XFRA:0CH China Shengda Packaging Group Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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: June 30, 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 August 10, 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
Period Ended June 30, 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. 2
Item 3. Quantitative and Qualitative Disclosures About Market Risk 8
Item 4. Controls and Procedures. 8

PART II
OTHER INFORMATION

Item 1. Legal Proceedings. 9
Item 1A. Risk Factors. 9
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 9
Item 3. Defaults Upon Senior Securities 9
Item 4. Mine Safety Disclosures. 9
Item 5. Other Information. 9
Item 6. Exhibits 9

i


PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

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

CONTENTS

  Page
Consolidated financial statements:  
         Consolidated balance sheets F-2
         Consolidated statements of income and comprehensive income F-3
         Consolidated statements of cash flows F-4
         Notes to the consolidated financial statements F-5-F-25

1



CHINA SHENGDA PACKAGING GROUP INC.
 
 
Consolidated Financial Statements
June 30, 2012
 

F-1



CHINA SHENGDA PACKAGING GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in US$)

 

  June 30,     December 31,  

 

  2012     2011  

 

  (Unaudited)        

ASSETS

           

   Current assets

           

       Cash and cash equivalents

$  14,361,236   $  19,294,089  

       Restricted cash

  18,493,200     7,851,387  

       Accounts and notes receivable, net

  39,097,648     36,835,095  

       Inventories

  17,649,882     19,449,954  

       Prepayments and other receivables

  2,390,394     929,126  

       Amount due from related parties

  85,403     133,608  

   Total current assets

  92,077,763     84,493,259  

 

           

   Non-current assets

           

       Property, plant and equipment, net

  43,243,946     34,573,246  

       Prepayment for land use right to related party

  11,887,968     11,805,000  

       Prepayment for construction in progress

  5,975,685     5,424,412  

       Customer relationship, net

  314,429     550,316  

       Deferred tax assets

  379,833     409,845  

       Goodwill

  175,724     174,497  

   Total assets

$  154,055,348   $  137,430,575  

 

           

LIABILITIES AND EQUITY

           

   Current liabilities

           

       Accounts and notes payable

$  32,274,776   $  18,750,719  

       Amounts due to related parties

  350,083     137,689  

       Accrued expenses and other payables

  2,985,308     1,651,283  

       Taxes payable

  2,930,954     3,358,902  

         Short-term loans

  3,500,000     10,073,600  

   Total current liabilities

  42,041,121     33,972,193  

 

           

   Non-current liabilities

           

       Long-term loans

  9,000,000     4,500,000  

       Deferred tax liabilities

  78,607     137,579  

         Total liabilities

  51,119,728     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 June 30, 2012 and December 31, 2011, 38,790,811 outstanding at June 30, 2012 and December 31, 2011, respectively)

  39,456     39,456  

           Treasury stock (665,500 shares both at June 30, 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

  43,633,457     40,438,219  

           Accumulated other comprehensive income

  8,971,981     8,258,441  

   Total stockholder’s equity

  102,524,309     98,615,531  

           Noncontrolling interest

  411,311     205,272  

   Total equity

  102,935,620     98,820,803  

   Total liabilities and equity

$  154,055,348   $  137,430,575  

See notes to the consolidated financial statements

F-2



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

 

Three months ended June 30,     Six months ended June 30,  

 

  2012     2011     2012     2011  

 

  (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  

Revenues

$  36,654,052   $  32,585,321   $  65,117,848   $  59,511,365  

Cost of goods sold

  30,795,625     26,377,850     53,807,822     46,227,594  

Gross profit

  5,858,427     6,207,471     11,310,026     13,283,771  

Operating expenses

                       

     Selling expenses

  1,320,933     1,149,984     2,581,724     2,282,167  

     General and administrative expenses

  2,597,650     2,616,389     4,906,298     4,819,065  

 

  3,918,583     3,766,373     7,488,022     7,101,232  

Other income (expenses)

                       

     Interest income

  102,858     86,877     180,196     211,410  

     Interest expense

  (169,805 )   (161,663 )   (372,063 )   (329,588 )

     Subsidy income

  155,635     283,691     217,405     706,650  

     Other

  (10,395 )   -     24,020     -  

 

  78,293     208,905     49,558     588,472  

Income before income tax expense and noncontrolling interest

  2,018,137     2,650,003     3,871,562     6,771,011  

 

                       

     Income tax expense

  365,517     381,402     679,516     1,058,003  

Net income

  1,652,620     2,268,601     3,192,046     5,713,008  

Less: net loss attributable to noncontrolling interest

  1,853     -     3,192     -  

Net income attributable to company’s common stockholders

$  1,654,473   $  2,268,601   $  3,195,238   $  5,713,008  

 

                       

Basic and diluted earnings per share

$  0.04   $  0.06   $  0.08   $  0.14  

Weighted-average number of shares outstanding - basic and diluted

$  38,790,811     39,456,311     38,790,811     39,456,311  

 

