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EX-2.3 - Shiner International, Inc.v226612_ex2-3.htm
EX-31.2 - Shiner International, Inc.v226612_ex31-2.htm
EX-32.1 - Shiner International, Inc.v226612_ex32-1.htm
EX-32.2 - Shiner International, Inc.v226612_ex32-2.htm
EX-31.1 - Shiner International, Inc.v226612_ex31-1.htm

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

Form 10-Q/A
Amendment No. 1

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

For the quarterly period ended March 31, 2011

¨
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
(IRS Employer
of incorporation or organization)
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           ¨           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

On May 16, 2011, 27,541,491 shares of the registrant's common stock were outstanding.
 
 
 

 
 
EXPLANATORY NOTE
 
This Amendment No. 1 to Form 10-Q (the “Amendment”) of Shiner International, Inc. (the “Company”) amends the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, originally filed with the Securities and Exchange Commission on May 16, 2011 (the “Original Report”). This Amendment is being filed solely to amend the certification of the Company’s Interim Chief Financial Officer required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 appended as Exhibit 32.2. Specifically, the Company is re-filing the Exhibit 32.2 certification solely to correct a typographical error in the report and period referenced in the first paragraph of the certification to the Quarterly Report on Form 10-Q for the period quarter ended March 31, 2011.
 
Other than these changes, the remainder of the document is unchanged from the Original Report. This Amendment does not reflect events occurring after the filing of the Original Report or modify or update the disclosures therein in any way other than as required to reflect the changes described in this Explanatory Note.
 
This Amendment has been signed as of a current date, and includes Exhibits 31.1, 31.2, 32.1 and 32.2, which are currently dated.
 
 
 

 
 
TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
     
Item 1.
Financial Statements
    3  
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
    27  
Item 3.
Defaults Upon Senior Securities
    27  
Item 4.
(Removed and Reserved)
    27  
Item 5.
Other Information
    27  
Item 6.
Exhibits
    28  
 
 
2

 
 
SHINER INDUSTRIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

   
March 31,
   
December 31,
 
   
2011
   
2010
 
   
(unaudited)
       
ASSETS
           
             
CURRENT ASSETS:
           
Cash & cash equivalents
  $ 3,022,375     $ 8,622,035  
Accounts receivable, net of allowance for doubtful accounts of $297,899 and $262,502
    9,480,195       10,005,572  
Advances to suppliers
    7,956,711       3,462,074  
Notes receivable
    199,896       26,056  
Inventory, net
    8,935,337       7,355,601  
Prepaid expenses & other current assets
    669,423       610,066  
                 
Total current assets
    30,263,937       30,081,404  
                 
Property and equipment, net
    27,740,711       19,399,717  
Construction in progress
    4,784,948       4,017,721  
Advance for the purchase of equipment
    1,752,849       1,356,989  
Intangible assets, net
    1,067,039       1,061,855  
                 
TOTAL ASSETS
  $ 65,609,484     $ 55,917,686  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES:
               
Accounts payable
  $ 3,089,699     $ 5,350,064  
Other payables
    4,698,530       4,655,300  
Unearned revenue
    1,144,723       295,609  
Accrued payroll
    136,420       141,884  
Short-term loans
    7,635,000       6,826,500  
                 
Total current liabilities
    16,704,372       17,269,357  
                 
Long-term loans
    9,024,570       -  
                 
Total Liabilities
    25,728,942       17,269,357  
                 
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 at March 31, 2011 and December 31, 2010
    27,603       27,603  
Additional paid-in capital
    14,322,179       14,321,484  
Treasury stock (61,845 shares)
    (58,036 )     (58,036 )
Other comprehensive income
    4,286,905       4,060,637  
Statutory reserve
    3,020,985       2,905,861  
Retained earnings
    18,243,434       17,353,554  
Total Shiner stockholders' equity
    39,843,070       38,611,103  
Noncontrolling interest
    37,472       37,226  
Total equity
    39,880,542       38,648,329  
                 
TOTAL LIABILITIES AND EQUITY
  $ 65,609,484     $ 55,917,686  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
3

 
 
SHINER INDUSTRIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER
COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010

   
2011
   
2010
 
   
(unaudited)
   
(unaudited)
 
             
Net Revenue
  $ 15,906,845     $ 11,586,719  
                 
Cost of good sold
    13,539,738       9,699,466  
                 
Gross profit
    2,367,107       1,887,253  
                 
Operating expenses
               
Selling
    444,676       403,770  
General and administrative
    717,039       441,372  
Total operating expenses
    1,161,715       845,142  
                 
Income from operations
    1,205,392       1,042,111  
                 
Non-operating income (expense):
               
Other income, net
    194,611       86,191  
Interest income
    6,273       2,286  
Interest expense
    (142,951 )     (42,829 )
Exchange loss
    (55,795 )     (7,461 )
Total non-operating income (expense)
    2,138       38,187  
                 
Income before income tax
    1,207,530       1,080,298  
                 
Income tax expense
    210,836       158,205  
                 
Net income
    996,694       922,093  
                 
Net loss attributed to noncontrolling interest
    8,310       -  
                 
Net income attributed to Shiner
  $ 1,005,004     $ 922,093  
                 
Comprehensive income (loss)
               
Net income
  $ 996,694     $ 922,093  
Foreign currency translation gain (loss)
    226,514       (9,337 )
                 
Comprehensive income
  $ 1,223,208     $ 912,756  
                 
Weighted average shares outstanding :
               
Basic
    27,541,491       24,588,155  
Diluted
    27,546,675       24,598,358  
                 
Earnings per share attributed to Shiner common stockholders
               
Basic
  $ 0.04     $ 0.04  
Diluted
  $ 0.04     $ 0.04  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
4

 
 
SHINER INDUSTRIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010

   
2011
   
2010
 
   
(unaudited)
   
(unaudited)
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 1,005,004     $ 922,093  
Adjustments to reconcile net income to net cash used in operating activities:
               
Depreciation
    518,462       395,917  
Amortization
    1,809       31,819  
Stock compensation expense
    695       6,318  
Change in working capital components:
               
Accounts receivable
    589,310       (829,991 )
Inventory
    (1,526,012 )     (1,822,659 )
Advances to suppliers
    (4,456,522 )     (958,247 )
Other assets
    (74,521 )     (186,285 )
Accounts payable
    (2,287,552 )     1,713,513  
Unearned revenue
    844,269       75,803  
Other payables
    14,066       27,353  
Accrued payroll
    (6,377 )     (8,941 )
                 
