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BEST > SEC Filings for BEST > Form 10-K on 3-Apr-2014All Recent SEC Filings

Show all filings for SHINER INTERNATIONAL, INC.

Form 10-K for SHINER INTERNATIONAL, INC.


3-Apr-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Special Note Regarding Forward Looking Statements

In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as "believe," "expect," "anticipate," "project," "target," "plan," "optimistic," "intend," "aim," "will" or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; and any statements regarding future economic conditions or performance, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements. Potential risks and uncertainties include, among other things, the factors discussed in "Risk Factors" included elsewhere is this Annual Report on Form 10-K.

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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 People's 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 years ended December 31, 2013 and 2012:

                                            2013       2012
                       BOPP tobacco film    58.7%      62.1%
                       Water-based latex     0.9%       0.5%
                       Coated film          28.5%      23.4%
                       Color printing        4.7%       4.6%
                       Advanced film         7.2%       9.4%
                                           100.0%     100.0%

We have 22 patents issued by the State Intellectual Property Office of China and have 75 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.

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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 years ended December 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.

Comparison of the Years Ended December 31, 2013 and 2012

                                   Year Ended December 31,            $              %
                                    2013            2012           Change         Change
Revenues                       $  85,641,394   $  72,036,187   $  13,605,207         18.9%
Cost of goods sold                77,016,733      67,397,899       9,618,834         14.3%
Gross profit                       8,624,661       4,638,288       3,986,373         85.9%
Selling, general and               9,594,352       8,896,294         698,058          7.8%
administrative expenses
Impairment of intangible                   -       3,819,214      (3,819,214 )    (100.0)%
assets
Loss on write down of assets               -       2,106,379      (2,106,379 )    (100.0)%
Interest expense, net of           1,508,383       1,423,227          85,156          6.0%
interest income
Other income (expense), net          839,115       1,651,176        (812,061 )     (49.2)%
Exchange gain (loss)                (132,790 )       (55,588 )       (77,202 )      138.9%
Income tax expense                   414,693         546,057        (131,364 )     (24.1)%
Net loss attributed to               503,578       1,496,446        (992,868 )     (66.3)%
noncontrolling interest
Net loss attributed to Shiner  $  (1,682,864 ) $  (9,060,849 ) $   7,377,985       (81.4)%

Revenues

Revenues in 2013 increased $13.6 million (or 18.9%), to $85.6 million, compared to $72.0 million in 2012. The increase was primarily attributable to an increase in revenues generated from BOPP tobacco film, coated film, color printing and water based latex, partially offset by a decrease in advanced film. In 2013, there was a $5.4 million (or 12.2%) increase in sales from BOPP tobacco film, a $7.5 million (or 44.6%) increase in sales from coated film, a $0.44 million (or 122.0%) increase in water-based latex, a $0.74 million (or 22.4%) increase in color printing and a $0.55 million (or 8.2%) decrease in advanced film compared to 2012. In 2013, our domestic (China Mainland) sales increased slightly compared to 2012. In 2013 and 2012, sales generated domestically accounted for 86.3% and 85.0%, respectively, of our total revenues, and sales generated internationally from selling our advanced film, coated film, and color printing accounted for 14.1% and 15%, respectively.

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Cost of Goods Sold

In 2013, cost of goods sold ("COGS") increased $9.6 million (or 14.3%), from $67.4 million to $77.0 million, compared to 2012. COGS for 2013 and 2012 was 89.9% and 93.6% of our revenues, respectively. The decrease in COGS as a percentage of revenues from 2012 to 2013 was a result of high sales volume to absorb the fixed production costs.

Gross Profit

Our gross profit in 2013 was $8.6 million, a profit margin of 10.1%, an increase of 3.6% from 6.4% in 2012. The increase in profit margin from 2012 to 2013 was a result of high sales volume to absorb the fixed production costs.

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

In 2013, our SG&A expenses increased by $0.7 million (or 7.8%) to $9.6 million, compared to $8.9 million in 2012. 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 R&D expenses of $0.9 million in connection with our ongoing investment in technology updates for our packaging products.

Impairment of Intangible Assets

At December 31, 2012, we evaluated our goodwill and patents for impairment and concluded that the assets should be impaired in their entirety. Accordingly we recognized an impairment loss of $2.0 million and $1.8 million related to goodwill and patents, respectively. There were no such impairments in 2013.

Loss on Write off of Assets

During 2012, we sold certain subsidiary assets for a loss of $1.5 million and wrote off the value of other assets by $0.6 million. There were no such losses in 2013.

Interest Expense, net

In 2013, interest expense increased by $0.1 million (or 6.0%) to $1.5 million, compared to $1.4 million in 2012, primarily due to additional short-term and long-term loans, which increased by $11.2 million in 2013.

