UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-Q
[ ] Quarterly report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2012
[ ] Transition report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _______to _______.
001-33960
(Commission file number)
SHINER INTERNATIONAL,
INC.
(Exact name of registrant as specified in its
charter)
Nevada | 98-0507398 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
19/F, Didu Building, Pearl River Plaza,
No. 2 North
Longkun Road
Haikou, Hainan Province
China
570125
(Address of principal executive offices)
011-86-898-68581104
(Issuers telephone
number)
N/A
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [ ] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)
Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] | Accelerated filer [ ] |
Non-accelerated filer [ ] | Smaller reporting company [X] |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [ ]
On November [*], 2012, 27,541,491 shares of the registrant's common stock were outstanding.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION | |||
Item 1. | Financial Statements | 1 | |
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations | 18 | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 25 | |
Item 4. | Controls and Procedures | 25 | |
PART II OTHER INFORMATION | |||
Item 1. | Legal Proceedings | 26 | |
Item 1A. | Risk Factors | 26 | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 26 | |
Item 3. | Defaults Upon Senior Securities | 26 | |
Item 4. | Mine Safety Disclosures | 26 | |
Item 5. | Other Information | 26 | |
Item 6. | Exhibits | 26 |
PART 1 - FINANCIAL INFORMATION
ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES |
CONSOLIDATED BALANCE SHEETS |
September 30, | December 31, | |||||
2012 | 2011 | |||||
(unaudited) | ||||||
ASSETS | ||||||
CURRENT ASSETS: | ||||||
Cash & equivalents | $ | 3,592,817 | $ | 2,831,808 | ||
Restricted cash | 641,475 | 57,613 | ||||
Accounts receivable, net of allowance for doubtful accounts of $792,893 and $121,017 at 2012 and 2011 | 6,229,266 | 7,744,377 | ||||
Advances to suppliers | 10,852,070 | 10,042,214 | ||||
Notes receivable | 249,023 | 7,865 | ||||
Inventory, net | 11,172,322 | 10,252,955 | ||||
Prepaid expenses & other current assets | 550,315 | 1,072,326 | ||||
Total current assets | 33,287,288 | 32,009,158 | ||||
Property and equipment, net | 31,187,080 | 27,836,253 | ||||
Construction in progress | 5,302,166 | 12,037,154 | ||||
Advance for the purchase of equipment | 788,971 | 763,427 | ||||
Intangible assets, net | 2,902,230 | 3,063,646 | ||||
Goodwill | 2,033,633 | 2,023,342 | ||||
TOTAL ASSETS | $ | 75,501,368 | $ | 77,732,980 | ||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||
CURRENT LIABILITIES: | ||||||
Accounts payable | $ | 4,621,683 | $ | 5,133,835 | ||
Other payables | 7,156,681 | 7,021,179 | ||||
Unearned revenue | 1,064,424 | 1,313,320 | ||||
Accrued payroll | 142,944 | 193,884 | ||||
Short-term loans | 13,366,416 | 10,684,625 | ||||
Total current liabilities | 26,352,148 | 24,346,843 | ||||
Long-term loans | 11,067,000 | 9,957,090 | ||||
Total Liabilities | 37,419,148 | 34,303,933 | ||||
Commitments and contingencies | ||||||
EQUITY: | ||||||
Shiner stockholders' equity: | ||||||
Common stock, par value $0.001; 75,000,000 shares
authorized, 27,603,336 shares issued and 27,541,491 shares outstanding |
27,603 |
27,603 |
||||
Additional paid-in capital | 14,335,440 | 14,332,392 | ||||
Treasury stock (61,845 shares) | (58,036 | ) | (58,036 | ) | ||
Other comprehensive income | 5,648,859 | 5,426,393 | ||||
Statutory reserve | 3,301,653 | 3,523,273 | ||||
Retained earnings | 13,200,131 | 18,478,618 | ||||
Total Shiner stockholders' equity | 36,455,650 | 41,730,243 | ||||
Noncontrolling interest | 1,626,570 | 1,698,804 | ||||
Total equity | 38,082,220 | 43,429,047 | ||||
TOTAL LIABILITIES AND EQUITY | $ | 75,501,368 | $ | 77,732,980 | ||
The accompanying notes are an integral part of these consolidated financial statements.
1
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS) |
(unaudited) |
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||
Net Revenue | $ | 16,706,608 | $ | 18,611,849 | $ | 50,478,117 | $ | 52,385,921 | ||||
Cost of goods sold | 15,257,456 | 16,490,987 | 46,370,015 | 45,378,458 | ||||||||
Gross profit | 1,449,152 | 2,120,862 | 4,108,102 | 7,007,463 | ||||||||
Operating expenses | ||||||||||||
Selling | 619,959 | 688,448 | 1,851,990 | 1,682,076 | ||||||||
General and administrative | 1,899,924 | 1,103,239 | 4,933,369 | 2,486,638 | ||||||||
Loss on sale and write off of assets | 2,106,379 | - | 2,106,379 | - | ||||||||
Total operating expenses | 4,626,262 | 1,791,687 | 8,891,738 | 4,168,714 | ||||||||
Income (loss) from operations | (3,177,110 | ) | 329,175 | (4,783,636 | ) | 2,838,749 | ||||||
Non-operating income (expense): | ||||||||||||
Other income, net | 86,140 | 545,417 | 279,669 | 617,250 | ||||||||
Interest income | 16,842 | 2,453 | 35,236 | 10,917 | ||||||||
Interest expense | (470,722 | ) | (275,395 | ) | (1,082,587 | ) | (689,675 | ) | ||||
Exchange (loss) | (12,435 | ) | 1,283 | (22,083 | ) | 61,996 | ||||||
Total non-operating income (expense) | (380,175 | ) | 273,758 | (789,765 | ) | 488 | ||||||
Income (loss) before income tax | (3,557,285 | ) | 602,933 | (5,573,401 | ) | 2,839,237 | ||||||
Income tax expense (benefit) | (8,038 | ) | 219,894 | 7,683 | 653,132 | |||||||
Net income (loss) | (3,549,247 | ) | 383,039 | (5,581,084 | ) | 2,186,105 | ||||||
Net loss attributed to noncontrolling interest | (17,950 | ) | (27 | ) | (80,977 | ) | (1,336 | ) | ||||
Net income (loss) attributed to Shiner | $ | (3,531,297 | ) | $ | 383,066 | $ | (5,500,107 | ) | $ | 2,187,441 | ||
Comprehensive income (loss) | ||||||||||||
Net income (loss) | $ | (3,549,247 | ) | $ | 383,039 | $ | (5,581,084 | ) | $ | 2,186,105 | ||
Foreign currency translation gain (loss) | (84,620 | ) | 440,458 | 222,466 | 1,143,003 | |||||||
Comprehensive income (loss) | $ | (3,633,867 | ) | $ | 823,497 | $ | (5,358,618 | ) | $ | 3,329,108 | ||
Weighted average shares outstanding : | ||||||||||||
Basic | 27,541,491 | 27,541,491 | 27,541,491 | 27,541,491 | ||||||||
Diluted | 27,541,491 | 27,541,491 | 27,541,491 | 27,541,491 | ||||||||
Earnings (loss) per share attributed to Shiner common stockholders | ||||||||||||
Basic | $ | (0.13 | ) | $ | 0.01 | $ | (0.20 | ) | $ | 0.08 | ||
Diluted | $ | (0.13 | ) | $ | 0.01 | $ | (0.20 | ) | $ | 0.08 | ||
The accompanying notes are an integral part of these consolidated financial statements.
