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EXCEL - IDEA: XBRL DOCUMENT - China Shengda Packaging Group Inc.Financial_Report.xls
EX-31.2 - EXHIBIT 31.2 - China Shengda Packaging Group Inc.exhibit31-2.htm
EX-32.2 - EXHIBIT 32.2 - China Shengda Packaging Group Inc.exhibit32-2.htm
EX-31.1 - EXHIBIT 31.1 - China Shengda Packaging Group Inc.exhibit31-1.htm
EX-32.1 - EXHIBIT 32.1 - China Shengda Packaging Group Inc.exhibit32-1.htm

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: September 30, 2014

[  ]  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
incorporation or organization)
(I.R.S. Employer Identification No.)

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 November 14, 2014 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 September 30, 2014

TABLE OF CONTENTS

      PART I
FINANCIAL INFORMATION

Item 1. Financial Statements. 2
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 3
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 11
Item 4. Controls and Procedures. 11

PART II
OTHER INFORMATION

Item 1. Legal Proceedings 12
Item 1A. Risk Factors. 12
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Mine Safety Disclosures. 12
Item 5. Other Information. 12
Item 6. Exhibits 13

1


PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

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

Contents Page(s)
Consolidated Balance Sheets F-3
Consolidated Statements of Income and Comprehensive Income F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6-F24

2


CHINA SHENGDA PACKAGING GROUP INC.

Consolidated Financial Statements
 
 
September 30, 2014
(Unaudited)

F-1


CHINA SHENGDA PACKAGING GROUP INC. AND SUBSIDIARIES

CONTENTS

 

   Page
   
Consolidated balance sheets F-3
   
Consolidated statements of income and comprehensive income F-4
   
Consolidated statements of cash flows F-5
   
Notes to the consolidated financial statements F-6~F-24

F-2


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

    September 30,     December 31,  
ASSETS   2014     2013  
   Current assets  

(Unaudited)

       
         Cash and cash equivalents $  12,632,603   $  6,569,495  
         Restricted cash   12,528,750     10,129,756  
         Accounts and notes receivable, net   40,570,341     42,710,653  
         Inventories   16,005,265     18,605,074  
         Prepayments and other receivables   3,977,596     1,583,203  
         Amount due from related parties   114,191     225,822  
         Deductable value added tax payable   1,023,534     3,056,867  
   Total current assets   86,852,280     82,880,870  
             
   Non-current assets            
         Property, plant and equipment, net   69,790,453     68,481,643  
         Land use right   11,709,308     11,988,879  
         Deferred tax assets   2,659,343     1,505,981  
         Goodwill   180,151     181,481  
Total assets $  171,191,535   $  165,038,854  
             
LIABILITIES AND EQUITY            
             
   Current liabilities            
         Accounts and notes payable $  40,408,235   $  32,820,222  
         Amounts due to related parties   2,709,207     2,131,846  
         Accrued expenses and other payables   3,685,833     2,889,933  
         Taxes payable   1,582,640     1,215,127  
         Short-term loans   5,937,500     10,048,000  
         Current portion of long-term loans   -     4,500,000  
   Total current liabilities   54,323,415     53,605,128  
             
   Non-current liabilities            
         Long-term loans   4,500,000     -  
   Total liabilities $  58,823,415   $  53,605,128  
             
   Commitment and contingencies Equity        
         Stockholders’ equity            
         Common stock (US$0.001 par value,
         190,000,000 shares authorized, 38,790,811
         shares issued and outstanding at September
         30, 2014 and December 31, 2013)
  38,791     38,791  
         Additional paid-in capital   43,036,464     43,036,464  
         Appropriated retained earnings   8,025,455     7,240,218  
         Unappropriated retained earnings   49,402,648     48,360,582  
         Accumulated other comprehensive income   11,640,275     12,459,426  
         Total equity for stockholders of China Shengda Packaging   112,143,633     111,135,481  
         Noncontrolling interest   224,487     298,245  
Total equity   112,368,120     111,433,726  
Total liabilities and equity $  171,191,535   $  165,038,854  

See notes to the consolidated financial statements

F-3


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

    Three months ended September30,     Nine months ended September 30,  
                         
                         
    2014     2013     2014     2013  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
Revenues $  47,272,700   $  39,929,058   $  116,800,217   $  100,509,307  
Cost of goods sold   40,316,190     34,564,105     99,215,634     85,028,553  
Gross profit   6,956,510     5,364,953     17,584,583     15,480,754  
Operating expenses                        
     Selling expenses   1,976,474     1,901,019     5,440,436     4,130,936  
     General and administrative expenses   3,304,403     2,784,893     9,316,087     8,581,080  
    5,280,877     4,685,912     14,756,523     12,712,016  
Other income (expenses)                        
     Interest income   66,149     151,792     607,591     356,340  
     Interest expense   (312,949 )   (248,127 )   (991,557 )   (562,348 )
     Subsidy income   -     4,302     214,193     327,876  
     Other   (2,462 )   174,645     (638,803 )   212,583  
    (249,262 )   82,612     (808,576 )   334,451  
                         
Non-operating (income) expense   (27,391 )   98,120     (88,437 )   294,925  
    (27,391 )   98,120     (88,437 )   294,925  
Income before income tax expense and noncontrolling interest 1,453,762 663,533 2,107,921 2,808,264
                         
     Income tax expense   174,709     161,221     354,512     704,277  
Net income   1,279,053     502,312     1,753,409     2,103,987  
     Net loss attributable to noncontrolling interest   18,235     33,077     73,894     61,855  
Net income attributable to company’s common stockholders $ 1,297,288 $ 535,389 $ 1,827,303 $ 2,165,842
                         
Basic and diluted earnings per share $ 0.03   $ 0.01   $ 0.05   $ 0.06  
Weighted-average number of shares outstanding - basic and diluted 38,790,811 38,790,811 38,790,811 38,790,811
                         
Comprehensive income:                        
Net income   1,279,053     502,312     1,753,409     2,103,987  
     Foreign currency translation adjustment   65,431     541,354     (819,015 )   2,625,923  
Comprehensive income   1,344,484     1,043,666     934,394     4,729,910  
    Comprehensive loss attributable to                        
    Noncontrolling interest   17,996     33,515     73,758     62,586  
                         
  $  1,362,480   $  1,077,181   $  1,008,152   $  4,792,496  

See notes to the consolidated financial statements

F-4


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

    Nine Months Ended September 30,  
    2014     2013  
             
    (Unaudited)     (Unaudited)  
Cash flows from operating activities            
Net income $  1,753,409   $  2,103,987  
Adjustments to reconcile net income to net cash provided by operating activities:
   Depreciation and amortization expenses   5,842,626     4,301,872  
Deferred tax   (1,165,835 )   (657,893 )
Loss from disposal of property, plant and equipment   638,803     90,614  
Change in operating assets and liabilities:            
   Restricted cash   (2,622,724 )   8,804,882  
   Accounts and notes receivable   1,824,116     (5,615,309 )
   Inventories   2,466,457     (5,078,848 )
   Prepayments and other receivables   (2,346,193 )   (1,379,429 )
   Accounts and notes payable   8,073,716     (14,016,566 )
   Amount due from (to) related party   703,830     836,702  
   Accrued expenses and other payables   876,806     2,055,666  
   Tax payables   2,390,284     (205,277 )
   Net cash provided by (used in) operating activities   18,435,295     (8,759,599 )
             