Other Income, net

In 2013, other income decreased by $0.8 million (49.2%) to $0.84 million, compared to $1.7 million in 2012. For the year ended December 31, 2013 we recognized a $0.8 million gain from the sale of certain fixed assets.

Income Tax Expense

In 2013, we recorded a tax provision of $0.4 million, compared to $0.5 million in 2012. Our effective tax rates for 2013 and 2012 were (23%) and (5)%, 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 2013 and 2012 even though we incurred an overall net loss.

Net Loss

In 2013, we incurred a net loss of $1.7 million, representing a decrease in net loss of $7.4 million (or 81.4%) from a net loss of $9.1 million in 2012. The change in net loss was principally due to other income recognized in 2013 and the absence of a loss on write off of assets and impairment of fixed assets in 2013, as explained above.

Liquidity and Capital Resources

At December 31, 2013, we had $9.1 million in cash and equivalents on hand, compared to $4.2 million at December 31, 2012, and had working capital of $6.3 million at December 31, 2013 and 2012. 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 years ended December 31, 2013 and 2012:

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                                                         2013              2012
Net cash used in operating activities              $    (5,260,177 ) $    (2,559,753 )
Net cash provided by (used in) investing                   299,065        (2,768,009 )
activities
Net cash provided by financing activities                9,660,797         6,699,931
Effect of exchange rate changes on cash and                203,120            29,206
equivalents
Net increase in cash and equivalents                     4,902,805         1,401,375
Cash and equivalents at beginning of year                4,233,183         2,831,808
Cash and equivalents at end of year                $     9,135,988   $     4,233,183

Operating Activities

Net cash used in operating activities in 2013 was $5.3 million, an increase of $2.7 million, compared to $2.6 million used in 2012. The increase in the use of cash in operating activities during 2013, compared to 2012, was comprised primarily of changes in working capital components. The changes in working capital components that primarily contributed to the increase in cash flow used in operating activities for 2013.

Investing Activities

Net cash generated in investing activities in 2013 was $.03 million, an increase of $3.1 million, compared to net cash used of $2.8 million in 2012. During 2012, we used $2.6 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 2013 we generated $2.3 million from sale of assets and we used $1.0 million for the acquisition of property and equipment.

Financing Activities

Net cash provided by financing activities for 2013 was $9.7 million, an increase of $2.9 million, compared to 2012. During 2013, we received proceeds from short-term loans of $41.2 million, compared to $28.0 million in 2012, and we repaid $31.0 million of short-term loans, compared to $22.3 million in 2012.

Assets

Our total assets as of December 31, 2013 were $98.9 million, an increase of $21.4 million, compared to $77.5 million as of December 31, 2012. The increase was primarily due to increase of $11.3 million in advances to suppliers, $6.3 million in cash and equivalents, $2.6 million in accounts receivable, and $2.7 million in other receivables, offset by a decrease of $2.6 million in property and equipment,. We intend to continue our efforts to maintain accounts receivable at reasonable levels in relation to our sales.

Liabilities

Our current liabilities increased by $22.5 million as of December 31, 2013 compared to December 31, 2012, principally due to increase in short-term loans from $12.5 million as of December 31, 2012 to $28.9 million, and increase in accounts payable of $5.1 million and other payables of $3.1 million, respectively.

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 December 31, 2013) on the loan. During the year ended December 31, 2013, we repaid $1.6 million of the January 24, 2011 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.

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

During 2013, we paid $31.1 million of our short-term loans and borrowed an additional $41.2 million. The current outstanding short-term loans are due through December 2014. We intend to meet our liquidity requirements, including capital expenditures related to the purchase of equipment, purchase of raw material, and the expansion of our business, through cash flow provided by operations, and our current credit facilities.

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, 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.

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 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

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The Company records stock-based compensation in accordance with FASB ASC Topic 718, "Compensation - Stock Compensation." FASB 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 FASB ASC Topic 740, "Income Taxes." FASB 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 FASB 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 FASB 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

The FASB has issued ASU No. 2013-04, Liabilities (Topic 405), "Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date." ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date, except for obligations addressed within existing guidance in US GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. We do not expect the adoption of this guidance to have a material impact on the Company's consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740):
"Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, A Similar Tax Loss, or a Tax Credit Carryforward Exists (A Consensus the FASB Emerging Issues Task Force)". ASU 2013-11 provides guidance on financial statement presentation of unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The FASB's objective in issuing this ASU is to eliminate diversity in practice resulting from a lack of guidance on this topic in current US GAAP. This ASU applies to all entities with unrecognized tax benefits that also have tax loss or tax credit carryforwards in the same tax jurisdiction as of the reporting date. This amendment is effective for public entities for fiscal years beginning after December 15, 2013 and interim periods within those years. We do not expect the adoption of this standard to have a material impact on the . . .

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