Overview

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

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

The table below shows the percentage of revenue by each of our business segments for the years ended December 31, 2011 and 2010:

                                            Percent of Revenue
                                             2011          2010
                      BOPP tobacco film         51.0 %       28.9 %
                      Water-based latex          0.5 %        0.0 %
                      Coated film               30.1 %       40.4 %
                      Color printing             7.6 %        6.4 %
                      Advanced film             10.8 %       24.3 %
                                               100.0 %      100.0 %

We have 19 patents by the State Intellectual Property Office of China and have 10 patent applications relating to our products and manufacturing processes pending. Although our patents and processes provide us a competitive advantage, we do not believe the loss of any single patent would have a material adverse effect on our business.

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

Results of Operations

Comparison of the Year Ended December 31, 2011 and 2010

                                                                             $               %
                                          2011             2010            Change          Change
Revenues                              $ 75,294,512     $ 58,165,410     $ 17,129,102           29.4 %
Cost of goods sold                      65,275,356       48,361,075       16,914,281           35.0 %
Gross profit                            10,019,156        9,804,335          214,821            2.2 %
Selling, general and administrative
expenses                                 7,988,178        5,176,194        2,811,984           54.3 %
Interest expense, net of interest
income                                   1,093,095          217,849          875,246          401.8 %
Other income (expense), net              1,404,336          649,800          754,536          116.1 %
Exchange gain (loss)                        61,442          (93,170 )        154,612         -165.9 %
Income tax expense                         763,424          818,769          (55,345 )         -6.8 %
Net loss attributed to
noncontrolling interest                    102,239            8,079           94,160         1165.5 %
Net income attributed to Shiner       $  1,742,476     $  4,156,232     $ (2,413,756 )        -58.1 %

Revenues



Our revenue by business segment is as follows:

                                                                     $              %
Revenue by business segment       2011             2010            Change        Change
 BOPP tobacco film            $ 38,407,457     $ 16,830,883     $ 21,576,574       128.2 %
 Water-based latex                 383,729                -          383,729         n/a
 Coated film                    22,634,520       23,474,569         (840,049 )      -3.6 %
 Color printing                  5,736,812        3,707,089        2,029,723        54.8 %
 Advanced film                   8,131,994       14,152,869       (6,020,875 )     -42.5 %
                              $ 75,294,512     $ 58,165,410     $ 17,129,102        29.4 %

The increase in revenue was primarily caused by an increase in domestic product volume. 83.9%, or $63.2 million, of our sales in 2011 were made to Chinese companies. In 2010, 81.1%, or $47.2 million, of our sales were made domestically.The Company provides coated film to its largest customer which manufactures snack cakes and our remaining top three customers are tobacco manufacturers which use our BOPP tobacco film.

Internationally, we sell three lines of products: Advanced film (anti-counterfeit film), coated film, and color printing. International sales for 2011 were $12.1 million, or 16.1%, of our revenues in 2011 as compared to 11.0 million or 18.9% of revenue for 2010. The increase was not significant. All international sales are indirect using a network of distributors and converters.

The increase in revenue of BOPP tobacco film is due to the increased volume and price, we derived an increase of $20.4 million due to increased sales volume and $1.2 due to higher unit prices for BOPP tobacco film. The decrease in revenue of coated film is due to the increased volume and decreased price, we derived an increase of $4.3 million due to an increased sales volume offset by a $5.2 million decrease in unit prices for coated film. The increase in revenue of color printing products is mainly due to the increase of volume. The decrease in revenue of Advanced film is due to the increase of volume and decrease of price. We derived an increase of $0.5 million due to an increase in sales volume offset by a $6.5 million decrease in unit prices for Advanced film.

Our five largest customers accounted for 7%, 4%, 3%, 3% and 3% of our revenue, respectively, for 2011 and 16%, 10%, 8%, 7% and 4% of our revenue, respectively, for 2010.

Cost of Goods Sold

Cost of goods sold increased $16.9 million, or 35.0%, from $48.4 million for 2010 to $65.3 million for 2011. The cost of goods sold was 86.5% and 83.1% of our revenue in the year ended 2011 and 2010, respectively. The principal cost component of our cost of goods sold is raw materials which includes petroleum. The increase in cost of goods sold year to year was primarily caused by an increase in raw material costs due to petroleum price fluctuations. We estimate an increase in the price of crude oil of $10 per barrel would cause our raw material cost to increase by approximately 6%. There was some increase in the cost of our raw materials as a result of an increase in crude oil prices throughout the period. There has not been a significant difference in the cost of goods sold percentages among our different product lines and therefore, any increase or decrease in our raw material costs would be expected to have a similar impact to our different product lines' profitability.

