XFRA:0CH China Shengda Packaging Group Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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

FORM 10−Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2012

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________to _____________

Commission File Number: 001-34997

CHINA SHENGDA PACKAGING GROUP INC.
(Exact Name of Registrant as Specified in Its Charter)

Nevada 26-1559574
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)  

No. 2 Beitang Road
Xiaoshan Economic and Technological Development Zone
Hangzhou, Zhejiang Province 311215
People’s Republic of China
(Address of Principal Executive Offices, Zip Code)

(86) 571-82838805
(Registrant’s Telephone Number, Including Area Code)

_____________________________________________________
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]          No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X]          No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer (Do not check if a smaller reporting company) [  ] Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ]          No [X]

The number of shares outstanding of each of the issuer’s classes of common stock, as of May 8, 2012 is as follows:

                     Class of Securities                                        Shares Outstanding                  
Common Stock, $0.001 par value 38,790,811



CHINA SHENGDA PACKAGING GROUP INC.

Quarterly Report on Form 10-Q
Three Months Ended March 31, 2012

TABLE OF CONTENTS

 PART I 
 FINANCIAL INFORMATION 
     
Item 1. Financial Statements. 1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 3
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 11
Item 4. Controls and Procedures. 11
 PART II 
 OTHER INFORMATION 
     
Item 1. Legal Proceedings. 11
Item 1A. Risk Factors. 11
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 11
Item 3. Defaults Upon Senior Securities. 12
Item 4. Mine Safety Disclosures. 12
Item 5. Other Information. 12
Item 6. Exhibits. 12

i


PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

CHINA SHENGDA PACKAGING GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Contents Page(s)
Consolidated Balance Sheets F-1
Consolidated Statements of Income and Comprehensive Income F-2
Consolidated Statements of Cash Flows F-3
Notes to Consolidated Financial Statements F-4~F-22

1


 

CHINA SHENGDA PACKAGING GROUP, INC.

Consolidated Financial Statements

March 31, 2012
(Unaudited)




CHINA SHENGDA PACKAGING GROUP INC. AND SUBSIDIARIES   
CONSOLIDATED BALANCE SHEETS   
(Amounts in US$)    
             
    March 31,     December 31,  
    2012     2011  

 

  (Unaudited)        

ASSETS

           

   Current assets

           

         Cash and cash equivalents

$  19,709,349   $  19,294,089  

         Restricted cash

  12,813,559     7,851,387  

         Accounts and notes receivable, net

  32,542,707     36,835,095  

         Inventories

  20,061,908     19,449,954  

         Prepayments and other receivables

  3,160,107     929,126  

         Amount due from related parties

  152,927     133,608  

   Total current assets

  88,440,557     84,493,259  

 

           

   Non-current assets

           

         Property, plant and equipment, net

  34,081,430     34,573,246  

         Prepayment for land use right to related party

  11,881,753     11,805,000  

         Prepayment for construction in progress

  7,918,951     5,424,412  

         Customer relationship, net

  434,079     550,316  

         Deferred tax assets

  396,072     409,845  

         Goodwill

  175,632     174,497  

Total assets

$  143,328,474   $  137,430,575  

 

           

LIABILITIES AND EQUITY

           

   Current liabilities

           

         Accounts and notes payable

$  22,115,802   $  18,750,719  

         Amounts due to related party

  190,514     137,689  

         Accrued expenses and other payables

  2,203,324     1,651,283  

         Taxes payable

  1,558,681     3,358,902  

         Short-term loans

  7,129,052     10,073,600  

   Total current liabilities

  33,197,373     33,972,193  

 

           

   Non-current liabilities

           

         Long-term loans

  9,000,000     4,500,000  

         Deferred tax liabilities

  108,520     137,579  

   Total liabilities

  42,305,893     38,609,772  

 

           

   Commitment and contingencies

  -     -  

   Equity

           

         Stockholders’ equity

           

         Common stock (US$0.001 par value, 190,000,000 shares 
authorized, 39,456,311 shares issued at March 31, 2012 
and December 31, 2011, 38,790,811 outstanding at
March 31, 2012 and December 31, 2011, respectively)

  39,456     39,456  

         Treasury stock (665,500 shares at March 31, 2012 and December 31, 2011)

  (729,444 )   (729,444 )

         Additional paid-in capital

  43,765,243     43,765,243  

         Appropriated retained earnings

  6,843,616     6,843,616  

         Unappropriated retained earnings

  41,978,984     40,438,219  

         Accumulated other comprehensive income

  8,920,814     8,258,441  

Total equtiy for stockholders of China Shengda Packaging

  100,818,669     98,615,531  

         Noncontrolling interest

  203,912     205,272  

Total equity

  101,022,581     98,820,803  

Total liabilities and equity

$  143,328,474   $  137,430,575  

See notes to the consolidated financial statements 

F-1


CHINA SHENGDA PACKAGING GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Amounts in US$)

    Three Months Ended March 31,  
    2012     2011  
    (Unaudited)     (Unaudited)  

Revenues

$  28,463,796   $  26,926,044  

Cost of goods sold

  23,012,197     19,849,744  

Gross profit

  5,451,599     7,076,300  

Operating expenses

           

   Selling expenses

  1,260,791     1,132,183  

   General and administrative expenses

  2,308,648     2,202,676  

 

  3,569,439     3,334,859  

Other income (expenses)

           

   Interest income

  77,338     124,533  

   Interest expense

  (202,258 )   (167,925 )

   Subsidy income

  61,770     422,959  

   Other

  34,415     -  

 

  (28,735 )   379,567  

 

           

Income before income tax expense and noncontrolling interest

  1,853,425     4,121,008  

 

           

Income tax expense

  313,999     676,601  

Net income

  1,539,426     3,444,407  

Less: net loss attributable to noncontrolling interest

  1,339     -  

Net income attributable to Company’s common stockholders

$  1,540,765   $  3,444,407  

 

           

Basic and diluted earnings per share

$  0.04   $  0.09  

Weighted-average number of shares outstanding

           

   - basic and diluted

  38,790,811     39,456,311  

 

           

Comprehensive income:

           

Net income

$  1,539,426   $  3,444,407  

   Foreign currency translation adjustment

  662,352     329,515  

Comprehensive income

  2,201,778     3,773,922  

Less: comprehensive loss attributable to noncontrolling interest

  1,360     -  

Net comprehensive income attributable to the Company’s common stockholders

$  2,203,138   $  3,773,922  

   See notes to the consolidated financial statements

F-2



CHINA SHENGDA PACKAGING GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in US$)

 

     

 

  Three Months Ended March 31,  

 

  2012     2011  

 

  (Unaudited)     (Unaudited)  

Cash flows from operating activities

           

Net income

$  1,539,426   $  3,444,407  

Adjustments to reconcile net income to net cash provided by operating activities:

       

   Depreciation and amortization expenses

  1,114,954     980,208  

   Deferred tax

  (13,547 )   (13,011 )

Change in operating assets and liabilities:

           

   Restricted cash

  (4,922,510 )   5,942,658  

   Accounts and notes receivable

  4,542,386     (1,906,313 )

   Inventories

  (486,621 )   (2,554,918 )

   Prepayments and other receivables

  (2,224,212 )   848,148  

   Accounts and notes payable

  3,250,690     (15,747,768 )

   Amount due to/from related parties

  38,299     (451,993 )

   Accrued expenses and other payables

  542,559     (440,988 )

   Tax payables

  (1,826,284 )   (771,473 )

   Net cash provided by (used in) operating activities

  1,555,140     (10,671,043 )

 

           

Cash flows from investing activities

           

   Purchase of property, plant and equipment

  (276,597 )   (2,015,289 )

   Prepayments for the construction in progress

  (2,464,972 )   -  

   Net cash used in investing activities

  (2,741,569 )   (2,015,289 )

 

           

Cash flows from financing activities

           

   Proceeds from borrowings

  7,692,176     14,030,000  

   Repayment of short-term loans

  (6,215,272 )   (14,030,000 )

   Net cash provided by financing activities

  1,476,904     -  

 

           

Effect of foreign currency exchange rate fluctuation on cash and cash equivalents

  124,785     111,960  

Net changes in cash and cash equivalents

  415,260     (12,574,372 )

Cash and cash equivalents, beginning of periods

  19,294,089     35,581,323  

Cash and cash equivalents, end of periods

$  19,709,349   $  23,006,951  

 

           

Cash paid during the periods for:

           

Interest paid

$  191,157   $  156,581  

Income taxes paid

$  96,273   $  1,395,562  

See notes to the consolidated financial statements

F-3


CHINA SHENGDA PACKAGING GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in US$)

1. PRINCIPAL ACTIVITIES AND ORGANIZATION

The consolidated financial statements include the financial statements of China Shengda Packaging Group Inc. (the “Company” or “China Shengda Packaging”) and its subsidiaries, Evercharm Holdings Limited (“Evercharm”), Zhejiang Great Shengda Packaging Co., Ltd (“Great Shengda”), Zhejiang Shengda Color Pre-printing Co. Ltd (“Shengda Color”), Hangzhou Shengming Paper Co., Ltd (“Hangzhou Shengming”), Suzhou Asian and American Paper Products Co., Ltd (“Suzhou AA”) and Jiangsu Shuangsheng Paper Technology Development CO., Ltd. (“Shuangsheng”). The Company and its subsidiaries are collectively referred to as the “Group”.