Cash flows from investing activities            
   Purchase of property, plant and equipment   (5,401,922 )   (3,685,181 )
   Prepayment paid for construction in progress   (3,169,862 )   -  
   Proceeds from disposal of property, plant and equipment   176,346     59,676  
Net cash used in investing activities   (8,395,438 )   (3,625,505 )
             
Cash flows from financing activities            
   Proceeds from short-term loans   12,666,190     6,428,000  
   Proceeds from long-term loans   4,513,872     -  
   Repayment of short-term loans   (16,733,690 )   -  
   Repayment of current portion of long-term loans   (4,513,872 )   -  
   Restricted cash   146,430     -  
Net cash flows provided by (used in) financing activities (3,921,070 ) 6,428,000
             
   Effect of foreign currency exchange rate fluctuation on cash and cash equivalents (55,679 ) 221,914
   Net changes in cash and cash equivalents   6,063,108     (5,735,190 )
Cash and cash equivalents, beginning of period   6,569,495     11,903,937  
Cash and cash equivalents, end of period $  12,632,603   $  6,168,747  
             
Cash paid during the period for:            
Interest paid $  819,367   $  374,852  
Income taxes paid $  1,277,002   $  1,008,024  

See notes to the consolidated financial statements

F-5


CHINA SHENGDA PACKAGING GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(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”), Jiangsu Shuangsheng Paper Technology Development CO., Ltd. (“Shuangsheng”), and Jiangsu Great Shengda Concept Packaging Development Co., Ltd. (“Shengda Concept”) . The Company and its subsidiaries are collectively referred to as the “Group”.

The Company, formerly named as Health place Corporation, was incorporated in the State of Nevada on March 16, 2007as 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 ofUS$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.

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

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 September 30, 2014. Great Shengda is engaged in manufacturing and processing corrugated paper cartons and paperboard and package decoration printing and selling.

Shengda Color, Great Shengda’s100% wholly-owned subsidiary, was incorporated in Hangzhou city, Zhejiang province, PRC on August 8, 2005 with registered capital of RMB10 million. Shengda Color is engaged in the manufacturing and sale of paper cartons and paperboard, as well as the research and development of paper packing technology.

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 cartons and paperboard, 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).

F-6


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

Shuangsheng was incorporated in Yancheng city, Jiangsu province, PRC on September 22, 2011. Shuangsheng has register capital amounting to RMB200 million, 98.68% held by Great Shengda and 1.32% held by Shuangdeng Paper Industrial Company Limited (“Shuangdeng Paper”), a company incorporated in PRC, and is controlled by the same ultimate stockholders of the Company. Shuangsheng is engaged in the business of new paper making technology, related research and the development, application, transfer and consultation of such relevant technology.

Shengda Concept, Great Shengda’s 100% wholly-owned subsidiary, was incorporated in Yangcheng city, Jiangsu province, PRC on June 16, 2014, with registered capital of RMB30.18 million. Shengda Concept is engaged in the manufacturing and sale of paper cartons and paperboard as well as the research development of paper packing technology. It was at the development stage as of September 30, 2014.

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


(a)

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 September 30, 2014 and for the Three-month and Nine- month periods ended September 30, 2014 and 2013 have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and notes 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 consolidated interim 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, 2013, 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 September 30, 2014, its consolidated results of operations and cash flows for the Three-month and Nine-month periods ended September 30, 2014 and 2013, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.

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

(b)

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires the Group to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the allowance for doubtful receivables, recoverability of the carrying amount of inventory, and the assessment of deferred tax assets or liabilities. These estimates are often based on complex judgments and assumptions that management believes to be reasonable but are inherently uncertain and unpredictable. Actual results could differ from these estimates.

F-7


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

(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.

(d)

Restricted cash

Restricted cash represents the deposits held as compensating balances against banks’ acceptances issued, loans borrowed, amounting to US$12,528,750 and US$10,129,756 as of September 30, 2014 and December 31, 2013, 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 as of September 30, 2014 and December 31, 2013.

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 September 30, 2014 and December 31, 2013.

(f)

Inventories

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

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

No value was written down for the inventories as of September 30, 2014 and December 31, 2013.

(g)

Property, plant and equipment and construction in process

Other than those acquired in a business combination, property, plant and equipment is 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.

F-8


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

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 measured as the 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.

(h)

Land use right

Land use right represents the cost paid to the PRC government authorities. Land use right is amortized on a straight line basis over its estimated useful life, which is the periods over which the asset is expected to contribute directly or indirectly to the future cash flows of the Group. The land use right, with 166,533 square meters in area, has a term of 50 years and will expire in December 2058, the estimated useful life is as follows:

  Years   Residual value
Land use right 46   0%

(i)

Goodwill

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

(j)

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.

F-9


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

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.

(k)

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. 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.

(l)

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 September 30, 2014 and December 31, 2013, the statutory reserve recorded by the Company’s subsidiaries incorporated in the PRC amounted to US$8,025,455 and US$7,240,218, respectively.

As of September 30, 2014, the statutory reserve balances of Great Shengda, Hangzhou Shengming, Shengda Color, Suzhou AA and Shuangsheng accounted for approximately 15.2%, 14.3%, 50.0%, 29.6% and nil of their registered capital. The future income of these subsidiaries will be subject to statutory reserve.

(m)

Revenue recognition

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 majority of domestic sales contracts transfer title and risk of loss to customers upon receipt. The majority of oversea sales contracts transfer title and risk of loss to customers when goods were delivered to the carriers. The sales price is not considered to be fixed or determinable until all contingencies related to the sale have been resolved.

F-10


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

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.

(n)

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$3,240,392 and US$3,324,629 were recorded in general and administrative expenses for nine months ended September 30, 2014 and 2013, respectively, US$1,119,851 and US$ 1,276,576 were recorded in general and administrative expenses for three months ended September 30, 2014 and 2013, respectively.

(o)

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$1,131,857 and US$954,686 for nine months ended September 30, 2014 and 2013, respectively, US$446,068 and US$346,583 were approximately for three months ended September 30, 2014 and 2013, respectively.

(p)

Income taxes

Deferred tax assets and liabilities are recognized 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.

The Company also periodically evaluates whether it has any uncertain tax positions requiring accounting recognition in its financial statements. Under applicable U.S. GAAP, companies may recognize a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Applicable U.S. GAAP also provides guidance on the de-recognition of income tax liabilities, classification of interest and penalties on income taxes, and accounting for uncertain tax positions in interim period financial statements. The Company's policy is to record interest and penalties on uncertain tax provisions as a component of its income tax expense. 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 September 30, 2014 and December 31, 2013.

(q)

Earnings per share

Basic earnings per share are 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.

(r)

Comprehensive income

Comprehensive income consists of net income and other gains and losses affecting shareholders' equity that, under U.S. GAAP, are excluded from net income. During the periods presented, the Group's comprehensive income (loss) represents its net income (loss) and foreign currency translation gains and losses.

F-11



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

(s)

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.

Fair value is defined 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.

The Group maximizes the use of observable inputs and minimizes 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. Three levels of inputs are 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.

