10-Q 1 form10q.htm FORM 10-Q Shiner International, Inc. - Form 10-Q - Filed by newsfilecorp.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] Quarterly report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2016

[_] 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
(Issuer’s 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 [X]        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 [X]        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 [X]

The number of shares outstanding of each of the issuer’s classes of common stock, as of May 20, 2016 is as follows:

Class of Securities Shares Outstanding
Common Stock, $0.001 par value 27,541,491


TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION   
           Item 1. Financial Statements 1
           Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
           Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
           Item 4. Controls and Procedures 26
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 27
           Item 4. Mine Safety Disclosures 27
           Item 5. Other Information 27
           Item 6. Exhibits 27

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PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED MARCH 31, 2016 AND 2015

  Page(s)
Financial Statements  
                                 Consolidated Balance Sheets 2
                                 Consolidated Statements of Operations and Other Comprehensive Income (Loss) 4
                                 Consolidated Statements of Cash Flows 6
                                 Notes to Consolidated Financial Statements 8 - 20


SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

 

  March 31,     December 31,  

 

  2016     2015  

 

  (Unaudited)        

ASSETS

           

 

           

CURRENT ASSETS:

           

       Cash and equivalents

$  1,973,999   $  829,391  

       Restricted cash

  59,476     219,605  

       Accounts receivable, net

  10,302,421     10,051,326  

       Other receivables

  4,131,862     5,959,283  

       Advances to suppliers

  19,340,553     19,402,658  

       Notes receivable

  232,650     341,843  

       Inventory, net

  9,871,137     11,990,551  

       Prepaid expenses and other current assets

  607,384     381,129  

 

           

             Total current assets

  46,519,482     49,175,786  

 

           

       Property and equipment, net

  22,378,788     22,018,192  

       Construction in progress

  7,814,302     7,434,263  

       Advance for purchase of equipment

  575,944     404,632  

       Other non-current receivables

  5,041,163     11,485,998  

       Intangible assets, net

  974,076     973,372  

 

           

TOTAL ASSETS

$  83,303,755   $  91,492,243  

 

           

LIABILITIES AND EQUITY

           

 

           

CURRENT LIABILITIES:

           

       Accounts payable

$  9,106,315   $  7,032,147  

       Other payables

  9,609,848     9,890,606  

       Unearned revenue

  2,104,162     1,610,508  

       Accrued payroll

  133,752     110,477  

       Short-term loans

  17,603,316     21,728,100  

       Long-term loan, currently in default

  6,204,000     12,328,000  

 

           

             Total current liabilities

  44,761,393     52,699,838  

 

           

       Long-term loans

  4,653,000     4,623,000  

 

           

             Total liabilities

  49,414,393     57,322,838  

 

           

       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

  14,336,456     14,336,456  

       Treasury stock (61,845 shares)

  (58,036 )   (58,036 )

       Other comprehensive income

  5,134,011     4,849,974  

       Statutory reserve

  4,322,533     4,247,524  

       Retained earnings

  9,913,513     10,490,793  

 

           

             Total Shiner stockholders' equity

  33,676,080     33,894,314  

 

           

       Noncontrolling interest

  213,282     275,091  

 

           

             Total equity

  33,889,362     34,169,405  

 

           

       TOTAL LIABILITIES AND EQUITY

$  83,303,755   $  91,492,243  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.



SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS
THREE MONTHS ENDED MARCH 31, 2016 AND 2015
(unaudited)

 

  2016     2015  

 

           

 

           

Net revenue

$  12,305,719   $  13,806,856  

Cost of goods sold

  10,360,581     11,479,169  

Gross profit

  1,945,138     2,327,687  

 

           

Operating expenses:

           

               Selling

  445,100     1,045,384  

               General and administrative

  1,897,733     1,759,842  

                       Total operating expenses

  2,342,833     2,805,226  

 

           

Loss from operations

  (397,695 )   (477,539 )

 

           

Non-operating income (expense):

           

               Other income, net

  106,149     201,857  

               Interest income

  432,828     733,954  

               Interest expense

  (590,179 )   (1,252,610 )

               Exchange loss

  (12,414 )   2,108  

                       Total non-operating income (expense)

  (63,616 )   (314,691 )

 

           

Income before income tax

  (461,311 )   (792,230 )

 

           

Income tax expense

  103,653     62,609  

 

           

Net loss

  (564,964 )   (854,839 )

Net loss attributed to noncontrolling interest

  (62,693 )   (20,912 )

Net loss attributed to Shiner

$  (502,271 ) $  (833,927 )

 

           

Comprehensive loss:

           

               Net loss

$  (564,964 ) $  (854,839 )

               Foreign currency translation gain

  284,921     154,264  

Comprehensive loss

$  (280,043 ) $  (700,575 )

 

           

Weighted average shares outstanding :

           

               Basic

  27,541,491     27,541,491  

               Diluted

  27,541,491     27,541,491  

 

           

Loss per share attributed to Shiner common stockholders:

           

               Basic

$  (0.02 ) $  (0.03 )

               Diluted

$  (0.02 ) $  (0.03 )

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.



SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2016 AND 2015

 

  2016     2015  

 

           

CASH FLOWS FROM OPERATING ACTIVITIES:

           

     Net loss

$  (564,964 ) $  (854,839 )

     Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

       

             Depreciation

  244,608     999,346  

             Amortization

  5,533     5,887  

             Gain on sale and write off of assets

           

             Change in working capital components:

           

                     Accounts receivable

  (183,235 )   633,558  

                     Other receivables

  180,374     503,670  

                     Inventory

  1,909,702     (952,145 )

                     Notes receivable

  109,831     (143,176 )

                     Advances to suppliers

  185,348     (2,304,993 )

                     Other assets

  (153,607 )   48,788  

                     Accounts payable

  2,000,032     232,382  

                     Unearned revenue

  476,350     (269,410 )

                     Other payables

  (338,997 )   (382,201 )

                     Accrued payroll

  22,239     (21,857 )

     Net cash provided by (used in) operating activities

  3,893,214     (2,504,990 )

 

           

CASH FLOWS FROM INVESTING ACTIVITIES:

           

             Payments for property and equipment

  (952,619 )   (88,446 )

             Decrease in restricted cash

  159,263     6,706,123  

             Issuance of other receivables

  (688,065 )   (1,885,225 )

             Payment on other receivable

  8,705,305     7,831,113  

     Net cash provided by investing activities

  7,223,884     12,563,565  

 

           

CASH FLOWS FROM FINANCING ACTIVITIES:

           

             Repayment of short-term loans

  (9,174,000 )   (19,219,656 )

             Proceeds from short-term loans

  4,968,724     21,720,765  

             Repayment of long-term loans

  (6,116,000 )   (6,508,000 )

             Contribution by non-controlling interest

        634,530  

     Net cash provided by (used in) financing activities

  (10,321,276 )   (3,372,361 )

 

           

Effect of exchange rate changes on cash and equivalents

  348,786     53,348  

 

           

NET INCREASE IN CASH AND EQUIVALENTS

  1,144,608     6,739,562  

 

           

CASH AND EQUIVALENTS, BEGINNING BALANCE

  829,391     5,710,373  

 

           

CASH AND EQUIVALENTS, ENDING BALANCE

$  1,973,999   $  12,449,935  

 

           

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

           

     Interest paid

$  590,179   $  1,210,039  

     Income taxes paid

$  19,089   $  -  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)

Note 1 - Organization and Basis of Presentation

The unaudited consolidated financial statements were prepared by Shiner International, Inc. (the “Company” or “Shiner”), pursuant to the rules and regulations of the Securities and 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 Company’s Annual Report on Form 10-K filed with the SEC on April 18, 2016. The results for the three months ended March 31, 2016, are not necessarily indicative of the results to be expected for the year ending December 31, 2016.