The Company, formly named as Healthplace Corporation, was incorporated in the State of Nevada on March 16, 2007 as a web-based service provider offering an online service where health practitioners could purchase products and services to improve their work and home lives, including books, CDs, clothing, and accessories geared towards the needs of these practitioners. However, it did not engage in any operations and was dormant from its inception until its reverse acquisition of Evercharm on April 8, 2010.

On April 8, 2010, the Company completed a reverse acquisition transaction through a share exchange with Evercharm and its sole shareholder, Shengda (Hangzhou) Holdings Limited (“Shengda Holdings”), whereby China Shengda Packaging acquired 100% of the issued and outstanding capital stock of Evercharm, in exchange for 27,600,000 shares of China Shengda Packaging’s common stock, which constituted 92% of its issued and outstanding shares on a fully-diluted basis of China Shengda Packaging immediately after the consummation of the reverse acquisition. As a result of the reverse acquisition, Evercharm became China Shengda Packaging’s wholly-owned subsidiary and Shengda Holdings, the former shareholder of Evercharm, became China Shengda Packaging’s controlling stockholder. The share exchange transaction with Evercharm was treated as a reverse acquisition, with Evercharm as the accounting acquirer and China Shengda Packaging as the acquired party.

On April 29, 2010, the Company completed a private placement of shares of its common stock with a group of accredited investors. Pursuant to a securities purchase agreement with the investors, the Company issued to the investors an aggregate of 1,456,311 shares at a price per share of US$3.43 for US$5 million. Net proceeds after deducting offering costs were approximately US$4.0 million.

On December 10, 2010, the Company completed a public offering and issued an aggregate of 8,000,000 shares at a price per share of US$4.0 for US$32 million. Net proceeds after deducting offering costs were approximately US$29.7 million.

On July 18, 2011, the Company’s board of directors authorized a share repurchase program for up to $5 million of its common stock over the next twelve months, subject to market and other conditions. Under this plan, the Company can repurchase shares from time to time for cash in open market purchases, block transactions, and privately negotiated transactions in accordance with applicable US federal securities laws. This share repurchase program may be modified, suspended, terminated or extended by the Company at any time without prior notice. The repurchases will be funded with available cash on hand. (Note 18)

Evercharm was incorporated in British Virgin Islands (“BVI”) on September 15, 2004, and is a holding company without any operation.

Great Shengda, Evercharm’s wholly-owned subsidiary, was incorporated in Hangzhou city, Zhejiang province, People’s Republic of China (“PRC”) on November 22, 2004. Its registered capital was US$39 million as of December 31, 2011. Great Shengda is engaged in manufacturing and processing corrugated fibreboard boxes and paper board and package decoration printing and selling.

Shengda Color, Great Shengda’s 100% wholly-owned subsidiary, was incorporated in Hangzhou city, Zhejiang province, PRC on August 8, 2005 with registered capital of RMB10 million (US$1.2 million). Shengda Color is engaged in the manufacturing and sale of paper boxes and paper board, as well as the research and development of paper packing technology.

F-4


CHINA SHENGDA PACKAGING GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in US$)

Hangzhou Shengming, 75% held by Shengda Color and 25% held by Evercham, was incorporated in Hangzhou city, Zhejiang province, PRC on December 28, 2006 with registered capital of US$12 million. It is engaged in the manufacturing and sale of paper boxes and paper board, as well as the research and development of paper packing technology.

Suzhou AA was incorporated in Suzhou city, Jiangsu province, PRC on June 22, 2010, with registered capital amounting to RMB1.58 million. It is engaged in manufacturing and sales of paper products. On August 12, 2010, Great Shengda acquired 100% equity interest of Suzhou AA from its original shareholders, for cash consideration amounting to RMB3 million (US$0.44 million).

Shuangsheng was incorporated in Yancheng city, Jiangsu province, PRC on September 22, 2011. Shuangsheng has register capital RMB88 million with actually invested capital of RMB44 million (US$14 million), 97% held by Great Shengda and 3% held by Shuangdeng Paper Industrial Company Limited (“Shuangdeng Paper”), a company incorporated in PRC, and is controlled by the same ultimate stockholders of the Company. Shuangsheng is engaged in the business of new paper making technology, related research and the development, application, transfer and consultation of such relevant technology. It was at the developing stage as of March 31, 2012.

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   
(a)

Change of reporting entity and basis of presentation

   

The consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.

   

The consolidated interim financial information as of March 31, 2012 and for the three month periods ended March 31, 2012 and 2011 have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures, which are normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have not been included. The interim consolidated financial information should be read in conjunction with the Financial Statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, previously filed with the SEC.

   

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s consolidated financial position as of March 31, 2012, its consolidated results of operations and cash flows for the three month periods ended March 31, 2012 and 2011, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.

   

Noncontrolling interest represents the ownership interests in a subsidiary that was held by owners other than the parent and is part of the equity of the consolidated group. The noncontrolling interest is reported in the consolidated statement of financial position within equity, separately from the parent’s equity. Net income or loss and comprehensive income or loss is attributed to the parent and the noncontrolling interest. If losses attributable to the parent and the noncontrolling interest in a subsidiary exceed their interests in the subsidiary’s equity, the excess, and any further losses attributable to the parent and the noncontrolling interest, is attributed to those interests.

F-5


CHINA SHENGDA PACKAGING GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in US$)

(b)

Use of estimates

   

The preparation of financial statements in conformity with U.S. GAAP requires the Group to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

   
(c)

Business combination

   

For a business combination with acquisition date on or after January 1, 2009, the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree were recognized at the acquisition date, measured at their fair values as of that date. In a business combination achieved in stages, the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, were recognized at the full amounts of their fair values. In a bargain purchase in which the total acquisition-date fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred plus any noncontrolling interest in the acquiree, that excess in earnings was recognized as a gain attributable to the Group.

   

Deferred tax liability and asset were recognized for the deferred tax consequences of differences between the tax bases and the recognized values of assets acquired and liabilities assumed in a business combination in accordance with Accounting Standards Codification (“ASC”) Topic 740-10.

   
(d)

Cash and cash equivalents

   

Cash includes not only currency on hand but demand deposits with banks or other financial institutions. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less. No cash and cash equivalents are restricted as to withdrawal or usage.

   
(e)

Restricted cash

   

Restricted cash represents the deposits held as compensating balances against banks’ acceptances issued and loans borrowed, amounting to US$12,813,559 and US$7,851,387 as of March 31, 2012 and December 31, 2011, respectively.

   
(f)

Accounts and notes receivable, net

   

Accounts receivable are recognized and carried at original sales amounts less an allowance for uncollectible accounts, as needed.

   

Accounts receivable are reviewed periodically as to whether they are past due based on contractual terms and their carrying value has become impaired. An allowance for doubtful accounts is recorded in the period in which loss is determined to be probable based on an assessment of specific evidence indicating doubtful collection, historical experience, account balance aging and prevailing economic conditions. Accounts receivable balances are written off after all collection efforts have been exhausted. No significant account receivable balance was written off for March 31, 2012 and December 31, 2011, respectively.

   

Notes receivable represent banks’ acceptances that have been arranged with third-party financial institutions by certain customers to settle their purchases from us. These banks’ acceptances are non-interest bearing and are collectible within six months. Such sales and purchasing arrangements are consistent with industry practices in the PRC.

There are no outstanding amounts from customers that individually represent greater than 10% of the total balance of accounts receivable as of March 31, 2012 and December 31, 2011.

F-6


CHINA SHENGDA PACKAGING GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in US$)

(g)

Inventories

   

Inventories are stated at lower of cost or market. Cost is determined using weighted average method. Inventory includes raw materials and finished goods. The variable production overheads are allocated to each unit of production on the basis of the actual use of the production facilities. The allocation of fixed production overheads to the costs of conversion is based on the normal capacity of the production facilities.

   

Where there is evidence that the utility of inventories, in their disposal in the ordinary course of business, will be less than cost, whether due to physical deterioration, obsolescence, changes in price levels, or other causes, the inventories are written down to their fair value for the difference with charge to cost of sales.

   

No value was written down for the inventories as of March 31, 2012 and December 31, 2011.

   
(h)

Property, plant and equipment and construction in progress

   

Other than those acquired in a business combination, property, plant and equipment are stated at historical cost less accumulated depreciation and impairment. The historical cost of acquiring an item of property, plant and equipment includes the costs necessarily incurred to bring it to the condition and location necessary for its intended use. If an item of property, plant and equipment requires a period of time in which to carry out the activities necessary to bring it to that condition and location, the interest cost incurred during that period as a result of expenditures for the item is a part of the historical cost. This item is categorized as construction in progress and is not depreciated until substantially all the activities necessary to bring it to the condition and location necessary for its intended use are completed.