                       

Comprehensive income:

                       

Net income

  1,652,620     2,268,601     3,192,046     5,713,008  

     Foreign currency translation adjustment

  50,964     1,622,471     713,337     1,951,986  

Comprehensive income

  1,703,584     3,891,072     3,905,383     7,664,994  

Less: comprehensive loss attributable to noncontrolling interest

  3,374     -     3,395     -  

 

  1,706,958     3,891,072   $  3,908,778   $  7,664,994  

See notes to the consolidated financial statements

F-3



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

 

  Six months ended June 30,  

 

  2012     2011  

 

  (Unaudited)     (Unaudited)  

Cash flows from operating activities

           

Net income

$  3,192,046   $  5,713,008  

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

       

   Depreciation and amortization expenses

  2,221,491     1,913,758  

Change in operating assets and liabilities:

           

   Restricted cash

  (10,597,046 )   9,141,882  

   Accounts and notes receivable

  (2,000,508 )   (3,175,947 )

   Inventories

  1,938,675     (720,265 )

   Prepayments and other receivables

  (712,774 )   1,346,868  

   Accounts and notes payable

  13,405,447     (23,272,261 )

   Amount due to related party

  260,826     (374,484 )

   Deferred tax

  (27,073 )   (26,055 )

   Accrued expenses and other payables

  1,323,720     (307,907 )

   Tax payables

  (451,999 )   96,468  

   Net cash provided by (used in) operating activities

  8,552,805     (9,664,935 )

 

           

Cash flows from investing activities

           

   Purchase of property, plant and equipment

  (10,417,503 )   (2,343,201 )

   Prepayment paid for construction in progress

  (1,252,821 )   -  

   Net cash used in investing activities

  (11,670,324 )   (2,343,201 )

 

           

Cash flows from financing activities

           

   Proceeds from short-term loans

  6,668,579     14,048,400  

   Proceeds from long-term loan

  4,485,578     -  

   Repayment of short-term loans

  (13,319,514 )   (14,048,400 )

   Investment from noncontrolling interests

  209,228     -  

   Net cash flows used in financing activities

  (1,956,129 )   -  

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

  140,795     546,374  

Net changes in cash and cash equivalents

  (4,932,853 )   (11,461,762 )

Cash and cash equivalents, beginning of period

  19,294,089     35,581,323  

Cash and cash equivalents, end of period

$  14,361,236   $  24,119,561  

 

           

Cash paid during the period for:

           

Interest paid

$  329,692   $  329,588  

Income taxes paid

$  535,413   $  1,918,714  

See notes to the consolidated financial statements

F-4



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-5



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, 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. The remaining register capital of RMB44 million (US$7.0 million) was fully received on April 20, 2012. Shuangsheng is engaged in the business of new paper making technology, related research and the development, application, transfer and consultation of such relevant technology.

 

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 June 30, 2012 and for the six-month periods ended June 30, 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 June 30, 2012, its consolidated results of operations and cash flows for the six-month periods ended June 30, 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 is 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 are 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-6



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

(b)

Use of estimates

   

The preparation of consolidated 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)

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.

   
(d)

Restricted cash

   

Restricted cash represents the deposits held as compensating balances against banks’ acceptances issued and loans borrowed, amounting to $18,493,200 and $7,851,387 as of June 30, 2012 and December 31, 2011, respectively.

   
(e)

Accounts and notes receivable

   

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 six months ended June 30, 2012 and 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 June 30, 2012 and December 31, 2011.

   
(f)

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, a provision is accrued for the difference with charges to cost of sales.

   

No value was written down for the inventories for six months and three months ended June 30, 2012 and 2011, respectively.

F-7



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

(g)

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 represented 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.

F-8



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

(h)

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.

 

 

(i)

Customer relationship

 

 

Customer relationship are 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.

 

 

(j)

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 June 30, 2012 and December 31, 2011, respectively.

 

 

(k)

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, equity is translated at the historical exchange rate at the injection date and revenues and expenses are translated at the average exchange rates during the reporting periods. Translation adjustments are reported in other comprehensive income.

F-9



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

(l)

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.

   
(m)

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, 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 June 30, 2012 and December 31, 2011, the statutory reserve recorded by the Company’s subsidiaries incorporated in the PRC amounted to US$6,843,616nd US$6,843,616 respectively.

   

As of June 30, 2012, the statutory reserve balances of Great Shengda, Hangzhou Shengming, Shengda Color , Suzhou AA and Shuangsheng accounted for approximately 13.7%, 9.2%, 48.2%, 8.8% and nil of their registered capital, respectively. The future income of these subsidiaries will be subject to statutory reserve.

   
(n)

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 (the “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.

F-10



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

(o)

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$2,645,273and US$1,696,724 for the six months ended June 30, 2012 and 2011, respectively. US$1,886,450 and US$930,114 were recorded in general and administrative expenses for the three months ended June 30, 2012 and 2011, respectively.