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

The percentage increase in our cost of goods sold for 2011 was influenced by a 70% increase in raw material costs due to petroleum price fluctuations; a 30% increase in the cost of labor; and the amortization of the added depreciation of Phase I of the Hainan manufacturing facility into the cost of goods sold.

Gross Profit

Our gross profit for 2011 was $10.2 million, a profit margin of 13.3%, a decrease of 3.5% from 16.9% for 2010. The decrease in gross profit margin was primarily a consequence of an increase in overhead unit rates as a result of increased labor costs and depreciation of the new property.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses increased by 54.3%, or $2.8 million, to $8.0 million for 2011 compared to $5.2 million in 2010. General and administrative expenses include rent, management and staff salaries, insurance, marketing, accounting, legal, and research and development expenses. Although we have strict standards to control our general and administrative expenses, we have increased our research and development expenditures as compared to 2010. The increase in selling, general and administrative expenses is mainly due to an increase of $1.4 million research and development expenses, an increase of $0.5 million for marketing activities and an increase of $0.5 million for insurance expenses.

Interest Expense, net

Interest expense, net for 2011 increased by 402%, or $875,246, to $1,093,095 compared to $217,849 in 2010. We obtained additional short-term and long-term loans during 2011 compared to 2010.

Other Income

Other income increased by $0.8 million or 116.1% to $1.4 million for 2011 compared to income of $649,800 in 2010. During 2011, we received $1.4 million in subsidy income from Chinese Governmental Agencies for developing technology and research and development projects. We did not have these subsidies during 2010. During 2010, we received $293,000 from a former landlord for vacating leased space, which was paid in full during 2010.

Income Tax Expense

For 2011, we recorded a tax provision of $763,424 compared to $818,769 for 2010. Our effective tax rates for 2011 and 2010 were 31.8% and 16.5%, respectively. The increase in the effective tax rate is due to losses incurred by certain subsidiaries where the loss was not able to offset income generated by other subsidiaries.

Net Income

The decrease in our net income for 2011 compared to 2010 was mainly due to increased labor costs, depreciation of the new property, no other income from a former landlord offset by an increase in subsidy income.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of December 31, 2011 that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our interests.

Liquidity and Capital Resources

At December 31, 2011, we had $2.8 million in cash and equivalents on hand, compared to $8.6 million at December 31, 2010, and we had working capital of $9.7 million, a decrease of $3.1 million from December 31, 2010. The decrease in working capital is primarily due to the use of current assets such as cash, other payables and short-term loans to purchase non-current assets.Our principal demands for liquidity are: increasing capacity, purchasing raw materials, sales distribution and the possible acquisition of new subsidiaries in our industry, as well as other general corporate purposes. The following table summarizes the key cash flow metrics from our condensed consolidated statements of cash flows for 2011 and 2010.

Cash Flows



Below is a summary of the cash flow activity for 2011 and 2010:



                                                                2011              2010
Net cash (used in) provided by operating activities         $     379,709     $  5,996,894
Net cash used in investing activities                         (19,641,558 )     (6,769,342 )
Net cash provided by financing activities                      13,347,652        6,315,290
Effect of exchange rate changes on cash and equivalents           123,970           19,397
Net (decrease)/increase in cash and equivalents                (5,790,227 )      5,562,239
Cash and cash equivalents at beginning of the year              8,622,035        3,059,796
Cash and cash equivalents at end of the year                $   2,831,808     $  8,622,035

Operating Activities

Net cash flows provided by operating activities for 2011 was $0.4 million, which was comprised primarily of net income of $3.8 million and depreciation of $2.3 million, offset by an increase in working capital components of $5.8 million.

Investing Activities

We used $19.6 million from our investing activities during 2011 primarily for the acquisition of property and equipment including construction in progress and the purchase of Shimmer Sun Ltd. for $3.2 million. We are building a new tobacco film production line. The new line will be a BOPP film production line in a fully automated plant equipped with state-of-the-art production machinery. The cost of this new facility is approximately $14.0 million. We have an RMB 70 million ($11.1 million) credit facility we can draw down upon to pay for the cost of the building (see discussion under "Liabilities" below).

