SHINER INTERNATIONAL, INC. – 10-K/A – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Note

In prior years, we recognized two business segments (packaging film and color printing) and four product lines (BOPP tobacco film, coated film, anti-counterfeit film and color printing) for reporting and disclosure purposes: Management has determined that this no longer accurately reflects our business and our future growth and, as a result, we have reclassified our business segments based on our four product lines: BOPP tobacco film, coated film, color printing and advanced film (anti-counterfeit film). As a result of this reclassification, we now recognize four business segments. The reclassification reflects primarily revenue and expenses among business segments. None of the changes impacts our previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share.

Our advanced film segment currently includes out high-tech anti-counterfeiting film. We anticipate that the advanced film segment will grow to encompass other products that are created for specialty niche purposes and are developed using our proprietary material science technologies and intellectual property.

Overview

We are a Nevada corporation engaged in the packaging and anti-counterfeit plastic film business in China through our operating subsidiaries. Our primary business consists of the R&D, manufacture and distribution of technology driven advanced packaging film products. Our products include coated film, BOPP tobacco film, color printed packaging materials and high-tech anti-counterfeit laser holographic film. 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 Shiner Industrial and Zhuhai. In 2009, Shiner Industrial acquired all of the assets of Shiny-day and Hainan Hi-Tech in an effort to improve efficiencies, reduce expenses and take advantage of favorable tax treatment. On September 20, 2010, Shanghai Juneng commenced operations. Shanghai Juneng focuses on pursuing sales opportunities for us among the domestic food safety packaging market and target China's leading food producers.

We are a principal manufacturer of flexible packaging material and advanced film, 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. 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.

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Results of Operations

Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009

                                         For the Year Ended                                            December 31,                   $                %                                        2010             2009            Change          Change Revenues                           $ 58,165,410     $ 34,516,827     $ 23,648,583            68.5 % Cost of goods sold                   48,361,075       29,925,504       18,435,571            61.6 % Gross profit                          9,804,335        4,591,323        5,213,012           113.5 % Selling, general and                  5,176,194        4,784,457          391,737             8.2 % administrative expenses Interest expense, net of                217,849          133,163           84,686            63.6 % interest income Other income, net                       649,800          287,673          362,127           125.9 % Exchange gain (loss)                    (93,170 )         51,304         (144,474 )            ** Income tax expense (benefit)            818,769          112,481          706,288              ** Net income (loss)                  $  4,148,153     $    (99,801 )   $  4,247,954              **   

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Revenues

Revenues for the year ended December 31, 2010 increased 68.5%, or $23.6 million, to $58.2 million compared to $34.5 million in 2009. Revenue from BOPP tobacco film increased by 21.7%, from $13.8 million in 2009 to $16.8 million in 2010. The increase in revenue of BOPP tobacco film is due to a 19.7% increase in sale volume compared to the same period in 2009 and only a slight increase in price. Revenue from coated film increased by 129.2%, from $10.2 million in 2009 to $23.5 million in 2010. The increase in revenue of coated film is due to a 175.6% increase in the domestic sale volume and the 14% increase in the average domestic sales price. Revenue from color printing product sales increased by 40%, from $2.7 million in 2009 to $3.7 million in 2010. The increase in revenue of color printing products is mainly due to an increase in our customer base.

Advanced film (anti-counterfeiting) sales increased 81.6% to $14.2 million, up from $7.8 million in 2009. The increase in advanced film revenue is due to a 230.8% increase in the sales volume and the 36.2% increase in the average sales price. The revenue from goods sold was $58.2 million for the year ended December 31, 2010 and $34.5 million in 2009. This increase was mainly a result of increased sales across all of our product lines.

The increase in revenue was primarily caused by two factors: an increase in domestic product volume and an improvement in our sales prices. Approximately 81.0%, or $47.2 million, of our total sales in 2010 were made domestically to Chinese companies. In 2009, approximately 70%, or $24.1 million, of our total sales were made domestically. Our largest customer is a manufacturer of snack cakes and our next three largest customers are tobacco manufacturers who use our BOPP tobacco film.

