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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-K

(Mark One)

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 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 No. 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 (I.R.S. Employer Identification No.)
organization)  

No. 2 Beitang Road
Xiaoshan Economic and Technological Development Zone
Hangzhou, Zhejiang Province 311215
People’s Republic of China
-------------------------------------------------------------------------------------------------------
(Address of principal executive offices)

(86) 571-8283-8805
-------------------------------------------------------------------------------------------------------
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered
Common Stock, par value $0.001 per share NASDAQ Capital Market

Securities registered pursuant to Section 12(g) of the Exchange Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes  [  ]  No  [ X ] 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes  [  ]  No  [ X ] 

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 Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Yes  [  ]  No  [ X ]

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 registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes  [  ]  No  [  ] 

As of June 30, 2014 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the shares of the registrant’s common stock held by non-affiliates (based upon the closing sale price of such shares as reported on the NASDAQ Capital Market) was approximately $17.86 million. Shares of the registrant’s common stock held by each executive officer and director and each by each person who owns 10% or more of the outstanding common stock have been excluded from the calculation in that such persons may be deemed to be affiliates of the registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes.


There were a total of 38,790,811 shares of the registrant’s common stock outstanding as of March 30, 2015.

DOCUMENTS INCORPORATED BY REFERENCE

None.


CHINA SHENGDA PACKAGING GROUP INC.
 
Annual Report on Form 10-K
Year Ended December 31, 2014

TABLE OF CONTENTS

 PART I 
     
Item 1 Business. 2
Item 1A. Risk Factors. 19
Item 1B. Unresolved Staff Comments. 35
Item 2. Properties. 35
Item 3. Legal Proceedings. 35
Item 4. Mine Safety Disclosures 35
     
 PART II 
     
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 36
Item 6. Selected Financial Data 37
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 37
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 46
Item 8. Financial Statements and Supplementary Data. 46
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 46
Item 9A. Controls and Procedures. 46
Item 9B. Other Information. 47
     
 PART III 
     
Item 10. Directors, Executive Officers and Corporate Governance. 47
Item 11. Executive Compensation. 53
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 54
Item 13. Certain Relationships and Related Transactions, and Director Independence. 54
Item 14. Principal Accounting Fees and Services 57
     
 PART IV 
     
Item 15. Exhibits, Financial Statement Schedules. 58


INTRODUCTORY NOTES

Special Note Regarding Forward Looking Statements

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. Such statements include, among others, those concerning our expected financial performance; strategic and operational plans; management forecast; economies of scales; litigation; potential and contingent liabilities; management’s plans; taxes; 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 that a number of risks and uncertainties could cause actual results of the Company to differ materially from those anticipated, expressed or implied in the forward-looking statements. The words “believe,” “expect,” “anticipate,” “project,” “targets,” “optimistic,” “intend,” “aim,” “will” or similar expressions are intended to identify forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. Risks and uncertainties that could cause actual results to differ materially from those anticipated include general economic conditions; our ability to overcome competition in our industry; the impact that a downturn or negative changes in the industries in which our products are sold could have on our business and profitability; any decrease in the availability, or increase in the cost, of raw materials and energy; our ability to simultaneously fund the implementation of our business plan and invest in new projects; economic, political, regulatory, legal and foreign exchange risks associated with international expansion; loss of key members of our senior management; and unexpected changes to China’s political or economic situation and legal environment. Additional disclosures regarding factors that could cause our results and performance to differ from results or performance anticipated by this report are discussed in Item 1A. “Risk Factors.”

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 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 AA, Shuangsheng, Shengda Concept, Shengda Zhongtian and Xiaosheng;
  • “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;
  • “Shengda Zhongtian” are to Chengdu Shengda Zhongtian Packaging Co., Ltd., a PRC company;
  • “Xiaosheng” are to Hangzhou Xiaoshan Xiaosheng Paper 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;

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  • “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.

PART I

ITEM 1. BUSINESS.

Business Overview

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, pharmaceuticals, chemicals, 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 sales volume of paper cartons and corrugating medium paper in 2014 reached 304.9 million square meters and 117.7 thousand tons respectively, with an annual production capacity of 545 million square meters and 150 thousand tons in 2014.

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 customer service center 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.

Our senior management has been involved in the paperboards and paper cartons business since 1999, when Zhejiang New Shengda, the company that sold to Great Shengda the assets that form the basis of our operations, was incorporated. We benefit from the industry connections and experience of our senior management, which enable us to develop a strong reputation among our customers and in our industry. Great Shengda was granted the “China Packaging Leading Enterprise Award” by the China Packaging Technology Association (the predecessor of China Packaging Federation), and was named a “Chinese Development and Production Base of Paper Packaging” by the State Economic and Trade Commission and China Packaging Federation. Our Shengda trademark was recognized as a Chinese Well-Known Trademark in 2010 as a result of the market reputation we have built over the years.