(t)

Recently issued accounting standards

In May, 2014, the FASB issued Accounting Standards Update (ASU) 2014-09. The ASU amends the guidance in the FASB Accounting Standards Codification (FASB ASC) Topic 606, entitled Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The ASU also specifies the accounting for incremental costs to obtain, or costs to fulfill, a contract with a customer. Further, the ASU states that an entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

The amendments are effective for public entities for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted for public entities. The amendments in this ASU should be applied using one of the following two methods: (1) retrospectively to each prior reporting period presented or (2) retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application

F-12


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

Except for the ASU above, in the period from January 1, 2014 to November 14 2014, the FASB has issued ASU No. 2014-01 through ASU 2014-15, which is not expected to have a material impact on the consolidated financial statements upon adoption.

(u) 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 and accounts and notes receivable. As of September 30, 2014 and December 31, 2013, substantially all of the Group’s cash and cash equivalents were deposited in financial institutions that management believes to be of high credit quality located in the PRC, which management believes are of high credit quality. Accounts receivable are typically unsecured and are derived from revenue earned from customers in the PRC. The risk with respect to accounts receivable is mitigated by credit evaluations the Group performs on its customers and its ongoing monitoring process of outstanding balances.

Concentration of Customers

There are no revenues from customers that individually represent greater than 10% of the total revenues during the three and nine months ended September 30, 2014 and 2013.

Concentration of Suppliers

The Company purchased its products from two major suppliers during the nine months ended September 30, 2014, accounting for 13.02% and 10.26% of the purchases, and two major suppliers during the three months ended September 30, 2014, accounting for 12.14% and 11.55% of the purchase. The Company purchased its products from two major suppliers during the nine months ended September 30, 2013, accounting for 13.90% and 11.44% of the purchases, and two major suppliers during the three months ended September30, 2013, accounting for 14.81% and 12.64% of the purchase.

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.

(v) Segment reporting

The company uses the management approach model, which is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. And the company's reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

Accordingly, the Group categorizes its business into two operating segments, namely (i) Paper cartons and other paper products; (ii) Corrugating medium paper.

F-13



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

3.

ACCOUNTS AND NOTES RECEIVABLE, NET

Accounts and notes receivable consist of the following:

      September 30,     December 31,  
      2014     2013  
      (Unaudited)        
  Accounts receivable $  34,309,512   $  36,902,846  
  Notes receivable   6,260,829     5,807,807  
    $  40,570,341   $  42,710,653  

No allowance for doubtful amounts was provided as of September 30, 2014 and December 31, 2013.

4.

INVENTORIES

Inventories consist of the following:

      September 30,     December 31,  
      2014     2013  
      (Unaudited)        
  Raw materials $  13,821,514   $  14,529,545  
  Finished goods   2,158,298     4,054,453  
  Work in process   25,453     21,076  
    $  16,005,265   $  18,605,074  

No value was written down for inventories as of September 30, 2014 and December 31, 2013.

5.

PREPAYMENTS AND OTHER RECEIVABLES

Prepayments and other receivables consist of the following:

      September 30,     December 31,  
      2014     2013  
      (Unaudited)        
  Prepayments $  3,575,258   $  1,323,926  
  Other receivables   402,338     259,277  
    $  3,977,596   $  1,583,203  

The prepayments were mainly paid to their suppliers in advance for raw materials purchased.

6.

PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment consist of the following:

      September 30,     December 31,  
      2014     2013  
      (Unaudited)        
  Buildings and improvements $  28,537,252   $  27,685,361  
  Machinery   61,753,370     59,891,529  
  Office equipment and furnishing   966,770     864,976  
  Motor vehicles   1,469,170     1,586,513  
  Construction in progress   3,422,580     153,647  
      96,149,142     90,182,026  
  Less: accumulated depreciation   (26,358,689 )   (21,700,383 )
                                                                                                                                    $ 69,790,453   $  68,481,643  

F-14


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

The Group recorded depreciation expenses of US$5,493,883 and US$3,867,592 for the nine months ended September 30, 2014 and 2013, respectively, and US$1,809,787 and US$1,686,598 for the three months ended September 30, 2014 and 2013, respectively.

The property, plant and equipment with net book value amounting to US$8,591,985 and US$9,010,726 were pledged as collateral for bank loans as of September 30, 2014 and December 31, 2013, respectively.

7.

LAND USE RIGHT

In October2010, Great Shengda paid US$12,180,000(RMB75,000,000) to Shengda Group Jiangsu Shuangdeng Paper Industrial Co., Ltd. (“Shuangdeng Paper”), a related party of the Group, for the acquisition of the land use right, which is located in Yancheng city, Jiangsu province. The land use right, with 166,533 square meters in area, has a term of 50 years and will expire in December 2058. It was purchased for construction of paper manufacturing plants to expand the Group's business. As of September 30, 2014, the Group recorded amortization expense of US$198,594 and US$196,153 for nine months ended September 30, 2014 and 2013, respectively. US$66,686 and US$65,823 for three months ended September 30, 2014 and 2013, respectively. However, the certificate of land use right is still awaiting the local government’s authorization.

      September 30,     December 31,  
      2014     2013  
      (Unaudited)        
  Land use right $  12,194,163   $  12,277,500  
  Less: accumulated depreciation   (484,855 )   (288,621 )
    $  11,709,308   $  11,988,879  

The future amortization is as follows:

  Year   Amount  
  2014Q4 $ 66,116  
  2015   264,467  
  2016   264,467  
  2017   264,467  
  2018   264,467  
  2019 and thereafter   10,585,324  
  Total $ 11,709,308  

8.

LOANS

Short-term loans

Short-term loans consist of the following:

      September 30,2014 (Unaudited)         December31,2013  
  Lender   Interest rate     Maturity date     Balance     Interest rate     Maturity date     Balance  
  Bank of China   Libor+2.7%1     Jun.3, 2015   $ 3,500,000     Libor+1.5%1     Apr.22, 2014   $  3,500,000  
  Industrial and Commercial Bank of China - 6.16% Mar.13, 2014 3,274,000
  Jiangsu Sheyang Rural Commercial Bank - 7.80% Sep.2, 2014 3,274,000
  Jiangsu Sheyang Rural Commercial Bank 7.80% Jun.20, 2015 1,625,000 -
  Jiangsu Sheyang Rural Commercial Bank 7.80% Jan.20, 2015 812,500 -
  Total           5,937,500             10,048,000  

Note 1 the effective interest rate was 3.27% and 2.3% as of September 30, 2014 and December 31, 2013, respectively.

F-15


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

All of short-term loans were denominated in RMB or USD for working capital purpose, with weighted average balances of US$9,971,747 and US$5,906,242; with weighted average interest rates of 5.72%and 4.84% for nine months ended September 30, 2014 and 2013, respectively, and with weighted average balances of US$11,747,293 and US$7,352,913; with weighted average interest rates of 5.14% and 5.05% for the three months ended September 30, 2014 and 2013, respectively.

The Bank of China loans amounting to US$3,500,000 was guaranteed by Shengda Group Co., Limited (“SD Group”), a related party (Note 11), as of September 30, 2014. The Jiangsu Sheyang Rural Commercial Bank loan amounting to US$2,437,500 was guaranteed by Great Shengda.

Current portion of long-term loans
Current portion of long-term loans consist of the following:

      September 30,2014 (Unaudited)         December31,2013        
            Maturity                   Maturity        
  Lender   Interest rate     date     Balance     Interest rate      date     Balance  
  Bank of China             $     Libor+2.5%1     Feb.28,2014   $  4,500,000  

Note 1 the effective interest rate was 3.7% as of December 31, 2013.