   
(p)

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$14,439 for the six months ended June 30, 2012 and 2011, respectively. Nil and US$5,697 was recorded in the selling expenses for three months ended June 30, 2012 and 2011, respectively.

   
(q)

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$585,797 and US$561,657 for the six months ended June 30, 2012 and 2011, respectively. US$306,863 and US$249,668 for three months ended June 30, 2012 and 2011, respectively.

   
(r)

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.

   
(s)

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 June 30, 2012 and December 31, 2011.

   
(t)

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.

F-11



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

(u)

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.

   
(v)

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.

   

The Group adopted ASC Topic 820-10 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.

   
(w)

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.

F-12



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

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.

   

In December 2011, The FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05. ASU 2011-12 defers the requirement that company’s present reclassification adjustments for each component of accumulated other comprehensive income (“AOCI”) in both net income and other comprehensive income (“OCI”) on the face of the financial statements. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

   

In July 2012, the FASB issued ASU 2012-02, “Intangibles-Goodwill and Other (Topic 350): Testing Indefinite- Lived Intangible Assets for Impairment." This ASU simplifies how entities test indefinite-lived intangible assets for impairment which improve consistency in impairment testing requirements among long-lived asset categories. These amended standards permit an assessment of qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. For assets in which this assessment concludes it is more likely than not that the fair value is more than its carrying value, these amended standards eliminate the requirement to perform quantitative impairment testing as outlined in the previously issued standards. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

   

Except for the ASUs above, in the period ended August 10, 2012, The FASB has issued ASU No. 2012-01 through ASU 2011-02, which is not expected to have a material impact on the consolidated financial statements upon adoption.

   
(x)

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 June 30, 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.

F-13



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

Concentration of Customers

   

There are no revenues from other 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 all 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.

   
3.

ACCOUNTS AND NOTES RECEIVABLE, NET

   

Accounts and notes receivable consist of the following:


      June 30,     December 31,  
      2012     2011  
      (Unaudited)        
               
  Accounts receivable $  34,859,378   $  32,445,001  
  Notes receivable   4,238,270     4,390,094  
    $  39,097,648   $  36,835,095  

No allowance for doubtful amounts was provided as of June 30, 2012 and December 31, 2011.

   
4.

INVENTORIES

   

Inventories consist of the following:

F-14



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

      June 30,     December 31,  
      2012     2011  
      (Unaudited)        
  Raw materials $  15,976,557   $  17,236,406  
  Finished goods   1,673,325     2,213,548  
    $  17,649,882   $  19,449,954  

F-15



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

5.

PREPAYMENTS AND OTHER RECEIVABLES

   

Prepayments and other receivables consist of the following:


      June 30,     December 31,  
      2012     2011  
      (Unaudited)        
  Prepayments $  2,128,251   $  666,344  
  Other receivables   262,143     262,782  
    $  2,390,394   $  929,126  

6.

PROPERTY, PLANT AND EQUIPMENT, NET

   

Property, plant and equipment consist of the following:


      June 30,     December 31,  
      2012     2011  
      (Unaudited)        
  Buildings and improvements $  10,912,282   $  9,010,793  
  Machinery   35,325,083     34,926,527  
  Office equipment and furnishing   667,071     705,849  
  Motor vehicles   1,547,240     1,536,442  
  Construction in progress   10,230,360     2,131,598  
      58,682,036     48,311,209  
  Less: accumulated depreciation   (15,438,090 )   (13,737,963 )
    $  43,243,946   $  34,573,246  

The Group recorded depreciation expenses of US$1,913,119 and US$1,682,786 for the six months ended June 30, 2012 and 2011 respectively. US$747,916 and US$844,214 for the three months ended June 30, 2012 and 2011, respectively.

   

No property, plant and equipment were pledged as collateral for bank loans as of June 30, 2012 and December 31, 2011.

   
7.

PREPAYMENT FOR CONSTRCUTION IN PROGRESS

   

As of June 30, 2012 and December 31, 2011, the Group prepaid US$6,688,459 and US$5,424,412 principally for Shuangdeng’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$11,887,968 (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 June 30, 2012, the transferring of license of land use right is still awaiting the local government’s authorization.

F-16



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:


      June 30,     December 31,  
      2012     2011  
    (Unaudited)        
               
  Customer relationship   2,173,526     2,158,357  
  Less: accumulated amortization   (1,859,097 )   (1,608,041 )
                                                                                                                                                $  314,429   $  550,316  

Total amortization expenses were US$239,755 and US$230,972 for the six months ended June 30, 2012 and 2011, respectively. US$119,662 and US$115,355 for the three months ended June 30, 2012 and 2011, respectively. As of June 30, 2012 customer relationship recognized in the acquisition of Hangzhou Shengming had a remaining useful life of six months, and will be amortized at US$183,749 in 2012. Customer relationship recognized in the acquisition of Suzhou AA has a remaining useful life of one years and two month, and will be amortized at US$56,005 in 2012 and US$74,675 in 2013.

