying them cash equal to 8% of the gross proceeds from the sales of units placed and (ii) issuing them warrants to purchase that number of shares of our common stock equal to 15% of the units placed. The warrants granted to these finders have the same terms and conditions as the warrants granted in the offering.
During the six months ended June 30, 2009, we purchased 43,679 shares of our common stock on the open market (treasury shares) for $40,299. We accounted for the purchase of these treasury shares using the cost method.
Net cash flows provided by operating activities for the six months ended June 30, 2009 was $2,028,996 compared to $310,614 for the six months ended June 30, 2008. This change in cash flows from operating activities was mainly due to a reduction in accounts receivable during the six months ended June 30, 2009.
We used $3,796,592 in investing activities during the six months ended June 30, 2009 for the issuance of a note receivable; acquisition of property and equipment and an increase is time deposits collateralizing our short-term loans.
Cash provided by financing activities during the six months ended June 30, 2009 was $415,331 due to the issuance of notes payable offset by repayments of our short term loans.
Assets
As of June 30, 2009, our accounts receivable decreased by $1,785,669 compared with the balance as of December 31, 2008. The decrease in accounts receivable during then six months ended June 30, 2009 was due primarily to a decreased sales. We intend to continue our efforts to maintain accounts receivable at reasonable levels in relation to our sales. Notes receivables increased by $916,517 and advances to suppliers increased by $1,248,258 in the same period. Prepaid expenses and other current assets increased by $416,890 and inventory decreased by $149,271 during six months ended June 30, 2009.
Liabilities
Our accounts payable increased by $963,394 during the six months ended June 30, 2009 and unearned revenues (payments received before all the relevant criteria for revenue recognition are satisfied) increased by $201,598 over the same period.
Short-term loans decreased by $661,197 due to the repayment of one of our short-term loans during the six months ended June 30, 2009 and notes payable increased $1,111,314 during the same period due to the issuance of two notes payable.
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 funds raised through private placement offerings of our securities.
The majority of our revenues and expenses were denominated primarily in RMB, the currency of the PRC.
There is no assurance that exchange rates between the RMB and the USD will remain stable. We do not engage in currency hedging. Inflation has not had a material impact on our business.
Recent Accounting Pronouncements
In April 2009, the FASB issued FSP No. FAS 157-4, "Determining Fair Values When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly." This FSP provides guidance on (1) estimating the fair value of an asset or liability when the volume and level of activity for the asset or liability have significantly declined and (2) identifying transactions that are not orderly. The FSP also amends certain disclosure provisions of SFAS No. 157 to require, among other things, disclosures in interim periods of the inputs and valuation techniques used to measure fair value. This pronouncement is effective prospectively beginning April 1, 2009. The adoption of this standard did not have a material impact on our consolidated results of operations or financial condition.
In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments" (FSP 115-2). This FSP modifies the requirements for recognizing other-than-temporarily impaired debt securities and changes the existing impairment model for such securities. The FSP also requires additional disclosures for both annual and interim periods with respect to both debt and equity securities. Under the FSP, impairment of debt securities will be considered other-than-temporary if an entity (1) intends to sell the security, (2) more likely than not will be required to sell the security before recovering its cost, or (3) does not expect to recover the security's entire amortized cost basis (even if the entity does not intend to sell). The FSP further indicates that, depending on which of the above factor(s) causes the impairment to be considered other-than-temporary, (1) the entire shortfall of the security's fair value versus its amortized cost basis or (2) only the credit loss portion would be recognized in earnings while the remaining shortfall (if any) would be recorded in other comprehensive income. FSP 115-2 requires entities to initially apply the provisions of the standard to previously other-than-temporarily impaired debt securities existing as of the date of initial adoption by making a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The cumulative-effect adjustment potentially reclassifies the noncredit portion of a previously other-than-temporarily impaired debt security held as of the date of initial adoption from retained earnings to accumulated other comprehensive income. This pronouncement is effective April 1, 2009. The adoption of this standard did not have a material impact on our consolidated results of operations or financial condition.
In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments." This FSP essentially expands the disclosure about fair value of financial instruments that were previously required only annually to also be required for interim period reporting. In addition, the FSP requires certain additional disclosures regarding the methods and significant assumptions used to estimate the fair value of financial instruments.
In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, Subsequent Events ("FAS 165") [ASC 855-10-05], which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. FAS 165 also requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. FAS 165 is effective for interim and annual periods ending after June 15, 2009, and accordingly, we adopted this pronouncement during the second quarter of 2009. FAS 165 requires that public entities evaluate subsequent events through the date that the financial statements are issued. We have evaluated subsequent events through the time of filing these financial statements with the SEC on August 11, 2009.
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets - an amendment of FASB Statement No. 140 ("FAS 166") [ASC 860], which requires entities to provide more information regarding sales of securitized financial assets and similar transactions, particularly if the entity has continuing exposure to the risks related to transferred financial assets. FAS 166 eliminates the concept of a "qualifying special-purpose entity," changes the requirements for derecognizing financial assets and requires additional disclosures. FAS 166 is effective for fiscal years beginning after November 15, 2009. We have not completed its assessment of the impact FAS 166 will have on its financial condition, results of operations or cash flows.
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) ("FAS 167") [ASC 810-10], which modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. FAS 167 clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity's purpose and design and a company's ability to direct the activities of the entity that most significantly impact the entity's economic performance. FAS 167 requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. FAS 167 also requires additional disclosures about a company's involvement in variable interest entities and any significant changes in risk exposure due to that involvement. FAS 167 is effective for fiscal years beginning after November 15, 2009. We have not completed its assessment of the impact FAS 167 will have on its financial condition, results of operations or cash flows.
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles a Replacement of FASB Statement No. 162 ("FAS 168"). This Standard establishes the FASB Accounting Standards Codification™ (the "Codification") as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. The Codification is effective for interim and annual periods ending after September 15, 2009, and as of the effective date, all existing accounting standard documents will be superseded. The Codification is effective in the third quarter of 2009, and accordingly, the Quarterly Report on Form 10-Q for the quarter ending September 30, 2009 and all subsequent public filings will reference the Codification as the sole source of authoritative literature.
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