2
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
(unaudited) |
Nine Months Ended | ||||||
September 30, | ||||||
2012 | 2011 | |||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||
Net income (loss) | $ | (5,581,084 | ) | $ | 2,186,105 | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||
Depreciation | 2,374,995 | 1,721,406 | ||||
Amortization | 177,221 | 54,460 | ||||
Stock compensation expense | 3,048 | 2,085 | ||||
Loss on sale and write off of assets | 2,106,379 | - | ||||
Change in working capital components: | ||||||
Accounts receivable | 1,556,464 | 3,669,116 | ||||
Inventory | (868,319 | ) | (2,372,742 | ) | ||
Advances to suppliers | (759,743 | ) | (7,106,058 | ) | ||
Other assets | 522,937 | (267,767 | ) | |||
VAT receivable | - | |||||
Accounts payable and accrued expenses | (538,765 | ) | 726,024 | |||
Unearned revenue | (253,282 | ) | 1,206,913 | |||
Other payables | 101,551 | 206,121 | ||||
Accrued payroll | (51,992 | ) | (3,794 | ) | ||
Net cash provided by (used in) operating activities | (1,210,590 | ) | 21,869 | |||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||
Purchase of Shimmer Sun Ltd | - | (3,200,000 | ) | |||
Cash acquired in acquisition of Shimmer Sun Ltd | - | 248,743 | ||||
Cash from the sale of assets | 1,226,825 | - | ||||
Issuance of notes receivable | (249,348 | ) | - | |||
Payment on note receivable | 7,925 | 34,594 | ||||
Payments for property and equipment | (2,138,400 | ) | (9,034,984 | ) | ||
Payments for construction in progress | - | (5,040,177 | ) | |||
Increase in restricted cash | (584,308 | ) | - | |||
Net cash used in investing activities | (1,737,306 | ) | (16,991,824 | ) | ||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||
Repayment of short-term loans | (20,432,635 | ) | (7,020,000 | ) | ||
Proceeds from short-term loans | 23,063,410 | 7,800,000 | ||||
Proceeds from long-term loans | 1,060,610 | 9,219,600 | ||||
Net cash provided by financing activities | 3,691,385 | 9,999,600 | ||||
Effect of exchange rate changes on cash and cash equivalents | 17,520 | 135,841 | ||||
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS | 761,009 | (6,834,514 | ) | |||
CASH AND EQUIVALENTS, BEGINNING BALANCE | 2,831,808 | 8,622,035 | ||||
CASH AND EQUIVALENTS, ENDING BALANCE | $ | 3,592,817 | $ | 1,787,521 | ||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||
Interest paid | $ | 897,520 | $ | 623,826 | ||
Income taxes paid | $ | 7,604 | $ | 621,980 |
The accompanying notes are an integral part of these consolidated financial statements.
3
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2012 AND 2011 (unaudited) |
Note 1 - Organization and Basis of Presentation
The unaudited consolidated financial statements were prepared by Shiner International, Inc., a Nevada corporation (the Company or Shiner), pursuant to the rules and regulations of the Securities Exchange Commission (SEC). The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) were omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Companys Annual Report on Form 10-K. The results for the nine months ended September 30, 2012, are not necessarily indicative of the results to be expected for the year ending December 31, 2012.
Organization and Line of Business
Shiner was incorporated in the State of Nevada on November 12, 2003. The Company, through its subsidiaries manufactures Biaxially Oriented Polypropylene (BOPP) tobacco film, coated films, color printing products, advanced film, and water based coatings selling to customers throughout China, Asia, Australia, Europe, the Middle East and North America. Our products are sold to companies in these industries: food, tobacco, chemical, agribusiness, medical, pharmaceutical, personal care, electronics, automotive, construction, graphics, music and video publishing and other consumer goods.
Except as otherwise indicated by the context, all references in this report to Shiner, Company, we, us or our are to Shiner 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) Shanghai Juneng Functional Film Company, Ltd., or Shanghai Juneng, (vi) Shimmer Sun Ltd., or Shimmer Sun, (vii) Hainan Jingyue New Material Co., Ltd ., or Jingyue, (viii) Hainan Shunhao New Material Co., Ltd., or Shunhao, (viii) Hainan Yongxin Environmental Co., Ltd., or Yongxin, and (ix) Ningbo Neisuoer Latex Co., Ltd., or "Ningbo".
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Shiner and its subsidiaries as follows:
Subsidiary | Place | Percentage | Parent |
Incorporated | Owned | ||
Shiner International, Inc. | Nevada, USA | None | |
Hainan Shiner | China | 100% | Shiner International, Inc. |
Shiny-Day | China | 100% | Shiner International, Inc. |
Hainan Modern | China | 100% | Shiny Day |
Zhuhai Modern | China | 100% | Shiny Day |
Shanghai Junneng | China | 70% | Shiner International, Inc. |
Shimmer Sun | China | 100% | Shiner International, Inc. |
Jingyue | China | 100% | Shimmer Sun Ltd. |
Shunhao | China | 100% | Jingyue |
Yongxin | China | 100% | Shunhao |
Ningbo | China | 65% | Yongxin |
The accompanying consolidated financial statements were prepared in conformity with US GAAP. The Companys functional currency is the Chinese Yuan Renminbi (RMB); however, the accompanying consolidated financial statements were translated and presented in United States Dollars ($ or USD).
4
Noncontrolling Interest
On September 20, 2010, the Company commenced operations of a majority-owned subsidiary, Shanghai Juneng Functional Film Company, Ltd. (Shanghai Juneng), with Shanghai Shifu Film Material, Co., Ltd., (Shanghai Shifu). Under the agreement, Shiner owns 70% of Shanghai Juneng, and Shanghai Shifu owns 30%. The general manager of Shanghai Juneng reports directly to Shiners Chief Executive Officer. Shanghai Juneng pursues sales opportunities among Chinas leading food producers in the Yangtze River Delta, one of Chinas largest economic centers.
On May 2, 2011, Shiner acquired 100% of the stock of Shimmer Sun Ltd. ("Shimmer") for $3.2 million. The Company paid $1.3 million in cash and the remaining $1.9 million was recorded as other payables which was paid by September 30, 2011. The acquisition gave Shiner a 65% controlling interest in Shimmer's subsidiary, Ningbo Neisuoer Latex Co., Ltd. ("Ningbo"). The transaction was accounted for under the acquisition method of accounting, with the purchase price allocated based on the fair value (FV) of the individual assets acquired and liabilities assumed.
The Company follows Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 810, Consolidation, which governs the accounting for and reporting of noncontrolling interests (NCIs) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs be treated as a separate component of equity, not as a liability, that increases and decreases in the parents ownership interest that leave control intact be treated as equity transactions rather than as step acquisitions or dilution gains or losses, and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. This standard also required changes to certain presentation and disclosure requirements.
The net income (loss) attributed to the NCI is separately designated in the accompanying statements of operations and other comprehensive income (loss). Losses attributable to the NCI in a subsidiary may exceed the NCIs interests in the subsidiarys equity. The excess attributable to the NCI is attributed to those interests. The NCI shall continue to be attributed its share of losses even if that attribution results in a deficit NCI balance.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Shiner International, Inc. and its subsidiaries. All significant intercompany transactions and balances were eliminated in consolidation.
Foreign Currency Translation
The accounts of the Companys Chinese subsidiaries are maintained in the RMB and the accounts of the U.S. parent company are maintained in the USD. The accounts of the Chinese subsidiaries are translated into USD in accordance with ASC Topic 830 Foreign Currency Matters, with the RMB as the functional currency. According to Topic 830, all assets and liabilities are translated at the exchange rate on the balance sheet date, stockholders equity is translated at historical rates and statement of operations items are translated at the weighted average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with ASC Topic 220, Comprehensive Income. Gains and losses resulting from the translations of foreign currency transactions and balances are reflected in the statement of operations.
Note 2 - Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Equivalents
Cash and equivalents include cash in hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.
Restricted Cash
Restricted cash consists of monies restricted by the Companys lender related to its outstanding debt obligations.
5
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.
Advances to Suppliers
To insure a steady supply of raw materials, the Company is required from time to time to make cash advances when placing its purchase orders. Management determined that no reserve was necessary for advances to suppliers. The advances to suppliers are interest free and unsecured.
Inventory
Inventory is valued at the lower of the inventorys cost (weighted average basis) or the current market price of the inventory. Management compares the cost of inventory with its market value and an allowance is made to write down inventory to market value, if lower.
Notes Receivable
Notes receivable consist of bank notes received from customers as payment of their accounts receivable. The notes are guaranteed by a bank and bear no interest. The notes are generally due within three months from the date of issuance.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and repairs are expenses as incurred; additions, renewals and improvements are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives as follows:
Operating equipment | 10 years |
Vehicles | 8 years |
Office equipment | 5 years |
Buildings and improvements | 20 years |
The following are the details regarding the Companys property and equipment at September 30, 2012 and December 31, 2011 (audited):
September 30, | December 31, | |||||
2012 | 2011 | |||||
Operating equipment | $ | 25,516,978 | $ | 14,028,345 | ||
Vehicles | 693,969 | 801,057 | ||||
Office equipment | 226,613 | 250,809 | ||||
Buildings | 12,152,745 | 18,912,102 | ||||
Building and equipment improvements | - | 538,930 | ||||
38,590,305 | 34,531,243 | |||||
Less accumulated depreciation | (7,403,225 | ) | (6,694,990 | ) | ||
$ | 31,187,080 | $ | 27,836,253 |
Construction in Progress and Government Grants
Construction in progress mainly consists of amounts expended to build a manufacturing workshop in Hainan and a product line for a BOPP tobacco line. The costs incurred and capitalized as construction in progress at September 30, 2012 and December 31, 2011 are $5.3 million and $12.0 million, respectively, which includes the facility and the equipment. Once the project is completed, the project will be transferred from Construction in progress to Property and equipment. The first phase of the project was completed during 2010. The total cost of the new Hainan manufacturing workshop and the BOPP tobacco line is expected to be $25.1 million. In October 2009, the Company received a government grant for this project of RMB29.1 million (or $4.3 million based on the exchange rate at December 31, 2009) from the Hainan Province Finance Bureau (HPFB). The Company is required to provide detailed expenses of the construction project to the HPFB. At the end of the project, the government will determine if the funds were used in accordance with the grant. At September 30, 2012 and December 31, 2011, respectively, the RMB29.1 million (or $4.5 million based on the exchange rate at September 30, 2012) government grant was recorded in Other payables on the accompanying consolidated financial statements (Note 6). If the government determines the funds were used for their intended purpose, the amount of the government grant is then amortized into other income over the useful life of the asset on the same basis used to depreciate the asset.