Organization and Line of Business

The Company 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 the People’s Republic of China (“China” or “PRC”), Asia, Australia, Europe, the Middle East and North America. Our products are sold to companies in the following 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 International, Inc. and its direct and indirect subsidiaries: (i) Hainan Shiner Industrial Co., Ltd., or “Hainan Shiner,” (ii) Hainan Shiny-Day Color Printing Packaging Co., Ltd., or “Shiny-Day,” (iii) Hainan Modern Hi-Tech Industrial Co., Ltd., or “Hainan Modern,” (iv) Zhuhai Modern Huanuo Packaging Material Co., Ltd., or “Zhuhai Modern,” (v) Shimmer Sun Ltd., or “Shimmer Sun,” (vi) Hainan Jingyue New Material Co., Ltd., or “Jingyue,” (vii) Hainan Shunhao New Material Co., Ltd., or “Shunhao,” (viii) Hainan Yongxin Environmental Co., Ltd., or “Yongxin,” (ix) Hainan Runhai Color Printing Packaging Co., or “Hainan Runhai,” (x) Hainan Saihang Photoelectric Co. Ltd., or “Hainan Saihang, ” (xi) Hainan Juneng Functional Film Co., or “Hainan Juneng” and (xii) Ningbo Neisuoer Latex Co., Ltd., or “Ningbo.”

The Company has historically advanced minimal funds to customers and other unrelated third parties that are non-interest bearing and payable upon demand. However, in 2014 the Company decided to temporarily expand its advances to unrelated third parties. On April 17, 2014, Hainan Shiner, the Company’s primary operating subsidiary, drew down entirely on a RMB120 million (approximately $19.5 million) credit facility collateralized by the common stock of Hainan Shiner, buildings and land use rights. The facility bears interest at 7.35% per annum and is due and payable on April 17, 2017. Under the terms of the credit facility agreement, the proceeds of the funds borrowed under the credit facility are to be used solely for the construction of an office building and research facility at the Hainan Xiandai Packaging Industrial Park, and for the purchase of research and development equipment. However, on April 30, 2014, the Company loaned the entire proceeds of the credit facility to unrelated third parties (See Note 3). The business purpose for these loans was for the Company to make the spread between the amount of interest it pays on the credit facility and the amount of interest it can charge. Such parties have not provided the Company with significant collateral on such loans, other than a written guarantee from each of the borrowers and an unrelated fourth party. The Company does not consider this practice of lending money to third parties to be a new business segment as we deem this practice to be temporary.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Shiner and its subsidiaries as follows:

    Place   Percentage    
Subsidiary   Incorporated   Owned   Parent
Shiner International, Inc.   Nevada, USA       -
Hainan Shiner   China   100%   Shiner International, Inc.
Shiny-Day   China   100%   Shiner International, Inc.
Hainan Modern   China   100%   Shiny-Day/Hainan Shiner
Zhuhai Modern   China   100%   Hainan Shiner/Shiner International, Inc.
Shimmer Sun   China   100%   Shiner International, Inc.

- 5 -


SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)

Jingyue   China   100%   Shimmer Sun Limited
Shunhao   China   100%   Jingyue
Yongxin   China   100%   Shunhao
Hainan Runhai   China   100%   Shiny-Day
Hainan Saihang   China   100%   Hainan Shiner
Hainan Juneng   China   50%   Hainan Shiner
Ningbo   China   65%   Yongxin

The accompanying consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”). The Company’s functional currency is the Chinese Yuan Renminbi (“RMB”); however, the accompanying consolidated financial statements were translated and presented in United States Dollars (“$” or “USD”).

Noncontrolling Interest

On May 2, 2011, Shiner acquired 100% of the stock of Shimmer Sun 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 Sun’s subsidiary, 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.

In the fourth quarter of 2014, the Company set up a new subsidiary, Hainan Juneng, originally owned 70% by Hainan Shiner and 30% by an unrelated third party. During the quarter ended March 31, 2015 another unrelated third party purchased additional stock from Hainan for RMB 3,900,000 ($634,530). As of March 31, 2016, the Company owns 50% of Hainan Juneng and two other parties own the remaining 50%. The 50% owned by the third parties is presented as noncontrolling interest.

The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, “Consolidation,” which governs the accounting for and reporting of non-controlling 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 parent’s 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 attributed to the NCI is separately designated in the accompanying consolidated statements of income and other comprehensive income (loss).

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 Company’s Chinese subsidiaries are maintained in RMB and the accounts of the US parent company are maintained in USD. The accounts of the Chinese subsidiaries are translated into USD in accordance with FASB ASC Topic 830, “Foreign Currency Matters” with the RMB as the functional currency. According to ASC 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 FASB ASC Topic 220, “Comprehensive Income.” Gains and losses resulting from the translations of foreign currency transactions and balances are reflected in the consolidated statement of operations and other comprehensive income (loss).

Note 2 - Summary of Significant Accounting Policies

Going Concern

- 6 -


SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)

These consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. As of March 31, 2016 and December 31, 2015, the Company was in violation of certain loan covenants which required the entire loan amount to be shown as a current liability. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

On April 17, 2014, Hainan Shiner drew down entirely on a RMB120 million (approximately $19.5 million) credit facility collateralized by the common stock of Hainan Shiner, buildings and land use rights. The facility bears interest at 7.35% per annum and is due and payable on April 17, 2017. During the three months ended March 31, 2016 and the year ended December 31, 2015, the Company repaid RMB 40 million, and RMB 40 million, respectively, (approximately $6.1 million and $6.4 million) of this credit facility. Under the terms of the credit facility agreement, the proceeds of the funds borrowed under the credit facility are to be used solely for the construction of an office building and research facility at the Hainan Xiandai Packaging Industrial Park, and for the purchase of research and development equipment. However, on April 30, 2014, the Company loaned the entire proceeds of the credit facility to unrelated third parties. Such parties have not provided the Company with significant collateral on such loans, other than a written guarantee from each of the borrowers and an unrelated fourth party. The use of the proceeds from the credit facility to provide such loans constitutes a breach under the credit facility agreement. The Company has not obtained a waiver from the lender for such use of proceeds and the lender has the right to declare a breach of the trust agreement and enforce its right to ownership of the stock, buildings and land use rights of Hainan Shiner. Furthermore, if the borrowers are unable to fulfill their obligations under the Company’s loans to them and their guarantees fail, the Company will be obligated to repay the credit facility in its entirety. If the Company is unable to repay this debt in full by the due date it could lose control of Hainan Shiner, certain buildings and land use rights. Finally, the Company’s inability to obtain a waiver for the violation of the loan agreement resulted in the amount due under this credit facility being shown as a current liability. If the lender calls the loan due to the violation of the trust agreement, the Company will attempt to negotiate a waiver from the current lender or request additional time to repay the loan to allow the Company time to collect the amounts due from the unrelated third parties, or to obtain other financing to repay this lender.

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 on 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 Company’s lenders related to its outstanding debt obligations.

Accounts Receivable, net

The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis. Based on historical collection activity, the Company had allowances of 2,078,605 and $1,845,038 at March 31, 2016 and December 31, 2015, respectively.

Other Receivables

Other receivables consist of amounts due from customers that are non-interest bearing and payable ranging from on demand to up to one year and amounts due from other unrelated third parties that bear interest and have specific repayment dates (See Note 3).

Advances to Suppliers

- 7 -


SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)

To ensure 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 no reserve was necessary for advances to suppliers. The advances to suppliers are interest free and unsecured.

Notes Receivable

Notes receivable consist of bank notes received from customers as payment of their accounts receivable. The notes are guaranteed by banks and bear no interest. The notes are generally due within twelve months from the date of issuance.

Inventory, net

Inventory is valued at the lower of the inventory’s 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.

Property and Equipment, net

Property and equipment are stated at cost. Expenditures for maintenance and repairs are expensed 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

Construction in Progress and Government Grants

Construction in progress mainly consists of amounts expended to build a manufacturing workshop in Hainan, including a product line for a BOPP tobacco line. The costs incurred and capitalized as construction in progress at March 31, 2016 and December 31, 2015 include facility and equipment. Once the project is completed, it will be transferred from “Construction in progress” to “Property and equipment.” The total cost of the new Hainan manufacturing workshop and the BOPP tobacco line is expected to be $25.1 million. The first phase of the project was completed during 2010.