The current portion of long-term loans was denominated in USD for working capital purpose, with weighted average balances of US$972,527 and US$9,000,000, with weighted average interest rates of 4.05% and 3.71% for nine months ended September 30, 2014 and 2013, respectively; and with weighted average balance of nil and US$9,000,000, with weighted average interest rates of nil and 3.71% for three months ended September30, 2014 and 2013, respectively.

The loan was pledged with restricted cash amounting to US$5,156,550 as of December 31, 2013.

Long-term loans
Long-term loans consist of the following:

      September30,2014 (Unaudited)         December31,2013        
            Maturity                 Maturity        
  Lender   Interest rate     date     Balance     Interest rate     date     Balance  
  Bank of China   Libor+2.3%1     Feb.17,2016   $  4,500,000               $  -  

Note 1 the effective interest rate was 3.27% as of September 30, 2014.

The long term loans were denominated in USD for working capital purpose, with weighted average balances of US$3,560,440 and nil, with weighted average interest rates of 3.27% and nil for the nine months ended September 30, 2014 and 2013, respectively; and with weighted average balances of US$4,500,000 and nil, with weighted average interest rates of 3.27% and nil for the three months ended September30, 2014 and 2013.

F-16


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

The loan was pledged with restricted cash amounting to US$4,972,500 as of September 30, 2014. The following table summarizes the unused lines of credit:

      September30,2014 (Unaudited)            December31,2013        
      Starting     Maturity     Facility     Unused     Starting     Maturity     Facility     Unused  
  Lender   date     date     amount     facility     date     date     amount     facility  
  Bank of China             $  -   $  -     Mar.19,2013     Mar.18,2014     $  13,096,000    $  8,450,100  
  Bank of China               -     -     Mar.19,2013     Mar.18,2014     8,185,000     8,185,000  
  Bank of China               -     -     Sep.5,2013     Sep.4,2014     13,096,000     11,459,000  
  Bank of China   Oct.8,2014     Sept.21,2015   $ 13,000,000   $ 8,687,500                 -     -  
  Industrial Commercial Bank of China   Nov.15,2012     Nov.15,2014     11,375,000     11,375,000     Nov.15,2012     Nov.15,2014     11,459,000     8,185,000  
  Jiangsu Sheyang Rural Commercial Bank   Mar.25, 2013     Mar.24,2016     3,250,000     3,250,000     Mar.25,2013     Mar.24, 2016     3,274,000     3,274,000  
  Jiangsu Sheyang Rural Commercial Bank   Dec.30,2013     Dec.20,2016     3,250,000     812,500     Mar.30, 2013     Dec.20,2016     3,274,000     -  
  Total             $ 30,875,000   $ 24,125,000               $ 52,384,000   $ 39,553,100  

The facilities of Bank of China and Industrial and Commercial Bank of China were guaranteed by SD Group, a related party, for working capital and general corporate purposes (Note 11).

The facility of Jiangsu Sheyang Rural Commercial Bank was pledged with Shuangsheng’s property and guaranteed by Great Shengda. All the unused facilities can be withdrawn upon demand.

9.

ACCOUNTS AND NOTES PAYABLE

Accounts and notes payable consist of the following:

      September30,     December31,  
      2014     2013  
      (Unaudited)        
  Notes payable $ 15,112,500   $ 9,658,300  
  Accounts payable   25,295,735     23,161,922  
    $ 40,408,235   $ 32,820,222  

The notes payable were issued by the Great Shengda to their suppliers for raw materials purchased. All the notes payable were bank accepted notes payable without interest and due within six months. They are pledged with restricted cash amounting to US$7,556,250 and US$4,829,150 as of September 30, 2014 and December 31, 2013, respectively. The notes payable from Agriculture Bank of China was guaranteed by SD Group (Note 11).

F-17


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

10.

ACCRUED EXPENSES AND OTHER PAYABLES

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

      September30,     December31,  
      2014     2013  
      (Unaudited)        
  Advance from customers $  1,092,299   $  725,563  
  Payroll and welfare payable   1,047,713     726,550  
  Other payables   879,411     1,054,544  
  Accrued expenses   666,410     383,276  
    $  3,685,833   $  2,889,933  

11.

RELATED PARTY TRANSACTION

Related party balances are as follows:

            September 30,     December31,  
  Related parties   Relationship     2014     2013  
  Amounts due from related parties         (Unaudited)        
  Zhejiang Shuangsheng Logistic Company Limited (“Shuangsheng Logistic”)   Controlled by the same ultimate stockholders   $  -   $  97,887  
  Shuangdeng Paper   Controlled by the same ultimate stockholders     114,191     127,935  
          $  114,191   $  225,822  
                     
  Amounts due to related parties                  
                     
  SD Group   Controlled by the same ultimate stockholders   $  304,687   $  -  
  Shuang Ke Da   Controlled by the same ultimate stockholders     332,540     216,992  
  Shuangsheng Logistic   Controlled by the same ultimate stockholders     2,417     2,435  
  Hangzhou New Shengda Investment Limited (“New Shengda”)   Controlled by the same ultimate stockholders     904,573     551,112  
  Shuangdeng Paper   Controlled by the same ultimate stockholders     1,164,990     1,361,307  
          $  2,709,207   $  2,131,846  

The amount due from Shuangsheng Logistics represents the prepayment for transportation fee. The amount due from Shuangdeng Paper represents the receivable for selling the paper cartons. 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 SD Group represents the payable for the land and building lease from SD Group. The amount due to ShuangKeDa represents the payable for land lease and purchase of electricity and water from ShuangKeDa by the Group. The amount due to Shuangsheng Logistic represents the payable for transportation fee. The amount due to New Shengda represents the payable for land lease from New Shengda by the Group. The amount due to Shuangdeng Paper represents the payable for purchase of water, electricity and steam. They were recorded as “amount due to related parties” in the consolidated balance sheets, non-interest bearing and repayable within one year.

Significant related party transactions as follows:

F-18


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

            Three Months Ended September 30,     Nine Months Ended September 30,  
  Related parties   Relationship     2014     2013     2014     2013  
            (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
  Lease from related parties                              
  New Shengda Controlled by the same ultimate stockholders $ 147,510 $ 68,080 $ 439,290 $ 202,880
  ShuangKeDa Controlled by the same ultimate stockholders 68,838 - 205,002 -
  SD Group Controlled by the same ultimate stockholders 102,438 145,357 305,063 361,575
          $  318,786   $  213,437   $  949,355   $  564,455  
                                 
  Transportation service from related party                              
  Shuangsheng Logistic Controlled by the same ultimate stockholders $ 180,033 $ 191,176 $ 382,678 $ 339,200
                                 
  Sales to related parties                              
  Shuangdeng Paper Controlled by the same ultimate stockholders $ 54,993 $ 49,299 $ 219,838 $ 191,464
                                 
  Shengda XiangWei Controlled by the same ultimate stockholders 14,107 58,495 73,025 163,296
          $  69,100   $  107,794   $  292,863   $  354,760  
  Purchase of steam from related party                              
  Shuangdeng Paper Controlled by the same ultimate stockholders $ 601,928 $ 1,831,244 $ 1,253,734 $ 1,831,224
                                 
  Purchase of water and electricity from related party
  Shuang Ke Da Controlled by the same ultimate stockholders $ 272,008 $ 226,632 $ 959,593 $ 684,419

Guarantee by SD Group

SD Group entered into maximum debt guarantee contracts with Bank of China Xiaoshan Branch and Industrial Commercial Bank of China Xiaoshan Branch, under which SD Group agreed to act as guarantor for loans borrowed by Great Shengda from Bank of China Xiaoshan Branch and Industrial Commercial Bank of China Xiaoshan Branch (Note 8).