Net cash used in operating activities
    (5,377,369 )     (633,307 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Issuance of notes receivable
    (173,074 )     (205,019 )
Payments for property and equipment
    (9,089,081 )     (50,441 )
Payments for construction in progress
    (738,208 )     (1,079,695 )
(Increase)/decrease in restricted cash
    -       733,205  
                 
Net cash used in investing activities
    (10,000,363 )     (601,950 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Repayment of short-term loans
    (6,848,001 )     -  
Proceeds from notes payable
    16,602,598       -  
                 
Net cash provided by financing activities
    9,754,597       -  
                 
Effect of exchange rate changes on cash and cash equivalents
    23,475       (411 )
                 
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS
    (5,599,660 )     (1,235,668 )
                 
CASH & CASH EQUIVALENTS, BEGINNING BALANCE
    8,622,035       3,059,796  
                 
CASH & CASH EQUIVALENTS, ENDING BALANCE
  $ 3,022,375     $ 1,824,128  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Interest paid
  $ 142,784     $ 42,829  
Income taxes paid
  $ 219,128     $ 114,900  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
5

 
 
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011 AND 2010
(unaudited)

Note 1 - Organization and Basis of Presentation

The unaudited consolidated financial statements were prepared by Shiner International, Inc., a Nevada corporation (the “Company” or “Shiner”), pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”).  The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) were omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K.  The results for the three months ended March 31, 2011, are not necessarily indicative of the results to be expected for the full year ending December 31, 2011.

Organization and Line of Business

Shiner International, Inc. (hereinafter referred to as the “Company” or “Shiner”) was incorporated in the State of Nevada on November 12, 2003.  The Company’s subsidiaries are Hainan Shiner Industrial Co., Ltd. (“Shiner Industrial”) and Hainan Shiny-day Color Printing Packaging Co., Ltd. (“Shiny-day”).  Shiner International’s and Shiny-Day’s subsidiaries are Hainan Modern Hi-Tech Industrial Co., Ltd. (“Modern”) and Zhuhai Modern Huanuo Packaging Material Co., Ltd. (“Zhuhai”), respectively.  Shiner Industrial, Shiny-day, Modern and Zhuhai are each Chinese corporations and are referred to collectively as the “Shiner Group.”  In 2009, Shiner Industrial acquired all of the assets of Shiny-day and Modern in an effort to improve efficiencies, reduce expenses and take advantage of favorable tax treatment.   The transfer of these assets and liabilities was done at historical cost with no gain or loss being recognized.

Concurrently with the closing of the transactions contemplated by the share exchange agreement and as a condition thereof, the Company entered into an agreement with Zubeda Mohamed-Lakhani, the Company’s sole director and chief executive officer, pursuant to which she returned 4,750,000 shares of the Company’s common stock for cancellation. Ms. Mohamed-Lakhani was not compensated for the cancellation of her shares. Upon completion of the foregoing transactions, the Company had 21,150,000 shares of common stock issued and outstanding.

The exchange of shares with the Shiner Group was accounted for as a reverse acquisition under the purchase method of accounting since the Shiner Group obtained control of the Company. On July 24, 2007, Cartan Holdings, Inc. changed its name to Shiner International, Inc. Accordingly, the merger of the Shiner Group into the Company was recorded as a recapitalization of the Shiner Group, the Shiner Group being treated as the continuing entity. The Shiner Group had common shareholders and common management. The historical financial statements presented are the combined financial statements of the Shiner Group. The share exchange agreement was treated as a recapitalization and not as a business combination; therefore, no pro forma information is disclosed. At the date of this transaction, the net liabilities of the legal acquirer were $34,867.

The Company is engaged in the research, manufacture, sale, and distribution of packaging film and color printing for the packaging industry.

Basis of Presentation

The accompanying consolidated financial statements were prepared in conformity with 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”).
 
 
6

 
 
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011 AND 2010
(unaudited)

Noncontrolling Interest

On September 20, 2010, the Company commenced operations of a majority-owned subsidiary, Shanghai Juneng Functional Film Company, Ltd. (“Shanghai Juneng”), with Shanghai Shifu Film Material, Co., Ltd., (‘Shanghai Shifu”).  Under the terms of the agreement, Shiner owns 70% of Shanghai Juneng, and Shanghai Shifu owns the remaining 30%. The general manager of Shanghai Juneng reports directly to Shiner’s Chief Executive Officer.  Shanghai Juneng will focus on pursuing sales opportunities among China’s leading food producers in the Yangtze River Delta, one of China’s largest economic centers. 

The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, “Consolidation,” which establishes standards governing the accounting for and reporting of noncontrolling interests (NCIs) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs be treated as a separate component of equity, not as a liability, that increases and decreases in the 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 (loss) attributed to the NCI was separately designated in the accompanying statements of operations and other comprehensive income. Losses attributable to the NCI in a subsidiary may exceed the NCI’s interests in the subsidiary’s equity. The excess attributable to the NCI is attributed to those interests. The NCI shall continue to be attributed its share of losses even if that attribution results in a deficit NCI balance.

Principles of Consolidation

The accompanying consolidated financial statements include the account 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 the RMB and the accounts of the U.S. parent company are maintained in the USD.  The accounts of the Chinese subsidiaries are translated into USD in accordance with Accounting Standards Codification (“ASC”) Topic 830 “Foreign Currency Matters,” with the RMB as the functional currency for the Chinese subsidiaries.  According to Topic 830, all assets and liabilities are translated at the exchange rate on the balance sheet date, stockholders’ equity is translated at historical rates and statement of operations items are translated at the weighted average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with ASC Topic 220, “Comprehensive Income.”  Gains and losses resulting from the translations of foreign currency transactions and balances are reflected in the statement of operations.

Note 2 - Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include cash in hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.
 
 
7

 
 
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011 AND 2010
(unaudited)

Accounts Receivable

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

Advances to Suppliers

The Company makes advances to certain suppliers for the purchase of its materials. The advances to suppliers are interest free and unsecured.

Inventory

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.