International sales of our products for the year ended December 31, 2010 were $11.0 million, or 19%, of our total revenues in 2010 and represented a $0.6 million or 5.6% increase from the $10.4 million in international sales in 2009. The decrease was not significant. All international sales are indirect using a network of distributors and converters.

Our five largest customers accounted for 16%, 10%, 8%, 7% and 4% of our revenue for the year ended December 31, 2010 and 9%, 9%, 7%, 7% and 6% of our revenue for the year ended December 31, 2009.

Cost of Goods Sold

Cost of goods sold increased $18.4 million, or 61.6%, from $29.9 million for the year ended December 31, 2009 to $48.3 million in 2010. The cost of goods sold represented 83.1% and 86.7% of our total revenue in 2010 and 2009, 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 impact to our different product lines' profitability.

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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. We had a favorable response from all of our then customers.

The percentage decrease in our cost of goods sold in 2010 was positively influenced by the following events:

   · An improving global economy following the economic crisis, which positively     impacted the various industries we serve;         · Improved production efficiency as we strengthened our R&D capabilities;      · Changes in our product mix - we optimized our product portfolio and increased     our focus on products with high gross profit and sales volume; and                  · Lower overhead rates from higher capacity utilization.   

Gross Profit

Our gross profit for the year ended December 31, 2010 was $9.8 million, a gross margin of 16.9%, an increase of 3.6% from the gross margin of 13.3% for 2009. The increase in gross margin was a consequence of a decrease in overhead unit rates as a result of increased production volume.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses increased by 8.2%, or $0.4 million, to $5.2 million for the year ended December 31, 2010 compared to $4.8 million in 2009. General and administrative expenses include rent, management and staff salaries, insurance, marketing, accounting, legal, and R&D expenses. Although we have strict standards to control our general and administrative expenses, we have increased our R&D expenditures in the last year. Research and development expenses increased $1.1 million or 310.0%, to $1.4 million for year ended December 31 2010, from $0.35 million in 2009.

Interest Expense, net

Interest expense, net for the year ended December 31, 2010 increased by 63.6%, or $84,686, to $217,849 compared to $133,163 in 2009. We have obtained additional short-term loans in 2010 compared with 2009, so our interest expense increased.

Other Income

Other income increased by $362,127 or 125.9% to $649,800 for the year ended December 31, 2010 compared to $287,673 in 2009. The increase is related to the $73,345 quarterly payment we began receiving during 2010 from our former landlord for vacating the leased space at the landlord's request. We have received approximately $293,000 in 2010.

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Income Tax Expense

For the year ended December 31, 2010, we recorded a tax provision of $818,769 compared to $112,481 in 2009. Our effective tax rates for the years ended December 31, 2010 and 2009 were 16% and 887%, respectively. During 2009, one of our subsidiaries made a profit and had a tax expense of 15% of net income before taxes. The other subsidiaries had losses which resulted in an overall loss before taxes. Another subsidiary had a tax benefit. As losses from one subsidiary cannot be used to offset gains from another subsidiary, we had an overall tax expense for the year ended December 31, 2009 even though as a company, we had a very small income before income taxes.

Net Income

The increase in our net income for the year ended December 31, 2010 compared to a net loss in 2009 was the result of increased sales, and increased margins on those sales resulting from declining raw material prices, the application of lower overhead rates due to the increase in capacity utilization and a higher realized sales price.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements during the year ended December 31, 2010 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 December 31, 2010, we had $8.6 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 December 31, 2010, we had six short-term loans outstanding for a total of $6.8 million, with interest rates of 5.6% to 5.8%. These loans mature on various dates from May 2011 through December 2011 and are collateralized by buildings and equipment. As of December 31, 2010, we had working capital of $12.8 million, an increase of $1.5 million from December 31, 2009. We anticipate we will have adequate working capital to fund our operations and growth in the foreseeable future.