SD Group also entered into debt guarantee contracts with Agriculture Bank of China, under which SD Group agreed to act as guarantor for bank accepted notes payable amounting to US$6,743,750 borrowed by Great Shengda (Note 9).

12.

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(i), 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$51,100,710 and US$50,315,473 as of September 30, 2014 and December 31, 2013, respectively.

F-19


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

13.

TAXATION

Taxes payable are composed of the following:

      September 30,     December31,  
      2014     2013  
      (Unaudited)        
  VAT payable $  627,026   $  617,708  
  Income tax payable   776,772     512,552  
  Other taxes payable   178,842     84,867  
    $  1,582,640   $  1,215,127  

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

1)

VAT

Pursuant to the Provisional Regulation of the PRC on VAT and the related 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 apportion 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.

The deductible value added tax payable represents the VAT already paid or borne exceeded the VAT required to pay, amounting to US$1,023,534 and US$3,056,867 as of September 30, 2014 and December 31, 2013, respectively. The deductible VAT will be used to offset future VAT required to pay.

2)

Income tax

United States

China Shengda Packaging is subject to United States tax at a tax rate of 34%. In nine months ended September 30, 2014 and the year ended December 31, 2013, the Company does not provide for U.S. income taxes on foreign subsidiaries’ undistributed earnings as they will be permanently reinvested in foreign operations.

BVI

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

PRC

Great Shengda has obtained the approval and is qualified as New and High-Tech Enterprise (“NHTE”) by relevant government authorities in February 2014. According to the PRC Enterprise Income Tax Law, Great Shengdais eligible to enjoy a preferential tax rate of 15% for the calendar year of 2013, 2014 and 2015.

Shengda Color, Hangzhou Shengming, 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 2013 and 2014. Shengda Concept is subject to income tax at a rate of 25% for calendar year 2014.

Under the Enterprise Income Tax Law, dividends, interests, rent, royalties and gains on transfers of property payable 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.

F-20


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

The following table reconciles the Group’s effective tax for the periods presented:

      Three Months Ended September     Nine Months Ended September  
      30,     30,  
      2014     2013     2014     2013  
      (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
  Expected enterprise income tax at statutory tax rate $ 363,406 $ 167,907 $ 850,765 $ 704,277
  Effect of preferential rate   (224,793 )   -     (535,408 )   -  
  Others   36,096     (6,686 )   39,155     -  
  Effective enterprise income tax $  174,709   $  161,221   $  354,512   $  704,277  

The significant components of income tax expense are as follows:

      Three Months Ended September     Nine Months Ended September  
      30,     30,  
      2014     2013     2014     2013  
      (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
  Current tax expenses $  614,040   $  518,445   $  1,520,347   $  1,362,170  
  Deferred tax benefits   (439,331 )   (357,224 )   (1,165,835 )   (657,893 )
  Income tax expenses $  174,709   $  161,221   $  354,512   $  704,277  

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:

      September 30,     December31,  
      2014     2013  
      (Unaudited)        
  Net operating loss carried forward $  2,421,685   $  1,215,612  
  Effect of deductible temporary differences between assigned value of property,
plant and equipment and their tax bases in a business combination
237,658 290,369
  Total deferred tax assets $  2,659,343   $  1,505,981  

Shuangsheng, one of the Group's subsidiaries, incurred a pretax loss of approximately US$9.7 million since its paper mill officially went into production in June 2013, which resulted in the increase of net operating loss carried forward. The net operating loss carry forwards will expire if unused in the years ending December 31, 2018 through 2019.

14.

COMMITMENTS AND CONTINGENCIES

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

  Year   Amount  
  2014 $  1,893,450  
  2015 and thereafter   284,050  
  Total $  2,177,500  

F-21


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

The Group has entered into operating lease agreements for land, offices and plants. The estimated future rental expense for the last three months of fiscal year 2014 is US$416,880.

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 September 30, 2014 and December 31, 2013.

15.

SEGMENT REPORTING

The Group determines segments based on the differences in products and services to segments and measuring their performance.

The Group’s operations are mainly classified into two principal reportable segments that provide different products or services, the one is for manufacturing and processing corrugated paper cartons and paper board and package decoration printing and selling. And the other one is for Corrugating medium paper. Separate management of each segment is required because each business unit is subject to different marketing, operation, and technology strategies.

Accounting policies of the transactions between segments are the same as those described in the summary of significant accounting policies. Performance is measured by various factors such as segment revenue and segment profit. Individual segment assets and all corporate expenses and income tax expenses are allocated to the segments.

F-22


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

      Paper cartons and other paper     Corrugating medium paper     Elimination of inter-segment     Total  
      products                                      
                              Nine Months Ended September     Nine Months Ended September  
      Nine Months Ended September 30     Nine Months Ended September 30     30     30  
      2014     2013     2014     2013     2014     2013     2014     2013  
  Revenues  $ 92,692,677 $ 93,975,576 $ 32,093,978 $ 7,631,067 $ (7,986,438 ) $ (1,097,336 ) $ 116,800,217 $ 100,509,307
  Depreciation & amortization   3,151,810     3,164,903     2,690,816     1,136,969     -     -     5,842,626     4,301,872  
  Interest revenue   606,559     354,286     1,032     2,054     -     -     607,591     356,340  
  Interest expense   382,245     416,990     609,312     145,358     -     -     991,557     562,348  
  Income tax expense (benefit) 1,570,991 1,391,552 (1,216,479 ) (687,275 ) - - 354,512 704,277
  Profit (loss)   5,601,441     4,231,198     (3,848,032 )   (2,127,211 )   -     -     1,753,409     2,103,987  
  Capital expenditure 5,913,711 1,360,866 2,658,073 2,324,315 - - 8,571,784 3,685,181
  Total assets   137,715,525     153,328,121     54,257,343     49,478,249     (20,781,333 )   (33,422,396 )   171,191,535     169,383,974  

      Paper cartons and other paper     Corrugating medium paper     Elimination of inter-segment     Total  
      products                                      
                              Three Months Ended     Three Months Ended September  
      Three Months Ended September 30     Three Months Ended September 30     September 30     30  
      2014     2013     2014     2013     2014     2013     2014     2013  
  Revenues $ 36,674,258   $ 34,058,017   $ 12,012,553   $ 6,968,377   $  (1,414,111 ) $  (1,097,336 ) $ 47,272,700   $ 39,929,058  
  Depreciation & amortization   1,072,923     1,063,435     856,270     773,736     -     -     1,929,193     1,837,171  
  Interest revenue   65,867     151,237     282     555     -     -     66,149     151,792  
  Interest expense   84,602     161,088     228,347     87,039     -     -     312,949     248,127  
  Income tax expense (benefit)   632,773     528,739     (458,064 )   (367,518 )   -     -     174,709     161,221  
  Profit (loss)   2,719,932     1,670,251     (1,440,879 )   (1,167,939 )   -     -     1,279,053     502,312  
  Capital expenditure   4,864,533     900,424     505,223     (500,570 )   -     -     5,369,756     399,854  
  Total assets   137,715,525     153,328,121     54,257,343     49,478,249     (20,781,333 )   (33,422,396 )   171,191,535     169,383,974  

16.