Notes Receivable

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

Property and Equipment

Property and equipment are stated at cost. Expenditures for maintenance and repairs are expenses as incurred; additions, renewals and improvements are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives as follows:

Operating equipment
10 years
Vehicles
8 years
Office equipment
5 years
Buildings and improvements
20 years

The following are the details regarding the Company’s property and equipment at March 31, 2011 and December 31, 2010:

   
March 31,
   
December 31,
 
   
2011
   
2010
 
         
(Audited)
 
             
Operating equipment
  $ 21,884,042     $ 13,028,014  
Vehicles
    163,872       162,799  
Office equipment
    197,550       189,301  
Buildings
    9,656,124       9,597,807  
Building and equipment improvements
    632,603       667,050  
      32,534,191       23,644,971  
Less accumulated depreciation
    (4,793,480 )     (4,245,254 )
    $ 27,740,711     $ 19,399,717  
 
 
8

 
 
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011 AND 2010
(unaudited)

Construction-in-Progress and Government Grants

Construction-in-progress mainly consists of amounts expended to build a new manufacturing workshop in Hainan. The first phase of the project was completed during 2010.  Once the project is completed, the project will be transferred from “Construction-in-progress” to “Property and equipment, net.”  The total cost of the new Hainan manufacturing workshop is expected to be approximately $12 million.  In October 2009, the Company received a government grant for this project of approximately $4.3 million 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, 2011 and December 31, 2010, the $4.3 million government grant was recorded as “Other payables” on the accompanying consolidated financial statements.  If the government determines the funds were used for their intended purpose, the amount of the government grant will be amortized into other income over the useful life of the asset on the same basis used to depreciate the asset.

Long-Lived Assets
 
The Company applies the provisions of ASC Topic 360, “Property, Plant, and Equipment,” which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. ASC 360 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair values are reduced to recognize the cost of disposal. Based on its review, the Company believes that as of March 31, 2011 and December 31, 2010 (audited), 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 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 plot, the Company’s rights run through October 2060. 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 assets, other long-lived assets, and goodwill 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.

Fair Value of Financial Instruments

For certain of the Company’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, advances to suppliers, accounts payable, accrued liabilities and short-term debt, the carrying amounts approximate their fair values 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 fair values based on current rates of interest for instruments with similar characteristics.

ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company.  ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value 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 fair values 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:

 
9

 
 
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011 AND 2010
(unaudited)

 
·
Level 1inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.

 
·
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in inactive markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 
·
Level 3 inputs to the valuation methodology us one or more unobservable inputs which are significant to the fair value measurement.

The Company analyzes all financial instruments with features of both liabilities and equity under ASC Topic 480, “Distinguishing Liabilities from Equity,” and ASC Topic 815, “Derivatives and Hedging.”

As of March 31, 2011 and December 31, 2010 (audited), the Company did not identify any assets and liabilities that are required to be presented on the balance sheet at fair value.

Revenue Recognition

The Company’s revenue recognition policies comply with SEC Staff Accounting Bulletin 104 (codified in FASB ASC Topic 480). 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.
 
Sales returns and allowances was $0 for the three months ended March 31, 2011 and 2010. The Company does not provide unconditional right of return, price protection or any other concessions to its dealers or other customers.

Other Income

Included in other income for the three months ended March 31, 2010 was $73,225 arising from a payment from the Company's former landlord for vacating leased space at the request of the landlord. The Company recognizes other income in the period the Company has earned the revenue and collectability is reasonably assured.

Advertising Costs

The Company expenses the cost of advertising as incurred or, as appropriate, the first time the advertising takes place. Advertising costs for the three months ended March 31, 2011 and 2010, were not significant.
 
 
10

 
 
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011 AND 2010
(unaudited)

Research and Development

The Company expenses its research and development costs as incurred. Research and development costs for the three months ended March 31, 2011 and 2010 were $195,795 and $143,525, respectively, which are recorded as general and administrative expenses in the accompanying consolidated financial statements.

Stock-Based Compensation

The Company records stock-based compensation in accordance with ASC Topic 718, “Compensation – Stock Compensation.”  ASC 718 requires companies to measure compensation cost for stock-based employee compensation at fair value at the grant date and recognize the expense over the employee’s requisite service period. The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees. There were 60,000 options outstanding as of March 31, 2011.

Income Taxes

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

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

Basic and Diluted Earnings Per Share

Earnings per share is calculated in accordance with the ASC Topic 260, “Earnings Per Share.”  Basic earnings per share is based upon the weighted average number of common shares outstanding.  Diluted earnings per share 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 521,664 warrants outstanding as of March 31, 2011 with weighted-average exercise prices of $1.25 and $1.70, respectively. There were 190,000 options and 970,050 warrants outstanding as of March 31, 2010 with weighted-average exercise prices of $2.73 and $6.00, respectively.  The following is a reconciliation of the number of shares (denominator) used in the basic and diluted earnings per share computations for the three months ended March 31, 2011 and 2010:

   
Three Months Ended
   
Three Months Ended
 
   
March 31, 2011
   
March 31, 2010
 
         
Per Share
         
Per Share
 
   
Shares
   
Amount
   
Shares
   
Amount
 
Basic earnings per share
    27,541,491     $ 0.04       24,588,155     $ 0.04  
Effect of dilutive stock options
                               
and warrants
    5,184       -       10,203       -  
Diluted earnings per share
    27,546,675     $ 0.04       24,598,358     $ 0.04  
 
 
11

 
 
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011 AND 2010
(unaudited)

Foreign Currency Translation

The accounts of the Company’s Chinese subsidiaries are maintained in RMB and the accounts of the U.S. parent company are maintained in USD.   The accounts of the Chinese subsidiaries were translated into USD in accordance with ASC Topic 830, “Foreign Currency Matters,” with the RMB as the functional currency for the Chinese subsidiaries.  According to ASC Topic 830, all assets and liabilities were translated at the exchange rate on the balance sheet date, stockholders’ equity is translated at historical rates and statement of operations items are translated at the weighted average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with ASC Topic 220, “Comprehensive Income.”  Gains and losses resulting from the translations of foreign currency transactions and balances are reflected in the statement of operations.

Foreign Currency Transactions and Comprehensive Income

US GAAP generally requires recognized revenue, expenses, gains and losses be included in net income. Certain statements, however, require entities to report specific changes in assets and liabilities, such as gain or loss on foreign currency translation, as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. The functional currency of the Company’s Chinese subsidiaries is the RMB. Translation gains of $4,286,648 and $4,060,637 at March 31, 2011 and December 31, 2010 (audited), 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 ASC Topic 230, “Statement of Cash Flows,” cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rates. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.

Segment Reporting

ASC Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. The Company has determined it has two reportable segments. See Note 13.

Dividends

The Company's Chinese subsidiaries have restrictions on the payment of dividends to the Company. China has adopted 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 persons and natural persons, to register with the competent local SAFE branch before establishing or controlling any company outside of China.  Although the Company believes its Chinese subsidiaries are in compliance with these regulations, should these regulations or the interpretation of them by courts or regulatory agencies change, the Company may not be able to pay dividends outside of China.

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2010-06, Improving Disclosures about Fair Value Measurements (“ASU No. 2010-06”). The new standard addresses, among other things, guidance regarding activity in Level 3 fair value measurements. Portions of ASU No. 2010-06 that relate to the Level 3 activity disclosures are effective for the annual reporting period beginning after December 15, 2010. The Company will provide the required disclosures beginning with the Company’s Annual Report on Form 10-K for the year ending December 31, 2011. Based on the initial evaluation, the Company does not anticipate a material impact to the Company’s financial position, results of operations or cash flows as a result of this change.