Depreciation of property, plant and equipment is calculated using the straight-line method (after taking into account their respective estimated residual value) over the estimated useful lives of the assets as follows.

  Years   Residual value
Buildings and improvements 5-20   5%-10%
Machinery 10   5%-10%
Office equipment 3-5   5%-10%
Motor vehicles 5   5%-10%

Depreciation of property, plant and equipment attributable to manufacturing activities is capitalized as part of inventories, and expensed to cost of goods sold when inventories are sold. Expenditures for maintenance and repairs are expensed as incurred.

The gain or loss on the disposal of property, plant and equipment is the difference between the net sales proceeds and the carrying amount of the relevant assets and is recognized in the consolidated statements of operations.

Construction in progress represents capital expenditure in respect of direct costs of construction or acquisition and design fees incurred. Capitalization of these costs ceases and the construction in progress is transferred to the appropriate category of property, plant and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. Construction in progress is not depreciated.

(i) Goodwill

Goodwill represents the excess of acquisition costs over the fair value of tangible net assets and identifiable intangible assets of businesses acquired. Goodwill and certain other intangible assets deemed to have indefinite lives are not amortized. Intangible assets determined to have definite lives are amortized over their useful lives. Goodwill and indefinite lived intangible assets are subject to impairment testing annually as of the fiscal year-end or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable, using the guidance and criteria described in ASC Topic 350, “Goodwill and Other Intangible Assets”. This testing compares carrying values to fair values and, when appropriate, the carrying value of these assets is reduced to fair value.

F-7


CHINA SHENGDA PACKAGING GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in US$)

(j)

Customer relationship

   

Customer relationship is amortized on a straight line basis over their respective estimated useful lives, which are the periods over which the assets are expected to contribute directly or indirectly to the future cash flows of the Group.

   
(k)

Impairment of long-lived assets

   

A long-lived asset (disposal group) classified as held for sale is measured at the lower of its carrying amount or

   

fair value less cost to sell. A long-lived asset is not depreciated (amortized) while it is classified as held for sale. A gain or loss not previously recognized that result from the sale of a long-lived asset (disposal group) is recognized at the date of sale.

   

A long-lived asset (asset group) is tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. An impairment loss is recognized only if the carrying amount of a long-lived asset (asset group) is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset (asset group) is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group). The assessment is based on the carrying amount of the asset (asset group) at the date it is tested for recoverability, whether in use or under development. An impairment loss is measured as the amount by which the carrying amount of a long-lived asset (asset group) exceeds its fair value. There were no events or changes in circumstances that necessitated a review of impairment of long-lived assets as of March 31, 2012 and December 31, 2011, respectively.

   
(l)

Foreign currency translation and transactions

   

The Company’s and Evercharm’s functional currency is the United States dollar (“US$”). The functional currency of the Company’s subsidiaries in the PRC is Renminbi (“RMB”).

   

At the date a foreign currency transaction is recognized, each asset, liability, revenue, expense, gain, or loss arising from the transaction is measured initially in the functional currency of the recording entity by use of the exchange rate in effect at that date. The increase or decrease in expected functional currency cash flows upon settlement of a transaction resulting from a change in exchange rates between the functional currency and the currency in which the transaction is denominated is recognized as foreign currency transaction gain or loss that is included in determining net income for the period in which the exchange rate changes. At each balance sheet date, recorded balances that are denominated in a foreign currency are adjusted to reflect the current exchange rate.

   

The Company’s reporting currency is US$. Assets and liabilities of the PRC subsidiaries are translated at the current exchange rate at the balance sheet dates, and revenues and expenses are translated at the average exchange rates during the reporting periods. Translation adjustments are reported in other comprehensive income.

   
(m)

Commitments and contingencies

   

In the normal course of business, the Group is subject to loss contingencies, such as legal proceedings and claims arising out of its business, that cover a wide range of matters, including, among others, government investigations, product and environmental liability, and tax matters. In accordance with ASC Topic 450 the Group records accruals for such loss contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Historically, the Group has not experienced any material service liability claims.

F-8


CHINA SHENGDA PACKAGING GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in US$)

(n)

Appropriated retained earnings

  

The income of the Company’s PRC subsidiaries is distributable to its stockholders after transfer to reserves as required by relevant PRC laws and regulations and the subsidiaries’ articles of association. Appropriations to the reserves are approved by the respective boards of directors.

  

Reserves include statutory reserves and other reserves. Statutory reserves can be used to make good previous years’ losses, if any, and may be converted into capital in proportion to the existing equity interests of stockholders, provided that the balance after such conversion is not less than 25% of the registered capital. The appropriation of statutory reserve may cease to apply if the balance of the fund is equal to 50% of the entity’s registered capital. Pursuant to relevant PRC laws and articles of association of Great Shengda, Shengda Color, Hangzhou Shengming, Suzhou AA and Shuangsheng Paper, the appropriation to the statutory reserves and other reserves is 15% of net profit after taxation of respective entity, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the financial statements prepared in accordance with U.S. GAAP might differ from those reflected in the statutory financial statements of the Company’s subsidiaries.

  

As of March 31, 2012 and December 31, 2011, the statutory reserve recorded by the Company’s subsidiaries incorporated in the PRC both amounted to US$6,843,616 in both cases.

  

As of March 31, 2012, the statutory reserve balances of Great Shengda, Hangzhou Shengming, Shengda Color, Suzhou AA and Shuangsheng Paper accounted72.8%, 20.0%, 9.5%, 0.6% and nil, approximately and of their registered capital, respectively. The future income of these subsidiaries will be subject to statutory reserve.

  
(o)

Revenue recognition

  

The Group recognizes revenue in accordance with ASC Topic 605. All of the following criteria must exist in order for the Group to recognize revenue: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) price to the buyer is fixed or determinable; and (4) collectability is reasonably assured.

  

Delivery does not occur until products have been shipped to the customers, risk of loss has transferred to the customers and customers’ acceptance has been obtained, or the Group has objective evidence that the criteria specified in customers’ acceptance provisions have been satisfied. The sales price is not considered to be fixed or determinable until all contingencies related to the sale have been resolved.

  

In the PRC, value added tax (“VAT”) of 17% on invoice amount is collected in respect of the sales of goods on behalf of tax authorities. Revenue is recognized on a net basis, and the VAT collected is not recognized as revenue of the Company.

  
(p)

Research and development costs

  

Research and development costs are expensed as incurred. These expenses consist of the costs of the Company’s internal research and development activities and the costs of developing new products and enhancing existing products. Research and development costs amounted to US$758,823 and US$930,114 were recorded in general and administrative expenses for three months ended March 31, 2012 and 2011, respectively.

  
(q)

Advertising

  

Advertising which generally represents the cost of promotions to create or stimulate a positive image of the Group or a desire to buy the Group’s products and services, are expensed as incurred. Advertising costs amounted to nil and US$5,697 was recorded in the selling expenses for three months ended March 31, 2012 and 2011, respectively.

F-9


CHINA SHENGDA PACKAGING GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in US$)

(r)

Retirement and other postretirement benefits

  

Full-time employees of the Group in the PRC participate in a government mandated defined contribution plan, pursuant to which certain pension benefits, medical care, maternity insurance, work-related injury insurance and other welfare benefits are provided to employees. Chinese labor regulations require that the PRC subsidiaries of the Group make contributions to the government for these benefits based on certain percentages of the employees’ salaries. The Group has no legal obligation for the benefits beyond the contributions made. The total amounts for such employee benefits, which were expensed as incurred, were approximately US$278,933 and US$249,668 for three months ended March 31, 2012 and 2011, respectively.

  
(s)

Income taxes

  

The Group follows ASC Topic 740, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates, applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

  
(t)

Uncertain tax positions

  

The Group follows ASC Topic 740, according to which prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740 also provides guidance on recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures. The Group did not have any interest and penalties associated with tax positions and did not have any significant unrecognized uncertain tax positions as of March 31, 2012 and 2011.

  
(u)

Earnings per share

  

Earnings per share are calculated in accordance with ASC Topic 260. Basic earnings per share is computed by dividing income attributable to holders of common shares by the weighted average number of common shares outstanding during the period. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares.

  
(v)

Comprehensive income

  

The Group follows ASC Topic 220, which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, ASC Topic 220 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. During the periods presented, the Group’s comprehensive income represents its net income and foreign currency translation adjustments.

  
(w)

Fair value measurements

  

Financial instruments include cash and cash equivalents, accounts and notes receivable, prepayments and other receivables, short-term loans, accounts and notes payable, other payables and amounts due to related party. The carrying amounts of these financial instruments approximate their fair value due to the short term maturities of these instruments.

F-10


CHINA SHENGDA PACKAGING GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in US$)

The Group adopted ASC Topic 820-10 on January 1, 2008 for all financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis (at least annually). ASC Topic 820-10 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The Group has not adopted ASC Topic 820-10 for non-financial assets and non-financial liabilities, as these items are not recognized at fair value on a recurring basis.