6
In December 2011, the Company received a government grant of RMB14 million (or $2.2 million based on the exchange rate of $0.1581 as of September 30, 2012) from the Haikou Finance Bureau (HFB) for the adjustment and expansion of our operation and related capital expenditures for construction and equipment purchase. The Company is required to provide detailed expenses of the construction project to HFB. At the end of the project, the government will determine if the funds were used in accordance with the grant. At September 30, 2012 and December 31, 2011, respectively, the grant was recorded in Other payables on the accompanying consolidated financial statements (Note 6). If the government determines the funds were used for their intended purpose, the amount of the government grant is then amortized into other income over the useful life of the asset on the same basis being used to depreciate the asset.
In Jan 2012, the Company received a government grant of RMB1.8 million (or $0.3 million based on the exchange rate of $0.1581 as of September 30, 2012) from the HFB for the adjustment and expansion of our operation and related capital expenditures for construction and equipment purchase. The Company is required to provide detailed expenses of the construction project to the HFB. At the end of the project, the government will determine if the funds were used in accordance with the grant. At September 30, 2012, the grant was recorded in Other payables on the accompanying consolidated financial statements. If the government determines the funds were used for their intended purpose, the amount of the government grant is then amortized into other income over the useful life of the asset on the same basis being used to depreciate the asset.
Long-Lived Assets
The Company applies ASC Topic 360, Property, Plant, and Equipment, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. ASC 360 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the FV of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that FVs are reduced to recognize the cost of disposal. Based on its review, the Company believes that as of September 30, 2012 and December 31, 2011, respectively, there was no significant impairment of its long-lived assets.
Intangible Assets
Intangible assets consist of rights to use three plots of land in Haikou City granted by the Municipal Administration of China for state-owned land. For two of these plots, the Companys rights run through January 2059 and, for the third, the Companys rights run through October 2060. The Company also acquired a patent with the acquisition of Shimmer that is being amortized over 10 years. The Company evaluates intangible assets for impairment, at least on an annual basis and whenever events or changes in circumstances indicate the carrying value may not be recoverable from its estimated future cash flows. Recoverability of intangible and other long-lived assets is measured by comparing their net book value to the related projected undiscounted cash flows from these assets, considering a number of factors including past operating results, budgets, economic projections, market trends and product development cycles. If the net book value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired, and a second test is performed to measure the amount of impairment loss.
Goodwill
Goodwill is the excess of purchase price over the underlying net assets of businesses acquired. Under accounting requirements, goodwill is not amortized but is subject to annual impairment tests, and more frequently if circumstances dictate. The impairment testing is based on the FV of the reporting units, which is estimated based on a discounted cash flow valuation model and the projected future cash flows of the underlying businesses. As of December 31, 2011 the Company performed the required impairment review which resulted in no impairment adjustments. The Company did not perform an impairment test at September 30, 2012.
7
Fair Value of Financial Instruments
For certain of the Companys financial instruments, including cash and equivalents, restricted cash, accounts receivable, advances to suppliers, accounts payable, accrued liabilities and short-term debt, the carrying amounts approximate their FVs due to their short maturities. In addition, the Company has long-term debt with financial institutions. The carrying amounts of the line of credit and other long-term liabilities approximate their FVs based on current rates of interest for instruments with similar characteristics.
ASC Topic 820, Fair Value Measurements and Disclosures, requires disclosure of the FV of financial instruments held by the Company. ASC Topic 825, Financial Instruments, defines FV, and establishes a three-level valuation hierarchy for disclosures of FV measurement that enhances disclosure requirements for FV measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their FVs because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in inactive markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 inputs to the valuation methodology us one or more unobservable inputs which are significant to the FV measurement.
The Company analyzes all financial instruments with features of both liabilities and equity under ASC Topic 480, Distinguishing Liabilities from Equity, and ASC Topic 815, Derivatives and Hedging.
As of September 30, 2012 and December 31, 2011 (audited), respectively, the Company did not identify any assets and liabilities required to be presented on the balance sheet at FV.
Revenue Recognition
The Companys revenue recognition policies comply with FASB ASC Topic 605. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.
Sales revenue consists of the invoiced value of goods, which is net of value-added tax (VAT). All of the Companys products sold in the Peoples Republic of China (PRC) are subject to Chinese VAT of 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing their end product. The Company recorded VAT payable and VAT receivable net of payments in the financial statements. The VAT tax return is filed offsetting the payables against the receivables.
Sales and purchases are recorded net of VAT collected and paid. VAT taxes are not affected by the income tax holiday.
Sales returns and allowances was $0 for the nine months ended September 30, 2012 and 2011. The Company does not provide unconditional right of return, price protection or any other concessions to its dealers or other customers.
Other Income
The Company recognizes other income in the period the Company has earned the revenue and collectability is reasonably assured. Other income in 2011 consists primarily of subsidy income received from Chinese Government Agencies for developing technology and research and development. The Company must manage the funds according to government requirements. The Company recognizes the revenue over the contract period.
Advertising Costs
The Company expenses the cost of advertising as incurred or, as appropriate, the first time the advertising takes place. Advertising costs for the three and nine months ended September 30, 2012 and 2011, were not significant.
8
Research and Development
The Company expenses its research and development (R&D) costs as incurred. R&D costs included in general and administrative expenses for the three and nine months ended September 30, 2012 were $766,758 and $2,103,700, respectively, and $464,445 and $964,080 for the three and nine months ended September 30, 2011 respectively.
Stock-Based Compensation
The Company records stock-based compensation in accordance with ASC Topic 718, Compensation Stock Compensation. ASC Topic 718 requires companies to measure compensation cost for stock-based employee compensation at FV at the grant date and recognize the expense over the employees requisite service period. The Company recognizes in the statement of operations the grant-date FV of stock options and other equity-based compensation issued to employees and non-employees. There were 90,000 options outstanding as of September 30, 2012.
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 more than 50% likely of being realized on examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded.
Basic and Diluted Earnings (Loss) Per Share
Earnings (loss) per share is calculated in accordance with the ASC Topic 260, Earnings Per Share. Basic earnings per share (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 90,000 options and 521,664 warrants outstanding as of September 30, 2012 with weighted-average exercise prices of $0.95 and $1.70, respectively. All options and warrants were excluded from the diluted loss per share for the nine months ended September 30, 2012 due to the dilutive effect. The following is a reconciliation of the number of shares (denominator) used in the basic and diluted EPS computations for three and nine months ended September 30, 2012 and 2011:
Three Months Ended September 30, | ||||||||||||
2012 | 2011 | |||||||||||
Per Share | Per Share | |||||||||||
Shares | Amount | Shares | Amount | |||||||||
Basic earnings per share | 27,541,491 | $ | (0.13 | ) | 27,541,491 | $ | 0.01 | |||||
Effect of dilutive stock options and warrants | - | - | - | - | ||||||||
Diluted earnings per share | 27,541,491 | $ | (0.13 | ) | 27,541,491 | $ | 0.01 |
Nine Months Ended September 30, | ||||||||||||
2012 | 2011 | |||||||||||
Per Share | Per Share | |||||||||||
Shares | Amount | Shares | Amount | |||||||||
Basic earnings per share | 27,541,491 | $ | (0.20 | ) | 27,541,491 | $ | 0.08 | |||||
Effect of dilutive stock options and warrants | - | - | - | - | ||||||||
Diluted earnings per share | 27,541,491 | $ | (0.20 | ) | 27,541,491 | $ | 0.08 |
9
Foreign Currency Transactions and Comprehensive Income
US GAAP generally requires recognized revenue, expenses, gains and losses be included in net income. Certain statements, however, require entities to report specific changes in assets and liabilities, such as gain or loss on foreign currency translation, as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. The functional currency of the Companys Chinese subsidiaries is the RMB. Translation gains of $5,648,859 and $5,426,393 (audited) at September 30, 2012 and December 31, 2011, respectively, are classified as an item of other comprehensive income in the stockholders equity section of the consolidated balance sheets.
Statement of Cash Flows
In accordance with ASC Topic 230, Statement of Cash Flows, cash flows from the Companys operations are calculated based upon the local currencies using the average translation rates. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.
Segment Reporting
ASC Topic 280, Segment Reporting, requires use of the management approach model for segment reporting. The management approach model is based on the way a companys management organizes segments within the company for making operating decisions and assessing performance. The Company determined it has five reportable segments. See Note 14.