 
12

 
 
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011 AND 2010
(unaudited)

Note 3 - Inventory

Inventory at March 31, 2011 and December 31, 2010 consisted of the following:

   
March 31,
   
December 31,
 
   
2011
   
2010
 
         
(Audited)
 
             
Raw Material
  $ 4,597,671     $ 3,099,222  
Work in process
    1,124,918       842,793  
Finished goods
    3,365,840       3,547,916  
      9,088,429       7,489,931  
Less: Obsolescence Reserve
    (153,092 )     (134,330 )
    $ 8,935,337     $ 7,355,601  

Note 4 - Intangible Assets

Intangible assets at March 31, 2011 and December 31, 2010 consisted of the following:

   
March 31,
   
December 31,
 
   
2011
   
2010
 
         
(Audited)
 
             
Right to use land
  $ 1,119,704     $ 1,112,371  
Less: Accumulated amortization
    (52,665 )     (50,516 )
Intantible assets, net
  $ 1,067,039     $ 1,061,855  

Pursuant to the regulations of the government of the People’s Republic of China’s (“PRC”), the PRC government owns all land. The Company has recognized the amounts paid for the acquisition of rights to use land as an intangible asset and amortizing such rights over the period the Company has use of the land, which range from 54 to 57 years.
 
 
13

 
 
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011 AND 2010
(unaudited)

Note 5 - Loans

Loans at March 31, 2011 and December 31, 2010 (audited) consisted of the following:

   
March 31,
   
December 31,
 
   
2011
   
2010
 
                 
The term of the loan is from December 20, 2010 to December 19, 2011, with an interest rate of 5.56% at December 31, 2010. The loan is collateralized by buildings and equipment
  $ -     $ 1,972,100  
                 
The term of the loan is from November 12, 2010 to November 11, 2011, with an interest rate of 5.56% at December 31, 2010. The loan is collateralized by buildings and equipment
    -       455,100  
                 
The term of the loan is from September 20, 2010 to September 19, 2011, with an interest rate of 5.56% at December 31, 2010. The loan is collateralized by buildings and equipment
    -       606,800  
                 
The term of the loan is from July 21, 2010 to July 20, 2011, with an interest rate of 5.56% at December 31, 2010. The loan is collateralized by buildings and equipment
    -       758,500  
                 
The term of the loan is from June 24,2010 to June 24, 2011, with an interest rate of 5.56% at December 31, 2010. The loan is collateralized by buildings and equipment
    -       1,517,000  
                 
The term of the loan is from May 07, 2010 to May 6, 2011, with an interest rate of 5.841% at December 31, 2010. The loan is collateralized by buildings and equipment
    -       1,517,000  
                 
The term of the loan is from December 20, 2010 to December 19, 2011, with an interest rate of 5.56% at March 31, 2011. The loan is collateralized by equipment
    1,985,100       -  
                 
The term of the loan is from February 28, 2011 to February 28, 2012, with an interest rate of 6.06% at March 31, 2011. The loan is collateralized by equipment
    4,122,900       -  
                 
The term of the loan is from May 7, 2010 to May 6, 2011, with an interest rate of 5.56% at March 31, 2011. The loan is collateralized by buildings and equipment
    1,527,000       -  
                 
The term of the loan is from January 24, 2011 to January 24,2018, with an interest rate of 6.60% at March 31, 2011. The loan is collateralized by buildings and land use rights
    2,443,200       -  
                 
The term of the loan is from February 10, 2011 to February 10, 2018, with an interest rate of 6.60% at March 31, 2011. The loan is collateralized by buildings and land use rights
    2,748,600       -  
                 
The term of the loan is from February 16, 2011 to February 16, 2018, with an interest rate of 6.60% at March 31, 2011. The loan is collateralized by buildings and land use rights
    2,214,150       -  
                 
The term of the loan is from February 17, 2011 to February 17, 2018, with an interest rate of 6.60% at March 31, 2011. The loan is collateralized by buildings and land use rights
    1,206,330       -  
                 
The term of the loan is from March 25, 2011 to March 25, 2018, with an interest rate of 6.60% at March 31, 2011. The loan is collateralized by buildings and land use rights
    412,290       -  
                 
    $ 16,659,570     $ 6,826,500  

At March 31, 2011, $7,635,000 and $9,024,570 were short term and long term, respectively.  At December 31, 2010, $6,826,500 and $0 were short term and long term, respectively.

 
14

 
 
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011 AND 2010
(unaudited)

Note 6 - Stock Options and Warrants

Stock Options

The following is a summary of the Company’s stock option activity for the three months ended March 31, 2011:

         
Weighted
       
         
Average
   
Aggregate
 
   
Options
   
Exercise Price
   
Intrinsic
 
   
Outstanding
   
Price
   
Value
 
Outstanding at December 31, 2010
    60,000       1.25        
Granted
    -       -        
Canceled
    -       -        
Exercised
    -       -        
Outstanding at March 31, 2011
    60,000     $ 1.25     $ -  
Exercisable at March 31, 2011
    50,000     $ 1.25     $ -  

The number and weighted average exercise prices of all options outstanding as of March 31, 2011, are as follows:

Options Outstanding
 
                 
Weighted
 
           
Weighted
   
Average
 
     
Number
   
Average
   
Remaining
 
Range of
   
Outsanding
   
Exercise
   
Contractual Life
 
Exercise Price
   
March 31, 2011
   
Price
   
(Years)
 
                     
$ 1.25       60,000     $ 1.25       2.18  
          60,000                  

The number and weighted average exercise prices of all options exercisable as of March 31, 2011, are as follows:

Options Exercisable
 
                 
Weighted
 
           
Weighted
   
Average
 
     
Number
   
Average
   
Remaining
 
Range of
   
Outsanding
   
Exercise
   
Contractual Life
 
Exercise Price
   
March 31, 2011
   
Price
   
(Years)
 
                     
$ 1.25       50,000     $ 1.25       1.98  
          50,000                  

The compensation expense for the unvested options as of March 31, 2011, was $2,086, which will be recognized through December 31, 2011.