ASC Topic 820-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

ASC Topic 820-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC Topic 820-10 establishes three levels of inputs that may be used to measure fair value:

Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

(x)

Recently issued accounting standards

  

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”, which is adopted for fiscal years, and interim periods beginning after December 15, 2011 for public entities with retrospective application. There is no material impact on the consolidated financial statements upon adoption.

  

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income”. Under the amendments in this ASU, an entity has two options for presenting its total comprehensive income: to present total comprehensive income and its components along with the components of net income in a single continuous statement, or in two separate but consecutive statements. The amendments in this ASU are required to be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. There is no material impact on the consolidated financial statements upon adoption.

  

In September 2011, the FASB issued ASU No. 2011-08, Intangibles—Goodwill and Other (Topic 350)— Testing Goodwill for Impairment, to simplify how entities test goodwill for impairment. ASU No. 2011-08 allows entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If greater than 50 percent likelihood exists that the fair value is less than the carrying amount then a two-step goodwill impairment test as described in Topic 350 must be performed. The guidance provided by this update becomes effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company adopts this ASU beginning with its Quarterly Report on Form 10-Q for the three months ended March 31, 2012. There is no material impact on the consolidated financial statements upon adoption.

F-11


CHINA SHENGDA PACKAGING GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in US$)

(y)

Concentration of Risks

Concentration of Credit Risk

Assets that potentially subject the Group to significant concentration of credit risk primarily consist of cash and cash equivalents, accounts and notes receivable. As of March 31, 2012 and December 31, 2011, substantially all of the Group’s cash and cash equivalents were deposited in financial institutions located in the PRC, which management believes are of high credit quality. Accounts receivable are typically unsecured and are derived from revenue earned from customers in the PRC. The risk with respect to accounts receivable is mitigated by credit evaluations the Group performs on its customers and its ongoing monitoring process of outstanding balances.

Concentration of Customers

There are no revenues from customers which individually represent greater than 10% of the total revenues for the periods presented.

Concentration of Suppliers

There are no purchases from supplier which individually represent greater than 10% of the total purchase for the periods presented.

Current vulnerability due to certain other concentrations

The Group’s operations may be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for more than 30 years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC’s political, economic and social conditions. There is also no guarantee that the PRC government’s pursuit of economic reforms will be consistent or effective.

The Group transacts majority of its business in RMB, which is not freely convertible into foreign currencies. On January 1, 1994, the PRC government abolished the dual rate system and introduced a single rate of exchange as quoted daily by the People’s Bank of China (the “PBOC”). However, the unification of the exchange rates does not imply that RMB may be readily convertible into US$ or other foreign currencies. All foreign exchange transactions continue to take place either through the PBOC or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the PBOC. Approval of foreign currency payments by the PBOC or other institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts.

Additionally, the value of RMB is subject to changes in central government policies and international economic and political developments affecting supply and demand in the PRC foreign exchange trading system market.

F-12


CHINA SHENGDA PACKAGING GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in US$)

3. ACCOUNTS AND NOTES RECEIVABLE, NET

Accounts and notes receivable consist of the following:

    March 31,     December 31,  
    2012     2011  
    (Unaudited)        
Accounts receivable $  29,063,207   $  32,445,001  
Notes receivable   3,479,500     4,390,094  
  $  32,542,707   $  36,835,095  

No allowance for doubtful amounts was provided as of March 31, 2012 and December 31, 2011.

4. INVENTORIES

Inventories consist of the following:

    March 31,     December 31,  
    2012     2011  
    (Unaudited)        
Raw materials $  18,389,700   $  17,236,406  
Finished goods   1,672,208     2,213,548  
  $  20,061,908   $  19,449,954  
   
5. PREPAYMENTS AND OTHER RECEIVABLES

Prepayments and other receivables consist of the following:

    March 31,     December 31,  
    2012     2011  
    (Unaudited)        
Prepayments $  2,763,112   $  666,344  
Other receivables   396,995     262,782  
  $  3,160,107   $  929,126  

F-13


CHINA SHENGDA PACKAGING GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in US$)

6. PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment consist of the following:

    March 31,     December 31,  
    2012     2011  
    (Unaudited)        
Buildings and improvements $  10,945,731   $  9,010,793  
Machinery   35,230,762     34,926,527  
Office equipment and furnishing   658,358     705,849  
Motor vehicles   1,546,430     1,536,442  
Construction in progress   165,690     2,131,598  
    48,546,971     48,311,209  
Less: accumulated depreciation   (14,465,541 )   (13,737,963 )
  $  34,081,430   $  34,573,246  

The Group recorded depreciation expenses of US$952,211 and US$838,572 for the three months ended March 31, 2012 and 2011, respectively.

No property, plant and equipment were pledged as collateral for bank loans as of March 31, 2012 and December 31, 2011.

7.

PREPAYMENT FOR CONSTRCUTION IN PROGRESS

   

As of March 31, 2012 and December 31, 2011, the Group prepaid $7,918,951 and $5,424,412 principally for Shuangdeng Paper’s construction in progress located in Yancheng city, Jiangsu Province, PRC. All the prepayments were paid to the third party construction companies.

   
8.

PREPAYMENT FOR LAND USE RIGHT TO RELATED PARTY

   

In October 2010, Great Shengda prepaid US$11,881,753 (RMB75,000,000) to Shengda Group Jiangsu Shuangdeng Paper Industrial Co., Ltd. (“Shuangdeng Paper”), a related party of the Group, for the acquisition of a land use right, which is located in Yancheng city, Jiangsu province. The land use right, approximately 166,533 square meters in area, has a term of 50 years and will expire in December 2058. The land use right was purchased for construction of plants to expand the Group’s business, and its transaction price was determined with reference to market prices. As of March 31, 2012, the transferring of license of land use right is still awaiting the local government’s authorization.

F-14


CHINA SHENGDA PACKAGING GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in US$)

9. CUSTOMER RELATIONSHIP, NET

Customer relationship recognized in the acquisition of Hangzhou Shengming on November 22, 2007 and in the acquisition of Suzhou AA on August 12, 2010 is amortized using straight-line method over their estimated useful life of five years and three years, respectively.

The customer relationship is summarized as follows:            
             
    March 31,     December 31,  
    2012     2011  
    (Unaudited)        
             
Customer relationship $  2,172,390   $  2,158,357  
Less: accumulated amortization   (1,738,311 )   (1,608,041 )
  $  434,079   $  550,316  

Total amortization expenses were US$120,093 and US$115,355 for the three months ended March 31, 2012 and 2011, respectively. As of March 31, 2012 customer relationship recognized in the acquisition of Hangzhou Shengming had a remaining useful life of nine months, and will be amortized at US$263,789 in 2012. Customer relationship recognized in the acquisition of Suzhou AA has a remaining useful life of one year and five months, and will be amortized at US$107,202 and US$63,088 in 2012 and 2013, respectively.

10. BORROWINGS

Short-term loans

Short-term loans consist of the following:

    March 31, 2012 (Unaudited)           December 31, 2011        
Lender   Interest rate     Maturity date      Balance     Interest rate     Maturity date     Balance  
    105% of                                
Bank of China   Benchmark of PBOC*     Jul.05,2012   $  3,168,468     Benchmark of PBOC     Feb.16,2012   $  3,148,000  
      3.30%     Jun.26,2012     3,960,584     3.30%     Jun.26,2012     3,935,000  
Subtotal             $

  7,129,052

              $

   7,083,000

 
                                       
Agricultural Bank of China      

-

Benchmark of PBOC

Feb.15,2012

2,990,600

Total             $ 7,129,052               $  10,073,600  

Note* the effective interest rate was 6.41% as of March 31, 2012.

The short-term loans were denominated in RMB for working capital purpose and the short term loan of US$3,168,468 was guaranteed by Shengda Group.

F-15


CHINA SHENGDA PACKAGING GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in US$)

 
                                     
Long-term loans
                           
Long-term loans consist of the following:
                                     
                                     
    March 31, 2012 (Unaudited)   December 31, 2011  
          Maturity           Interest     Maturity        
Lender   Interest rate     date     Balance     rate     date     Balance  
Bank of China   LIBOR+2.5% *     Dec.28,2013   $ 4,500,000     LIBOR+2.5%     Dec.28,2013   $ 4,500,000  
    LIBOR+2.5% *     Feb.20,2014   $ 4,500,000                 -  
                                     
              $ 9,000,000               $ 4,500,000  

Note* the effective interest rate was 3.23% as of March 31, 2012.

A restricted bank deposit of approximately US$10.0 million restricted bank deposit was provided by Great Shengda as collateral for the long-term loans. The long-term loans were denominated in USD for working capital purposes.

The weighted average balances for short-term and long-term loans were US$16,556,186 and US$11,220,349 and weighted average interest rates were 5.615% and 5.269% for three months ended March 31, 2012 and the year ended December 31, 2011, respectively.