Dividends
The Company's Chinese subsidiaries have restrictions on the payment of dividends to the Company. China has currency and capital transfer regulations that may require the Company's Chinese subsidiaries to comply with complex regulations for the movement of capital. These regulations include a public notice issued in October 2005 by the State Administration of Foreign Exchange (SAFE) requiring PRC residents, including both legal and natural persons, to register with the competent local SAFE branch before establishing or controlling any company outside of China. Although the Company believes its Chinese subsidiaries are in compliance with these regulations, should these regulations or the interpretation of them by courts or regulatory agencies change, the Company may not be able to pay dividends outside of China.
Recent Accounting Pronouncements
In May 2011, the FASB issued ASU 2011-04 to provide a consistent definition of FV and ensure the FV measurement and disclosure requirements are similar between US GAAP and IFRS. ASU 2011-04 changes certain FV measurement principles and enhances the disclosure requirements particularly for Level 3 FV measurements. This guidance was effective for the Company on January 1, 2012. The adoption of ASU 2011-04 did not have a significant impact the Companys 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 new guidance 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, did not have a significant impact the Companys 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 two-step test for goodwill impairment. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not the FV 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 the Company for its annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of ASU 2011-08 did not significantly impact the Companys consolidated financial statements.
10
In July 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment. The ASU provides entities with an option to first assess qualitative factors to determine whether events or circumstances indicate it is more likely than not the indefinite-lived intangible asset is impaired. If an entity concludes it is more than 50% likely that an indefinite-lived intangible asset is not impaired, no further analysis is required. However, if an entity concludes otherwise, it would be required to determine the FV of the indefinite-lived intangible asset to measure the amount of impairment, if any, as currently required under US GAAP. The ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of this pronouncement will not have a material impact on our financial statements.
Note 3 Advances to Suppliers
Advances to suppliers represent prepayment to vendors for the purchases of inventory.
Note 4 - Inventory
Inventory at September 30, 2012 and December 31, 2011(audited), respectively, consisted of the following:
September 30, | December 31, | |||||
2012 | 2011 | |||||
Raw material | $ | 3,958,907 | $ | 4,093,316 | ||
Work in process | 1,152,193 | 1,724,754 | ||||
Finished goods | 6,431,186 | 4,781,927 | ||||
11,542,286 | 10,599,997 | |||||
Less: Obsolescence reserve | (369,964 | ) | (347,042 | ) | ||
$ | 11,172,322 | $ | 10,252,955 |
Note 5 - Intangible Assets
Intangible assets at September 30, 2012 and December 31, 2011(audited), respectively, consisted of the following:
September 30, | December 31, | |||||
2012 | 2011 | |||||
Patent | $ | 2,131,131 | $ | 2,120,348 | ||
Right to use land | 1,159,301 | 1,153,434 | ||||
Less: Accumulated amortization | (388,202 | ) | (210,136 | ) | ||
Intangible assets, net | $ | 2,902,230 | $ | 3,063,646 |
Pursuant to the regulations, the PRC government owns all land. The Company has recognized the amounts paid for the acquisition of rights to use land as an intangible asset and amortizing such rights over the period the Company has use of the land, which range from 54 to 57 years.
Note 6 Other Payables
Other payables at September 30, 2012 and December 31, 2011(audited), respectively, consisted of the following:
September 30, | December 31, | |||||
2012 | 2011 | |||||
Special purpose fund for Shi Zi Ling workshop | $ | 4,447,353 | $ | 4,577,430 | ||
Special purpose fund for structure and equipment | 2,139,620 | 2,202,200 | ||||
Miscellaneous payables | 569,708 | 241,549 | ||||
$ | 7,156,681 | $ | 7,021,179 |
11
The $4,447,353 and $2,139,620 payables at September 30, 2012 are liabilities recorded pursuant to the funds received as part of government grants. See Construction in Progress and Government Grants in Note 2.
Note 7 - Debt
Short-term loans at September 30, 2012 and December 31, 2011(audited), respectively, consisted of the following:
September 30, | December 31, | |||||
2012 | 2011 | |||||
From February 28, 2011 to February 28, 2012, with interest of 6.06% at December 31, 2011. The loan was collateralized by equipment | $ | - | $ | 4,247,100 | ||
From March 16, 2012 to February 18, 2013, with interest of 8.53% at September 30, 2012. The loan is collateralized by equipment | 1,581,000 | - | ||||
From June 19, 2012 to June 19, 2013, with interest of 8.20% at September 30, 2012. The loan is collateralized by equipment | 2,371,500 | - | ||||
From June 8, 2012 to June 7, 2013, with interest rate 7.26% at September 30, 2012. The loan is collateralized by equipment | 4,268,700 | - | ||||
From June 30, 2011 to September 30, 2012, with interest of 8.203% at September 30, 2012. The loan was collateralized by buildings and equipment | - | 1,573,000 | ||||
Various short-term loans payable to bank, with interest ranging from 3.21% to 6.41%. The loans were due through September 28, 2012 and were collateralized by accounts receivable | - | 2,795,039 | ||||
Various bank acceptance bills payable through January 24, 2013 | 2,267,796 | 2,069,486 | ||||
From August 28, 2012 to November 24, 2012, with interest of 7.28% at September 30, 2012. The loan is collateralized by a letter of credit | 2,086,920 | - | ||||
From September 10, 2012 to March 10, 2013, with interest of 6.16% at September 30, 2012. The loan is collateralized by a building and equipment | 790,500 | - | ||||
$ | 13,366,416 | $ | 10,684,625 |
12
Long-term loans at September 30, 2012 and December 31, 2011 (audited), respectively, consisted of the following:
September 30, | December 31, | |||||
2012 | 2011 | |||||
From January 24, 2011 to
January 24, 2018, with interest of 6.60% . The loan is collateralized by buildings and land use rights |
$ | 2,529,600 | $ | 2,516,800 | ||
From February 10, 2011
to February 10, 2018, with interest of 6.60%. The loan is collateralized by buildings and land use rights |
2,845,800 | 2,831,400 | ||||
From February 16, 2011 to February 16,
2018, with interest of 6.60%. The loan is collateralized by buildings and land use rights |
2,292,450 |
2,280,850 |
||||
From February 17, 2011 to February 17,
2018, with interest of 6.60%. The loan is collateralized by buildings and land use rights |
1,248,990 |
1,242,670 |
||||
From March 25, 2011 to March 25, 2018, with
interest of 6.60%. The loan is collateralized by buildings and land use rights |
426,870 |
424,710 |
||||
From November 30, 2011 to November 30,
2018, with interest of 6.60%. The loan is collateralized by buildings and land use rights |
158,100 |
157,300 |
||||
From December 23, 2011 to December 23,
2018, with interest of 6.60%. The loan is collateralized by buildings and land use rights |
505,920 |
503,360 |
||||
From March 19, 2012 to January 18, 2018,
with interest of 6.60%. The loan is collateralized by buildings and land use rights |
1,059,270 |
- |
||||
$ | 11,067,000 | $ | 9,957,090 |
Aggregate future maturities of long-term loans at September 30, 2012 are as follows:
Year ending December 31, | |||
2013 | $ | - | |
2014 | - | ||
2015 | - | ||
2016 | - | ||
2017 | - | ||
Thereafter | 11,067,000 | ||
$ | 11,067,000 |
On August 2, 2010, Hainan Shiner Industrial Co., Ltd. (Hainan Shiner), the Companys wholly owned subsidiary, entered into a credit facility with the Hainan Branch of the Bank of China. The credit facility is a secured revolving credit facility in an aggregate of RMB70 million (or approximately $11.1 million based on the exchange rate on December 31, 2010) for seven years. Under the credit facility arrangement, Hainan Shiner may only use the loan proceeds to improve the technology of its BOPP film and to purchase certain equipment necessary for the improvement. Proceeds under the facility not used for these purposes would be subject to a misappropriation penalty interest rate that is 100% of the current interest rate on the loan.
The initial interest rate on each withdrawal from the facility will be the 5-year benchmark lending rate announced by the Peoples Bank of China on the date of such withdrawal, and is subject to adjustment every 12 months based upon the benchmark. Additional interest will be paid on an 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, have provided guarantees and certain land, buildings, and property as collateral under this facility.
The credit facility includes covenants that prohibit Hainan Shiner from making distributions to the Company, its sole shareholder, if (a) its after-tax net income for the fiscal year is zero or negative, (b) its after-tax net income is insufficient to make up its accumulated loss, (c) its income before tax is not utilized in paying off the capital, interest and expense of the lender, or (d) its income before tax is insufficient to pay the capital, interest and expense of the lender.
As of September 30, 2012, the Company drew down the entire RMB70 million credit facility.