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 were no potential dilutive instruments. The following is a reconciliation of the basic and diluted earnings per share computations for three and nine months ended September 30, 2014 and 2013:

F-23


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

      Three Months Ended September 30,     Nine Months Ended September 30,  
      2014     2013     2014     2013  
      (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
  Net income attributable to Company’s common stockholders $  1,297,288   $  535,389   $  1,827,303   $  2,165,842  
  Weighted average number of common shares outstanding – basic and diluted   38,790,811     38,790,811     38,790,811     38,790,811  
  Earnings per share – basic and diluted $  0.03   $  0.01   $  0.05   $  0.06  

17.

SUBSEQUENT EVENT

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

F-24



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, 2013, 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;
  • “Shengda Concept” are to Jiangsu Great Shengda Concept Packaging 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.

3


Overview of Our Business

We are a leading paper packaging company in China. 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 and corrugating medium paper, which are used for the production of 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 paper cartons and corrugating medium paper as of September 30, 2014 was approximately 545 million square meters and 150 thousand tons.

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 four manufacturing facilities in the provinces of Zhejiang and Jiangsu, we have established a sales network with five customer service centers that can service customers throughout the YRD, which accounted for the majority of our revenues. 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 of the 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 Development

On August 12, 2014, the Board of Directors of the Company (the “Board”) appointed Ms. Angel Yanki Wong (“Ms. Wong”) as director of the Company.

The Board also appointed three directors (the “Independent Directors”) below to the following committees:

Director

Audit Committee

Compensation
Committee
Nominating and
Corporate Governance
Committee
Angel Yanki Wong ** * *
Yaoquan Zhang * * **
Zhen Yuan * ** *

* Member
** Chair

On October 23, 2014, the Company received notification from the NASDAQ Listing Qualifications Department that its application to list its common stock on the NASDAQ Capital Market has been approved. Effective October 27, 2014, the Company’s common stock started trading on NASDAQ Capital Market. As previously announced, the Company has to regain compliance with NASDAQ Minimum Bid Price Rule until December 9, 2014.

Third Quarter Financial Performance Highlights

The following are some financial highlights for the third quarter of 2014:

Revenues: Revenues increased by $7.4 million, or 18.4 %, to $47.3 million for the three months ended September 30, 2014, from $39.9 million for the same period of last year.

4


Gross Profit: Gross profit increased by $1.6 million, or 29.7 %, to $7.0 million for the three months ended September 30, 2014, from $5.4 million for the same period of last year.

Net income attributable to common stockholders: Net income attributed to stockholders increased by $0.8 million, or 142.3 %, to $1.3 million for the three months ended September 30, 2014, from $0.5 million for the same period of last year.

Basic and diluted net income per share: Basic and diluted net income per share was $0.03 for the three months ended September 30, 2014, compared with $0.01 for the same period last year.

Results of Operations

Comparison of Three Months Ended September 30, 2014 and September 30 2013 (unaudited)

The following table sets forth key components of our results of operations during the three months ended September 30, 2014 and 2013, both in dollars and as a percentage of our revenues.

    Three Months Ended     Three Months Ended  
    September 30, 2014     September 30, 2013  
          % of           % of  
    Dollars     Revenues     Dollars     Revenues  
Revenues $  47,272,700     100.0%   $  39,929,058     100.0%  
Cost of goods sold   40,316,190     85.3%     34,564,105     86.6%  
Gross profit   6,956,510     14.7%     5,364,953     13.4%  
Operating expenses                        
           Selling expenses   1,976,474     4.2%     1,901,019     4.8%  
           General and administrative expenses   3,304,403     7.0%     2,784,893     7.0%  
Total operating expenses   5,280,877     11.2%     4,685,912     11.7%  
Other income (expenses)                        
           Interest income   66,149     0.1%     151,792     0.4%  
           Interest expense   (312,949 )   (0.7)%     (248,127 )   (0.6)%  
           Subsidy income   -     0.0%     4,302     0.0%  
           Other   (2,462 )   (0.0)%   174,645     0.4%  
Total other income (expenses)   (249,262 )   (0.5)%     82,612     0.2%  
                         
Non-operating (income) expense   (27,391 )   (0.1)%     98,120     0.2%  
                         
Income before income tax expense and noncontrolling   1,453,762     3.1%     663,533     1.7%  
       interest                        
           Income tax expense   174,709     0.4%     161,221     0.4%  
Net income   1,279,053     2.7%     502,312     1.3%  
           Net loss attributable to noncontrolling interest   18,235     0.0%     33,077     0.1%  
Net income attributable to common stockholders $  1,297,288     2.7%   $  535,389     1.3%  

Revenues. We generate revenues from the sale of our paper cartons, corrugated paper and other paper products. Revenues by segment were as follows:

    Three Months Ended     Three Months Ended  
    September 30, 2014     September 30, 2013  
             
    Dollars     Dollars  
Paper cartons and other paper products $  36,674,258   $  34,058,017  
Corrugating medium paper   12,012,553     6,968,377  
Elimination of inter-segment transactions   (1,414,111 )   (1,097,336 )
Revenues $  47,272,700   $  39,929,058  

5


Revenues of paper cartons and other paper products

Our revenues of paper cartons and other paper products increased by $2.6 million, or 7.7 %, to $36.7 million for the three months ended September 30, 2014, from $34.1 million for the same period in 2013. The increase was mainly attributable to the increase of sales volume. Sales volume increased by 5.4 million square meters, or 6.3 %, to 90.5 million square meters for the three months ended September 30, 2014, from 85.1 million square meters for the same period of 2013. The increased sales volume was mainly the result of the great efforts of our sales team. The average price per square meter was approximately $0.41 for the three months ended September 30, 2014, as compared to $0.40 for the same period of 2013.

For the three months ended September 30, 2014, color cartons accounted for 18.1% and flexo cartons accounted for 59.4% of our revenues, compared to 25.2% and 60.2%, respectively, for the same period of 2013. Average per square meter prices for our color cartons and flexo cartons for the three months ended September 30, 2014 were approximately $0.40 and $0.41, respectively, as compared to approximately $0.41 and $0.40, respectively, for the same period of 2013.

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 17.5 % and 15.4%, respectively, of our revenues for the three months ended September 30, 2014, compared to 22.5% and 24.6%, respectively, for the same period of 2013.

Revenues of corrugating medium paper

Our revenues of corrugating medium paper increased by $5.0 million, or 72.4 %, to $12.0 million for the period ended September 30, 2014, from $7.0 million for the same period in 2013. The increase was mainly due to the increased sales volume as the corrugating medium paper segment officially went into production in June 2013. Sales volume of corrugating medium paper was approximately 33.7 thousand tons and the average price was approximately $356 per ton, as compared with 19.5 thousand tons and $358 per ton for the same period in 2013 respectively.

