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BEST > SEC Filings for BEST > Form 10-Q on 20-May-2013All Recent SEC Filings

Show all filings for SHINER INTERNATIONAL, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for SHINER INTERNATIONAL, INC.


20-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

We were incorporated in Nevada in November 2003, but since July 2007, have been headquartered in Hainan, China. Through our operating subsidiaries, Hainan Shiner, Shiny-Day, Hainan Modern, Zhuhai Modern, Shimmer Sun, Ningbo and Shanghai Juneng we manufacture and sell packaging and anti-counterfeit plastic film to manufacturers and producers in China. We 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 months ended March 31, 2013, and 2012:

                     2013       2012

BOPP tobacco film    53.4%      57.8%
Water-based latex     1.4%       0.1%
Coated film          25.4%      23.7%
Color printing        6.9%       5.9%
Advanced film        12.9%      12.5%
                    100.0%     100.0%

We have 21 patents issued by the State Intellectual Property Office of China and have 22 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.

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 March 31, 2013 and 2012 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.

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Comparison of Three Months Ended March 31, 2013 and 2012

The following table summarizes the results of our operations during the
three-month periods ended March 31, 2013 and 2012 and provides information
regarding the dollar and percentage increase or (decrease) in such periods:

                                                                      $             %
                                    2013            2012           Change         Change
Revenues                       $  13,843,529   $  17,370,024   $  (3,526,495 )      (20.3 )%
Cost of goods sold                12,930,090      15,199,083      (2,268,993 )      (14.9 )%
Gross profit                         913,439       2,170,941      (1,257,502 )      (57.9 )%
Selling, general and
administrative expenses            2,096,518       2,301,008        (204,490 )       (8.9 )%
Interest expense, net of
interest income                      312,806         279,840          32,966         11.8  %
Other income (expense), net        1,007,440        (101,183 )     1,108,623      (1095.7 )%
Exchange loss                        (38,060 )        (5,873 )       (32,187 )      548.1  %
Income tax expense                         -          78,943         (78,943 )     (100.0 )%
Net income (loss) attributed
to noncontrolling
interest                                  15         (41,386 )       (41,401 )     (100.0 )%
Net loss attributed to Shiner  $    (526,520 ) $    (554,520 ) $      28,000         (5.0 )%

Revenues

Revenues for the three months ended March 31, 2013 decreased $3.5 million (or 20.3%), to $13.8 million, compared to $17.4 million in the 2012 period. The decrease was primarily attributable to decreased revenues generated from the sale of BOPP tobacco, coated film, color printing and advanced film, which, was partially offset by an increase in revenues generated from the sale of water-based latex. In the 2013 first quarter, there was a $2.6 million (or a 26.4%) decrease in sales from tobacco film, a 14.5% decrease in coated film, a 7.7% decrease in color printing and a 17.7% decrease in advanced film, which was partially offset by an increase in sales from water-based latex (1,342.2%), as compared to the 2012 period. In the 2013 first quarter, revenue from advanced film decreased $0.4 million (or 17.7%) to $1.8 million, down from $2.2 million; revenue from BOPP tobacco decreased $2.6 million (or 26.4%) to $7.4 million, down from $10.0 million; and revenue from water-based latex increased $0.2 million (or 1,342.2%) to $0.2 million, from $0.01 million, as compared to the 2012 period. In the 2013 first quarter, revenue from coated film decreased $0.6 million (or 14.5%) to $3.5 million, from $4.1 million, and revenue from color printing decreased $0.08 million (or 7.7%) to $1.0 million, from $1.0 million in the 2012 period. In the 2013 first quarter, the division between our domestic and international sales remained stable as compared to 2012. In first quarter of 2013 and 2012, sales generated domestically accounted for 77.2% and 82.8%, respectively, of our total revenues, and sales generated internationally from selling our advanced film, coated film, and color printing accounted for 22.8% and 17.2%, respectively.

Cost of Goods Sold

For the three months ended March 31, 2013, cost of goods sold ("COGS") decreased $2.3 million (or 14.9%), from $15.2 million in the 2012 period, to $12.9 million. COGS for the 2013 and 2012 first quarters was 93.4% and 87.5% of our revenues, respectively. The increase in COGS as a percentage of revenues was primarily caused by an increase in raw material costs due to petroleum price fluctuations, cost of labor, and the amortization of the added depreciation of Phase I of the Hainan manufacturing facility.

Gross Profit

Our gross profit for the three months ended March 31, 2013 was $.9 million, with a profit margin of 6.6%, a 5.9% decrease from 12.5% in the 2012 first quarter. The decrease in profit margin was primarily a consequence of an increase in our COGS as a result of increase in raw material costs, labor costs and depreciation of the new property.

Selling, General and Administrative ("SG&A") Expenses

For the three months ended March 31, 2013, our SG&A expenses decreased by $0.2 million (or 8.9%) to $2.1 million, compared to $2.3 million in the 2012 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 decrease of $0.2 million in R&D expenses .

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Interest Expense, net

For the three months ended March 31, 2013, interest expense increased by $85,487 (or 29.6%) to $374,556 compared to $288,669 in the 2012 period, primarily due to additional short-term and long-term loans, which increased by $6.9 million in the 2013 period.

Other Income, net

For the three months ended March 31, 2013, other income increased by $1.1 million (or 1,095.7%) to $1.0 million, compared to an expense of $0.1 million in the 2012 period. In the 2013 first quarter, we recognized $0.8million in subsidy income from PRC governmental agencies for developing technology and R&D projects compared to $0.3 million in the 2012 period.