13
Note 8 - Stock Options and Warrants
Stock Options
The following is a summary of the Companys stock option activity for the nine months ended September 30, 2012:
Weighted | |||||||||
Average | Aggregate | ||||||||
Options | Exercise Price | Intrinsic | |||||||
Outstanding | Price | Value | |||||||
Outstanding at December 31, 2011 | 120,000 | 1.03 | |||||||
Granted | - | - | |||||||
Canceled/Expired | (30,000 | ) | 1.25 | ||||||
Exercised | - | - | |||||||
Outstanding at September 30, 2012 | 90,000 | $ | 0.95 | $ | - | ||||
Exercisable at September 30, 2012 | 70,000 | $ | 0.99 | $ | - |
The number and weighted average exercise prices of all options outstanding as of September 30, 2012, are as follows:
Options Outstanding | |||||||||
Weighted | |||||||||
Weighted | Average | ||||||||
Number | Average | Remaining | |||||||
Range of | Outstanding | Exercise | Contractual Life | ||||||
Exercise Price | September 30, 2012 | Price | (Years) | ||||||
$ 0.80 | 60,000 | $ | 0.80 | 4.19 | |||||
1.25 | 30,000 | $ | 1.25 | 1.68 | |||||
90,000 |
The number and weighted average exercise prices of all options exercisable as of September 30, 2012, are as follows:
Options Exercisable | |||||||||
Weighted | |||||||||
Weighted | Average | ||||||||
Number | Average | Remaining | |||||||
Range of | Outstanding | Exercise | Contractual Life | ||||||
Exercise Price | September 30, 2012 | Price | (Years) | ||||||
$ 0.80 | 40,000 | $ | 0.80 | 4.19 | |||||
1.25 | 30,000 | $ | 1.25 | 1.68 | |||||
70,000 |
Warrants
The following is a summary of the Companys warrant activity for the nine months ended September 30, 2012:
Weighted | |||||||||
Weighted | Average | ||||||||
Average | Remaining | ||||||||
Warrants | Exercise Price | Contractual Life | |||||||
Outstanding | Price | (Years) | |||||||
Outstanding at December 31, 2011 | 521,664 | 1.70 | |||||||
Granted | - | - | |||||||
Canceled | - | - | |||||||
Exercised | - | - | |||||||
Outstanding at September 30, 2012 | 521,664 | $ | 1.70 | 0.49 | |||||
Exercisable at September 30, 2012 | 521,664 | $ | 1.70 | 0.49 |
14
Note 9 - Employee Welfare Plans
The expense for employee common welfare was $7,599 and $50,404 for the three and nine months ended September 30, 2012, respectively, and $41,544 and $133,859 for the three and nine months ended September 30, 2011, respectively.
Note 10 - Statutory Common Welfare Fund
As stipulated by the Company Law of the PRC, net income after taxation can only be distributed as dividends after appropriation has been made for the following:
i. |
Making up cumulative prior years losses, if any; | |
|
| |
ii. |
Allocations to the statutory surplus reserve of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the reserve reaches 50% of the Companys registered capital; | |
|
| |
iii. |
Allocations of 5% to 10% of income after tax, as determined under PRC accounting rules and regulations, to the Companys statutory common welfare fund, which is established for the purpose of providing employee facilities and other collective benefits to the Companys employees; and | |
|
| |
iv. |
Allocations to the discretionary surplus reserve, if approved in the stockholders general meeting. |
The Company appropriated $0 and $360,722 as reserve for the statutory surplus reserve and statutory common welfare fund for the nine months ended September 30, 2012 and 2011, respectively.
Note 11 - Current Vulnerability Due to Certain Concentrations
Two customers accounted for 5% and 4%, respectively, of the Companys sales for the nine months ended September 30, 2012.
There were no customers that exceeded 10% of the Companys sales for the three or nine months ended September 30, 2011.
One vendor provided 15% of the Companys raw materials for the nine months ended September 30, 2012, there was no vendor which accounted for 10% or more of the Companys raw material purchases for the three and nine months ended September 30, 2011.
The Companys operations are carried out in the PRC. Accordingly, the Companys business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC and by the general state of the PRCs economy. The Companys business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
Note 12 Commitments and Contingencies
At September 30, 2012, the Company is contingently liable to banks for discounted notes receivable and to vendors for endorsed notes receivable of $776,395.
Note 13 Segment Information
The Company has five segments: BOPP tobacco films, water-based latex, coated film, color printed packaging, and advanced film. The water-based latex is one of the raw materials used in coated film to make the packaging more environmental friendly and the barrier property better. Approximately 70% of the water-base latex products manufactured by Ningbo are sold to Hainan Shiner, Hainan Shiny-day and Zhuhai Huanuo.
15
The following tables summarize the Companys segment
information for the three and nine months ended September 30, 2012 and 2011:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||
Revenues from unrelated entities | ||||||||||||
Tobacco film | $ | 10,355,542 | $ | 7,144,354 | $ | 30,990,541 | $ | 22,829,240 | ||||
Water-based latex | 1,689 | 119,636 | 294,499 | 293,073 | ||||||||
Coated film | 3,717,094 | 6,931,047 | 11,609,264 | 18,749,972 | ||||||||
Color printing | 1,018,844 | 1,428,615 | 2,435,323 | 4,557,557 | ||||||||
Advanced film | 1,613,439 | 2,988,197 | 5,148,490 | 5,956,079 | ||||||||
$ | 16,706,608 | $ | 18,611,849 | $ | 50,478,117 | $ | 52,385,921 | |||||
Intersegment revenues | ||||||||||||
Tobacco film | $ | 5,123,093 | $ | 3,843,162 | $ | 14,890,567 | $ | 7,720,336 | ||||
Water-based latex | 288,488 | 440,243 | 457,436 | 659,140 | ||||||||
Coated film | 1,842,386 | 522,237 | 5,578,106 | 2,292,834 | ||||||||
Color printing | 499,660 | 255,043 | 1,170,143 | 1,204,568 | ||||||||
Advanced film | 800,486 | - | 2,473,785 | - | ||||||||
$ | 8,554,113 | $ | 5,060,685 | $ | 24,570,037 | $ | 11,876,878 | |||||
Total Revenues | ||||||||||||
Tobacco film | $ | 15,478,635 | $ | 10,987,516 | $ | 45,881,108 | $ | 30,549,576 | ||||
Water-based latex | 290,177 | 559,879 | 751,935 | 952,213 | ||||||||
Coated film | 5,559,480 | 7,453,284 | 17,187,370 | 21,042,806 | ||||||||
Color printing | 1,518,504 | 1,683,658 | 3,605,466 | 5,762,125 | ||||||||
Advanced film | 2,413,925 | 2,988,197 | 7,622,275 | 5,956,079 | ||||||||
Less Intersegment revenues | (8,554,113 | ) | (5,060,685 | ) | (24,570,037 | ) | (11,876,878 | ) | ||||
$ | 16,706,608 | $ | 18,611,849 | $ | 50,478,117 | $ | 52,385,921 | |||||
Income (loss) from operations | ||||||||||||
Tobacco film | $ | (611,087 | ) | $ | 667,999 | $ | (1,364,197 | ) | $ | 2,879,859 | ||
Water-based latex | (2,394 | ) | 97,523 | 58,119 | 109,079 | |||||||
Coated film | (254,277 | ) | (217,401 | ) | (809,033 | ) | 440,344 | |||||
Color printing | (175,401 | ) | (54,347 | ) | (445,333 | ) | (344,441 | ) | ||||
Advanced film | (16,965 | ) | (44,761 | ) | (82,007 | ) | 35,832 | |||||
Holding Company | (10,607 | ) | (119,838 | ) | (34,806 | ) | (281,924 | ) | ||||
$ | (1,070,731 | ) | $ | 329,175 | $ | (2,677,257 | ) | $ | 2,838,749 | |||
Interest income | ||||||||||||
Tobacco film | $ | 10,394 | $ | (50 | ) | $ | 21,633 | $ | 3,860 | |||
Water-based latex | 46 | (1,037 | ) | 205 | 50 | |||||||
Coated film | 3,805 | 1,390 | 8,104 | 3,261 | ||||||||
Color printing | 928 | 8 | 1,700 | 742 | ||||||||
Advanced film | 1,669 | 195 | 3,594 | 1,012 | ||||||||
Holding Company | - | 1,947 | - | 1,992 | ||||||||
$ | 16,842 | $ | 2,453 | $ | 35,236 | $ | 10,917 | |||||
Interest Expense | ||||||||||||
Tobacco film | $ | 283,983 | $ | 108,225 | $ | 652,827 | $ | 431,125 | ||||
Water-based latex | 2,954 | - | 6,791 | - | ||||||||
Coated film | 112,643 | 105,201 | 258,947 | 163,108 | ||||||||
Color printing | 22,791 | 27,613 | 52,392 | 44,518 | ||||||||
Advanced film | 47,683 | 34,356 | 109,616 | 50,924 | ||||||||
Holding Company | 668 | - | 2,014 | - | ||||||||
$ | 470,722 | $ | 275,395 | $ | 1,082,587 | $ | 689,675 |
16
Income tax expense (benefit) | ||||||||||||
Tobacco film | $ | (4,697 | ) | $ | (46,954 | ) | $ | 4,577 | $ | 276,591 | ||
Water-based latex | - | 9,382 | - | 11,836 | ||||||||
Coated film | (2,301 | ) | 182,634 | 2,152 | 278,084 | |||||||
Color printing | - | - | - | - | ||||||||
Advanced film | (1,040 | ) | 74,832 | 954 | 86,621 | |||||||
Holding Company | - | - | - | - | ||||||||