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. Cost of goods sold by segment was as follows:

    Three Months Ended     Three Months Ended  
    September 30, 2014     September 30, 2013  
             
    Dollars     Dollars  
Paper cartons and other paper products $  28,926,574   $  27,648,031  
Corrugating medium paper   12,803,727     8,013,410  
Elimination of inter-segment transactions   (1,414,111 )   (1,097,336 )
Revenues $  40,316,190   $  34,564,105  

Cost of goods sold of paper cartons and other paper products

Our cost of goods sold of paper cartons and other paper products increased by $1.3 million, or 4.6%, to $28.9 million for the three months ended September 30, 2014, from $27.6 million for the same period of 2013. The increase was mainly attributable to the increased sales volume. Average cost of goods sold per square meter for the three months ended September 30, 2014 was approximately $0.32, which was approximately same as for the same period of 2013. Management will keep monitoring for cost control.

Cost of goods sold of corrugating medium paper

Our cost of goods sold of corrugating medium paper increased by $4.8 million, or 59.8%, to $12.8 million for the period ended September 30, 2014, from $8.0 million for the same period of 2013. Sales volume of corrugating medium paper was approximately 33.7 thousand tons and the average cost was approximately $380 per ton for the period ended September 30, 2014, as compared to 19.5 thousand tons and $412 respectively for the same period in 2013. The increase was mainly attributable to increased sales volume. The decreased average cost of corrugating medium paper was mainly due to the economies of scale achieved as the sales volume increased. We will keep streamlining the manufacture process and monitoring the cost control.

6


Gross profit. Our gross profit increased by $1.6 million, or 29.7%, to $7.0 million for the three months ended September 30, 2014, from $5.4 million for the same period of 2013. Gross profit from external customers by segment was as follows:

    Three Months Ended     Three Months Ended  
    September 30, 2014     September 30, 2013  
             
    Dollars     Dollars  
Paper cartons and other paper products $  7,747,685   $  6,409,986  
Corrugating medium paper   (791,175 )   (1,045,033 )
Gross profit $  6,956,510   $  5,364,953  

Gross profit of paper cartons and other paper products

Gross profit of paper cartons and other paper products increased by $1.3 million, or 20.9%, to $7.7 million for the three months ended September 30, 2014, from $6.4 million for the same period of 2013. Gross profit of flexo cartons increased by $1.5 million, or 36.4%, to $5.7 million for the three months ended September 30, 2014, from $4.2 million for the same period of 2013. Gross profit of color cartons decreased by $0.2 million, or 9.5%, to $2.0 million for the three months ended September 30, 2014, from $2.2 million for the same period of 2013. The increase in our gross profit of paper cartons and other paper products was mainly due to increased revenues of paper cartons and other paper products as noted above. Gross profit as a percentage of revenues was 21.1 % for the three months ended September 30, 2014, as compared to 18.8% for the same period of 2013.

Gross profit of corrugating medium paper

Gross profit of corrugating medium paper was negative $0.8 million for the three months ended September 30, 2014, compared with negative $1.0 million for the same period of 2013. The increase of the gross profit was mainly due to economical scale effect due to increased sales volume. We will keep streamlining the manufacture process, improving products quality and reducing the raw material consumption and trying to increase the gross profit step by step.

Selling expenses. Our selling expenses include freight, salary and benefits for sales and marketing personnel, travelling and marketing expenses. Our selling expenses increased by $0.1 million, or 4.0 %, to $2.0 million for the three months ended September 30, 2014, from $1.9 million for the same period of 2013. Such increase was primarily attributable to the increased freight expenses. As a percentage of revenues, selling expenses for the three months ended September 30, 2014 decreased to 4.2%, from 4.8% for the same period of 2013.

General and administrative expenses. Our general and administrative expenses are comprised of research and development, or R&D, expense, salary and benefits for administrative personnel, rental fees, depreciation and amortization for equipment used other than for production and miscellaneous expenses unrelated to production. Our general and administrative expenses increased by $0.5 million, or 18.7 %, to $3.3 million for the three months ended September 30, 2014, from $2.8 million for the same period of 2013. The increase resulted mainly from increased staff costs. As a percentage of revenues, general and administrative expenses for the three months ended September 30, 2014 was 7.0 %, approximately the same as compared to the same period of 2013.

Net income attributable to common stockholders. As a result of the cumulative effect of the above factors, our net income attributable to common stockholders increased by $0.8 million, or 142.3 %, to $1.3 million for the three months ended September 30, 2014, from $0.5 million for the same period of 2013.

Comparison of Nine Months Ended September 30, 2014 and September 30, 2013 (unaudited)

The following table sets forth key components of our results of operations during the nine months ended September 30, 2014 and 2013, both in dollars and as a percentage of our revenues.

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    Nine Months Ended     Nine Months Ended  
    September 30, 2014     September 30, 2013  
          % of           % of  
    Dollars     Revenues     Dollars     Revenues  
Revenues $ 116,800,217     100.0%   $ 100,509,307     100.0%  
Cost of goods sold   99,215,634     84.9%     85,028,553     84.6%  
Gross profit   17,584,583     15.1%     15,480,754     15.4%  
Operating expenses                        
           Selling expenses   5,440,436     4.7%     4,130,936     4.1%  
           General and administrative expenses   9,316,087     8.0%     8,581,080     8.5%  
Total operating expenses   14,756,523     12.6%     12,712,016     12.6%  
Other income (expenses)                        
           Interest income   607,591     0.5%     356,340     0.4%  
           Interest expense   (991,557 )   (0.8)%   (562,348 )   (0.6)%
           Subsidy income   214,193     0.2%     327,876     0.3%  
           Other   (638,803 )   (0.5)%     212,583     0.2%  
Total other income (expenses)   (808,576 )   (0.7)%     334,451     0.3%  
                         
Non-operating (income) expense   (88,437 )   (0.1)%   294,925     0.3%  
                         
Income before income tax expense and noncontrolling interest 2,107,921 1.8% 2,808,264 2.8%
           Income tax expense   354,512     0.3%     704,277     0.7%  
Net income   1,753,409     1.5%     2,103,987     2.1%  
           Net loss attributable to noncontrolling interest   73,894     0.1%     61,855     0.1%  
Net income attributable to common stockholders $  1,827,303     1.6%   $  2,165,842     2.2%  

Revenues. Revenues by segment were as follows:

    Nine Months Ended     Nine Months Ended  
    September 30, 2014     September 30, 2013  
             
    Dollars     Dollars  
Paper cartons and other paper products $  92,692,677   $  93,975,576  
Corrugating medium paper   32,093,978     7,631,067  
Elimination of inter-segment transactions   (7,986,438 )   (1,097,336 )
Revenues $  116,800,217   $  100,509,307  

Revenues of paper cartons and other paper products

Our revenues of paper cartons and other paper products decreased by $1.3 million, or 1.4%, to $92.7 million for the nine months ended September 30, 2014, from $94.0 million for the same period of 2013. The decrease was primarily attributable to the decrease in sales volume. Although sales volume increased in the third quarter of 2014, the increase was not enough to offset the decrease in the first half of 2014. Sales volume decreased by 1.5 million square meters, or 0.6%, to 235.8 million square meters for the nine months ended September 30, 2014, from 237.3 million square meters for the same period of 2013. The decreased sales volume was mainly due to the challenges resulting from the domestic and foreign economic environment. The average price per square meter was $0.39 for the nine months ended September 30, 2014, approximately the same as compared to the same period of 2013.