In October 2009, the Company received a government grant for the above 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 March 31, 2016 and December 31, 2015 respectively, RMB17.2 million ($2.7 million based on the exchange rate at March 31, 2016) and RMB17.8 million ($2.8 million based on the exchange rate at December 31, 2015) was recorded as “Other payables” in the accompanying consolidated financial statements (Note 7). The government grant is being amortized into other income over the useful life of the asset on the same basis used to depreciate the asset. For the three months ended March 31, 2016 and 2015, the Company amortized $111,235 and $118,364, respectively, into “Other income.”

In December 2011, the Company received a government grant of RMB14.0 million (or $2.2 million (audited) based on the exchange rate as of December 31, 2011) from the Haikou Finance Bureau (“HFB”) for the adjustment and expansion of our operations and related capital expenditures for construction and equipment purchases. 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 March 31, 2016 and December 31, 2015, respectively, RMB8.3 million ($1.3 million based on the exchange rate at March 31, 2016) and RMB8.6 million ($1.3 million (audited) based on the exchange rate at December 31, 2015) was recorded as “Other payables” in the accompanying consolidated financial statements (Note 7). The government grant is being amortized into other income over the useful life of the asset on the same basis used to depreciate the asset. For the three months ended March 31, 2016 and 2015, the Company amortized $53,515 and $56,945, respectively, into “Other income.”

- 8 -


SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)

In January 2012, the Company received a government grant of RMB1.8 million (or $0.3 million based on the exchange rate as of January 31, 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 March 31, 2016 and December 31, 2015, the grant was recorded as “Other payables” in the accompanying consolidated financial statements (Note 7). If the government determines the funds were used for their intended purpose, the government grant is then amortized into “Other income” over the useful life of the asset on the same basis to be used to depreciate the asset.

A rollforward of the construction in progress (“CIP”) from December 31, 2015 to March 31, 2016 is below:

CIP at December 31, 2015

$  7,434,263  

Transfers to property and equipment

  -  

Additions during 2016

  327,089  

Foreign currency translation

  52,950  

CIP at March 31, 2016

$  7,814,302  

Long-Lived Assets

The Company applies FASB ASC Topic 360, “Property, Plant, and Equipment,” which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. FASB ASC Topic 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 March 31, 2016 and December 31, 2015, 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 Company’s rights run through January 2059 and, for the third, through October 2060. The Company also acquired a patent with the acquisition of Shimmer Sun 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. No impairment adjustment was required at March 31, 2016 or December 31, 2015.

Fair Value of Financial Instruments

For certain of the Company’s 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.

FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the FV of financial instruments held by the Company. FASB 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.

- 9 -


SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)

  • 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 FASB ASC Topic 480, “Distinguishing Liabilities from Equity,” and FASB ASC Topic 815, “Derivatives and Hedging.” As of March 31, 2016 and December 31, 2015, respectively, the Company did not identify any assets and liabilities required to be presented on the balance sheet at FV.

Revenue Recognition

The Company’s revenue recognition policies comply with FASB ASC Topic 605, “Revenue Recognition.” Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.

Sales revenue consists of the invoiced value of goods, which is net of value-added tax (“VAT”). All of the Company’s products sold in the 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.

There were no sales returns and allowances for the three months ended March 31, 2016 and 2015. 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 it has earned the revenue and collectability is reasonably assured. Other income for the three months ended March 31, 2016 and 2015 consists primarily of subsidy income received from Chinese Government Agencies for developing technology, research and development and constructing certain buildings and production lines. The Company must manage the funds according to government requirements. The Company recognizes the income over the useful life of the asset for which the subsidy was received.

Advertising Costs

The Company expenses the cost of advertising as incurred. Advertising costs for the three months ended March 31, 2016 and 2015 were not significant.

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 months ended March 31, 2016 and 2015 were $463,998 and $752,967, respectively.

Stock-Based Compensation

The Company records stock-based compensation in accordance with FASB ASC Topic 718, “Compensation – Stock Compensation.” FASB 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 employee’s requisite service period. The Company recognizes in the consolidated statement of operations and other comprehensive income the grant-date FV of stock options and other equity-based compensation issued to employees and non-employees. There were 60,000 options outstanding as of March 31, 2016 and December 31, 2015.

Income Taxes

- 10 -


SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)

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

Under FASB ASC Topic 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 FASB ASC Topic 260, “Earnings Per Share.” Basic earnings per share (“EPS”) is based on 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 60,000 options and 0 warrants outstanding as of March 31, 2016 with weighted-average exercise price of $0.80. There were 60,000 options and 0 warrants outstanding as of March 31, 2015 with weighted-average exercise prices of $0.80. All options and warrants were excluded from the diluted loss per share for 2016 and 2015 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 the three months ended March 31, 2016 and 2015:

 

  Three Months Ended March 31,  

 

  2016     2015  

 

        Per           Per  

 

        Share           Share  

 

  Shares     Amount     Shares     Amount  

 

                       

Basic loss per share

  27,541,491   $  (0.02 )   27,541,491   $  (0.03 )

Effect of dilutive stock options and warrants

  -     -     -     -  

 

                       

Diluted loss per share

  27,541,491   $  (0.02 )   27,541,491   $  (0.03 )

Foreign Currency Transactions and Comprehensive Income

US GAAP requires recognized revenue, expenses, gains and losses to 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 Company’s Chinese subsidiaries is the RMB. Translation gains of $5,134,011 and $4,849,974 at March 31, 2016 and December 31, 2015, 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 FASB ASC Topic 230, “Statement of Cash Flows,” cash flows from the Company’s operations are calculated based on 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

- 11 -


SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)

FASB 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 company’s management organizes segments within the company for making operating decisions and assessing performance. The Company determined it has five reportable segments (See Note 15).

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.

Reclassifications

Certain prior period amounts were reclassified to conform to the manner of presentation in the current period. These reclassifications had no effect on the net income or stockholders’ equity.

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09) , which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). Early adoption is not permitted. The Company is currently evaluating the impact of the pending adoption of ASU 2014-09 on its consolidated financial statements and has not yet determined the method by which it will adopt the standard beginning January 1, 2017.

In August, 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendment in this ASU defers the effective date of ASU No. 2014-09 for all entities for one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 31, 2016, including interim reporting periods with that reporting period.

In February, 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. ASU 2015-02 provides guidance on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). ASU 2015-02 is effective for periods beginning December 15, 2015. The adoption of ASU 2015-02 did not expected to have a material effect on the Company’s consolidated financial statements.

In September, 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805). Topic 805 requires that an acquirer retrospectively adjust provisional amounts recognized in a business combination, during the measurement period. To simplify the accounting for adjustments made to provisional amounts, the amendments in the Update require that the acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer is required to also record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition an entity is required to present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for fiscal years beginning December 15, 2015. The adoption of ASU 2015-016 did not expected to have a material effect on the Company’s consolidated financial statements.

- 12 -


SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. The new guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. This update is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The Company does not anticipate the adoption of this ASU will have a significant impact on its consolidated financial position, results of operations, or cash flows.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance in ASU No. 2016-02 supersedes the lease recognition requirements in ASC Topic 840, Leases (FAS 13). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect this standard will have on its consolidated financial statements.

In March 2016, the FASB issued an ASU amending the accounting for stock-based compensation and requiring excess tax benefits and deficiencies to be recognized as a component of income tax expense rather than equity. This guidance also requires excess tax benefits to be presented as an operating activity on the statement of cash flows and allows an entity to make an accounting policy election to either estimate expected forfeitures or to account for them as they occur. The ASU is effective for reporting periods beginning after December 15, 2016, with early adoption permitted. We are currently evaluating the impact of the ASU; however, we expect the ASU will have a material impact on the Company’s consolidated financial statements.