$ | (8,038 | ) | $ | 219,894 | $ | 7,683 | $ | 653,132 | ||||
Net Income (loss) | ||||||||||||
Tobacco film | $ | (2,078,652 | ) | $ | 514,511 | $ | (3,052,988 | ) | $ | 2,219,046 | ||
Water-based latex | (5,302 | ) | 74,834 | 51,534 | 83,726 | |||||||
Coated film | (925,934 | ) | (10,592 | ) | (1,557,217 | ) | 495,223 | |||||
Color printing | (197,264 | ) | (81,138 | ) | (496,025 | ) | (387,403 | ) | ||||
Advanced film | (312,870 | ) | 5,987 | (408,591 | ) | 57,832 | ||||||
Holding Company | (11,275 | ) | (120,536 | ) | (36,820 | ) | (280,983 | ) | ||||
$ | (3,531,297 | ) | $ | 383,066 | $ | (5,500,107 | ) | $ | 2,187,441 | |||
Provision for depreciation | ||||||||||||
Tobacco film | $ | 431,846 | $ | 190,909 | $ | 1,424,466 | $ | 687,538 | ||||
Water-based latex | 10,559 | 29,691 | 32,005 | 31,743 | ||||||||
Coated film | 171,295 | 210,118 | 565,022 | 632,198 | ||||||||
Color printing | 34,658 | 51,135 | 114,320 | 172,550 | ||||||||
Advanced film | 72,511 | 88,367 | 239,182 | 197,377 | ||||||||
Holding Company | - | - | - | - | ||||||||
$ | 720,869 | $ | 570,220 | $ | 2,374,995 | $ | 1,721,406 | |||||
As of | As of | |||||||||||
September 30, | December 31, | |||||||||||
2012 | 2011 | |||||||||||
Total Assets | (audited) | |||||||||||
Tobacco film | $ | 38,454,298 | $ | 31,239,495 | ||||||||
Water-based latex | 746,093 | 797,500 | ||||||||||
Coated film | 15,253,086 | 20,810,552 | ||||||||||
Color printing | 3,086,143 | 5,768,795 | ||||||||||
Advanced film | 6,456,855 | 7,470,573 | ||||||||||
Holding Company | 11,504,893 | 11,646,065 | ||||||||||
$ | 75,501,368 | $ | 77,732,980 |
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ITEM 2. | MANAGEMENTS 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 Item 1A, Risk Factors included in the Company annual report on Form 10-K filed on April 12, 2012.
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 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) Shanghai Juneng Functional Film Company, Ltd., or Shanghai Juneng, (vi) Shimmer Sun Ltd., or Shimmer Sun, (vii) Hainan Jingyue New Material Co., Ltd ., or Jingyue, (viii) 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 U.S. dollar, USD, US$ and $ are to the legal currency of the United States;
China, Chinese and PRC are to the Peoples Republic of China; and
BVI are to the British Virgin Islands.
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.
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The table below shows the percentage of revenue by each of our business segments for the nine months ended September 30, 2012 and 2011:
Percent of Revenue | ||||||||||||
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||
BOPP tobacco film | 62.0% | 38.4% | 61.4% | 43.6% | ||||||||
Water-based latex | 0.0% | 0.6% | 0.6% | 0.6% | ||||||||
Coated film | 22.2% | 37.2% | 23.0% | 35.8% | ||||||||
Color printing | 6.1% | 7.7% | 4.8% | 8.7% | ||||||||
Advanced film | 9.7% | 16.1% | 10.2% | 11.3% | ||||||||
100.0% | 100.0% | 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.
Results of Operations
Comparison of the Three Months Ended September 30, 2012 and 2011
Three Months Ended September 30, | $ | % | ||||||||||
2012 | 2011 | Change | Change | |||||||||
Revenues | $ | 16,706,608 | $ | 18,611,849 | $ | (1,905,241 | ) | -10.2% | ||||
Cost of goods sold | 15,257,456 | 16,490,987 | (1,233,531 | ) | -7.5% | |||||||
Gross profit | 1,449,152 | 2,120,862 | (671,710 | ) | -31.7% | |||||||
Selling, general and administrative expenses | 2,519,883 | 1,791,687 | 728,196 | 40.6% | ||||||||
Loss on sale and write off of assets | 2,106,379 | - | 2,106,379 | N/A | ||||||||
Interest expense, net of interest income | 453,880 | 272,942 | 180,938 | 66.3% | ||||||||
Other income (expense), net | 86,140 | 545,417 | (459,277 | ) | 84.2% | |||||||
Exchange gain (loss) | (12,435 | ) | 1,283 | (13,718 | ) | -1069.2% | ||||||
Income tax expense | (8,038 | ) | 219,894 | (227,932 | ) | -103.7% | ||||||
Net loss attributed to noncontrolling interest | 17,950 | 27 | 17,923 | -66381.5% | ||||||||
Net income (loss) attributed to Shiner | $ | (3,531,297 | ) | $ | 383,066 | $ | (3,914,363 | ) | -1021.9% |
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Revenues
Revenues for the three months ended September 30, 2012 decreased $1.9 million (or 10.2%), to $16.7 million compared to $18.6 million for the corresponding period in 2011. The decrease was primarily attributable to decreased revenues from coated film, color printing advanced film and water-based latex, which was partially offset by increase in revenues generated from BOPP tobacco. For the three months ended September 30, 2012, revenue from coated film revenue decreased $3.2 million (or 46.4%) to $3.7 million from $6.9 million for the corresponding period in 2011, and sales from color printing decreased $0.4 million (or 28.7%) to $1.0 million from $1.4 million for the corresponding period in 2011. For the three months ended September 30, 2012, revenue from BOPP tobacco increased $3.2 million (or 45.0%) to $10.3 million from $7.1 million for the corresponding period in 2011; revenue from advanced film decreased $1.4 million (or 46.0%) to $1.6 million from $3.0 million for the corresponding period in 2011; and revenue from water-based latex decreased $0.1 million (or 98.6%) to $0.01 million from $0.1 million for the corresponding period in 2011.
We sell or products both domestically and internationally. Our international sales are indirect sales through distributors and converters. For the three months ended in September 30, 2012, the division between our domestic and international sales remained substantially stable, as compared to the corresponding period in 2011. For the three months ended in September 30, 2012 and September 30, 2011, sales generated domestically accounted for 85.1% and 81.8%, respectively, of our total revenues for that period, and sales generated internationally from selling our advanced, coated film, and color printing, accounted for 14.9% and 18.2%, respectively, of our total revenues for that period.
Cost of Goods Sold
Cost of goods sold (COGS) for the three months ended September 30, 2012 decreased $1.2 million (or 7.5%) from $16.5 million to $15.3 million for the corresponding period in 2011. The COGS was 91.3% and 88.6% of our revenue for the three months ended September 30, 2012 and 2011, respectively. The principal cost component of our COGS is raw materials which includes petroleum. The increase in COGS year to year was primarily caused by an increase in raw material costs due to petroleum price fluctuations, an increase in the cost of labor, and the amortization of the added depreciation of Phase I of the Hainan manufacturing facility into the COGS. 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 COGS 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.
Packaging industry standards mandate the use of non-benzene based packaging products for food packaging. To be environmentally friendly and to improve work conditions in our factory, Shiner switched to non-benzene based ink products. 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 favorable feedback from all of our customers at the time.
Gross Profit
Our gross profit for the three months ended September 30, 2012 was $1.5 million, a profit margin of 8.7%, a decrease of 2.7% from 11.4% for the corresponding period in 2011. The decrease in profit margin was primarily a consequence of an increase in labor costs and depreciation of new property.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses for the three months ended September 30, 2012 increased by 40.6%, or $.7 million, to $2.5 million in 2012 compared to $1.8 million for the corresponding period in 2011. General and administrative (G&A) expenses include rent, management and staff salaries, insurance, marketing, accounting, legal, and research and development expenses (R&D expenses). Although we have strict standards to control our G&A expenses, we increased our R&D expenditures as compared to 2011. The increase in selling, general and administrative expenses was mainly due to a $0.3 million increase in R&D expense and a $0.7 million increase in bad debt allowance.
Loss on Sale and Write-off of Assets
During the three months ended September 30, 2012, we sold certain machinery and equipment used by our Zhuhai subsidiary, for a loss of $1,510,215, and wrote off the value of other assets by $596,164.