F-17



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

10.

BORROWINGS

   

Short-term loans consist of the following:


      June 30, 2012 (Unaudited)   December 31, 2011  
  Lender   Interest rate     Maturity date     Balance     Interest rate     Maturity date     Balance  
                Benchmark of PBOC     Feb.16,2012   $  3,148,000  
  Bank of China   LIBOR(USD) +2.5%     Apr.23, 2013   $ 3,500,000     3.30%     Jun.26,2012     3,935,000  
                                       
                                       
  Subtotal             $ 3,500,000               $  7,083,000  
  Agricultural Bank of China           -     Benchmark of PBOC     Feb.15,2012     2,990,600  
  Total             $ 3,500,000               $  10,073,600  

All of short-term loans were denominated in RMB or USD for working capital purpose, with weighted average balances of US$7,880,787and US$11,910,600 and weighted average interest rates of 4.29% and 5.443% for the six months ended June 30, 2012 and 2011, respectively, and with weighted average balances of US$8,359,788 and US$11,917,028 and weighted average interest rates of 4.42% and 5.26% for the three months ended June 30, 2012 and 2011, respectively.

Long-Term Loans consist of the following:

      June 30, 2012 (Unaudited)   December 31, 2011  
      Interest     Maturity           Interest     Maturity        
  Lender   rate     date     Balance     rate     date     Balance  
                                       
  Bank of China   LIBOR(USD) +2.5%     December 28, 2013   $ 4,500,000     LIBOR(USD) +2.5%     December 28, 2013   $ 4,500,000  
    LIBOR(USD) +2.5%     February 20, 2014   $ 4,500,000              
                $ 9,000,000               $ 4,500,000  

Note* the effective interest rate was 3.2% as of June 30, 2012.

The long term loan was with weighted average balances of US$7,825,000 and nil and weighted average interest rates of 3.25% and nil for the six months ended June 30, 2012 and 2011, and with weighted average balances of US$9,000,000 and nil and weighted average interest rates of 3.24% and nil for the three months ended June 30, 2012 and 2011 .

A restricted bank deposit of approximately US$10.0 million as provided by Great Shengda as collateral for the long-term loans. The remaining 8.5M restricted cash was the deposit for notes payable of Great Shengda and Shuangsheng. The long-term loans were denominated in USD for working capital purposes.

F-18



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

The following table summarizes the unused lines of credit:

      June 30, 2012 (Unaudited)     December 31, 2011  
      Starting     Maturity     Facility     Unused     Starting     Maturity     Facility     Unused  
  Lender   date     date     amount     facility     date     date     amount     facility  
    February 22, 2012     February 22, 2013   $ 7,925,312   $ 7,925,312     January 12,2012     January 12,2012   $  20,462,000   $  15,740,000  
  Bank of China   February 22, 2012     February 22, 2013   $ 12,680,499   $ 3,712,034                  
                                                   
  Agricultural Bank of China   -     -     -     -     February 22,2012     February 22,2012   $  4,722,000   $  1,731,400  
                                                   
  Total             $ 20,605,811   $  11,637,346               $  25,184,000   $  17,471,400  

The above lines of credit were guaranteed by Shengda Group for working capital and general corporate purposes. The unused credit facilities can be withdrawn upon demand.

   
11.

ACCOUNTS AND NOTES PAYABLE

   

Accounts and notes payable consist of the following:


      June 30,     December 31,  
      2012     2011  
      (Unaudited)        
  Notes payable $  18,359,513   $  15,602,719  
  Accounts payable   13,915,263     3,148,000  
    $  32,274,776   $  18,750,719  

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

F-19



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:


      June 30,     December 31,  
      2012     2011  
      (Unaudited)        
  Advance from customers $  762,464   $  333,666  
  Payroll and welfare payable   751,249     675,770  
  Other payables   983,187     411,683  
  Accrued expenses   488,408     230,164  
    $  2,985,308   $  1,651,283  

13.

RELATED PARTY TRANSACTION

   

Related party balances are as follows:


            June 30,     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     68,520     118,699  
  Shengda Xiang Wei Chemical Company Limited (“Shengda Xiang Wei”)   Controlled by the same ultimate stockholders     16,883     14,909  
          $  85,403   $  133,608  
                     
  Amounts due to related parties                  
  Zhejiang Shuang Ke Da Weaving Co., Ltd (“Shuang Ke Da”)   Controlled by the same ultimate stockholders   $  119,970   $  77,118  
                     
  Zhejiang Shuangsheng Logistic Company Limited (“Shuangsheng Logistic”)   Controlled by the same ultimate stockholders     230,113     60,571  
          $  350,083   $  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-20