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future financial statements.

Note 3 – Other Receivables

Other receivables at March 31, 2016 and December 31, 2015 consisted of the following:

 

  March 31,     December 31,  

 

  2016     2015  

 

        (Audited)  

Due from various unrelated customers, non-interest bearing and due upon demand

$  262,100   $  511,649  

 

           

Due April 21, 2017 from Rixin Hotel Management, an unrelated third party, with interest at 12%(1)

  2,780,840     2,825,578  

 

           

Due April 21, 2017 from Xiandai Meiju, an unrelated third party, with interest at 16%

  2,260,324     8,660,420  

 

           

Due May 1, 2016 to September 1, 2016 from Hainan Dingfeng Trading Co., an unrelated third party, with interest at 0% (2)

  1,938,766     1,232,800  

 

           

Due May 1, 2016 from Hainan Jinhong, an unrelated third party, with interest at 0% (2)

  341,220     339,020  

 

           

Due April 30, 2016 from Rixin Hotel Management, an unrelated third party, with interest at 0% (1)(2)

  1,589,775     3,875,814  

Total other receivables

  9,173,025     17,445,281  

Current portion

  4,131,862     5,959,283  

Non-current portion

$  5,041,163   $  11,485,998  

- 13 -


SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)

(1) At the time this transaction was entered into, Rixin Hotel Management was an unrelated third party; however, in the fourth quarter of 2014, the Company formed a new subsidiary, Hainan Juneng, that is owned 50% by the Company, 22% by Rixin Hotel Management and 28% by an unrelated third party.

(2) The receivables due on April 30, 2016 and May 1, 2016 were paid when due.

Note 4 – Inventory, net

Inventory at March 31, 2016 and December 31, 2015 consisted of the following:

 

  March 31,     December 31,  

 

  2016     2015  

 

        (Audited)  

Raw Material

$  3,689,757   $  4,831,858  

Work in process

  1,482,920     1,473,871  

Finished goods

  5,350,948     6,333,103  

Total Inventory

  10,523,625     12,638,832  

Less: Obsolescence reserve

  (652,488 )   (648,281 )

Inventory, net

$  9,871,137   $  11,990,551  

Note 5 – Property and Equipment, net

Property and equipment at March 31, 2016 and December 31, 2015 consisted of the following:

 

  March 31,     December 31,  

 

  2016     2015  

 

        (Audited)  

Operating equipment

$  25,656,469   $  25,030,991  

Vehicles

  659,666     655,413  

Office equipment

  148,110     144,376  

Buildings

  12,119,802     12,041,660  

Total property and equipment

  38,584,047     37,872,440  

Less accumulated depreciation

  (16,205,259 )   (15,854,248 )

Property and equipment, net

$  22,378,788   $  22,018,192  

Note 6 - Intangible Assets, net

Intangible assets at March 31, 2016 and December 31, 2015 consisted of rights to use land as follows:

 

  March 31,     December 31,  

 

  2016     2015  

 

        (Audited)  

Right to use land

$  1,137,302   $  1,129,970  

Less: Accumulated amortization

  (163,226 )   (156,598 )

Intangible assets, net

$  974,076   $  973,372  

Pursuant to the regulations, the PRC government owns all land. The Company has recognized the amounts paid for the acquisition of rights to use the land as an intangible asset and amortizes such rights over the period the Company has use of the land, which range from 54 to 57 years.

Note 7 – Other Payables

Other payables at March 31, 2016 and December 31, 2015 consisted of the following:

- 14 -


SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)

 

  March 31,     December 31,  

 

  2016     2015  

 

        (Audited)  

Government grant for Shi Zi Ling workshop

$  2,670,434   $  2,765,325  

Government grant for structure and equipment

  1,284,745     1,330,397  

Government grant for expansion and equipment

  276,854     275,069  

Taxes Payable

  1,972,379     1,954,864  

Due to Rixin Hotel Management*

  3,091,562     3,071,629  

Miscellaneous payables

  313,874     493,322  

 

$  9,609,848   $  9,890,606  

* At the time this transaction was entered into, Rixin Hotel Management was an unrelated third party; however, in the fourth quarter of 2014, the Company formed a new subsidiary, Hainan Juneng, that is owned 50% by the Company, 22% by Rixin Hotel Management and 28% by an unrelated third party.

The $2,670,434, $1,284,745 and $276,854 payables at March 31, 2016 are liabilities recorded pursuant to the funds received as part of government grants. See “Construction in Progress and Government Grants” in Note 2.

Note 8 - Short-term Loans

Short-term loans at March 31, 2016 and December 31, 2015 consisted of the following:

 

  March 31,     December 31,  

 

  2016     2015  

 

        (Audited)  

Due February 10, 2016 with interest of 6.2%

$  -   $  770,500  

Due February 15, 2016 with interest of 6.7%

  -     3,082,000  

Due March 9, 2016 with interest of 5.8%

  -     1,463,950  

Due March 13, 2016 with interest of 5.9%

  -     770,500  

Due March 19, 2016 with interest of 5.9%

  -     2,311,500  

Due April 3, 2016 with interest of 3.5%

  111,324     -  

Due April 3, 2016 with interest of 3.5%

  102,418     -  

Due April 10, 2016 with interest of 5.9%

  3,102,000     3,082,000  

Due April 29, 2016 with interest of 3.5%

  63,987     -  

Due May 3, 2016 with interest of 3.5%

  106,911     -  

Due May 3, 2016 with interest of 3.5%

  80,126     -  

Due May 5, 2016 with interest of 5.7%

  1,628,550     -  

Due May 20, 2016 with interest of 5.9%

  1,551,000     1,541,000  

Due June 8, 2016 with interest of 5.9%

  1,551,000     1,541,000  

Due June 8, 2016 with interest of 5.9%

  1,551,000     1,541,000  

Due June 17, 2016 with interest of 5.9%

  1,551,000     1,541,000  

Due June 20, 2016 with interest of 5.4%

  2,248,950     2,234,450  

Due June 28, 2016 with interest of 5.4%

  930,600     924,600  

Due March 22, 2017 with interest of 4.8%

  1,551,000     -  

Due May 10, 2016 with interest of 5.7%

  1,395,900     -  

Various bank acceptance bills payable on various dates through June 27, 2016

  77,550     924,600  

 

$  17,603,316   $  21,728,100  

All short-term loans are collateralized by Company buildings and equipment.

Note 9 - Long-term Loans

- 15 -


SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)

Long-term loans at March 31, 2016 and December 31, 2015 consisted of the following:

 

  March 31,     December 31,  

 

  2016     2015  

 

        (Audited)  

Due January 24, 2018, with interest of 6.60%

$  4,653,000   $  4,623,000  

Credit line due April 18, 2017, with interest of 7.35% (see Note 3)

  6,204,000     12,328,000  

 

  10,857,000     16,951,000  

Long-term loans, currently in default

  (6,204,000 )   (12,328,000 )

Long-term loans

$  4,653,000   $  4,623,000  

All long-term loans are collateralized by Company buildings and land use rights. The credit line due April 18, 2017 is also collateralized by all the capital stock of Hainan Shiner, the Company’s primary operating subsidiary. Aggregate future maturities of long-term loans at March 31, 2016 are as follows:

Year ending March 31,

     

2017

$  6,204,000  

2018

  4,653,000  

 

$  10,857,000  

The weighted average interest rate on long-term loans is 7.03% .

On August 2, 2010, Hainan Shiner entered into a credit facility with the Hainan Branch of the Bank of China. It is a secured revolving credit facility of RMB70 million (or $11.1 million based on the exchange rate on December 31, 2010) for seven years. Under the credit facility, Hainan Shiner may only use the loan proceeds to improve the technology of its BOPP film and to purchase certain equipment necessary for this 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 is the 5-year benchmark lending rate announced by the People’s Bank of China on the date of such withdrawal, and is subject to adjustment every 12 months based upon the benchmark. Additional interest is paid on an overdue loan under this credit facility at 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 use rights, 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 March 31, 2016, the outstanding balance under this credit facility was RMB30 million or $4.7 million.