The following table summarizes the unused lines of credit:

                         
                                                 
    March 31, 2012 (Unaudited)           December 31, 2011        
    Starting     Maturity     Facility     Unused     Starting     Maturity     Facility     Unused  
Lender   date     date     amount     facility     date     date     amount     facility  
 Bank of China   February 22,     February 22,                 January     January              
    2012     2013   $ 7,921,169   $ 4,752,701     12,2011     12,2012   $  20,462,000   $  15,740,000  
Agricultural Bank of China                           February     February              
                -     -     22,2011     22,2012   $  4,722,000   $  1,731,400  
                                                 

             Total

            $ 7,921,169   $ 4,752,701               $  25,184,000   $  17,471,400  

The above lines of credit are guaranteed by Shengda Group for working capital and general corporate purposes.

11. ACCOUNTS AND NOTES PAYABLE

 

Accounts and notes payable consist of the following:            
             
    March 31,     December 31,  
    2012     2011  
    (Unaudited)        
Accounts payable $  16,570,984   $  15,602,719  
Notes payable   5,544,818     3,148,000  
  $  22,115,802   $  18,750,719  

The notes payable were issued by the Great Shengda to their suppliers for raw materials purchased. All the notes payable were bank accepted notes payable without interest and due within six months.

F-16


CHINA SHENGDA PACKAGING GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in US$)

12. ACCRUED EXPENSES AND OTHER PAYABLES

Accrued expenses and other payables as of the end of the periods presented consist of the following:

    March 31,     December 31,  
    2012     2011  
    (Unaudited)        
Advance from customers $  601,155   $  333,666  
Payroll and welfare payable   386,636     675,770  
Other payables   708,836     411,683  
Accrued expenses   506,697     230,164  
  $  2,203,324   $  1,651,283  

 

13. RELATED PARTY TRANSACTIONS
               
Related party balances are as follows:              
          March 31,     December 31,  

Related parties

  Relationship     2012     2011  

Amounts due from related parties

 

 

    (Unaudited)        

Shuangdeng Paper Industrial Company Limited (“Shuangdeng Paper”)

Controlled by the same ultimate stockholders

149,190 118,699

Shengda Xiang Wei Chemical Company Limited(“Shengda Xiang Wei”)

Controlled by the same ultimate stockholders

3,737 14,909

 

 

 

  $  152,927   $  133,608  

 

 

 

             

 Amounts due to related parties

 

 

             

Zhejiang Shuang Ke Da Weaving Co., Ltd (“Shuang Ke Da”)

Controlled by the same ultimate stockholders

$ 80,909 $ 77,118

Zhejiang Shuangsheng Logistic Company Limited (“Shuangsheng Logistic”)

Controlled by the same ultimate stockholders

109,605 60,571

 

 

 

  $  190,514   $  137,689  

The amount due from Shuangdeng Paper and Shengda Xiang Wei represents the receivable from them for selling the paper boxes. They were recorded as “amount due from related parties” in the consolidated balance sheets, non-interest bearing and receivable within one year.

The amount due to Shuang Ke Da represents the payable for land lease and purchase electricity and water from Shuang Ke Da by the Group, the amount due to Shuangsheng Logistic represents the payable for transportation fee. It was recorded as “amount due to related party” in the consolidated balance sheets, non-interest bearing and repayable within one year.

F-17


CHINA SHENGDA PACKAGING GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in US$)

 
                   
Significant related party transactions as follows:              

 

 

 

    Three Months ended March 31,  

Related parties

 

Relationship

    2012     2011  

 

 

 

    (Unaudited)     (Unaudited)  

Lease from related parties

 

 

             

Hangzhou New Shengda Investment Limited

 

Controlled by the same ultimate stockholders

    66,823     64,176  

Zhejiang Shuang Ke Da Weaving Co., Ltd

 

Controlled by the same ultimate stockholders

         

Shengda Group

 

Controlled by the same ultimate stockholders

    77,450     66,573  

 

 

 

  $  144,273   $  130,749  

 

 

 

             

Prepayment for the land use right

             

Shuangdeng Paper

 

Controlled by the same ultimate stockholders

  $  -   $  11,400,000  

 

 

 

             

Transportation service from related party

             

Shuangsheng Logistic

 

Controlled by the same ultimate stockholders

  $  114,702   $  129,755  

 

 

 

             

Sales to related parties

 

 

             

Shuangdeng Paper

 

Controlled by the same ultimate stockholders

    101,245     19,609  

Shengda Xiang Wei

 

Controlled by the same ultimate stockholders

    38,327     -  

 

 

 

  $  139,572   $  19,609  

 

 

 

             

Purchase of water and electricity from related party

             

Zhejiang Shuang Ke Da Weaving Co., Ltd

 

Controlled by the same ultimate stockholders

  $  392,924   $  465,273  

The transactions prices were determined with reference to market prices.

Guarantee by SD Group

SD Group entered into a maximum debt guarantee contracts with Xiaoshan BOC under which SD Group agreed to act as guarantor for loans borrowed by Hangzhou Shengming and Great Shengda from Xiaoshan BOC. The maximum guaranteed amount is RMB130.0 million (approximately $20.5 million) for any loans borrowed by Hangzhou Shengming and Great Shengda from the bank from January 12, 2011 to January 12, 2012. Those maximum debt guarantee contracts were expired as of March 31, 2012.

SD Group entered into a maximum debt guarantee contract with Xiaoshan BOC under which SD Group agreed to act as guarantor for loans borrowed by Hangzhou Shengming from Xiaoshan ABC. The maximum guaranteed amount is RMB50.0 million (approximately $7.9 million) for any loans borrowed by Hangzhou Shengming from the bank from Februray 22, 2012 to February 22, 2013.

F-18


CHINA SHENGDA PACKAGING GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in US$)

14.

RESTRICTED NET ASSETS

   

The Company’s ability to pay dividends is primarily dependent on the Company receiving distributions of dividends from its PRC subsidiaries. As described in note 2(n), the net income of the Company’s PRC subsidiaries is distributable only after sufficient appropriation of reserves.

   

Amounts restricted include paid-in capital and reserve funds of the Company’s PRC subsidiaries as determined pursuant to the PRC accounting standards and regulations, totaling approximately US$49,918,871 both as of March 31 2012 and December 31, 2011.

   
15.

TAXATION

   

Taxes payable are composed of the following:


  March 31,       December 31,  
    2012     2011  
     (Unaudited)        
VAT payable $  345,463   $  2,341,700  
Income tax payable   1,207,385     842,583  
Other taxes payable   5,833     174,619  
                                                                                                                                              $ 1,558,681   $  3,358,902  

The Company and its consolidated entities each files tax returns separately.

   
1)

VAT

   

Pursuant to the Provisional Regulation of the PRC on VAT and their implementing rules, all entities and individuals (“taxpayers”) that are engaged in the sale of products in the PRC are generally required to pay VAT at a rate of 17% of the gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayers. Further, when exporting goods, the exporter is entitled to a portion of or all the refund of VAT that it has already paid or incurred.

   

The Group’s PRC subsidiaries are subject to VAT at 17% for their revenues.

   
2)

Income tax

   

United States

   

China Shengda Packaging is subject to United States tax at a tax rate of 34%. In the three months ended March 31, 2012 and 2011, the Company does not provide for U.S. income taxes on foreign subsidiaries’ undistributed earnings as they will be permanently reinvested in foreign operations.

   

BVI

   

Incorporated in BVI, Evercharm is governed by the income tax law of BVI. According to current BVI income tax law, the applicable income tax rate for Evercharm is 0%.

   

PRC

Great Shengda obtained the approval and is qualified as New and High-Tech Enterprise (“NHTE”) by relevant government authorities in December 2010. According to the PRC Enterprise Income Tax Law, Great Shengda is eligible to enjoy a preferential tax rate of 15% for the calendar year of 2010, 2011 and 2012.

F-19


CHINA SHENGDA PACKAGING GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in US$)

Shengda Color, Suzhou AA and Shuangsheng Paper are manufacturing domestic enterprises and are not entitled to any tax holiday. They were subject to income tax at a rate of 25% for calendar years 2011 and 2012.

Hangzhou Shengming is qualified as a manufacturing foreign-invested enterprise and thus was entitled to a tax holiday of two years full-exemption beginning with the first profitable year net of all loss carryforwards from the previous five years, followed by three years of taxation at half of the normal tax rate. Hangzhou Shengming’s first tax profitable year was 2007; therefore it was subject to income tax at a rate of 12.5% for calendar years 2009, 2010 and 2011, and 25% for 2012.

Under the Enterprise Income Tax Law, dividends, interests, rent, royalties and gains on transfers of property payable by a foreign-invested enterprise in the PRC to their foreign investors who are a non-resident enterprises will be subject to a 20% withholding tax, unless such non-resident enterprise’s jurisdiction of incorporation has a tax treaty with the PRC that provides for a reduced rate of withholding tax.