Interest Expense, net
Interest expense increased by 66.3%, or $180,938, to $453,880 in the three months ended September 30, 2012 compared to $272,942 in the corresponding period of 2011, primarily due to additional short-term and long-term loans.
Other Income
Other income decreased by $459,277 or 84.2% to $86,140 for the three months ended September 30, 2012 compared to $545,417 in the corresponding period of 2011. During the three months ended September 30, 2011, we received $604,000 in subsidy income from Chinese Governmental Agencies for developing technology and R&D projects. We did not have these subsidies during the corresponding period of 2012.
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Income Tax Expense
For the three months ended September 30, 2012, we recorded a tax benefit of $8,038 compared to a provision of $219,894 for the corresponding period of 2011. Our effective tax rates for 2012 and 2011 were 0% and 36%, 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 the three months ended September 30, 2012 compared to the corresponding period of 2011 was mainly due to increased labor costs, depreciation of the new property.
Comparison of the Nine Months Ended September 30, 2012 and 2011
Nine months ended | $ | % | ||||||||||
September 30, |
||||||||||||
2012 | 2011 | Change | Change | |||||||||
Revenues | $ | 50,478,117 | 52,385,921 | $ | (1,907,804 | ) | -3.6% | |||||
Cost of goods sold | 46,370,015 | 45,378,458 | 991,557 | 2.2% | ||||||||
Gross profit | 4,108,102 | 7,007,463 | (2,899,361 | ) | -41.4% | |||||||
Selling, general and administrative expenses | 6,785,359 | 4,168,714 | 2,616,645 | 62.8% | ||||||||
Loss on sale and write off of assets | 2,106,379 | - | 2,106,379 | N/A | ||||||||
Interest expense, net of interest income | 1,047,351 | 678,758 | 368,593 | 54.3% | ||||||||
Other income (expense), net | 279,669 | 617,250 | (337,581 | ) | -54.7% | |||||||
Exchange gain (loss) | (22,083 | ) | 61,996 | (84,079 | ) | -135.6% | ||||||
Income tax expense | 7,683 | 653,132 | (645,449 | ) | -98.8% | |||||||
Net loss attributed to noncontrolling interest | 80,977 | 1,336 | 79,641 | 5961.2% | ||||||||
Net income (loss) attributed to Shiner | $ | (5,500,107 | ) | $ | 2,187,441 | $ | (7,687,548 | ) | -351.4% |
Revenues
Revenues for the nine months ended September 30, 2012 decreased $1.9 million (or 3.6%), to $50.5 million compared to $52.4 million for the corresponding period in 2011. The decrease was primarily attributable to decreased revenues generated from coated film, color printing and advanced film, which was partially offset by increase in revenues generated from BOPP tobacco and water-based latex. For the nine months ended September 30, 2012, there was a $8.2 million (or 35.8%) increase in sales from tobacco film and water-based latex (0.5% increase), which, however, was offset by significant decrease in sales from coated film (38.1% decrease), color printing (46.6% decrease) and advanced film (13.6% decrease) as compared to the sales for the corresponding period of 2011. For the nine month ended September 30, 2012 as compared to the corresponding period in 2011, revenue from advanced film decreased $0.8 million (or 13.6%) to $5.1 million, down from $5.9 million, revenue from BOPP tobacco increased $8.2 million (or 35.8%) to $31.0 million from $22.8 million, and revenue from water based latex increased $0.01 million (or 0.5%) to $0.3 million from $0.3 million. For the nine month ended September 30, 2012 as compared to the corresponding period in 2011, revenue from coated film decreased $7.1 million (or 38.1%) to $11.6 million from $18.8 million, and revenue from color printing decreased $2.1 million (or 46.6%) to $2.4 million from $4.5 million.
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For the nine months ended in September 30, 2012, the division between our domestic and international sales remained stable compared to the corresponding period in 2011. For the nine months ended in September 30, 2012 and September 30, 2011, sales generated domestically accounted for 83.5% and 82.9%, respectively, of our total revenues for that period, and sales generated internationally from selling our advanced film, coated film, and color printing accounted for 16.5% and 17.1%, respectively, of our total revenues for that period.
Cost of Goods Sold
For the nine months ended September 30, 2012 compared to the corresponding period in 2011, COGS increased $1.0 million (or 2.2%) from $45.4 million to $46.4 million. The COGS for the nine months ended September 30, 2012 and 2011 accounted for 91.9% and 86.6% of our revenues for the corresponding period, respectively. As explained above, the increase in COGS 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 into the COGS.
Gross Profit
Our gross profit for the nine months ended September 30, 2012 was $4.1 million, a profit margin of 8.1%, a decrease of 5.2% from 13.4% for the corresponding period in 2011. The decrease in profit margin was primarily a consequence of an increase our COGS as a result of increase in raw material costs, labor costs and depreciation of the new property.
Selling, General and Administrative Expenses
For the nine months ended September 30, 2012, our selling, G&A expenses increased by $2.6 million (or 62.8%) to $6.8 million compared to $4.2 million for the corresponding period in 2011. G&A expenses include rent, management and staff salaries, insurance, marketing, accounting, legal, and R&D expenses. Although we have strict standards to control our G&A expenses, we increased our R&D expenditures as compared to 2011. The increase in selling, general and administrative expenses was mainly due to an increase of $1.1 million in R&D expenses, an increase of $0.6 million in marketing expenses, and an increase of $0.7 million in bad debt provision.
Loss on Sale and Write-off of Assets
During the nine months ended September 30, 2012, we sold certain subsidiary assets for a loss of $1,510,215 and wrote off the value of other assets by $596,164.
Interest Expense, net
Interest expense increased by $368,593 (or 54.3%) to $1,047,351 for the nine months ended September 30, 2012 as compared to $678,758 for the same period in 2011, primarily due to additional short-term and long-term loans, which have increased by approximately $3.7 million in 2012.
Other Income
Other income decreased by $337,581 (54.7%) to 279,669 for the nine months ended September 30, 2012 as compared to income of $617,250 for the corresponding period in 2011. During the nine months ended September 30, 2011, we received $759,000 in subsidy income from PRC governmental agencies for developing technology and R&D projects. We did not receive these subsidies during the 2012 period.
Income Tax Expense
For the nine months ended September 30, 2012, we recorded a tax provision of $7,683 compared to $653,132 for the corresponding period in 2011. Our effective tax rates for 2012 and 2011 were 0.1% and 23%, respectively. The decrease in the effective tax rate was due to losses incurred by certain subsidiaries.
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Net Income
We suffered a net loss of $5,500,107 for the nine months ended September 30, 2012, representing a decrease of $7,687,548 (or 351.4%) from a net income of $2,187,441 for the corresponding period in 2011. The decrease in our net income for the nine months ended September 30, 2012 compared to the corresponding period of 2011 was mainly due to a decrease in revenue and increases in COGS and selling and G&A expenses and the loss on the sale and write-off of assets, which was partially offset by an increase in other income, as explained elsewhere in this report.
Liquidity and Capital Resources
At September 30, 2012, we had $3.6 million in cash and equivalents on hand, compared to $2.8 million at December 31, 2011, and we had working capital of $6.9 million at September 30, 2012 compared to $7.7 million at December 31, 2011. 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.
Below is a tabular summary of our cash flows for the nine months ended September 30, 2012 and 2011 (unaudited):
2012 | 2011 | |||||
Net cash used in provided by operating activities | $ | (1,210,590 | ) | $ | 21,869 | |
Net cash used in investing activities | (1,737,306 | ) | (16,991,824 | ) | ||
Net cash provided by financing activities | 3,691,385 | 9,999,600 | ||||
Effect of exchange rate changes on cash and equivalents | 17,520 | 135,841 | ||||
Net (decrease)/increase in cash and equivalents | 761,009 | (6,834,514 | ) | |||
Cash and cash equivalents at beginning of the period | 2,831,808 | 8,622,035 | ||||
Cash and cash equivalents at end of the period | $ | 3,592,817 | $ | 1,787,521 |
Operating Activities
Net cash flows used in operating activities for the nine months ended September 30, 2012 was $1.2 million, an increase of $1.2 million, compared to net cash flow used by operating activities of $21,869 for the corresponding period in 2011. The increase in the use of cash in operating activities during the nine months ended September 30, 2012, compared to the corresponding period in 2011, was comprised primarily of a decrease in net income of $7.8 million and adjustments as a result 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 the nine months ended September 30, 2012 were a decrease in accounts receivable of $2.1 million (or 58%) and a non-cash loss on the sale and write-off of assets of $2.1 million, which was partially offset by an decrease in accounts payable and accrued expenses of $1.3 million (or 174%), and a decrease in unearned revenue of $1.5 million (or 121%). The decrease in our cash flow used in operating activities was largely due to the decrease in our income during the nine months ended September 30, 2012 as compared to the corresponding period in 2011.