The Company also has a RMB120 million (approximately $19.5 million) credit facility that it drew down in its entirety on April 17, 2014. The credit facility is collateralized by the stock of Hainan Shiner, bears interest at 7.35% per annum and is due on April 17, 2017. Under the terms of the credit facility agreement, the proceeds of the funds borrowed under this credit facility are to be used solely for the construction of an office building and research facility at the Hainan Xiandai Packaging Industrial Park and for the purchase of research and development equipment, however, the Company has loaned the entire proceeds of the credit facility to unrelated third parties who have no collateral on such loans other than a guarantee from each of the borrowers and an unrelated fourth party (See Note 3). During the three months ended March 31, 2016 and the year ended December 31, 2015, some of the loans made to unrelated third parties were repaid. The Company has not been able to obtain a waiver for the violation of the loan agreement, therefore the amount due under this credit facility is being shown as a current liability, as the lender will retain the right to declare a breach of the credit agreement and enforce its right to ownership of the stock, buildings and land use rights of Hainan Shiner, the Company’s primary operating subsidiary. Except as set forth above, as at March 31, 2016 and December 31, 2015, the Company is in compliance with all its obligations under the foregoing loan commitments.

- 16 -


SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)

During the three months ended March 31, 2016, the Company repaid approximately $6.1 million of this credit facility and during the year ended December 31, 2015, the Company repaid approximately $6.4 million of this credit facility. At March 31, 2016 and December 31, 2015, the outstanding balance under this credit facility was approximately $6.2 million and $12.3 million, respectively.

Note 10 - Stock Options

The following is a summary of the Company’s stock option activity for the three months ended March 31, 2016:

 

        Weighted        

 

        Average        

 

        Exercise     Aggregate  

 

  Options     Price     Intrinsic  

 

  Outstanding     Price     Value  

Outstanding at December 31, 2015

  60,000   $  0.80   $  -  

Granted

  -              

Canceled/ Expired

  -              

Exercised

  -              

Outstanding at March 31, 2016

  60,000   $  0.80   $  -  

Exercisable at March 31, 2016

  60,000   $  0.80   $  -  

The number and weighted average exercise prices of all options outstanding as of March 31, 2016, are as follows:

 Options Outstanding 
            Weighted
        Weighted   Average
        Average   Remaining
Range of   Number Outstanding   Exercise   Contractual Life
Exercise Price   March 31, 2016   Price   (Years)
$0.80   60,000   $0.80   0.69
    60,000        

The number and weighted average exercise prices of all options exercisable as of March 31, 2016, are as follows:

 Options Exercisable 
            Weighted
        Weighted   Average
        Average   Remaining
Range of   Number Outstanding   Exercise   Contractual Life
Exercise Price   March 31, 2016   Price   (Years)
$0.80   60,000                $0.80                                    0.69
    60,000        

Note 11 - Employee Welfare Plans

The expense for employee common welfare was $28,754 and $26,522 for the three months ended March 31, 2016 and 2015, respectively.

Note 12 - 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;

- 17 -


SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)

  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 Company’s registered capital;

     
  iii.

Allocations of 5% to 10% of income after tax, as determined under PRC accounting rules and regulations, to the Company’s “statutory common welfare fund,” which is established for the purpose of providing employee facilities and other collective benefits to the Company’s employees; and

     
  iv.

Allocations to the discretionary surplus reserve, if approved in the stockholders’ general meeting.

The Company appropriated $75,009 and $98,548 as reserve for the statutory surplus reserve and statutory common welfare fund for the three months ended March 31, 2016 and 2015, respectively.

Note 13 - Current Vulnerability Due to Certain Concentrations

The Company’s operations are carried out in the PRC. Accordingly, the Company’s 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 PRC’s economy. The Company’s 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 14 – Commitments and Contingencies

At March 31, 2016, the Company was contingently liable to banks for discounted notes receivable and to vendors for endorsed notes receivable of $403,399.

Note 15 – 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.

The following tables summarize the Company’s segment information for the three months ended March 31, 2016 and 2015:

 

  Three Months Ended March 31,  

 

  2016     2015  

 

           

Revenues from unrelated entities

           

           Tobacco film

$  7,532,899   $  7,517,532  

           Water-based latex

  71,905     130,848  

           Coated film

  2,568,136     4,082,185  

           Color printing

  818,779     1,103,516  

           Advanced film

  1,314,000     972,775  

 

$  12,305,719   $  13,806,856  

 

           

Intersegment revenues

           

           Tobacco film

$  5,625   $  5,131  

           Water-based latex

  2,930     43,387  

           Coated film

  1,917     2,963  

           Color printing

  611     801  

           Advanced film

  981     706  

 

$  12,064   $  52,988  

- 18 -


SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)

Total revenues

           

           Tobacco film

$  7,538,524   $  7,522,663  

           Water-based latex

  74,835     174,235  

           Coated film

  2,570,053     4,085,148  

           Color printing

  819,390     1,104,317  

           Advanced film

  1,314,981     973,481  

           Less Intersegment revenues

  (12,064 )   (52,988 )

 

$  12,305,719   $  13,806,856  

 

           

Income (loss) from operations

           

           Tobacco film

$  58,224   $  (444,493 )

           Water-based latex

  (39,129 )   43,271  

           Coated film

  (159,581 )   211,689  

           Color printing

  (184,097 )   (202,879 )

           Advanced film

  (48,575 )   (45,464 )

           Holding Company

  (24,537 )   (39,663 )

 

$  (397,695 ) $  (477,539 )

 

           

Interest income

           

           Tobacco film

$  265,393   $  350,014  

           Water-based latex

  2,533     6,479  

           Coated film

  90,479     202,145  

           Color printing

  28,847     54,645  

           Advanced film

  46,294     48,171  

           Holding Company

  (718 )   72,500  

 

$  432,828   $  733,954  

 

           

Interest expense

           

           Tobacco film

$  356,556   $  758,142  

           Water-based latex

  3,709     7,886  

           Coated film

  141,430     300,721  

           Color printing

  28,615     60,845  

           Advanced film

  59,869     127,299  

           Holding Company

  -     (2,283 )

 

$  590,179   $  1,252,610  

 

           

Income tax expense

           

           Tobacco film

$  62,937   $  33,951  

           Water-based latex

  -     -  

           Coated film

  26,935     23,143  

           Color printing

  -     -  

           Advanced film

  13,781     5,515  

           Holding Company

  -     -  

 

$  103,653   $  62,609  

 

           

Net income (loss)

           

           Tobacco film

$  (39,397 ) $  (726,522 )

           Water-based latex

  (40,304 )   41,654  

           Coated film

  (213,296 )   185,588  

           Color printing

  (183,866 )   (210,857 )

           Advanced film

  (63,564 )   (107,322 )

- 19 -


SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)

Holding Company

  (24,537 )   (37,380 )

$ (564,964 ) $  (854,839 )

Provision for depreciation

           

           Tobacco film

$  144,012   $ 601,478  

           Water-based latex

  7,734     10,024  

           Coated film

  57,123     238,579  

           Color printing

  11,558     48,271  

           Advanced film

  24,181     100,994  

           Holding Company

  -     -  

 

$  244,608   $ 999,346  

 

  As of     As of  

 

  March 31,     December 31,  

Total Assets

  2016     2015  

           Tobacco film

$  43,755,551   $  48,472,654  

           Water-based latex

  294,619     657,568  

           Coated film

  17,355,854     19,226,916  

           Color printing

  3,511,594     3,890,165  

           Advanced film

  7,346,987     8,139,035  

           Holding Company

  11,039,150     11,105,905  

 

$  83,303,755   $  91,492,243  

Note 16 - Geographical Sales

The geographical distribution of Shiner’s revenue for the three months ended March 31, 2016 and 2015 is as follows:

 

  Three Months Ended March 31,  

Geographical Areas

  2016     2015  

           Chinese Mainland

$  10,523,257   $  12,028,509  

           Asia (outside Mainland China)

  671,708     848,428  

           Australia

  873,030     563,645  

           North America

  117,512     184,225  

           Middle East

  91,890     92,553  

           Europe

  -     55,751  

           South America

  28,322     33,745  

 

$  12,305,719   $  13,806,856  

- 20 -


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

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 18, 2016.