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 June 30,     Six months ended June 30,  
  Related parties   Relationship     2012     2011     2012     2011  
            (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
  Lease                              
                                 
  Hangzhou New Shengda Investment Limited   Controlled by the same ultimate stockholders     66,703     64,176     133,526     128,520  
  Shengda Group   Controlled by the same ultimate stockholders     150,581     66,573     228,031     133,146  
            217,284     130,749     361,557     261,666  
                                 
  Transportation service from related party                              
  Shuangsheng Logistic   Controlled by the same ultimate stockholders     234,947     129,755     349,649     310,677  
                                 
  Sales to related party                              
  Shuangdeng Paper   Controlled by the same ultimate stockholders     84,098     19,609     185,342     19,635  
  Zhejiang Shengda Xiangwei Huagong Co., Ltd.   Controlled by the same ultimate stockholders     58,827     -     97,154     -  
            142,925     19,609     282,496     19,635  
                                 
  Purchase of water and electricity from related party                              
  Zhejiang Shuang Ke Da Weaving Co., Ltd   Controlled by the same ultimate stockholders     343,445     465,273     736,368     776,983  

The transactions prices were determined with reference to market prices.

Guarantee by SD Group

SD Group entered into maximum debt guarantee contracts with Xiaoshan BOC under which SD Group agreed to act as guarantor for loans borrowed by Great Shengda and Hangzhou Shengming from Xiaoshan BOC. The maximum guaranteed amount is RMB80 million (approximately US$17 million) and RMB50.0 (approximately US$7.9 million) for any loans borrowed by Great andShengda Hangzhou Shengming, respectively.

F-21



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(m), 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 as of June 30, 2012 and December 31, 2011 .

   
15.

TAXATION

   

Taxes payable are composed of the following:


      June 30,     December 31,  
      2012     2011  
      (Unaudited)        
  VAT payable $  1,841,944   $  2,341,700  
  Income tax payable   1,048,352     842,583  
  Other taxes payable   40,658     174,619  
    $  2,930,954   $  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 six months ended June 30, 2012 and December 31, 2011, the Company does not provide for U.S. income taxes on foreign subsidiary’s 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%.

F-22



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

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.

Shengda Color, Suzhou AA and Shuangsheng 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 June 30,     Six months ended June 30,  
 

 

  2012     2011     2012     2011  
 

 

  (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
 

Expected enterprise income tax at statutory tax rate

$  545,025   $  684,533   $  1,042,883   $  1,739,115  
 

Effect of tax holiday

  (167,100 )   (303,116 )   (362,817 )   (669,369 )
 

Others

  (12,408 )   (15 )   (550 )   (11,743 )
 

Effective enterprise income tax

$  365,517   $  381,402   $  679,516   $  1,058,003  

The significant components of income tax expense are as follows:

 

 

  Three months ended June 30,     Six months ended June 30,  
 

 

  2012     2011     2012     2011  
 

 

  (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
 

Current tax expenses

$  384,383   $  394,448   $  706,589   $  1,084,059  
 

Deferred tax benefits

  (18,866 )   (13,046 )   (27,073 )   (26,056 )
 

Income tax expenses

$  365,517   $  381,402   $  679,516   $  1,058,003  

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:

F-23



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

 

 

  June 30,     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

$  379,833   $  409,845  
 

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

$  (78,607 ) $  (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 $  4,976,890  
  2013 and thereafter   635,103  
  Total $  5,611,993  

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 $  1,003,718  
  2013 and thereafter   -  
  Total $  1,003,718  

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 June 30, 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 June 30, 2012 and December 31, 2011. Cost method is adopted for the treasury stock.

F-24



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 six months ended June 30, 2012 and 2011, and for the three months ended June 30, 2012 and 2011:


 

 

  Three month ended June 30,     Six month ended June 30  
 

 

  2012     2011     2012     2011  
 

 

  (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
 

Net income attributable to China Shengda Packaging’ common stockholders

$  1,654,473,   $  2,454,208   $  3,195,238   $  5,713,008  
 

Weighted average number of common shares outstanding – basic and diluted

  38,790,811     39,456,311     38,790,811     39,456,311  
 

 

                       
 

Earnings per share – basic and diluted

$  0.04   $  0.06   $  0.08   $  0.14  

20.

SUBSEQUENT EVENT

   

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

F-25



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; and

  • “U.S. dollars,” “dollars” and “$” are to the legal currency of the United States.

2


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 June 30, 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

The company held its 2012 Annual Meeting of Stockholders (the “Annual Meeting”) on July 13, 2012. At the Annual Meeting, the Company’s stockholders were asked to vote on a proposal to re-elect five directors to serve as members of the Board of Directors until the 2013 Annual Meeting of Stockholders or until their successors are duly elected. The stockholders elected Mr. Nengbin Fang, Ms. Congyi Fang, Mr. Zhihai Mao, Mr. Michael Zhang and Mr. Yaoquan Zhang as members of the Board of Directors of the Company by a plurality of the votes cast. Also ratified was the proposal for the appointment of Marcum Bernstein & Pinchuk LLP as the Company’s independent registered accounting firm for the fiscal year ending on December 31, 2012.