Net cash flows provided by operating activities for the year ended December 31, 2010 was $6.0 million, which was comprised primarily of net income of $4.1 million, depreciation expense of $1.6 million, and an increase in accounts payable of $2.5 million, offset by increases in accounts receivable of $3.3 million.

We used $6.8 million from our investing activities during the year ended December 31, 2010 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 $12 million. In 2010 we expended approximately $2.3 million on this facility and expect to incur the balance in 2011. We have a 70 million RMB credit facility that we can draw down upon to pay for the cost of the building (see discussion under "liabilities" below).

Net cash provided by financing activities was $6.3 million from the issuance of short-term loans and the proceeds from the sale of common stock.

Assets

As of December 31, 2010, our accounts receivable increased by $3.6 million compared with the balance as of December 31, 2009. The increase in accounts receivable during the year ended December 31, 2010 was due primarily to increased sales. We intend to continue our efforts to maintain accounts receivable at reasonable levels in relation to our sales.

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Liabilities

Our accounts payable increased by $2.6 million during the year ended December 31, 2010. The increase in accounts payable during the year ended December 31, 2010 was due primarily to increased sales. As the market demand increased, we purchased more raw materials for production.

We have entered into a formal agreement with a vendor whereby we agreed to purchase new equipment at the cost of 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 delivered and installed in the first quarter of 2011, and be operational in the second quarter of 2011.

On August 2, 2010, Shiner Industrial entered into a credit facility with the Hainan Branch of the Bank of China. The credit facility is comprised of seven-year 70 million RMB, or approximately $10.3 million, secured revolving credit facility. Shiner Industrial may not draw down under this facility after December 31, 2011. At December 31, 2010, no draw downs from this credit facility had been made. Shiner Industrial 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 is the above 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. Shiner Industrial 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 Shiner Industrial from making distributions to its sole stockholder 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.

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.

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Inventory

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

Revenue Recognition

The Company's revenue recognition policies are in compliance with SEC Staff Accounting Bulletin ("SAB") 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.

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 December 31, 2010.

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 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 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 December 31, 2010. All options and warrants were excluded from the diluted loss per share calculation due to their anti-dilutive effect.

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Recent Accounting Pronouncements

In August 2009, the FASB issued Accounting Standards Update 2009-05, Fair Value Measurements and Disclosures (ASC 820) Measuring Liabilities at Fair Value. This guidance clarifies that in circumstances in which a quoted price in an active market for an identical liability is not available, a reporting entity is required to measure fair value of such liability using one or more of the of the techniques prescribed by the update. This guidance is effective for the first reporting period beginning after issuance, which is the period ending December 31, 2009. The impact of the adoption of this guidance was not significant to our consolidated financial statements.

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, we do not anticipate a material impact to our financial position, results of operations or cash flows as a result of this change.

On March 5, 2010, the FASB issued ASU No. 2010-11 Derivatives and Hedging Topic 815 "Scope Exception Related to Embedded Credit Derivatives." This ASU clarifies the guidance within the derivative literature that exempts certain credit related features from analysis as potential embedded derivatives requiring separate accounting. The ASU specifies that an embedded credit derivative feature related to the transfer of credit risk that is only in the form of subordination of one financial instrument to another is not subject to bifurcation from a host contract under ASC 815-15-25, " Derivatives and Hedging - Embedded Derivatives - Recognition. " All other embedded credit derivative features should be analyzed to determine whether their economic characteristics and risks are "clearly and closely related" to the economic characteristics and risks of the host contract and whether bifurcation is required. The ASU became effective for the Company on July 1, 2010. The adoption of this ASU did not have an impact on our consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This update amends codification Topic 310 on receivables to improve the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. This guidance is being phased in, with the new disclosure requirements for period end balances effective as of December 31, 2010, and the new disclosure requirements for activity during the reporting period are effective March 31, 2011. The troubled debt restructuring disclosures in this ASU have been delayed by ASU 2011-01 Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20 , which was issued in January 2011.