Because the factors discussed in this report could cause our actual results or outcomes to differ materially from those expressed in any forward-looking statement made by us or on our behalf, you should not place undue reliance on any such forward-looking statement. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events, except as required by law. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement.

Use of Terms

Except as otherwise indicated by the context, all references in this report to:

  • “Shiner,” “Company,” “we,” “us” or “our” are to Shiner International, Inc., a Nevada corporation, and its direct and indirect subsidiaries: (i) Hainan Shiner Industrial Co., Ltd., or “Hainan Shiner,” (ii) Hainan Shiny-Day Color Printing Packaging Co., Ltd., or “Shiny-Day,” (iii) Hainan Modern Hi-Tech Industrial Co., Ltd., or “Hainan Modern,” (iv) Zhuhai Modern Huanuo Packaging Material Co., Ltd., or “Zhuhai Modern,” (v) Shimmer Sun Ltd., or “Shimmer Sun,” (vi) Hainan Jingyue New Material Co., Ltd., or “Jingyue,” (vii) Hainan Shunhao New Material Co., Ltd., or “Shunhao,” (viii) Hainan Yongxin Environmental Co., Ltd., or “Yongxin,” ,” (ix) Hainan Runhai Color Printing Packaging Co., or “Hainan Runhai,” (x) Hainan Saihang Photoelectric Co. Ltd., or “Hainan Saihang, ” (xi) Hainan Juneng Functional Film Co., or “Hainan Juneng” and (xii) Ningbo Neisuoer Latex Co., Ltd., or “Ningbo.”
  • “SEC” are to the United States Securities and Exchange Commission;
  • “Securities Act” are to the Securities Act of 1933, as amended; and “Exchange Act” are to the Securities Exchange Act of 1934, as amended;
  • “RMB” are to Renminbi, the legal currency of China; and “US dollar,” “USD,” and “$” are to the legal currency of the United States; and
  • “China,” “Chinese” and “PRC” are to the People’s Republic of China.

Overview

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

Our primary business consists of the manufacture and distribution of technology driven advanced packaging film products in five business segments: bi-axially oriented polypropylene, or BOPP, film for wrapping tobacco; water-based latex; coated film; color printed packaging; and advanced film. Our products are sold to customers in the food, tobacco, chemical, medical and pharmaceutical, personal care, electronics, automotive, construction, graphics, music and video publishing industries. Our current production capacity consists of: five coated film lines with a capacity of 15,000 tons a year; two BOPP tobacco film production lines with a capacity of 13,500 tons a year; one BOPP film production line with a capacity of 7,000 tons a year; three color printing lines; four anti-counterfeit film lines with a capacity of 2,500 tons a year; and two water-based latex reaction kettles with a capacity of 3,000 tons a year.

- 21 -


The table below shows the percentage of revenue by each of our business segments for the three months ended March 31, 2016 and 2015:

    Percent of Revenue  
    Three Months Ended March 31,  
    2016     2015  
             
BOPP tobacco film   61.1%     54.5%  
Water-based latex   0.6%     0.9%  
Coated film   20.9%     29.6%  
Color printing   6.7%     8.0%  
Advanced film   10.7%     7.0%  
    100.0%     100.0%  

We have 56 patents issued by the State Intellectual Property Office of China and have 11 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.

While our primary business consists of manufacture and distribution of technology driven advanced packaging film products, we have historically advanced minimal funds to customers and other unrelated third parties that are non-interest bearing and payable upon demand. In 2014 we decided to temporarily expand our advances to unrelated third parties. On April 17, 2014, Hainan Shiner, our primary operating subsidiary, drew down entirely on a RMB120 million (approximately $19.5 million) credit facility collateralized by the common stock of Hainan Shiner, our buildings and our land use rights. The facility bears interest at 7.35% per annum and is due and payable on April 17, 2017. Under the terms of the credit facility agreement, the proceeds of the funds borrowed under the credit facility are to be used solely for the construction of an office building and research facility at the Hainan Xiandai Packaging Industrial Park, and for the purchase of research and development equipment. However, on April 30, 2014, we loaned the entire proceeds of the credit facility to unrelated third parties. The business purpose for these loans was for us to make the spread between the amount of interest we pay on the credit facility and the amount of interest we can charge. Such parties have not provided us with significant collateral on such loans, other than a written guarantee from each of the borrowers and an unrelated fourth party. We do not consider this practice of lending money to third parties to be a new business segment as we deem this practice to be temporary. See our disclosures under Liquidity and Capital Resources for more information regarding our lending activities. During the three months ended March 31, 2016 and during the year ended December 31, 2015, approximately $8.7 million and $35.9 million, respectively, of these other receivables were repaid.  In addition, subsequent to March 31, 2016 an additional approximately $3.1 million of other receivables were repaid.

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

Principal Factors Affecting Our Financial Performance

We believe that the following factors will continue to affect our financial performance:

  • Global Economic Fragility – The ongoing turmoil in the global economy may have an impact on our business and our financial condition, and we may face challenges if economic conditions do not improve. These economic conditions impact levels of consumer spending, which have deteriorated and may remain depressed for the foreseeable future. If demand for our products fluctuates as a result of these economic conditions or otherwise, our revenue and gross margin could be harmed.

  • Fuel Prices Significant fluctuations in fuel prices could have both a positive and negative effect on our business and operations. Significant fluctuations in world fuel prices could significantly increase the price of shipping or transporting our products which we may not be able to pass on to our customers.

Results of Operations

The following summary of our results of operations should be read in conjunction with our financial statements and the notes thereto for the three months ended March 31, 2016 and 2015 included herein. The following tables set forth key components of our results of operations for the periods indicated, both in dollars and as a percentage of sales revenue and key components of our revenue for the periods indicated in dollars and percentages.

- 22 -


Comparison of Three Months Ended March 31, 2016 and 2015

The following table summarizes the results of our operations during the three months ended March 31, 2016 and 2015 and provides information regarding the dollar and percentage increase or (decrease) in such periods:

 

  Three Months Ended March 31,     $     %  

 

  2016     2015     Change     Change  

 

                       

Revenues

$  12,305,719   $  13,806,856   $  (1,501,137 )   -10.9%  

Cost of goods sold

  10,360,581     11,479,169     (1,118,588 )   -9.7%  

Gross profit

  1,945,138     2,327,687     (382,549 )   -16.4%  

Selling expenses

  445,100     1,045,384     (600,284 )   -57.4%  

General and administrative expenses

  1,897,733     1,759,842     137,891     7.8%  

Income from operations

  (397,695 )   (477,539 )   79,844     -16.7%  

Other income, net

  106,149     201,857     (95,708 )   -47.4%  

Interest income

  432,828     733,954     (301,126 )   -41.0%  

Interest expense

  (590,179 )   (1,252,610 )   662,431     -52.9%  

Exchange gain (loss)

  (12,414 )   2,108     (14,522 )   -688.9%  

Income tax expense

  103,653     62,609     41,044     65.6%  

Net loss attributed to noncontrolling interest

  (62,693 )   (20,912 )   (41,781 )   199.8%  

Net loss attributed to Shiner

$  (502,271 ) $  (833,927 ) $  331,656     -39.8%  

Revenues

Revenues for the three months ended March 31, 2016 decreased $1.5 million (or 10.9 %), to $12.3 million, compared to $13.8 million in 2015. The decrease was primarily attributable to decreased revenues generated from our coated film, color printing, and water-based latex segments. During the three months ended March 31, 2016, revenue from sales of our coated film decreased $1.5 million (or 37.1%) to $2.6 million, down from $4.1 million, revenue from color printing decreased $0.3 million (or 25.8%) to $0.8 million, down from $1.1 million, and revenue from water-based latex decreased $0.06 million (or 45.0%) to $.07 million, down from $0.13 million; offset by an increase in revenue from advanced film of $0.3 million (or 35.1%) to $1.3 million, up from $1.0 million and revenue from BOPP tobacco film was up just slightly. During the first quarter of 2016, our domestic (China Mainland) sales decreased as a percentage of total sales from 87.1% in 2015 to 85.5% in 2016. The decrease in revenue from our coated film, color printing, and water-based latex segments for the three months ended March 31, 2016, compared to the same period in 2015, was largely due to the Company’s limited acceptance of customer orders for these product lines that have become only marginally profitable.