The following table reconciles the Group’s effective tax for the periods presented:        
             
    Three months ended March 31,  
    2012     2011  
    (Unaudited)     (Unaudited)  
Expected enterprise income tax at statutory tax rate $  497,858   $  1,054,582  
Effect of tax holiday   (195,717 )   (366,253 )
Others   11,858     (11,728 )
Effective enterprise income tax $  313,999   $  676,601  
             
The significant components of income tax expense are as follows:            
             
    Three months ended March 31,  
    2012     2011  
    (Unaudited)     (Unaudited)  
Current tax expenses $  322,206   $  689,611  
Deferred tax benefits   (8,207 )   (13,010 )
Income tax expenses $  313,999   $  676,601  

F-20


CHINA SHENGDA PACKAGING GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in US$)

Deferred tax assets and deferred tax liabilities reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purpose and the tax bases used for income tax purpose. The following represents the tax effect of each major type of temporary difference:

    March 31,     December 31,  

 

  2012     2011  

 

  (Unaudited)        

Effect of deductible temporary differences between assigned value of property, plant and equipment and their tax bases in a business combination

$  396,072   $  409,845  

Effect of taxable temporary differences between assigned value of customer relationship and its tax base in a business combination

$  (108,520 ) $  (137,579 )

 

           

 

           
16. COMMITMENTS AND CONTINGENCIES

The Group has entered into construction for a factory. The estimated annual capital commitment is as follows:

Year     Amount  
2012   $  5,462,432  
2013 and thereafter     634,771  
Total   $  6,097,203  
         
The Group has entered into operating lease agreements for land, offices and plants. The estimated annual rental expense for lease commitment is as follows:  
       
         
Year     Amount  
2012   $  592,983  
2013 and thereafter     -  
Total   $  592,983  

The Group is not currently a party to any legal proceeding, investigation or claim which, in the opinion of the management, is likely to have a material adverse effect on the business, financial condition or results of operations.

   

The Group did not identify any contingency as of March 31, 2012 and December 31, 2011.

   
17.

SEGMENT REPORTING

   

The management has determined that the Group, as defined by Topic 280-10, “Segment Reporting”, has only one operating segment.

   
18.

TREASURY STOCK

   

The Company has 665,500 common shares at a cost of $729,444 both as of March 31, 2012 and December 31, 2011, respectively. Cost method is adopted for the treasury stock.

F-21


CHINA SHENGDA PACKAGING GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in US$)

19. EARNINGS PER SHARE

The Group reports earnings per share in accordance with ASC Topic 260, which requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. There was no incremental share through calculation to cause a dilutive effect. The following is a reconciliation of the basic and diluted earnings per share computations for the three months ended March 31, 2012 and 2011:

    Three Months ended March 31,  
    2012     2011  
    (Unaudited)     (Unaudited)  

Net income attributable to China Shengda Packaging’ common stockholders

$ 1,540,765 $ 3,444,407

Weighted average number of common shares outstanding – basic and diluted

38,790,811 39,456,311

Earnings per share – basic and diluted

$ 0.04 $ 0.09
   
20. SUBSEQUENT EVENT

The Group has evaluated subsequent events through the issuance of the consolidated financial statements and no subsequent event is identified.

F-22



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

Special Note Regarding Forward Looking Statements

In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as “believe,” “expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,” “aim,” “will” or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those identified in Item 1A “Risk Factors” described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements.

Readers are urged to carefully review and consider the various disclosures made by us in this report and our other filings with the SEC. These reports attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking statements made in this report speak only as of the date hereof and we disclaim any obligation, except as required by law, to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.

Use of Terms

Except as otherwise indicated by the context and for the purposes of this report only, references in this report to:

  • “the Company,” “our company,” “we,” “us,” or “our,” are to the combined business of China Shengda Packaging Group Inc., a Nevada corporation, and its consolidated subsidiaries: Evercharm, Great Shengda, Shengda Color, Hangzhou Shengming, Suzhou A&A and Shuangsheng;
  • “Evercharm” are to Evercharm Holdings Limited, a BVI company;
  • “Great Shengda” are to Zhejiang Great Shengda Packaging Co., Ltd., a PRC company;
  • “Shengda Color” are to Zhejiang Shengda Color Pre-printing Co. Ltd., a PRC company;
  • “Hangzhou Shengming” are to Hangzhou Shengming Paper Co., Ltd., a PRC company;
  • “Suzhou AA” are to Suzhou Asian & American Paper Products Co., Ltd., a PRC company;
  • “Shuangsheng” are to Jiangsu Shuangsheng Paper Technology Development Co., Ltd., a PRC company;
  • “SD Group” are to Shengda Group Co., Ltd.;
  • “BVI” are to the British Virgin Islands;
  • “PRC” and “China” are to the People’s Republic of China, excluding Hong Kong, Macau and Taiwan;
  • “YRD” are to Yangtze River Delta Economic Zone, which includes Shanghai, Zheijiang Province and Jiangsu Province;
  • “SEC” are to the Securities and Exchange Commission;
  • “Securities Act” are to the Securities Act of 1933, as amended;
  • “Exchange Act” are to the Securities Exchange Act of 1934, as amended;
  • “Renminbi” and “RMB” are to the legal currency of China;
  • “PBOC” are to the People’s Bank of China; and
  • “U.S. dollars,” “dollars” and “$” are to the legal currency of the United States.

3


Overview of Our Business

We are a leading paper packaging company in China. Through our wholly-owned subsidiaries, Great Shengda, Shengda Color, Hangzhou Shengming and Suzhou AA, we are principally engaged in the design, manufacturing and sale of flexo-printed and color-printed corrugated paper cartons in a variety of sizes and strengths. We also manufacture corrugated paperboards, which are used for the production of our flexo-printed and color-printed cartons.

We provide paper packaging solutions to a wide variety of industries, including food, beverage, cigarette, household appliance, consumer electronics, pharmaceutical, chemical, machinery and other consumer or industrial sectors. Our major products are single-layer paper cartons for food, drinks and medicine, double-layer paper cartons for garments, chemicals, furniture, refrigerators and air-conditioners, and triple-layer paper cartons for electrical machinery, motorcycles and other heavy-duty products. Our maximum annual production capacity of corrugated paperboards as of March 31, 2012 was approximately 545 million square meters.

Our production facilities are strategically located in the YRD, a manufacturing center in China, thus putting us in close proximity to a large number of paper carton customers. Due to the weight and bulk of paper products and the consequent high shipping costs, paper packaging companies are generally limited to servicing a geographic radius from their production site, usually between 300 and 500 kilometers, within which they can compete economically. The paper carton market, therefore, is highly influenced by regional supply and demand dynamics. Based from our three manufacturing facilities in Hangzhou, Zhejiang Province, we have established a sales network with five customer service centers that can service customers throughout the YRD. As the leading paper packaging manufacturer in the YRD, we are well positioned to capitalize on the fast-growing demand for paper cartons driven by the concentration and success of the manufacturing companies in the region.

We serve a broad base of reputable customers, including some Fortune 500 companies and Top 500 Chinese enterprises. Our major customers include Nongfu Spring Co., Ltd., Hangzhou Cigarette Company, Samsung’s Chinese subsidiary Suzhou Samsung Electrical Co., Ltd. and Panasonic’s Chinese subsidiary Hangzhou Panasonic Home Electrical Appliance Company. We have developed long-term relationships with and loyalty from our customers, many of which have been with us for over five years. We have also engaged in strategic alliance relationships with ten customers as their preferred supplier. At the same time, we continue to attract new customers to generate higher demand for our products and increase market penetration.

Recent Developments

On March 16, 2012, the Company’s board of directors appointed Marcum Bernstein & Pinchuk LLP (“MarcumBP”) as its independent registered public accounting firm for the fiscal year ending December 31, 2012.

First Quarter Financial Performance Highlights

The following are some financial highlights for the first quarter of 2012:

  • Revenues: Revenues increased $1.5 million, or 5.7%, to $28.4 million for the first quarter of 2012, from $26.9 million for the same period of last year.

  • Gross Profit: Gross profit decreased $1.6 million, or 23.0%, to $5.5 million for the first quarter of 2012, from $7.1 million for the same period of last year.

  • Net income attributable to common stockholders: Net income attributed to stockholders decreased $1.9 million, or 55.3%, to $1.5 million for the first quarter of 2012, from $3.4 million for the same period of last year.

  • Basic and diluted net income per share: Basic and diluted net income per share was $0.04 for the first quarter of 2012, compared with $0.09 for the same period last year.

4


Results of Operations

The following table sets forth key components of our results of operations during the three months ended March 31, 2012 and 2011, both in dollars and as a percentage of our revenues.