Financing Activities

Net cash provided by financing activities during 2011 was $13.4 million from the issuance of short and long-term loans. $7.0 million was paid to repay short-term loans offset by $20.4 million provided by the issuance of short-term loans and long-term loans under the credit facility bearing interest rates between 6.06% and 8.20%.

Assets

As of December 31, 2011, our accounts receivable decreased by $2.3 million compared with December 31, 2010. The decrease in accounts receivable during 2011 was due primarily to our collection of accounts receivable. We intend to continue our efforts to maintain accounts receivable at reasonable levels in relation to our sales. As of December 31, 2011, our inventory increased by $2.9 million compared with December 31, 2010.

Liabilities

Our current liabilities increased by $6.6 million during 2011 principally due to an increase in short-term loan and other payables. The increase in short-term loans during 2011 was due primarily to the need for additional cash to finance our increased sales volume.

We entered into a formal agreement with a vendor whereby we agreed to purchase new equipment for $13.2 million. We already paid $10.0 million toward the purchase of this equipment and issued a letter of credit for the remaining amount. The equipment was installed in the third quarter of 2011, and became operational in the first quarter of 2012.

On August 2, 2010, Hainan Shiner, our wholly owned subsidiary, entered into a credit facility with the Hainan Branch of the Bank of China. The credit facility is comprised of a seven-year 70 million RMB, or approximately $11.1 million, secured revolving credit facility. Hainan Shiner may not make any draw downs under this facility after December 31, 2011. On each of January 24, February 10, February 16, February 17, March 25, November 30, and December 23, 2011, Hainan Shiner made withdrawals on the credit facility of approximately $2.5 million, $2.6 million, $2.2 million, $1.2 million, $0.4 million, $0.2 million and $0.5 million, respectively. We have approximately $0.8 million of available credit. Hainan Shiner may only use the loan proceeds to improve the technology of its BOPP film and to purchase certain equipment necessary for these improvements.
Proceeds under the facility not used for these purposes may be subject to a misappropriation penalty interest rate of 100% of the current interest rate on the loan.

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

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

During 2011, we paid approximately $7.0 million of our short-term loans and borrowed an additional $10.5 million in short-term loans. These loans are due between February 2012 and June 2012. We intend to meet our liquidity requirements, including capital expenditures related to the purchase of equipment, purchase of raw materials, and the expansion of our business, through cash flow provided by operations, and our current credit facility.

Critical Accounting Policies

Accounts Receivable

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

Inventory

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

Revenue Recognition

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

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

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

Stock-Based Compensation

The Company records stock-based compensation in accordance with ASC Topic 718, "Compensation - Stock Compensation." ASC 718 requires companies to measure compensation cost for stock-based employee compensation at fair value at the grant date and recognize the expense over the employee's requisite service period. The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees. There were 120,000 options outstanding as of December 31, 2011.

Income Taxes

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

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

Basic and Diluted Earnings Per Share

Earnings per share ("EPS") is calculated in accordance with the ASC Topic 260, "Earnings Per Share." Basic EPS is based upon the weighted average number of common shares outstanding. Diluted EPS is based on the assumption that all dilutive convertible shares and stock warrants were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. There were 120,000 options and 521,664 warrants outstanding as of December 31, 2011. All options and warrants were excluded from the diluted loss per share calculation due to their anti-dilutive effect since the exercise prices are greater than the average stock price.

Recent Accounting Pronouncements

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

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

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

Contractual Obligations



Our significant contractual obligations as of December 31, 2011 are as follows:



                                                            Payments due by Period
                                Less than          One to          Three to        More Than
                                 One Year       Three Years       Five Years       Five Years         Total
Short-term loan                $ 10,684,625     $          -     $          -     $          -     $ 10,684,625
Long-term loans                           -                -                -        9,957,090        9,957,090
Interest on loan obligations        797,497          657,168          657,168          657,168        2,769,001
Lease obligations                   440,571          788,000                -                -        1,228,571
Total                          $ 11,922,693     $  1,445,168     $    657,168     $ 10,614,258     $ 24,639,287

Seasonality of our Sales

The first quarter of the calendar year is typically the slowest season of the year due to the Chinese New Year holiday. During this period, accounts receivable collection is very slow and we also need to prepare for upcoming busier seasons by making payments for inventory.

Inflation

Inflation does not materially affect our business or the results of our operations.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.