Cost of Goods Sold

For the three months ended March 31, 2016, cost of goods sold (“COGS”) decreased $1.1 million (or 9.7 %), from $11.5 million in the 2015, to $10.3 million in 2016. COGS for the three months ended March 31, 2016 and 2015 were 84.2% and 83.1% of our revenues, respectively, a 1.1% increase. The increase in COGS as a percentage of revenues for the three months ended March 31, 2016, compared to the three months ended March 31, 2015, was a result of slightly higher raw material costs during the 2016 period.

Gross Profit

Our gross profit for the three months ended March 31, 2016 was $1.9 million, with a profit margin of 15.8%, a 1.1% decrease from 16.9% for the three months ended March 31, 2015. The decrease in gross profit margin was a result of slightly higher raw material costs.

Selling Expenses

For the three months ended March 31, 2016, our selling expenses decreased by $0.6 million (or 57.4%) to $0.5 million, compared to $1.0 million in 2015. The decrease in selling expenses was mainly due to a decrease in our logistic expenses.

General and Administrative (“G&A”) Expenses

- 23 -


For the three months ended March 31, 2016, our G&A expenses increased by $0.1 million (or 7.8 %) to $1.9 million, compared to $1.8 million in 2015. G&A expenses include rent, management and staff salaries, insurance, accounting, legal, and R&D expenses. The increase in G&A expenses is primarily due to an increase in bad debt expense of $0.6 million offset by a decrease in R&D expenses of $0.3 million, and travel and entertainment of $0.1 million.

Other Income, net

For the three months ended March 31, 2016, other income decreased by $0.1 million (or 47.4 %), to $0.1 million in 2016, compared to other income of $0.2 million in 2015. The change in other income is mainly due to a decrease in subsidy income during the 2016 period.

Interest Income

For the three months ended March 31, 2016, interest income decreased by $0.3 million (or 41.1 %) to $0.4 million, compared to $0.7 million in 2015. The decrease in interest income is primarily due to a pay down of other receivables during 2016 in connection with temporary loans to unrelated third parties. During 2014, we borrowed RMB120 million, or approximately $19.5 million, at a 7.35% interest under a line of credit agreement and then lent these and other funds to unrelated third parties at interest rates ranging from 12% to 16%. A large portion of these loans were repaid during the latter half of the 2015 and the first quarter of 2016.

Interest Expense

For the three months ended March 31, 2016, interest expense decreased by $0.6 million (or 52.9 %) to $0.6 million, compared to $1.3 million in 2015. The decrease in interest expense is primarily due to the decrease in the amount of long-term loans outstanding. During 2014 we borrowed RMB120 million, or approximately $19.5 million, at a 7.35% interest under a line of credit agreement and then lent the funds to unrelated third parties at interest rates ranging from 12% to 16%. RMB 40 million of this loan was repaid in 2015 and an additional RMB 40 million was repaid during the three months ended March 31, 2016.

Income Tax Expense

For the three months ended March 31, 2016, we recorded a tax provision of $0.1 million, compared to $0.06 million in the 2015 period. Our effective tax rates for 2016 and 2015 were 22.5% and 7.9%, respectively. The effective rate in 2015 is lower than the statutory rate due to the reversal of a reserve that is not included in taxable income. We recorded tax expense in both 2016 and 2015 even though we recognized a net loss since losses incurred by some of our subsidiaries were not able to offset income generated by other subsidiaries for tax purposes.

Net Income (Loss)

Due to the factors explained above, for the three months ended March 31, 2016 we generated a net loss of $0.5 million, compared to a net loss of $0.8 million in the 2015 period.

Liquidity and Capital Resources

At March 31, 2016, we had $2.0 million in cash and equivalents on hand, compared to $0.8 million at December 31, 2015. We had working capital surplus of $1.8 million at March 31, 2016, compared to a working capital deficit of $3.5 million at December 31, 2015. The primary reason for the increase working capital is the pay down of a long-term loan, currently in default that is classified as a current liability. Our principal demands for liquidity are: increasing capacity, purchasing raw materials, sales distribution and the possible acquisition of new subsidiaries in our industry, as well as other general corporate purposes.

Below is a tabular summary of our cash flows for the three months ended March 31, 2016 and 2015:

 

  Three Months Ended March 31,  

 

  2016     2015  

Net cash provided by (used in) operating activities

$  3,893,214   $  (2,504,990 )

Net cash provided by investing activities

  7,223,884     12,563,565  

Net cash used in financing activities

  (10,321,276 )   (3,372,361 )

Effect of exchange rate changes on cash and equivalents

  348,786     53,348  

Net increase in cash and equivalents

  1,144,608     6,739,562  

Cash and equivalents at beginning of period

  829,391     5,710,373  

Cash and equivalents at end of period

$ 1,973,999   $ 12,449,935  

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Operating Activities

Net cash flow provided by operating activities during the three months ended March 31, 2016 was $3.9 million, an increase of $6.4 million, compared to cash flow used in operating activities during the three months ended March 31, 2015 of $2.5 million. The increase in cash used in operating activities during the three months ended March 31, 2016 was primarily attributable to the changes in working capital components, particularly the significant decrease in advances to suppliers and inventory, and the decreases in accounts payable and unearned revenue in the 2016 period.

Investing Activities

Net cash flows provided by investing activities during the three months ended March 31, 2016 was $7.2 million, a decrease of $5.3 million, compared to cash provided by investing activities of $12.6 million in 2015. During 2015, we received $7.8 million from the repayment of other receivables and received $6.7 million from the reduction in our restricted cash balances compared to the repayment of other receivables of $8.7 million in 2016.

Financing Activities

Net cash used in financing activities for the three months ended March 31, 2016 was $10.3 million, an increase of $6.9 million, compared to cash used in financing activities of $3.4 million in 2015. During the 2016 period, we repaid $9.2 million of short-term loans and $6.1 million of long-term loans and borrowed an additional $5.0 million from short-term loans. During the 2015 period, we repaid $19.2 million of short-term loans and $6.5 million of long-term loans and borrowed an additional $21.8 million from short-term loans.

Assets

Our total assets as of March 31, 2016 were $83.3 million, a decrease of $8.2 million, compared to $91.5 million as of December 31, 2015. The decrease was primarily due to the decrease of other receivables, current, of $1.85 million, other non-current receivables of $6.4 million and inventory of $2.1 million, offset by an increase in cash of $1.1 million. The decrease in other receivables (both current and long-term) is due to the repayment of amounts loaned to third parties. (See Note 3 to the financial statements). We have historically advanced minimal funds to customers and other unrelated third parties that are non-interest bearing and payable upon demand. However, in 2014 we decided to temporarily expand our advances to unrelated third parties. The decrease inventory is due to less inventory on hand needed to meet our expected demand. The increase in cash is due to the timing of collections of receivables and payment of payables.

Liabilities

Our total liabilities decreased by $7.9 million as of March 31, 2016, compared to December 31, 2015, principally due to a decrease in long-term loans of $6.1 million and short-term loans of $4.1 million; and an increase in accounts payable of $2.1 million.