 
15

 
 
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011 AND 2010
(unaudited)

Warrants

The following is a summary of the Company’s warrant activity for the three months ended March 31, 2011:

               
Weighted
 
         
Weighted
   
Average
 
         
Average
   
Remaining
 
   
Warrants
   
Exercise Price
   
Contractual Life
 
   
Outstanding
   
Price
   
(Years)
 
Outstanding at December 31, 2010
    521,664       1.70        
Granted
    -       -        
Canceled
    -       -        
Exercised
    -       -        
Outstanding at March 31, 2011
    521,664     $ 1.70       1.99  
Exercisable at March 31, 2011
    521,664     $ 1.70       1.99  

Note 9 - Employee Welfare Plans

The expense for employee common welfare was $62,814 and $36,821 for the three months ended March 31, 2011 and 2010, respectively.  The Company did not record a welfare payable as of March 31, 2011 or December 31, 2010 (audited).  The Chinese government abolished the 14% welfare plan policy in 2007.  The Company is not required to establish welfare and common welfare reserves.

Note 10 - Statutory Common Welfare Fund

As stipulated by the Company Law of the PRC, net income after taxation can only be distributed as dividends after appropriation has been made for the following:

 
i.
Making up cumulative prior years’ losses, if any;

 
ii.
Allocations to the “statutory surplus reserve” of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the reserve reaches 50% of the 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 $115,124 and $15,462 as reserve for the statutory surplus reserve and statutory common welfare fund for the three months ended March 31, 2011 and 2010, respectively.

Note 11 - Current Vulnerability Due to Certain Concentrations

Two customers accounted for 9% and 7% of the Company’s sales for the three months ended March 31, 2011.  One customer accounted for 13% of the Company’s sales for the three months ended March 31, 2010.

One vendor provided 15% of the Company’s raw materials for the three months ended March 31, 2011. There was no vendor which accounted for 10% or more of the Company’s raw material purchases for the three months ended March 31, 2010. 

 
16

 
 
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011 AND 2010
(unaudited)

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 12 - Contingent Liabilities

At March 31, 2011, the Company is contingently liable to banks for discounted notes receivable and to vendors for endorsed notes receivable of $1,044,810.

Note 13 – Segment Information

The Company’s business segments are flexible packaging and advanced file.  The Company made certain reclassifications to its business segment information the end of 2010 in order to more closely align its financial reporting with its business structure. Prior period amounts have been restated to conform to the current presentation. The packaging film and color printing segments have been reclassified as flexible packaging and advanced film. Flexible packaging includes the following product categories: Biaxially Oriented Polypropylene (BOPP)  tobacco films, coated films and color printing products, while the advanced film segment includes only anti-counterfeiting films.

The following tables summarize the Company’s segment information for the three months ended March 31, 2011 and 2010:

   
Three Months Ended March 31,
 
   
2011
   
2010
 
             
Revenues from unrelated entities
           
Flexible packaging
  $ 14,611,293     $ 9,501,451  
Advanced film
    1,295,552       2,085,268  
    $ 15,906,845     $ 11,586,719  
                 
Intersegment revenues
               
Flexible packaging
  $ 2,560,759     $ 6,666,222  
    $ 2,560,759     $ 6,666,222  
                 
Total Revenues
               
Flexible packaging
  $ 17,172,052     $ 16,167,673  
Advanced film
    1,295,552       2,085,268  
Less Intersegment revenues
    (2,560,759 )     (6,666,222 )
    $ 15,906,845     $ 11,586,719  
                 
Income (loss) from operations
               
Flexible packaging
  $ 1,219,200     $ 704,516  
Advanced film
    81,673       393,080  
Holding Company
    (95,481 )     (55,485 )
    $ 1,205,392     $ 1,042,111  
                 
Interest income
               
Flexible packaging
  $ 4,119     $ 1,332  
Advanced film
    265       743  
Holding Company
    1,889       211  
    $ 6,273     $ 2,286  
                 
Interest Expense
               
Flexible packaging
  $ 131,029     $ 35,985  
Advanced film
    11,922       6,844  
    $ 142,951     $ 42,829  
                 
Income tax expense (benefit)
               
Flexible packaging
  $ 198,098     $ 101,547  
Advanced film
    12,738       56,658  
    $ 210,836     $ 158,205  
                 
Net Income (loss)
               
Flexible packaging
  $ 946,254     $ 577,828  
Advanced film
    152,392       399,659  
Holding Company
    (93,642 )     (55,394 )
    $ 1,005,004     $ 922,093  
                 
Provision for depreciation
               
Flexible packaging
  $ 417,085     $ 326,947  
Advanced film
    101,377       68,970  
    $ 518,462     $ 395,917  
 
 
17

 
 
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011 AND 2010
(unaudited)
 
Note 14 - Geographical Sales and Revenue by Product Type

The geographical distribution of Shiner’s revenue for the three months ended March 31, 2011 and 2010 is as follows:

   
Three Months Ended March 31,
 
Geographical Areas
 
2011
   
2010
 
             
Chinese Main Land
  $ 13,084,399     $ 9,214,994  
Asia (outside Mainland China)
    1,227,574       1,344,543  
Middle East
    575,093       315,461  
Australia
    416,298       431,984  
North America
    601,418       183,193  
South America
    2,063       -  
Europe
    -       96,544  
    $ 15,906,845     $ 11,586,719  
 
 
18

 
 
SHINER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011 AND 2010
(unaudited)

The Company’s revenue by product type for the three months ended March 31, 2011 and 2010 is as follows:

   
Three Months Ended March 31,
 
Revenue by Product Type
 
2011
   
2010
 
             
BOPP Tobacco Film
  $ 8,035,528     $ 4,140,101  
Coated Film
    4,916,372       4,674,099  
Anit-Counterfeit
    1,298,771       2,085,268  
Color Printing
    1,656,174       687,251  
    $ 15,906,845     $ 11,586,719  

Note 15 – Subsequent Events

The Company has evaluated all subsequent events that occurred up to the time of the Company's issuance of its financial statements.
 
 
19

 
 
CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes 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 (the “Exchange Act”).  We have based these forward-looking statements on our current expectations and projections about future events.  These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements.  In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” anticipate,” believe,” estimate,” continue,” or the negative of such terms or other similar expressions.  Factors that might cause or contribute to such a discrepancy include, but are not limited to, those listed under the heading “Risk Factors” and those listed in our other SEC filings.  The following discussion should be read in conjunction with our Financial Statements and related notes thereto included elsewhere in this Quarterly Report. Throughout this Quarterly Report we will refer to Shiner International, Inc., together with its subsidiaries, as “Shiner,” the “Company,” “we,” “us,” and “our.

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a Nevada corporation engaged in the packaging and anti-counterfeit plastic film business in the People's Republic of China ("China") through our operating subsidiaries. We were incorporated on November 12, 2003 in Nevada.  As a result of a share exchange transaction in 2007, we changed our name to Shiner International, Inc. on July 24, 2007.  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. Our website is http: www.shinerinc.com.