Our total revenues for the year ended December 31, 2014 were 152.6 $million, an increase of $18.4 million, or 13.7%, from $134.2 million for the year ended December 31, 2013. Our net income attributable to the Company’s common stockholders for the year ended December 31, 2014 was $2.6 million, a decrease of $0.1 million, or 5.7%, from $2.7 million for the year ended December 31, 2013.

Corporate History and Background

We were incorporated in the State of Nevada on March 16, 2007 as a web-based service provider offering an online service where health practitioners (such as chiropractors, dentists, massage therapists, occupational therapists and counselors) 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, we did not engage in any operations and were dormant from our inception until our reverse acquisition of Evercharm on April 8, 2010.

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

Subsequently on May 10, 2010, Shengda Holdings distributed the shares it received in the reverse acquisition to the family of Nengbin Fang, our Chairman, and certain other individuals. As a result, members of the Fang family own approximately 54.02% of our common stock.

Through our ownership of Evercharm and its principal PRC operating subsidiaries, Great Shengda, Shengda Color, Hangzhou Shengming and Suzhou AA, we design, manufacture and sell paper cartons and offer packaging solutions to principally consumer and industrial goods manufacturing companies in China. Prior to the formation of Great Shengda, Zhejiang New Shengda operated our paper packaging business. Since 1999, the business had been managed under the leadership of Nengbin Fang, Zhejiang New Shengda’s then general manager and our current Chairman. In 2004, when Great Shengda was incorporated, Zhejiang New Shengda transferred all of its paper packaging assets to Great Shengda and became a dormant company, and Mr. Fang became the Chairman of Great Shengda to continue to manage the business.

On September 22, 2011, we incorporated Shuangsheng in Jiangsu Province, PRC. On September 27, 2011, we received Shuangsheng’s business license from the local Administration of Industry and Commerce approving Shuangsheng to be engaged in the business of new paper making technology, related research and the development, application, transfer and consultation of such relevant technology. Pursuant to the business license, Shuangsheng has registered capital of RMB 88 million (approximately $13.7 million) with actually invested capital of RMB 22 million (approximately $3.4 million). Shuangsheng officially went into production in June 2013. On April 18, 2014, Great Shengda increased its equity investment in Shuangsheng amounting to RMB112 million (approximately $18.12 million), On November 25, 2014, Great Shengda increased its equity investment in Shuangsheng amounting to RMB80 million (approximately $13.02 million). As a result, Shuangsheng has registered capital amounting to RMB280 million (approximately $45.58 million), with 99.06% held by Great Shengda and 0.94% held by Shuangdeng Paper Industrial Company Limited (“Shuangdeng Paper”), a company incorporated in PRC and controlled by the same ultimate stockholders of the Company.

On June 16, 2014, Shengda Concept, Great Shengda’s 100% wholly-owned subsidiary, was incorporated in Yangcheng city, Jiangsu province, PRC, with registered capital of RMB 30.18 million (approximately $4.88 million). Shengda Concept is engaged in manufacturing and sale of paper cartons and paperboard as well as research and development of paper packing technology.

On December 2, 2014, Great Shengda incorporated a joint venture in Chengdu, Sichuan Province, China with Chengdu Zhongtian Chengxin Packaging Co., Ltd., a Chinese company ("Chengdu Zhongtian"). On December 24 2014, the joint venture, Chengdu Shengda Zhongtian Packaging Co., Ltd. ("Shengda Zhongtian") received its business license from the local Administration of Industry and Commerce approving Shengda Zhongtian to be engaged in the business of manufacturing and sale of corrugated paper cardboards and cartons. Pursuant to Shengda Zhongtian's Articles of Incorporation, Shengda Zhongtian has registered capital of RMB 42,860,000 (approximately $6.89 million) (the "Registered Capital"). Great Shengda and Chengdu Zhongtian own 55% and 45% of the Registered Capital respectively.

On December 15, 2014, Shuangsheng submitted its Articles of Incorporation and applied business license to the local industrial and commercial bureau to form a wholly-owned company named Hangzhou Xiaoshan Xiaosheng Paper Co., Ltd. ("Xiaosheng") in Xiaoshan District, Hangzhou, Zhejiang Province, China for sale of paper products. Pursuant to Xiaosheng's Articles of Incorporation, Xiaosheng has registered capital of RMB 38 million (approximately $6.1 million). Xiaosheng received the business licenses on December 24, 2014.