Second Quarter Financial Performance Highlights

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

  • Revenues: Revenues increased by $4.1 million, or 12.5%, to $36.7 million for the three months ended June 30, 2012, from $32.6 million for the same period of last year.

  • Gross Profit: Gross profit decreased by $0.3 million, or 5.6%, to $5.9 million for the three months ended June 30, 2012, from $6.2 million for the same period of last year.

  • Net income attributable to common stockholders: Net income attributed to stockholders decreased by $0.6 million, or 27.1%, to $1.7 million for the three months ended June 30, 2012, from $2.3 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 three months ended June 30, 2012, compared with $0.06 for the same period last year.

3


Results of Operations

Comparison of Three Months Ended June 30, 2012 and June 30, 2011 (unaudited)

The following table sets forth key components of our results of operations during the three months ended June 30, 2012 and 2011, both in dollars and as a percentage of our revenues.

    Three Months Ended     Three Months Ended  
    June 30, 2012     June 30, 2011  
          % of           % of  
    Dollars     Revenues     Dollars     Revenues  

Revenues

$  36,654,052     100.00%   $  32,585,321     100.00%  

Cost of goods sold

  30,795,625     84.02%     26,377,850     80.95%  

Gross profit

  5,858,427     15.98%     6,207,471     19.05%  

Operating expenses

                       

         Selling expenses

  1,320,933     3.60%     1,149,984     3.53%  

         General and administrative expenses

  2,597,650     7.09%     2,616,389     8.03%  

Total operating expenses

  3,918,583     10.69%     3,766,373     11.56%  

Other income (expenses)

                       

         Interest income

  102,858     0.28%     86,877     0.27%  

         Interest expense

  (169,805 )   (0.46)%   (161,663 )   (0.50)%

         Subsidy income

  155,635     0.42%     283,691     0.87%  

         Other

  (10,395 )   (0.03)%   -     -  

Total other income (expenses)

  78,293     0.21%     208,905     0.64%  

Income before income tax expense and noncontrolling interest

  2,018,137     5.51%     2,650,003     8.13%  

         Income tax expense

  365,517     1.00%     381,402     1.17%  

Net income

  1,652,620     4.51%     2,268,601     6.96%  

         Less: net income attributable to noncontrolling interest

  (1,853 )   (0.01)%   -     -  

Net income attributable to common stockholders

$  1,654,473     4.51%   $  2,268,601     6.96%  

Revenues. We generate revenues from the sale of our paper cartons and other paper products. Our revenues increased by $4.1 million, or 12.5%, to $36.7 million for the three months ended June 30, 2012, from $32.6 million for the same period in 2011. The increase was attributable to the increase in sales volume, partially offset by the decrease in average prices per square meter. The average price per square meter decreased by approximately 2.6%, to approximately $0.40 for the three months ended June 30, 2012 from approximately $0.41 in the same period of 2011. Sales volume increased by 11.8 million square meters, or 14.7%, to 91.9 million square meters for the three months ended June 30, 2012, from 80.1 million square meters for the same period of 2011. The increased sales volume was mainly the result of greater efforts by our sales team, even though there were challenges resulting from the domestic and foreign economic environment.

For the three months ended June 30, 2012, color cartons accounted for 30.3% of our revenues and flexo cartons accounted for 69.7% of our revenues, compared to 28.6% and 71.4%, respectively, for the same period of 2011. Average per square meter prices for our color cartons and flexo cartons for the three months ended June 30, 2012 were approximately $0.41 and $0.39, respectively, as compared to approximately $0.46 and $0.39, respectively, for the same period of 2011.

Consumer and industrial goods manufacturing sectors are the principal markets we serve. Our major customers remained home appliances and electronics manufacturers and food, beverage and cigarette manufacturers in the YRD, which accounted for 25.7% and 32.1%, respectively, of our revenues for the three months ended June 30, 2012, compared to 22.2% and 23.9%, respectively, of our revenues in the three months ended June 30, 2011.

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 $4.4 million, or 16.7%, to $30.8 million for the three months ended June 30, 2012, from $26.4 million for the same period of 2011, which was mainly attributable to the increase in sales volume described above. Average cost of goods sold per square meter for the three months ended June 30, 2012 was approximately $0.33, which was approximately the same as for the same period of 2011. Management will keep monitoring raw material prices for cost control.