Our primary business consists of the, manufacture and distribution of technology driven advanced packaging film products in two business segments – “flexible packaging material” and “advanced film.”  Our flexible packaging material segment includes coated film, tobacco film and color printed products while our advanced film segment currently includes high-tech anti-counterfeit laser holographic film. We anticipate that this segment will grow to encompass other products created for specialty niche purposes and developed using our proprietary material science technologies and intellectual property.  In the first quarter of 2011, sales of our flexible packaging materials accounted for 92% of our revenue and sales of our advanced film accounted for 8%.
 
All of our operations are based in China and each of our subsidiaries was formed under the laws of China. We currently conduct our business through Hainan Shiner Industrial Co., Ltd. (“Shiner Industrial”), which was incorporated on May 21, 2003 and is headquartered in Haikou, Hainan Province, and Zhuhai Huanuo Packaging Material Co., Ltd. (“Zhuhai”), which was incorporated on December 25, 2006 and is headquartered in Zhuhai, Guangdong Province.  Shiner Industrial and Zhuhai currently produce all of our flexible packaging material and specialty films.  Our color printing operation is carried out by Shiner Industrial.

In late 2009, in an effort to improve efficiencies, reduce expenses and take advantage of favorable tax treatment, we consolidated the operations that were previously carried on by three of our subsidiaries - Shiner Industrial, Hainan Shiny-day Color Printing Packaging Co., Ltd. (“Shiny-day”) and Hainan Modern Hi-Tech Industrial Co., Ltd. (“Hainan Hi-Tech”) – into Shiner International.  Shiny-day and Hainan Hi-Tech are currently inactive subsidiaries of the Company.

On September 20, 2010, we commenced operations of Shanghai Juneng Functional Film Company, Ltd., a majority-owned subsidiary organized under the laws of China (“Shanghai Juneng”). We own 70% of Shanghai Juneng and Shanghai Shifu Film Material, Co., Ltd. (‘Shanghai Shifu”) owns the remaining 30%. The general manager of Shanghai Juneng reports directly to our Chief Executive Officer.  Shanghai Juneng is focused on pursuing sales opportunities among the domestic food safety packaging markets and targets China’s leading food producers.
 
 
20

 
 
We are a manufacturer of flexible packaging and advanced film products, selling to customers throughout China, Asia, Australasia, 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. The Ministry of Science and Technology of China has certified Shiner Industrial, one of our subsidiaries, as a Nationally-Focused Advanced High Technology Enterprise under the State Torch Program, which promotes the development and application of science- and technology-focused businesses in China.
 
We hold 16 patents and have 10 patent applications pending that relate to certain of our products and manufacturing processes that have been issued by the State Intellectual Property Office of China.  These are discussed in greater detail under the heading “Intellectual Property” on page 10 of our Annual Report on Form 10-K/A for the year ended December 31, 2010.  Although our patents and processes provide us with a competitive advantage, the loss of any single patent would not have a material adverse effect on our business as a whole.
 
Our current production capacity consists of: ten flexible packaging material production lines with an overall capacity of more than 25,500 metric tons per year and four advanced film lines with a total capacity of 2,500 metric tons a year.
 
Results of Operations

Three months ended March 31, 2011 compared to the three months ended March 31, 2010

   
For the Three Months Ended March 31,
   
 $
   
 %
 
   
2011
   
2010
   
Change
   
Change
 
Revenues
  $ 15,906,845     $ 11,586,719     $ 4,320,126       37.3 %
Cost of goods sold
    13,539,738       9,699,466       3,840,272       39.6 %
Gross profit
    2,367,107       1,887,253       479,854       25.4 %
Selling, general and administratrive expenses
    1,161,715       845,142       316,573       37.5 %
Interest expense, net of interest income
    136,678       40,543       96,135       237.1 %
Other income, net
    194,611       86,191       108,420       125.8 %
Exchange loss
    (55,795 )     (7,461 )     (48,334 )     647.8 %
Income tax expense
    210,836       158,205       52,631       33.3 %
Net income attributed to Shiner
  $ 1,005,004     $ 922,093     $ 82,911       9.0 %

Revenues

Revenues for the three months ended March 31, 2011 increased 37.3%, or $4.3 million, to $15.9 million compared to $11.6 million for the same 2010 period. Revenue from flexible packaging materials increased by 53.8%, from $9.5 million in the first quarter of 2010 to $14.6 million in the first quarter of 2011. Advanced film sales decreased 37.7% to $1.3 million, down from $2.1 million at March 31, 2010. The revenue was $15.9 million for the three months ended March 31, 2011 and $11.6 million for the same 2010 period. This increase was mainly a result of increased sales across the flexible packaging materials.  Biaxially Oriented Polypropylene (BOPP) tobacco revenue increased 94.1%, or $3.9 million, in the three months ended March 31, 2011 to $8.0 million from $4.1 million in the same 2010 period. Coated film revenue increased 5.2%, or $0.2 million, to $4.9 million in the three months ended March 31, 2011 from $4.7 million in the first quarter of 2010. Our anti-counterfeit revenue decreased 37.7%, or $0.8 million, to $1.3 million in the three months ended March 31, 2011 from $2.1 million in the first quarter of 2010. Our color printing segment revenues increased 141%, or $0.97 million, to $1.7 million in the three months ended March 31, 2011 compared to $.7 million in the first quarter of 2010.

The increase in revenue was primarily caused by two factors: an increase in domestic product volume and an improvement in our sales prices.  Approximately 82%, or $13.1 million, of our total sales in the three months ended March 31, 2011 were made domestically to Chinese companies.  In the first quarter of 2010, approximately 79%, or $9.2 million, of our total sales were made domestically.  The Company provides coated film to its largest customer who manufactures snack cakes and its remaining top 3 customers are tobacco manufacturers who use our BOPP tobacco film.

Internationally, we sell only three lines of products: anti-counterfeit film, coated film, and color printing.  International sales for the three months ended March 31, 2011 were $2.8 million, or 18%, of our revenues in 2011 and were a $0.5 million, or 19.2%, increase from the $2.4 million in international sales in the first quarter of 2010. The increase was not significant. All international sales are indirect using a network of distributors and converters.

 
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Our five largest customers accounted for 9%, 7%, 5%, 5% and 3% of our revenue for the three months ended March 31, 2011 and 13%, 8%, 7%, 5% and 5% of our revenue for the three months ended March 31, 2010.