Income Tax Expense

For the three months ended March 31, 2013, we recorded a tax provision of $0, compared to $78,943 in the 2012 period. Our effective tax rates for the 2013 and 2012 first quarters were 0% and 28.9%, respectively. The change 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. This resulted in us providing a provision for income taxes in the 2012 first quarter, even though we incurred an overall net loss.

Net Loss

For the three months ended March 31, 2013, we suffered a net loss of $0.5 million, representing a decrease of $0.07 million or 11.6% from a net loss of $0.6 million during the 2012 period. The decrease in our net loss in the 2013 first quarter was mainly due to a decrease in revenue and increases in COGS and SG&A expenses, the impairment of intangible assets and the loss on the sale and write-off of assets, which was partially offset by an increase in other income, as explained above.

Liquidity and Capital Resources

At March 31, 2013, we had $4.4 million in cash and equivalents on hand, compared to $4.2 million at December 31, 2012. We had working capital of $6.4 million at March 31, 2013, compared to $6.3 million at December 31, 2012. The increase in working capital is not material. 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 three months ended March 31, 2013, and 2012:

                                                             2013           2012
Net cash provided by operating activities               $  1,130,074   $  1,063,030
Net cash used in investing activities                       (519,340 )   (1,176,067 )
Net cash used in financing activities                       (516,520 )     (718,938 )
Effect of exchange rate changes on cash and equivalents       27,994         22,196
Net (decrease) increase in cash and equivalents              122,208       (809,779 )
Cash and equivalents at beginning of the period            4,233,183      2,831,808
Cash and equivalents at end of the period               $  4,355,391   $  2,022,029

Operating Activities

Net cash flows provided by operating activities during the three months ended March 31, 2013 was $1,130,074, an increase of $67,044, compared to $1,063,030 in the 2012 period. The increase in cash provided by operating activities during the 2013 first quarter was primarily attributable to a decrease in working capital components. The changes in working capital components that primarily contributed to the increase in cash flow used in operating activities for the 2013 first quarter was a decrease in accounts receivable of $1.5 million, and inventory of $1.1 million, offset by a decrease accounts payable of $2.0 million and other payables of $0.6 million.

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Investing Activities

Net cash flows used in investing activities during the three months ended March 31, 2013 was $0.5 million, a decrease of $0.7 million, compared to $1.2 million in the 2012 period. During the 2012 period, we used $1.2 million for the acquisition of property and equipment. The property and equipment were purchased for the construction of a new BOPP film production line and a fully automated plant equipped with state-of-the-art production machinery, which commenced in 2010. 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 and an increase in restricted cash of $0.8 million.

Financing Activities

Net cash used in financing activities for the three months ended March 31, 2013 was $0.5 million, a decrease of $0.2 million compared to the 2012 period. During the 2013 period, we decreased our net cash provided by financing activities by repaying $5.5 million of short-term loans, a decrease of $3.1 million from $8.6 million in the 2012 period, and decreasing our proceeds from our long-term loans from $1.1 million during the 2012 period to $0, a decrease of $1.1 million. The foregoing decrease in net cash provided by financing activities was partially offset by our decrease in proceeds from short-term loans to $4.9 million, a decrease of $1.8 million from $6.8 million in the 2012 period.

Assets

Our total assets as of March 31, 2013 were $76.4 million, a decrease of $1.1 million, compared to $77.5 million as of December 31, 2012. The decrease was primarily due to the decrease of advances to suppliers of $2.7 million and accounts receivable of $1.4 million, offset by an increase in inventory of $2.4 million. We intend to continue our efforts to maintain accounts receivable at reasonable levels in relation to our sales.

Liabilities

Our current liabilities decreased by $0.8 million as of March 31, 2013, compared to December 31, 2012, principally due to a decrease in unearned revenue of $0.5 million, and short-term loan maturities decreasing by $0.4 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 RMB 70 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 March 31, 2013) 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 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.

During the three months ended March 31, 2013, we paid $5.5 million of our short-term loans and borrowed an additional $4.9 million in short-term loans. The current outstanding short-term loans are due through June 2013. We intend to meet our liquidity requirements, including capital expenditures related to the purchase of equipment, purchase of raw materials, and the expansion of our business, through cash flow provided by operations, and our current credit facilities.

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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 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 management's 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 management's 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

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 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 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 ("FV") at the grant date and recognize the expense over the employee's requisite service period. The Company recognizes in the statement of operations the grant-date FV of stock options and other equity-based compensation issued to employees and non-employees.

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.

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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.

Recent Accounting Pronouncements

In December 2011, the FASB issued ASU No. 2011-11, "Balance Sheet (Topic 210):
Disclosures about Offsetting Assets and Liabilities." This ASU requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. In January 2013, this guidance was amended by ASU 2013-01, "Clarifying the Scope of Disclosure about Offsetting Assets and Liabilities," which limits the scope of ASU No. 2011-11 to certain derivatives, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions. This guidance is effective for annual and interim reporting periods beginning on or after January 1, 2013. The adoption of this standard did not have a material impact on our consolidated results of operations, financial condition, or liquidity.

Seasonality of Our Sales

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

Inflation

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

Off-Balance Sheet Arrangements

As of March 31, 2013, we did not have any off-balance sheet arrangements.

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