For the nine months ended September 30, 2014, color cartons accounted for 22.1% of our revenues and flexo cartons accounted for 57.3% of our revenues, compared to 27.1% and 66.4%, respectively, for the same period of 2013. Average per square meter prices for our color cartons and flexo cartons for the nine months ended September 30, 2014 were $0.40 and $0.39, respectively, approximately the same as compared to the same period of 2013.

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 19.8% and 18.1%, respectively, of our revenues for the nine months ended September 30, 2014, compared to 24.9% and 26.0%, respectively, of our revenues in the nine months ended September 30, 2013.

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Revenues of corrugating medium paper

Our revenues of corrugating medium paper increased by $24.5 million, or 320.6%, to $32.1 million for the period ended September 30, 2014, from $7.6 million for the same period in 2013. The increase was mainly due to the increased sales volume as the corrugating medium paper segment officially went into production in June 2013. Sales volume of corrugating medium paper was approximately 89.3 thousand tons and the average price was approximately $359 per ton, as compared with 21.3 thousand tons and $358 for the same period in 2013 respectively.

Cost of goods sold. Cost of goods sold by segment was as follows:

    Nine Months Ended     Nine Months Ended  
    September 30, 2014     September 30, 2013  
             
    Dollars     Dollars  
Paper cartons and other paper products $  72,884,502   $  76,721,082  
Corrugating medium paper   34,317,570     9,404,807  
Elimination of inter-segment transactions   (7,986,438 )   (1,097,336 )
Revenues $  99,215,634   $  85,028,553  

Cost of goods sold of paper cartons and other paper products

Our cost of goods sold of paper cartons and other paper products decreased by $3.8 million, or 5.0%, to $72.9 million for the nine months ended September 30, 2014, from $76.7 million for the same period of 2013. Average cost of goods sold per square meter for the nine months ended September 30, 2014 was approximately $0.31, a decrease of approximately $0.01, as compared to approximately $0.32 for the same period of 2013. This decrease was primarily due to the decreased cost of raw materials. We will keep streamlining the manufacture process and monitoring the cost control.

Cost of goods sold of corrugating medium paper

Our cost of goods sold of corrugating medium paper increased by $24.9 million, or 264.9%, to $34.3 million for the period ended September 30, 2014, from $9.4 million for the same period of 2013. The increase was mainly due to the increased sales volume. Sales volume of corrugating medium paper increased was approximately 89.3 thousand tons and the average cost was approximately $384 per ton for the period ended September 30, 2014, as compared to 21.3 thousand tons and $441 respectively for the same period in 2013. The decreased average cost of corrugating medium paper was mainly due to the economies of scale achieved as sales volume increased.

Gross profit. Gross profit by segment was as follows:

    Nine Months Ended     Nine Months Ended  
    September 30, 2014     September 30, 2013  
             
    Dollars     Dollars  
Paper cartons and other paper products $  19,808,175   $  17,254,494  
Corrugating medium paper   (2,223,592 )   (1,773,740 )
Gross profit $  17,584,583   $  15,480,754  

Gross profit of paper cartons and other paper products

Our gross profit of paper cartons and other paper products increased by $2.5 million, or 14.8%, to $19.8 million for the nine months ended September 30, 2014, from $17.3 million for the same period of 2013. Gross profit from flexo cartons increased by $2.1 million, or 18.5%, to $13.9 million for the nine months ended September 30, 2014, from $11.8 million for the same period of 2013. Gross profit from color cartons increased by $0.4 million, or 6.9%, to $5.9 million for the nine months ended September 30, 2014, from $5.5 million for the same period of 2013. The increase in our gross profit of paper cartons and other paper products was mainly due to decreased cost of goods sold of paper cartons and other paper products as noted above. Gross profit as a percentage of revenues was 21.4% for the nine months ended September 30, 2014, as compared to 18.4% for the same period of 2013.

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Gross profit of corrugating medium paper

Gross profit of corrugating medium paper was negative $2.2 million for the nine months ended September 30, 2014, compared with negative $1.8 million for the same period of 2013. The decrease of gross profit of corrugating medium paper was because the increased cost of goods sold surpassed the increased revenues of corrugating medium paper as noted above. We will keep streamlining the manufacture process, improving products quality and reducing the raw material consumption and trying to increase the gross profit step by step.

Selling expenses. Our selling expenses increased by $1.3 million, or 31.7%, to $5.4 million for the nine months ended September 30, 2014, from $4.1 million for the same period of 2013. Such increase resulted mainly from the operation of Shuangsheng since June 2013. As a percentage of revenues, selling expenses for the nine months ended September 30, 2014 increased to 4.7%, from 4.1% for the same period of 2013.

General and administrative expenses. Our general and administrative expenses increased by $0.7 million, or 8.6%, to $9.3 million for the nine months ended September 30, 2014, from $8.6 million for the same period of 2013. This was mainly attributable to the increase of staff costs. As a percentage of revenues, general and administrative expenses for the nine months ended September 30, 2014 decreased to 8.0%, as compared to 8.5% for the same period of 2013.

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 $0.4 million, or 15.6%, to $1.8 million for the nine months ended September 30, 2014, from $2.2 million for the same period of 2013.

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 September 30, 2014, we had cash and cash equivalents of $12.6 million and restricted cash of $12.5 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

    Nine Months Ended September 30,  
    2014     2013  
Net cash provided by (used in) operating activities $  18,435,295   $  (8,759,599 )
Net cash used in investing activities   (8,395,438 )   (3,625,505 )
Net cash provided by (used in) financing activities   (3,921,070 )   6,428,000  
Effect of foreign currency exchange rate fluctuation on cash and cash equivalents   (55,679 )   221,914  
Net increase (decrease) in cash and cash equivalents   6,063,108     (5,735,190 )
Cash and cash equivalents at beginning of the period   6,569,495     11,903,937  
Cash and cash equivalents at end of the period $  12,632,603   $  6,168,747  

Operating Activities

Net cash provided by operating activities was $18.4 million for the three months ended September 30, 2014, as compared to $8.8 million net cash used in operating activities for the same period of 2013. This was attributable to our net income of $1.8 million, adjusted by depreciation and amortization expenses of $5.8 million, a net increase in cash from accounts and notes payable of $8.1 million, and a net increase in cash from other working capital items of $2.7 million.

Investing Activities

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Net cash used in investing activities was $8.4 million for the three months ended September 30, 2014, as compared to $3.6 million for the same period of 2013. The $8.4 million net cash used in investing activities during the nine months ended September 30, 2014 was attributable to the purchases of property, plant and equipment, and prepayment paid for construction of Shengda Concept.

Financing Activities

Net cash used in financing activities was $3.9 million for the nine months ended September 30, 2014, as compared to $6.4 million net cash provided by financing activities for the same period of 2014. During the nine months ended September 30, 2013, we received loan proceeds amounting to $17.2 million, repaid $21.2 million loans, and received restricted cash of $0.1 million which was for the loans as collateral.

Seasonality

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

Inflation

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

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our investors.

Critical Accounting Policies

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 Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Recent Accounting Pronouncements

See Note 2(t) (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.

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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 September 30, 2014. 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 third quarter of fiscal 2014 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition, cash flow 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 third quarter of 2014 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 the quarter.

No repurchases of our common stock were made during the third quarter of 2014.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

12



ITEM 6. EXHIBITS.

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

13


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: November 14, 2014 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)


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).