The decrease in long-term loans is due to our repayment of RMB40 million (approximately $6.1 million) during the three months ended March 31, 2016 of an RMB 120 million credit facility pursuant to a Trust Agreement between Hainan Shiner, our primary operating subsidiary, and Zhongrong International Trust Co., Ltd., or Zhongrong, on April 17, 2014. The credit facility bears interest at 7.35% per annum, is due on April 17, 2017 and is collateralized by the common stock of Hainan Shiner, our buildings and our land use rights. We intend to meet our liquidity requirements under this Trust Agreement, including capital expenditures related to the purchase of equipment, purchase of raw materials, and the expansion of our business, through cash flow provided by operations, and our current credit facilities. Under the terms of the Trust Agreement, the proceeds of the funds borrowed were to be used solely for the construction of an office building and research facility at the Hainan Xiandai Packaging Industrial Park and for the purchase of research and development equipment, however, on April 30, 2014, we loaned the entire proceeds of the credit facility to unrelated third parties who have provided no collateral on such loans other than a written guarantee from each of the borrowers and an unrelated fourth party. As such, Zhongrong has the right to declare a breach of the Trust Agreement and enforce its right to ownership of the stock, buildings and land use rights of Hainan Shiner, our primary operating subsidiary. We have not been able to obtain a waiver for the violation of the use of proceeds provision of the Trust Agreement, therefore the remaining amount due under this credit facility of RMB 40 million (approximately $6.2 million) is being shown as a current liability. If Zhongrong calls the loan due to the violation of the agreement, we will attempt to negotiate a waiver, or request additional time in order to collect the amounts due from unrelated third parties or to obtain other financing to repay the loan.

The increase in long-term loans is due to our withdrawal of funds under a credit agreement discussed in more detail elsewhere herein, which we subsequently lent to unrelated third parties at higher interest rates than we are being charged. The increase in other payables is due to an increase in amounts due to two companies that we are engaged in business with. The decrease in accounts payable is due to the timing of payments to our vendors. The decrease in unearned revenue is due to shipping products to customers that had given us a deposit on their orders.

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Loan Commitments

In addition to the Trust Agreement disclosed under Liabilities, on August 2, 2010, Hainan Shiner, our wholly owned subsidiary, entered into a credit facility with the Hainan Branch of the Bank of China. The credit facility is comprised of a seven-year RMB70 million, or $11.1 million, secured revolving credit facility. On each of January 24, February 10, February 16, February 17, March 25, November 30, December 23, 2011 and March 19, 2012, Hainan Shiner made withdrawals on the credit facility of $2.5 million, $2.6 million, $2.2 million, $1.2 million, $0.4 million, $0.2 million, $0.5 million and $1.1 million, respectively. Hainan Shiner may only use the loan proceeds to improve the technology of its BOPP film and to purchase certain equipment necessary for these improvements. Proceeds under the facility not used for these purposes may be subject to a misappropriation penalty interest rate of 100% of the current interest rate (6.6% at March 31, 2016) on the loan. The initial interest rate on each withdrawal from the facility is the 5-year benchmark lending rate announced by the People’s Bank of China on the date of such withdrawal, and is subject to adjustment every 12 months based upon this benchmark. Additional interest is paid on any overdue loan under this credit facility of 50% of the current interest rate on the loan. Hainan Shiner and certain of its affiliates, including the Company, provided guarantees and certain land use rights, buildings, and property as collateral under this facility. The credit facility includes financial covenants that prohibit Hainan Shiner from making distributions to its sole shareholder if (a) its after-tax net income for the fiscal year is zero or negative, (b) its after-tax net income is insufficient to make up its accumulated loss for the last several fiscal years, (c) its income before tax is not utilized in paying off the capital, interest and expense of the lender, or (d) the income before tax is insufficient to pay the capital, interest and expense of the lender. As of March 31, 2016, the outstanding balance under this credit facility was RMB 30 million or $4.7 million.

Except as set forth above, as at March 31, 2016, the Company is in compliance with all its obligations under the foregoing loan commitments.

Dividends

Our Chinese subsidiaries have restrictions on the payment of dividends to us. China has currency and capital transfer regulations that may require our 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 we believe our Chinese subsidiaries are in compliance with these regulations, should these regulations or the interpretation of them by courts or regulatory agencies change, we may not be able to pay dividends outside of China.

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 of America (“US GAAP”) requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial conditions and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments.

Accounts Receivable, net

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

Inventory, net

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

Revenue Recognition

The Company’s revenue recognition policies comply with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition.” Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.

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

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

Stock-Based Compensation

The Company records stock-based compensation in accordance with FASB ASC Topic 718, “Compensation – Stock Compensation.” ASC Topic 718 requires companies to measure compensation cost for stock-based employee compensation at fair value (“FV”) at the grant date and recognize the expense over the employee’s requisite service period. The Company recognizes in the statement of operations the grant-date FV of stock options and other equity-based compensation issued to employees and non-employees.

Income Taxes

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

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

Basic and Diluted Earnings Per Share

Earnings per share (“EPS”) is calculated in accordance with the FASB ASC Topic 260, “Earnings Per Share.” Basic EPS is based upon the weighted average number of common shares outstanding. Diluted EPS is based on the assumption that all dilutive convertible shares and stock warrants were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). Early adoption is not permitted. The Company is currently evaluating the impact of the pending adoption of ASU 2014-09 on its consolidated financial statements and has not yet determined the method by which it will adopt the standard beginning January 1, 2017.

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In August, 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendment in this ASU defers the effective date of ASU No. 2014-09 for all entities for one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 31, 2016, including interim reporting periods with that reporting period.

In February, 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. ASU 2015-02 provides guidance on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). ASU 2015-02 is effective for periods beginning December 15, 2015. The adoption of ASU 2015-02 did not expected to have a material effect on the Company’s consolidated financial statements.

In September, 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805). Topic 805 requires that an acquirer retrospectively adjust provisional amounts recognized in a business combination, during the measurement period. To simplify the accounting for adjustments made to provisional amounts, the amendments in the Update require that the acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer is required to also record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition an entity is required to present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for fiscal years beginning December 15, 2015. The adoption of ASU 2015-016 did not expected to have a material effect on the Company’s consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. The new guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. This update is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The Company does not anticipate the adoption of this ASU will have a significant impact on its consolidated financial position, results of operations, or cash flows.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance in ASU No. 2016-02 supersedes the lease recognition requirements in ASC Topic 840, Leases (FAS 13). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect this standard will have on its consolidated financial statements.

In March 2016, the FASB issued an ASU amending the accounting for stock-based compensation and requiring excess tax benefits and deficiencies to be recognized as a component of income tax expense rather than equity. This guidance also requires excess tax benefits to be presented as an operating activity on the statement of cash flows and allows an entity to make an accounting policy election to either estimate expected forfeitures or to account for them as they occur. The ASU is effective for reporting periods beginning after December 15, 2016, with early adoption permitted. We are currently evaluating the impact of the ASU; however, we expect the ASU will have a material impact on the Company’s consolidated financial statements.

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future 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 materials to prepare for upcoming busier seasons.

Inflation

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

Off-Balance Sheet Arrangements

As of March 31, 2016, 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.

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 March 31, 2016. Based upon, and as of the date of this evaluation, Mr. Xing and Mr. Xu, determined that, as of March 31, 2016, 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 three months ended March 31, 2016 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 effect 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, 2015.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

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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

Certification of our Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended, filed herewith

31.2

Certification of our Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended, filed herewith

32.1

Certification of our Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith

32.2

Certification of our Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith

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.

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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.
   
May 25, 2016 By: /s/ Qingtao Xing
  Name: Qingtao Xing
  Title: President and Chief Executive Officer
  (Principal Executive Officer)
   
May 25, 2016 By: /s/ Xuezhu Xu
  Name: Xuezhu Xu
  Title: Interim Chief Financial Officer
  (Principal Financial and Accounting Officer)

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