Cost of Goods Sold

Cost of goods sold increased $3.8 million, or 39.6%, from $9.7 million for the three months ended March 31, 2010 to $13.5 million in 2011. The cost of goods sold represented 85.1% and 84% of our total revenue in the first quarters of 2011 and 2010, respectively.  The principal cost component of our cost of goods sold is our raw materials cost which includes the cost of petroleum. The increase in cost of goods sold year to year was primarily caused by an increase in raw material costs due to petroleum price fluctuations.  We estimate that an increase in the price of crude oil of $10 per barrel would cause our raw material cost to increase by approximately 6%. There has been some increase in the cost of our raw materials as a result of an increase in crude oil prices throughout the year.  There is not a significant difference in the cost of goods sold percentages among our different product lines and therefore, any increase or decrease in our raw material costs has similar a impact to our different product lines’ profitability.

The packaging industry requirements for the food industry mandate the use of non-benzene based products. In an effort to be environmentally friendly and to improve work conditions in our factory, Shiner proactively switched to non-benzene based ink products in a corporate effort to be green. This change also positively contributed to our compliance with the FSL, as our food packaging operations are conducted in the same facility.  At the time of the change, we received a favorable response from all of our customers.
 
The percentage increase in our cost of goods sold in the first quarter of 2011 was positively influenced by the following events:
 
 
·
The increase in raw material costs due to petroleum price fluctuations; and
 
 
·
The added depreciation of the new property which amortized into the cost of goods sold.

Gross Profit

Our gross profit increased $.5 million, or 25.4%, to 2.4 million for the first quarter of 2011 from $1.9 million for the three months ended March 31, 2010. The increase in gross profit was largely due to the increase in revenue from flexible packaging materials. The Company experienced a gross margin of 14.9% for the first quarter of 2011, compared to 16.3% for the same period in 2010.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses increased by 37.5%, or $0.3 million, to $1.2 million for the three months ended March 31, 2011 compared to $0.8 million in the 2010 period. General and administrative expenses include rent, management and staff salaries, insurance, marketing, accounting, legal, and research and development expenses.  Although we have strict standards to control our general and administrative expenses, we have increased our research and development expenditures in the last year.  Research and development expenses increased $0.06 million or 36.4%, to $.2 million for three months ended March 31 2011, compared to $0.14 million in 2010.

Interest Expense, net

Interest expense, net for the three months ended March 31, 2011 increased by 237.1%, or $96,135, to $136,678 compared to $40,543 in the 2010 period. We have obtained additional short-term and long-term loans in the three months ended March 31, 2011 compared with the comparable period in 2010.

Other Income

Other income increased by $108,420, or 125.8%, to $194,611 for the three months ended March 31, 2011 compared to $86,191 in 2010.  The increase is related to the grant which the Chinese government has given to the Company to support the high-tech enterprise.
 
 
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Income Tax Expense

For the three months ended March 31, 2011, we recorded a tax provision of $210,836 compared to $158,205 in the first quarter of 2010.  Our effective tax rates for the three months ended March 31, 2011 and 2010 were 19% and 15%, respectively.

Net Income

Net income attributed to Shiner increased by $82,911, or 9%, to $1.0 million for the three months ended March 31, 2011 compared to $0.9 million in the same period of 2010.  The increase in the net income attributed to Shiner was due to the increase in revenue from flexible packaging materials.

Off-Balance Sheet Arrangements

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

Liquidity and Capital Resources

Cash Flows

At March 31, 2011, we had $3.0 million in cash and cash equivalents on hand. 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. As of March 31, 2011, we had eight short-term and long-term loans outstanding for a total of $16.7 million, with interest rates of 5.6% to 6.6%.  The loans have due dates on various dates between June 2011 through March 2018 and are collateralized by buildings and equipment.  As of March 31, 2011, we had working capital of $13.6 million, an increase of $0.7 million from December 31, 2010. We anticipate we will have adequate working capital to fund our operations and growth in the foreseeable future.

Net cash flows used in operating activities for the three months ended March 31, 2011 was $5.4 million, which was comprised primarily of net income of $1.0 million, depreciation expense of $.5 million, an increase in inventory and advance to suppliers of $1.5 million and $4.5 million, respectively, and a decrease in accounts payable of $2.3 million, offset by increases in accounts receivable of $0.6 million and unearned revenue of $0.8 million.
 
We used $10.0 million from our investing activities during the three months ended March 31, 2011 primarily for the acquisition of property and equipment including construction in progress. We are building a new BOPP tobacco film production line to be completed in the second quarter of 2011. The new line will be a BOPP film production line in a fully automated plant equipped with state-of-the-art production machinery. The total cost of this new facility is expected to be approximately $13.2 million, of which approximately $2 million in costs are required to complete the facility. We have a 70 million RMB credit facility that we can draw down upon to pay for the cost of this property and equipment   (see discussion under “Liabilities” below).

Net cash provided by financing activities was $9.8 million from the issuance of short and long-term loans.  $6.8 million was paid to terminate short term loans offset by $16.6 million provided by the issuance of short and long term loans.

Assets

As of March 31, 2011, our accounts receivable decreased by $0.5 million compared with the balance as of December 31, 2010. The decrease in accounts receivable during the three months ended March 31, 2011 was due primarily to an increase of the collection of accounts receivable.  We intend to continue our efforts to maintain accounts receivable at reasonable levels in relation to our sales. As of March 31, 2011, our property and equipment increased by $8.3 million compared with the balance as of December 31, 2010. The increase in the property and equipment during the three months ended March 31, 2011 was due primarily to the completion of the first phase of the new facility.
 
 
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Liabilities

Our accounts payable decreased by $2.3 million during the three months ended March 31, 2011 primarily due to the purchase of fewer materials as the construction of our new plant in the Shiziling industrial park is nearing completion..  

We have entered into a formal agreement with a vendor whereby we agreed to purchase new equipment for approximately $13.2 million.  We already paid approximately $1.3 million toward the purchase of this equipment and have issued a letter of credit for the remaining amount.  The equipment is expected to be installed in the second quarter of 2011, and be operational in the third quarter of 2011.

On August 2, 2010, Hainan Shiner Industrial Co., Ltd. (“Hainan Shiner”), our wholly owned subsidiary, entered into a credit facility with the Hainan Branch of the Bank of China.  The credit facility is comprised of a seven-year 70 million RMB, or approximately $10.3 million, secured revolving credit facility.  Hainan Shiner may not make any draw downs under this facility after December 31, 2011.  On each of January 25, 2011, February 12, 2011, February 17, 2011, February 21, 2011, and March 23, 2011, Hainan Shiner made withdrawals on the credit facility of approximately $2.5 million, $2.6 million, $2.2 million, $1.2 million, and approximately $408,000, respectively.  Hainan Shiner may only use the loan proceeds to improve the technology of its BOPP film and to purchase certain equipment necessary for these improvements.  Proceeds under the facility not used for these purposes may be subject to a misappropriation penalty interest rate of 100% of the current interest rate on the loan.
 