4


Gross profit. Our gross profit decreased by $0.3 million, or 5.6%, to $5.9 million for the three months ended June 30, 2012, from $6.2 million for the same period of 2011. Gross profit from flexo cartons decreased by $0.1 million, or 2.5%, to $4.1 million for the three months ended June 30, 2012, from $4.2 million for the same period of 2011. Gross profit from color cartons decreased by $0.2 million, or 13.5%, to $1.8 million for the three months ended June 30, 2012, from $2.0 million for the same period of 2011. Gross profit as a percentage of revenues was 16.0% for the three months ended June 30, 2012, as compared to 19.0% 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, travelling and advertising expenses. Our selling expenses increased by $0.2 million, or 14.9%, to $1.3 million for the three months ended June 30, 2012, from $1.1 million for the same period of 2011. Such increase resulted mainly from staff costs, which include salary, benefits, social insurance and other relevant staff expenses. As a percentage of revenues, selling expenses for the three months ended June 30, 2012 increased to 3.6%, from 3.5% 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 were $2.6 million for the three months ended June 30, 2012, which was approximately the same as for the same period of 2011. As a percentage of revenues, general and administrative expenses for the three months ended June 30, 2012 decreased to 7.1%, as compared to 8.0% for the same period of 2011.

Subsidy income. We received local government funds in support of our R&D activities and hi-tech development in the amounts of $0.16 million and $0.28 million for the three months ended June 30, 2012 and 2011, respectively.

Income tax expense. Our income tax expense decreased to $0.37 million for the three months ended June 30, 2012, as compared to $0.38 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.

In December 2010, Great Shengda 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 $0.6 million, or 27.1%, to $1.7 million for the three months ended June 30, 2012, from $2.3 million for the same period of 2011.

Comparison of Six Months Ended June 30, 2012 and June 30, 2011 (unaudited)

The following table sets forth key components of our results of operations during the six months ended June 30, 2012 and 2011, both in dollars and as a percentage of our revenues.

    Six Months Ended     Six Months Ended  
    June 30, 2012     June 30, 2011  
          % of           % of  

 

  Dollars     Revenues     Dollars     Revenues  

Revenues

$  65,117,848     100.00%   $  59,511,365     100.00%  

Cost of goods sold

  53,807,822     82.63%     46,227,594     77.68%  

Gross profit

  11,310,026     17.37%     13,283,771     22.32%  

Operating expenses

                       

         Selling expenses

  2,581,724     3.96%     2,282,167     3.83%  

         General and administrative expenses

  4,906,298     7.53%     4,819,065     8.10%  

Total operating expenses

  7,488,022     11.50%     7,101,232     11.93%  

Other income (expenses)

                       

         Interest income

  180,196     0.28%     211,410     0.36%  

         Interest expense

  (372,063 )   (0.57)%   (329,588 )   (0.55)%  

         Subsidy income

  217,405     0.33%     706,650     1.19%  

         Other

  24,020     0.04%     -        

Total other income (expenses)

  49,558     0.08%     588,472     0.99%  

Income before income tax expense and noncontrolling interest

  3,871,562     5.95%     6,771,011     11.38%  

         Income tax expense

  679,516     1.04%     1,058,003     1.78%  

Net income

  3,192,046     4.90%     5,713,008     9.60%  

         Less: net loss attributable to noncontrolling interest

  (3,192 )   (0.00)%   -        

Net income attributable to common stockholders

$  3,195,238     4.91%   $  5,713,008     9.60%  

5



Revenues. Our revenues increased by $5.6 million, or 9.4%, to $65.1 million for the six months ended June 30, 2012, from $59.5 million for the same period of 2011. The increase was primarily attributable to the increase in sales volume. The average price per square meter was approximately $0.39 for the six months ended June 30, 2012, which was approximately the same as in the same period of 2011. Sales volume increased by 10.8 million square meters, or 7.0%, to 164.5 million square meters for the six months ended June 30, 2012, from 153.7 million square meters for the same period of 2011. The increased sales volume was mainly the result of greater efforts by our sales team to get purchase orders, even though there were challenges resulting from the domestic and foreign economic environment.

For the six months ended June 30, 2012, color cartons accounted for 28.9% of our revenues and flexo cartons accounted for 71.1% of our revenues, compared to 27.5% and 72.5%, respectively, for the same period of 2011. Average per square meter prices for our color cartons and flexo cartons for the six months ended June 30, 2012 were approximately $0.42 and $0.39, respectively, as compared to approximately $0.44 and $0.37, respectively, for the same period of 2011.

Consumer and industrial goods manufacturing sectors are the principal markets we serve. Our major customers remained home appliances and electronics manufacturers and food, beverage and cigarette manufacturers in the YRD, which accounted for 27.3% and 31.0%, respectively, of our revenues for the six months ended June 30, 2012, compared to 23.8% and 25.0%, respectively, of our revenues in the six months ended June 30, 2011.

Cost of goods sold. Our cost of goods sold increased by $7.6 million, or 16.4%, to $53.8 million for the six months ended June 30, 2012, from $46.2 million for the same period of 2011. Average cost of goods sold per square meter for the six months ended June 30, 2012 was approximately $0.33, an increase of approximately $0.03, as compared to approximately $0.30 for the same period of 2011. This increase was primarily due to the increased cost of raw materials. Management will keep monitoring raw material prices for cost control.