    Three Months Ended March 31,  
    2012     2011  
    (Unaudited)     (Unaudited)  
          % of           % of  

 

  Dollars     Revenues     Dollars     Revenues  

Revenues

$  28,463,796     100.0%   $  26,926,044     100.0%  

Cost of goods sold

  23,012,197     80.8%     19,849,744     73.7%  

Gross profit

  5,451,599     19.2%     7,076,300     26.3%  

Operating expenses

                       

         Selling expenses

  1,260,791     4.4%     1,132,183     4.2%  

         General and administrative expenses

  2,308,648     8.1%     2,202,676     8.2%  

Total operating expenses

  3,569,439     12.5%     3,334,859     12.4%  

Other income (expenses)

                       

         Interest income

  77,338     0.3%     124,533     0.5%  

         Interest expense

  (202,258 )   (0.7)%   (167,925 )   (0.6 )%

         Subsidy income

  61,770     0.2%     422,959     1.6%  

         Other income

  34,415     0.1%     -     -  

Total other income (expenses)

  (28,735 )   (0.1)%     379,567     1.4%  

Income before income tax expense and noncontrolling interest

  1,853,425     6.5%     4,121,008     15.3%  

         Income tax expense

  313,999     1.1%     676,601     2.5%  

Net income

  1,539,426     5.4%     3,444,407     12.8%  

         Less: net income attributable to noncontrolling interest

  (1,339 )   (0.0)%     -     -  

Net income attributable to common stockholders

$  1,540,765     5.4%   $  3,444,407     12.8%  

Revenues. We generate revenues from the sale of our paper cartons and other paper products. Our revenues increased by $1.5 million, or 5.7%, to $28.5 million for the three months ended March 31, 2012, from $26.9 million for the same period of 2011. The increase was primarily as a result of the increase in average prices per square meter, partially offset by the decrease in sales volume. The average price per square meter increased by 7.2%, to $0.39 for the three months ended March 31, 2012 from $0.37 in the same period of 2011. Sales volume decreased by 1.0 million square meters, or 1.4%, to 72.6 million square meters for the three months ended March 31, 2012, from 73.6 million square meters for the same period of 2011. The decreased sales volume was mainly the result of a reduction in demand from our customers due to challenges resulting from the domestic and foreign economic environment, which adversely affected the business of many of our customers.

For the three months ended March 31, 2012, color cartons accounted for 27.2% of our revenues and flexo cartons accounted for 72.8% of our revenues, compared to 26.0% and 74.0%, respectively, for the same period of 2011. Average prices per square meter for our color cartons and flexo cartons for the three months ended March 31, 2012 were approximately $0.44 and $0.38, respectively, as compared to approximately $0.42 and $0.35, respectively, for the same period of 2011.

Consumer and industrial goods manufacturing sectors are the principal markets we serve. Our major customers remained home appliance and electronics manufacturers and food, beverage and cigarette manufacturers in the YRD, which accounted for 29.4% and 29.6%, respectively, of our revenues for the three months ended March 31, 2012.

5


Cost of goods sold. Our cost of goods sold is comprised of raw materials, labor cost (production-related workers), depreciation and amortization of production-related equipment, utilities consumption costs and overhead allocation. Our cost of goods sold increased by $3.2 million, or 15.9%, to $23.0 million for the three months ended March 31, 2012, from $19.8 million for the same period of 2011. Average cost of goods sold per square meter for the three months ended March 31, 2012 was approximately $0.32, an increase of approximately $0.05, as compared to approximately $0.27 for the same period of 2011. This increase was primarily due to the increased cost of raw materials of approximately $0.04 per square meter compared to the same period last year. Management will keep monitoring raw material prices for cost control.

Gross profit. Our gross profit decreased by $1.6 million, or 23.0%, to $5.5 million for the three months ended March 31, 2012, from $7.1 million for the same period of 2011. Gross profit from flexo cartons decreased by $1.4 million, or 26.9%, to $3.8 million for the three months ended March 31, 2012, from $5.2 million for the same period of 2011. Gross profit from color cartons decreased by $0.2 million, or 13.5%, to $1.7 million for the three months ended March 31, 2012, from $1.9 million for the same period of 2011. Gross profit as a percentage of revenues was 19.2% for the three months ended March 31, 2012, as compared to 26.3% for the same period of 2011. The decrease in our gross profit was mainly due to increased cost of goods sold as noted above.

Selling expenses. Our selling expenses include freight, salary and benefits for sales and marketing personnel, travel and advertising expenses. Our selling expenses increased by $0.1 million, or 11.4%, to $1.3 million for the three months ended March 31, 2012, from $1.1 million for the same period of 2011. Such increase resulted mainly from staff costs, which includes salary, benefits, social insurance and other relevant staff expenses. As a percentage of revenues, selling expenses for the three months ended March 31, 2012 increased to 4.4%, from 4.2% for the same period of 2011.

General and administrative expenses. Our general and administrative expenses are comprised of research and development (or R&D) expense, salary and benefits for administrative personnel, rental fees, depreciation and amortization for equipment used other than for production and miscellaneous expenses unrelated to production. Our general and administrative expenses increased by $0.1 million, or 4.8%, to $2.3 million for the three months ended March 31, 2012, from $2.2 million for the same period of 2011. This was mainly attributable to a $0.2 million increase in staff costs, which includes salary, benefits, social insurance and other relevant staff expenses, and a $0.1 million decrease in R&D expenses. As a percentage of revenues, general and administrative expenses for the three months ended March 31, 2012 decreased to 8.1%, as compared to 8.2% for the same period of 2011.

Interest expense. Our interest expense increased by $ 0.03 million, or 20.4%, to $0.2 million for the three months ended March 31, 2012, from $0.17 million for the same period of 2011. The increase was mainly attributable to additional bank loans and higher interest rates during the three months ended March 31, 2012 as compared to the same period in 2011.

Income tax expense. Our income tax expense decreased to $0.3 million, or 53.6%, for the three months ended March 31, 2012, as compared to $0.7 million for the same period of 2011. The decrease in income tax expense was mainly attributable to the decrease in income before income tax expense and noncontrolling interest during the three months ended March 31, 2012 as compared to the same period in 2011.

In December 2010, Great Shengda was qualified as a National High-Tech Enterprise in the PRC, a status recognized by China’s Ministry of Science and Technology, Ministry of Finance, and State Administration of Taxation. In December, the status was approved by the local tax bureau. As a result, Great Shengda is entitled to a preferential tax rate of 15%, retroactively effective as of January 1, 2010. Such status is subject to review by government authorities every three years. We cannot assure that we will continue to have such status after 2013 or that the PRC government will continue the preferential tax treatment of designated high-tech enterprises.

Hangzhou Shengming was entitled to two years’ exemption followed by three years’ half deduction on its income tax rate from 2007. Thus, it was exempt from income tax for 2007 and 2008 and was granted a 12.5% income tax rate for 2009, 2010 and 2011. Hangzhou Shengming is subject to the uniform income tax rate of 25% for calendar year 2012.

Shengda Color, Suzhou AA and Shuangsheng are not entitled to any tax holidays or preferential tax treatment. Therefore, they are each subject to the uniform income tax rate of 25% for calendar years 2011 and 2012.

Net income attributable to common stockholders. As a result of the cumulative effect of the above factors, our net income attributable to common stockholders decreased by $1.9 million, or 55.3%, to $1.5 million for the three months ended March 31, 2012, from $3.4 million for the same period of 2011.

6


Liquidity and Capital Resources

Cash generated from our operations and borrowing capacity under our lines of credit are used as our primary source of liquidity. As of March 31, 2012, we had cash and cash equivalents of $19.7 million and restricted cash of $12.8 million. We anticipate that cash on hand, and cash generated from our operations will be sufficient to satisfy our obligations for at least the next 12 months.

The following table sets forth a summary of our cash flows for the periods indicated:

Cash Flow

    Three Months Ended March 31,  
    2012     2011  

 

  (Unaudited)     (Unaudited)  

Net cash provided by (used in) operating activities

$  1,555,140   $  (10,671,043 )

Net cash used in investing activities

  (2,741,569 )   (2,015,289 )

Net cash provided by financing activities

  1,476,90     -  

Effect of foreign currency exchange rate fluctuation on cash and cash equivalents

  124,785     111,960  

Net increase (decrease) in cash and cash equivalents

  415,260     (12,574,372 )

Cash and cash equivalents at beginning of the periods

  19,294,089     35,581,323  

Cash and cash equivalent at end of the periods

$  19,709,349   $  23,006,951  

Operating Activities

Net cash provided by operating activities was $1.6 million for the three months ended March 31, 2012, as compared to $10.7 million net cash used in operating activities for the same period of 2011. This was attributable to our net income of $1.5 million, adjusted by depreciation and amortization expenses of $1.1 million, and a net decrease in cash from working capital items of $1.0 million.

Investing Activities

Net cash used in investing activities was $2.7 million for the three months ended March 31, 2012, as compared to $2.0 million for the same period of 2011. The $2.7 million was used for purchases of property, plant and equipment and prepayment for construction in progress, primarily related to our paper mill.

Financing Activities

Net cash provided by financing activities was $1.5 million for the three months ended March 31, 2012, as compared to nil for the same period of 2011. During the three months ended March 31, 2012, we received proceeds from borrowings amounting to $7.7 million and repaid loans amounting to $6.2 million.