The initial interest rate on each withdrawal from the facility will be the 5-year benchmark lending rate announced by the People’s Bank of China on the date of such withdrawal, and is subject to adjustment every 12 months based upon the this benchmark.  Additional interest will be paid on an overdue loan under this credit facility of 50% of the current interest rate on the loan. Hainan Shiner and certain of its affiliates, including the Company, have provided guarantees and certain land, buildings, and property as collateral under this facility.
 
The credit facility includes 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.

We intend to meet our liquidity requirements, including capital expenditures related to the purchase of equipment, purchase of raw materials, and the expansion of our business, through cash flow provided by operations, the forgoing credit facility, and funds raised through private placement offerings of our securities.  Nothing set forth in this Quarterly Report on Form 10-Q shall be deemed an offer to sell any security nor a solicitation of an offer to purchase any security.

The majority of our revenues and expenses were denominated primarily in RMB, the currency of the PRC.

There is no assurance that exchange rates between the RMB and the USD will remain stable. We do not engage in currency hedging. Inflation has not had a material impact on our business.

Critical Accounting Policies

Accounts Receivable

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

Advances to Suppliers

The Company makes advances to certain suppliers for the purchase of its materials. The advances to suppliers are interest free and unsecured.
 
 
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Inventory

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.

Revenue Recognition

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

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

Sales and purchases are recorded net of VAT collected and paid. VAT taxes are not affected by the income tax holiday.
 
Sales returns and allowances was $0 for the three months ended March 31, 2011 and 2010. The Company does not provide unconditional right of return, price protection or any other concessions to its dealers or other customers.

Stock-Based Compensation

The Company records stock-based compensation in accordance with ASC Topic 718, “Compensation – Stock Compensation.”  ASC 718 requires companies to measure compensation cost for stock-based employee compensation at fair value at the grant date and recognize the expense over the employee’s requisite service period. The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees. There were 60,000 options outstanding as of March 31, 2011.

Income Taxes

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

Under ASC 740, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is 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. The adoption had no effect on the Company’s consolidated financial statements.
 
 
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Basic and Diluted Earnings Per Share

Earnings per share is calculated in accordance with the ASC Topic 260, “Earnings Per Share.”  Basic earnings per share is based upon the weighted average number of common shares outstanding.  Diluted earnings per share 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 521,664 warrants outstanding as of March 31, 2011. There were 190,000 options and 970,050 warrants outstanding as of March 31, 2010.  The following is a reconciliation of the number of shares (denominator) used in the basic and diluted earnings per share computations for the three months ended March 31, 2011 and 2010:

   
Three Months Ended
   
Three Months Ended
 
   
March 31, 2011
   
March 31, 2010
 
         
Per Share
         
Per Share
 
   
Shares
   
Amount
   
Shares
   
Amount
 
Basic earnings per share
    27,541,491     $ 0.04       24,588,155     $ 0.04  
Effect of dilutive stock options
                               
and warrants
    5,184       -       10,203       -  
Diluted earnings per share
    27,546,675     $ 0.04       24,598,358     $ 0.04  

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2010-06, Improving Disclosures about Fair Value Measurements (“ASU No. 2010-06”). The new standard addresses, among other things, guidance regarding activity in Level 3 fair value measurements. Portions of ASU No. 2010-06 that relate to the Level 3 activity disclosures are effective for the annual reporting period beginning after December 15, 2010. The Company will provide the required disclosures beginning with the Company’s Annual Report on Form 10-K for the year ending December 31, 2011. Based on the initial evaluation, the Company does not anticipate a material impact to the Company’s financial position, results of operations or cash flows as a result of this change.

Item 3.          Quantitative and Qualitative Disclosures About Market Risk

Not required

Item 4.          Controls and Procedures
 
The Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in the Exchange Act Rule 13a-15(e)) as of the end of the period covered by this quarterly report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.
 
There was no change in the Company’s internal control over financial reporting that occurred during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II.          OTHER INFORMATION

Item 1.           Legal Proceedings

There have been no material changes from the disclosure provided in Part 1, Item 3 of our Annual Report on Form 10-K/A for the year ended December 31, 2010.

Item 1A.        Risk Factors

There have been no material changes from the disclosure provided in Part 1, Item 1A of our Annual Report on Form 10-K/A for the year ended December 31, 2010.
 
 
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Item 2.           Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.           Defaults Upon Senior Securities

None.

Item 4.           (Removed and Reserved)

Item 5.           Other Information

None.
 
 
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Item 6.           Exhibits

(a)
Exhibits

Exhibit Number
 
Description of Exhibit
2.3 
  Share Transfer Agreement, dated as of May 2, 2011, by and between Fu Zhiyong and Shiner International, Inc.*
     
3.1  
 
Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.3 of Shiner's Current Report on Form 8-K (Commission File No. 001-33960) filed with the SEC on July 27, 2007).
   
   
3.2  
 
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 of Shiner's Current Report on Form 8-K (Commission File No. 001-33960) filed with the SEC on July 27, 2007).
   
   
10.15  
 
Amendment to Securities Purchase Agreement, dated as of January 10, 2011, between the Company and the Investors thereto (incorporated by reference to Exhibit 10.15 of Shiner's Current Report on Form 8-K (Commission File No. 001-33960) filed with the SEC on January 14, 2011).
   
   
31.1
 
Certification of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
     
31.2
 
Certification of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
     
32.1
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).
     
32.2
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).
 
*
Schedules omitted pursuant to Item 601(b)(2) of Regulation S-K.  The Company agrees to furnish a supplemental copy of any omitted Schedule to the Securities and Exchange Commission upon request.
 
 
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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.
   
June 23, 2011
By: /s/ Qingtao Xing
 
Name: Qingtao Xing
 
Title: President and Chief Executive Officer
 
 
Shiner International, Inc.
   
June 23, 2011
By: /s/ Xuezhu Xu
 
Name: Xuezhu Xu
 
Title: Interim Chief  Financial Officer
 
 
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EXHIBIT INDEX

Exhibit Number
 
Description of Exhibit
2.3
 
Share Transfer Agreement, dated as of May 2, 2011, by and between Fu Zhiyong and Shiner International, Inc.*
     
31.1
 
Certification of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
     
31.2
 
Certification of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
     
32.1
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).
     
32.2
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).
 
*
Schedules omitted pursuant to Item 601(b)(2) of Regulation S-K.  The Company agrees to furnish a supplemental copy of any omitted Schedule to the Securities and Exchange Commission upon request.
 
 
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