Investing Activities
Net cash flows used in investing activities for the nine months ended September 30, 2012 was $1.7 million, a decrease of $15.2 million, compared to net cash flows used in investing activities of $17.0 million for the corresponding period in 2011. During the nine months ended September 30, 2011, we invested $1.3 million in acquiring Shimmer Sun, and $8.8 million in purchasing property and equipment. During the nine months ended September 30, 2012, we did not acquire any subsidiary and we only used $2.1 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 and is still ongoing.
Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2012 was $3.7 million, a decrease of $6.3 million, compared to the corresponding period in 2011. During the nine months ended September 30, 2012 compared to the corresponding period in 2011, we decreased our net cash provided by financing activities by repaying $20.4 million of short term loans, an increase of $13.4 million from $7.0 million, and decreasing our proceeds from our long term loans from $9.2 million to $1.1 million, a decrease of $8.2 million. The foregoing decrease in net cash provided by financing activities was partially offset by our increase in proceeds from short-term loans to $23.0 million, an increase of $15.3 million from $7.8 million.
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Assets
Our total assets as of September 30, 2012 were $75.5 million, a decrease of $2.3 million, compared to $77.7 million as of December 31, 2011. The decrease was primarily due to the decrease of $1.5 million in our accounts receivable and an decrease in fixed assets of $3.4 million offset by an increase of $0.8 million in advances to suppliers and an increase of $0.9 million in our inventory due to higher costs of raw material. As of September 30, 2012, our accounts receivable decreased by $1.5 million (or 2.9%) compared with December 31, 2011. We intend to continue our efforts to maintain accounts receivable at reasonable levels in relation to our sales.
Loan Commitments
Our current liabilities increased by $2.0 million during the nine months ended September 30, 2012, principally due to the increase in short-term loan from $10.7 million as of December 31, 2011 to $13.4 million, an increase of $2.6 million, which was partially offset by the decrease in accounts payable of $0.5 million from $5.1 million to $4.6 million.
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 draws under this facility after September 30, 2012. 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 approximately $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 on the loan.
The initial interest rate on each withdrawal from the facility will be the 5-year benchmark lending rate announced by the Peoples Bank of China on the date of such withdrawal, and is subject to adjustment every 12 months based upon this benchmark. Additional interest 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 the nine months ended September 30, 2012, we paid approximately $20.4 million of our short-term loans and borrowed an additional $23.0 million in short-term loans. The current outstanding short-term notes become due through February 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 facility.
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 managements difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from managements current judgments. There have been no material changes to the critical accounting policies previously disclosed in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2012.
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Recent Accounting Pronouncements
In May 2011, the FASB issued ASU 2011-04 which was issued to provide a consistent definition of fair value (FV) and ensure that the FV measurement and disclosure requirements are similar between U.S. GAAP and IFRS. ASU 2011-04 changes certain FV measurement principles and enhances the disclosure requirements particularly for Level 3 FV measurements. This guidance is effective for us beginning on January 1, 2012. The adoption of ASU 2011-04 did not have a significant 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, did not have a significant 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 FV 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 did not have a significant impact our consolidated financial statements.
In July, 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment. The ASU provides entities with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. If an entity concludes that it is more than 50% likely that an indefinite-lived intangible asset is not impaired, no further analysis is required. However, if an entity concludes otherwise, it would be required to determine the FV of the indefinite-lived intangible asset to measure the amount of actual impairment, if any, as currently required under US GAAP. The ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of this pronouncement will not have a material impact on our financial statements.
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.
Off-balance sheet arrangements
As of September 30, 2012, we did not have any off-balance sheet arrangements.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable.
ITEM 4. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
25
As required by Rule 13a-15(e), our management has carried out an evaluation, with the participation and under the supervision of our Chief Executive Officer, Mr. Qingtao Xing and our Interim Chief Financial Officer, Xuezhu Xu, of the effectiveness of the design and operation of our disclosure controls and procedures, as of September 30, 2012. Based upon, and as of the date of this evaluation, Mr. Xing and Mr. Xu, determined that, as of September 30, 2011, and as of the date of this report, our disclosure controls and procedures were effective.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal controls over financial reporting during the first quarter of fiscal 2012 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results.
ITEM 1A. | RISK FACTORS. |
There are no material changes from the risk factors previously disclosed in Item 1A Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2011.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
None.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
None.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
ITEM 5. | OTHER INFORMATION |
We have no information to disclose that was required to be in a report on Form 8-K during the period covered by this report, but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.
ITEM 6. | EXHIBITS |
Exhibit | Description of Exhibit |
31.1 | |
31.2 | |
32.1 | |
32.2 | |
|
|
101* |
Interactive data files pursuant to Rule 405 of Regulation S-T |
* |
Filed with this Form 10-Q for Shiner International, Inc. Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or for purposes of Section 18 of the Securities Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
26
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SHINER INTERNATIONAL, INC. | |
November 14, 2012 | By: /s/ Qingtao Xing |
Name: Qingtao Xing | |
Title: President and Chief Executive Officer | |
(Principal Executive Officer) | |
November 14, 2012 | By: /s/ Xuezhu Xu |
Name: Xuezhu Xu | |
Title: Interim Chief Financial Officer | |
(Principal Financial and Accounting Officer) |
27
Exhibit 31.1
CERTIFICATIONS
I, Qingtao Xing, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of Shiner International, Inc.; | |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
4. |
The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
c) |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
d) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. |
The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): | ||
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and | ||
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: November 14, 2012
/s/ Qingtao Xing | |
Qingtao Xing | |
Chief Executive Officer | |
(Principal Executive Officer) |
Exhibit 31.2
CERTIFICATIONS
I, Xuezhu Xu, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of Shiner International, Inc.; | |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
4. |
The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
c) |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
d) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. |
The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): | ||
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and | ||
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: November 14, 2012
/s/Xuezhu Xu | |
Xuezhu Xu | |
Interim Chief Financial Officer | |
(Principal Financial Officer and Principal Accounting Officer) |
Exhibit 32.1
CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, |
AS ADOPTED PURSUANT TO SECTION 906 |
OF THE SARBANES-OXLEY ACT OF 2002 |
The undersigned, Qingtao Xing, the Chief Executive Officer of SHINER INTERNATIONAL, INC. (the Company), DOES HEREBY CERTIFY that:
1. The Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 (the Report), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and
2. Information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
IN WITNESS WHEREOF, each of the undersigned has executed this statement this 14th day of November, 2012.
/s/ Qingtao Xing | |
Qingtao Xing | |
Chief Executive Officer | |
(Principal Executive Officer) |
A signed original of this written statement required by Section 906 has been provided to Shiner International, Inc. and will be retained by Shiner International, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
The forgoing certification is being furnished to the Securities and Exchange Commission pursuant to § 18 U.S.C. Section 1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
Exhibit 32.2
CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, |
AS ADOPTED PURSUANT TO SECTION 906 |
OF THE SARBANES-OXLEY ACT OF 2002 |
The undersigned, Xuezhu Xu, the Interim Chief Financial Officer of SHINER INTERNATIONAL, INC. (the Company), DOES HEREBY CERTIFY that:
1. The Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 (the Report), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and
2. Information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
IN WITNESS WHEREOF, each of the undersigned has executed this statement this 14th day of November, 2012.
/s/ Xuezhu Xu | |
Xuezhu Xu | |
Interim Chief Financial Officer | |
(Principal Financial Officer and | |
Principal Accounting Officer) |
A signed original of this written statement required by Section 906 has been provided to Shiner International, Inc. and will be retained by Shiner International, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
The forgoing certification is being furnished to the Securities and Exchange Commission pursuant to § 18 U.S.C. Section 1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
Depreciation of Property and Equipment Is Using Straight-Line Method for Substantially all Assets with Estimated Lives (Details)
|
9 Months Ended |
---|---|
Sep. 30, 2012
|
|
Operating Equipment [Member]
|
|
Property Plant and Equipment, Useful Life | 10 years |
Vehicles [Member]
|
|
Property Plant and Equipment, Useful Life | 8 years |
Office Equipment [Member]
|
|
Property Plant and Equipment, Useful Life | 5 years |
Buildings And Improvements [Member]
|
|
Property Plant and Equipment, Useful Life | 20 years |
Summary of Stock Option Activity (Details) (USD $)
|
9 Months Ended |
---|---|
Sep. 30, 2012
|
|
Option Outstanding | |
Outstanding Beginning Balance | 120,000 |
Granted | 0 |
Canceled/Expired | (30,000) |
Exercised | 0 |
Outstanding Ending Balance | 90,000 |
Exercisable at the end of period | 70,000 |
Weighted Average Exercise Price | |
Beginning Balance | $ 1.03 |
Granted | $ 0 |
Canceled/Expired | $ 1.25 |
Exercised | $ 0 |
Ending Balance | $ 0.95 |
Exercisable at end of period | $ 0.99 |
Aggregate Intrinsic Value | |
Outstanding at the end of period | $ 0 |
Exercisable at the end of period | $ 0 |
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