Short Term Loans

As of March 31, 2012, we were party to several loan agreements, including:

  • Loan Agreement, dated July 15, 2011, between Great Shengda, as borrower, and Frankfurt Branch of Bank of China, pursuant to which the bank provided a loan of RMB 25.0 million (approximately $4.0 million) in principal amount. The agreement’s maturity date is June 26, 2012. The interest rate is 3.3% per annum. The loan agreement contains restrictive covenants restricting us during the term of the loan from undertaking any disposal of assets in a manner that is detrimental to our ability to repay the loan. The loan agreement also contains covenants that restrict us from making dividend distributions if we are unable to pay principal and interest or if our after tax profit for a particular fiscal year (1) equals nil or less; or (2) is insufficient to offset deficits of prior years.

  • Loan Agreement, dated January 6, 2012, between Hangzhou Shengming, as borrower, and Xiaoshan Branch of Bank of China, or Xiaoshan BOC, pursuant to which Xiaoshan BOC provided a loan of RMB 20.0 million (approximately $3.2 million) in principal amount. The agreement’s maturity date is July 5, 2012. The interest rate is 105% of the benchmark lending rate of the PBOC, effectively 6.41% at March 31, 2012. The loan agreement contains restrictive covenants restricting us during the term of the loan from undertaking any disposal of assets in a manner that is detrimental to our ability to repay the loan. The loan agreement also contains covenants that restrict us from making dividend distributions if we are unable to pay principal and interest or if our after tax profit for a particular fiscal year (1) equals nil or less; or (2) is insufficient to offset deficits of prior years.

7


As of March 31, 2012, we were also party to the following commercial bill acceptance agreement:

        Amount of   # of Required
Date Bank Applicant Guarantor Acceptance (x) Commission Bills Deposit
07/15/2011 Xiaoshan BOC Great Shengda SD Group $3.1 million 0.05% 11 50% of (x)

Under the above commercial bill acceptance agreement, if the applicant engages in or effects any re-organization, initial public offering, disposal of material assets, change of shareholding structure, or other events that may affect its financial status and ability to perform its obligations under the agreement, it shall notify the bank in a timely manner. If any such event materially and adversely affects the applicant’s ability to repay outstanding balances, it must obtain the bank’s consent.

Long Term Loans

As of March 31, 2012, we were party to two loan agreements, dated December 28, 2011 and February 20, 2012, respectively, between Great Shengda, as borrower, and Tokyo Branch of Bank of China, pursuant to which the bank provided two loans of $4.5 million in principal amount each, totaling $9 million. The agreements’ maturity dates are December 28, 2013 and February 20, 2014, respectively. For both loans, the interest rate is London Interbank Offer Rates (USD) plus 250 basis points, which will be re-priced on June 21 and December 21 each year before the maturity dates, effectively 3.23% at March 31, 2012. Each agreement contains restrictive covenants restricting us during the term of the loans from undertaking any disposal of assets in a manner that is detrimental to our ability to repay the loans. The agreements also contain covenants that restrict us from making dividend distributions if we are unable to pay principal and interest or if our after tax profit for a particular fiscal year (1) equals nil or less; or (2) is insufficient to offset deficits of prior years.

Seasonality

Our operating results and operating cash flows historically have not been subject to seasonal variations. This pattern may change, however, as a result of new market opportunities or new product introductions.

Inflation

Inflation and changing prices have not had a material effect on our business, and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future. However, our management will closely monitor price changes in the Chinese economy and our industry, and continually maintain effective cost controls in operations.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements 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 investors.

Critical Accounting Policies

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

8


Revenue Recognition

We recognize revenue in accordance with Accounting Standards Codification (“ASC”) Topic 605 “Revenue Recongition”. All of the following criteria must exist in order for us to recognize revenue: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) price to the buyer is fixed or determinable; and (4) collectability is reasonably assured.

Delivery does not occur until products have been shipped to the customers, risk of loss has transferred to the customers and customers’ acceptance has been obtained, or we have objective evidence that the criteria specified in customers’ acceptance provisions have been satisfied. The sales price is not considered to be fixed or determinable until all contingencies related to the sale have been resolved.

In the PRC, value added tax (“VAT”) of 17% on invoice amount is collected in respect of the sales of goods on behalf of tax authorities. Revenue is recognized on a net basis, and the VAT collected is not recognized as revenue of the Company.

Accounts and Notes Receivable

Accounts receivable are recognized and carried at original sales amount less an allowance for uncollectible accounts, as needed.

Accounts receivable are reviewed periodically as to whether they are past due based on contractual terms and their carrying value has become impaired. An allowance for doubtful accounts is recorded in the period in which loss is determined to be probable based on an assessment of specific evidence indicating doubtful collection, historical experience, account balance aging and prevailing economic conditions. Accounts receivable balances are written off after all collection efforts have been exhausted. No significant account receivable balance was written off for March 31, 2012 and December 31, 2011. Based on our collection experience, management does not believe that bad debt reserve is warranted at this time.

Notes receivable represent bankers' acceptances that have been arranged with third-party financial institutions by certain customers to settle their purchases from us. These bankers' acceptances are non-interest bearing and are collectible within six months. Such sales and purchasing arrangements are consistent with industry practices in the PRC.

There are no outstanding amounts from customers that individually represent greater than 10% of the total balance of accounts receivable for the period presented.

Income Taxes

We follow ASC Topic 740 “Income Taxes”, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates, applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

Fair Value Measurements

Financial instruments include cash and cash equivalents, accounts and notes receivable, prepayments and other receivables, short-term loans, accounts and notes payable, other payables and amounts due to related parties. The carrying amounts of these financial instruments approximate their fair value due to the short term maturities of these instruments.

We adopted Statement of Financial Accounting Standards No. 157, "Fair Value Measurements," or ASC Topic 820-10 “Fair Value Measurements”, on January 1, 2008 for all financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis (at least annually). ASC Topic 820-10 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. We have not adopted ASC Topic 820-10 for non financial assets and non financial liabilities, as these items are not recognized at fair value on a recurring basis.

9


ASC Topic 820-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for an asset or liability required or permitted to be recorded at fair value, we consider the principal or most advantageous market in which it would be transacted and consider assumptions that market participants would use when pricing the asset or liability.

ASC Topic 820-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC Topic 820-10 establishes three levels of inputs that may be used to measure fair value: Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities. Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

Concentration of Credit Risk

Assets that potentially subject us to significant concentration of credit risk primarily consist of cash and cash equivalents, accounts and notes receivable. As of March 31, 2012 and December 31, 2011, substantially all of our cash and cash equivalents were deposited in financial institutions located in the PRC, which management believes are of high credit quality. Accounts receivable are typically unsecured and are derived from revenue earned from customers in the PRC. The risk with respect to accounts receivable is mitigated by credit evaluations we perform on our customers and its ongoing monitoring process of outstanding balances.

Concentration of Customers

No customer individually accounted for greater than 10% of the total revenues for the periods presented. The majority of our customers are, however, located in the YRD, therefore, we are very dependent on such region's continued economic growth.

Current vulnerability due to certain other concentrations

Our operations may be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for more than 30 years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC’s political, economic and social conditions. There is also no guarantee that the PRC government’s pursuit of economic reforms will be consistent or effective.

We transact the majority of our business in RMB, which is not freely convertible into foreign currencies. On January 1, 1994, the PRC government abolished the dual rate system and introduced a single rate of exchange as quoted daily by the PBOC. However, the unification of the exchange rates does not imply that RMB may be readily convertible into US$ or other foreign currencies. All foreign exchange transactions continue to take place either through the PBOC or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the PBOC. Approval of foreign currency payments by the PBOC or other institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts.

Additionally, the value of RMB is subject to changes in central government policies and international economic and political developments affecting supply and demand in the PRC foreign exchange trading system market.

10


Recent Accounting Pronouncements

See Note 2(x) (Recently issued accounting standards) to our unaudited consolidated financial statements included elsewhere in this report.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q.

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2012, our disclosure controls and procedures were effective at a reasonable assurance level to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting during the first quarter of fiscal 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met.

PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results.

ITEM 1A. RISK FACTORS.

There are no material changes from the risk factors previously disclosed in Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2011.

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

None.

11



ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

We have no information to disclose that was required to be in a report on Form 8-K during the period covered by this report, but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.

ITEM 6. EXHIBITS.

The list of exhibits in the Exhibit Index to this report is incorporated herein by reference.

12


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1935, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: May 10, 2012 CHINA SHENGDA PACKAGING GROUP INC.
     
  By:                /s/ Daliang Teng                                       
    Daliang Teng, Chief Executive Officer
    (Principal Executive Officer)
     
  By: /s/ Ken He                                                  
    Ken He, Chief Financial Officer
    (Principal Financial Officer and Principal
    Accounting Officer)

13


EXHIBIT INDEX

Exhibit No.   Description
31.1 Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certifications of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certifications of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certifications of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101   Interactive data files pursuant to Rule 405 of Regulation S-T (furnished herewith).


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