Gross profit. Our gross profit decreased by $2.0 million, or 14.9%, to $11.3 million for the six months ended June 30, 2012, from $13.3 million for the same period of 2011. Gross profit from flexo cartons decreased by $1.5 million, or 15.6%, to $7.8 million for the six months ended June 30, 2012, from $9.3 million for the same period of 2011. Gross profit from color cartons decreased by $0.5 million, or 13.3%, to $3.5 million for the six months ended June 30, 2012, from $4.0 million for the same period of 2011. Gross profit as a percentage of revenues was 17.4% for the six months ended June 30, 2012, as compared to 22.3% 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 increased by $0.3 million, or 13.1%, to $2.6 million for the six months ended June 30, 2012, from $2.3 million for the same period of 2011. Such increase resulted mainly from $0.2 million increase in staff costs, which include salary, benefits, social insurance and other relevant staff expenses. As a percentage of revenues, selling expenses for the six months ended June 30, 2012 increased to 4.0%, from 3.8% for the same period of 2011.

General and administrative expenses. Our general and administrative expenses increased by $0.1 million, or 1.8%, to $4.9 million for the six months ended June 30, 2012, from $4.8 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, offset by a $0.1 million decrease in R&D expenses. As a percentage of revenues, general and administrative expenses for the six months ended June 30, 2012 decreased to 7.5%, as compared to 8.1% for the same period of 2011.

6


Subsidy income. We received local government funds in support of our R&D activities and hi-tech development in the amounts of $0.2 million and $0.7 million for the six months ended June 30, 2012 and 2011, respectively.

Income tax expense. Our income tax expense decreased to $0.7 million for the six months ended June 30, 2012, as compared to $1.1 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.

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 $2.5 million, or 44.1%, to $3.2 million for the six months ended June 30, 2012, from $5.7 million for the same period of 2011.

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 June 30, 2012, we had cash and cash equivalents of $14.4 million and restricted cash of $18.5 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

    Six Months Ended June 30,  

 

  2012     2011  

Net cash provided by (used in) operating activities

$  8,552,805   $  (9,664,935 )

Net cash used in investing activities

  (11,670,324 )   (2,343,201 )

Net cash used in financing activities

  (1,956,129 )   -  

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

  140,795     546,374  

Net increase (decrease) in cash and cash equivalents

  (4,932,853 )   (11,461,762 )

Cash and cash equivalents at beginning of the period

  19,294,089     35,581,323  

Cash and cash equivalent at end of the period

$  14,361,236   $  24,119,561  

Operating Activities

Net cash provided by operating activities was $8.6 million for the six months ended June 30, 2012, as compared to $9.7 million net cash used in operating activities for the same period of 2011. This was attributable to our net income of $3.2 million, adjusted by depreciation and amortization expenses of $2.2 million, and a net increase in cash from working capital items of $3.2 million.

Investing Activities

Net cash used in investing activities was $11.7 million for the six months ended June 30, 2012, as compared to $2.3 million for the same period of 2011. The $11.7 million was used for purchases of property, plant and equipment and prepayment for construction in progress, primarily related to machinery purchases and plant construction of our paper mill.

Financing Activities

Net cash used in financing activities was $2.0 million for the six months ended June 30, 2012, as compared to nil for the same period of 2011. During the six months ended June 30, 2012, we received proceeds from borrowings amounting to $11.2 million and repaid loans amounting to $13.3 million.

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.

7


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

Critical accounting policies are those we believe are most important to portraying our financial conditions and results of operations and also require the greatest amount of subjective or complex judgments by management. Judgments and uncertainties regarding the application of these policies may result in materially different amounts being reported under various conditions or using different assumptions. There have been no material changes to the critical accounting policies previously disclosed in our Quarterly Report on Form 10-Q for the period ended March 31, 2012.

Recent Accounting Pronouncements

See Note 2 (w) (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

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Rule 13a-15(e), our management has carried out an evaluation, with the participation and under the supervision of our Chief Executive Officer, Mr. Daliang Teng and our Chief Financial Officer, Mr. Ken He, of the effectiveness of the design and operation of our disclosure controls and procedures, as of June 30, 2012. Based upon, and as of the date of this evaluation, Messrs. Teng and He determined that our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.

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

8


PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

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

ITEM 1A. RISK FACTORS.

Not applicable.

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

We have not sold any equity securities during the second quarter of 2012 that were not previously disclosed in a quarterly report on Form 10-Q or a current report on Form 8-K that was filed during second quarter.

No repurchases of our common stock were made during the second quarter of 2012.

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 second quarter of 2012, 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.

9


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 13, 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)

10


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).

11


XFRA:0CH China Shengda Packaging Group Inc Quarterly Report 10-Q Filling

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