Our Corporate Structure

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All of our business operations are conducted through our Chinese subsidiaries. The chart below presents our corporate structure as of the date of this report:


Our Industry

The Paper Packaging Market in China

Our industry has grown steadily since the mid-1980s with one of the highest growth rates in the international packaging market. Corrugated packaging is the largest subsector of the paper packaging industry in China.

Compared to other countries, current per capita paper packaging consumption in China is very low. According to China Packaging Federation, each person in China consumes on average 55 kg of paper packaging annually, which is one-sixth that of the United States, one-fifth of Japan, a quarter of Europe and half of India. With per capita paper packaging consumption far below other large economies in the world, the Chinese paper packaging industry has considerable potential for sustainable growth.

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Demand for Our Products

The main customers of the paper packaging industry are consumer and industrial goods manufacturers that use corrugated paper cartons for packaging and shipping of their products, including food and beverage, home appliances, IT and electronics, daily necessities, pharmaceuticals, chemicals and machinery. The continued robust growth in the retail sales of consumer goods has significant positive impacts on the demand for corrugated packaging products.

Other trends in our industry expected to impact our growth include customer migration toward paper as a more environmentally-responsible packaging material than plastic, glass, metal, or wood; government policies designed to encourage domestic consumption of consumer goods; increasing competition for high-quality, low-cost packaging; and greater consolidation among paper packaging suppliers.

Market in East China

Our subsidiaries are located in the YRD of East China, which is the most affluent region amongst six major regions in China with the highest per capita gross domestic product, or GDP. The YRD consists of three areas, namely Shanghai, Jiangsu Province and Zhejiang Province, all ranked among top five in China in terms of per capita GDP. The high per capita GDP has led to strong purchasing power for various products, which in turn has generated high demand for corrugated cartons within the region.

Our Products

Corrugating medium paper

Corrugating medium paper is used for the production of paperboards, flexo-printed and color-printed cartons. Our corrugating medium paper is manufactured by Shuangsheng in Jiangsu Province which officially went into production in June 2013 with annual capacity of 150 thousand tons.

Corrugated paper cartons

The corrugated paper cartons that we design, manufacture and sell are flexo-printed or color-printed paper boxes. Our corrugated paper cartons are used for a wide variety of products, such as food, beverage, cigarette, household appliance, consumer electronics, pharmaceuticals, chemicals, furniture, garments, machinery and other consumer and industrial goods. Our paper cartons are available in a wide range of sizes and strengths depending on the type, weight and size of the products and the manner in which these paper cartons are used.

Our paper cartons are made of corrugated paperboards machine-cut to the designed dimensions and then folded into paper cartons. We use single-layer, double-layer and triple-layer corrugated paperboards sandwiched between Kraft paper sheets (Kraft paper is a type of paper, which is strong and relatively coarse, produced from the chemical pulp of softwood under the Kraft process). The thickness of the paperboards and the type of corrugated paper sheets used are key determinants of the strength of the paper cartons manufactured.

Our paperboards and paper cartons are summarized below:

Type of Paperboards Type of Paper Cartons Recommended Applications

Single-layer paper cartons Packaging for food, drinks
  and medicine
Single-layer paperboards comprising a single sheet of  
corrugated paper sandwiched between two sheets of Kraft    
paper.    

Double-layer paper cartons Packaging for garments,
  furniture, refrigerators and
Double-layer paperboards comprising two sheets of   air-conditioners
corrugated paper sandwiched between three sheets of Kraft    
paper.    


                                                                                                                                            Triple-layer paper cartons

Packaging for electrical
  machinery, motorcycles, and
  other heavy-duty products
   
Triple-layer corrugated paperboards comprising three sheets    
of corrugated paper sandwiched between four sheets of Kraft    
paper.    

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Our corrugated paper cartons deliver marketing and performance benefits at a competitive cost. We supply corrugated paper cartons designed to protect and contain products while providing:

  • Convenience through ease of carrying, storage, delivery and removal of the products by the end consumers;
  • A smooth surface printed with various resolutions of flexo- or multi-color graphic images that help improve brand awareness and visibility of products; and
  • Durability, stiffness and wet and dry tear strength; leak, abrasion and heat resistance; barrier protection.

The following charts illustrate the sales revenue breakdown by our product and end market from external customers for 2014.

Revenue Breakdown by Our Product
Year Ended December 31, 2014

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Revenue Breakdown by End Market
Year Ended December 31, 2014


Manufacturing and Production

All of our production plants are strategically located within the YRD, the PRC manufacturing belt. We lease most of manufacturing facilities which also contain administrative offices. We own all of equipment and machines.

Utilities

Electricity is the principal source of energy for our manufacturing operations. If a power shortage or stoppage were to occur, we have back-up power supply in the form of our two-way power supply and our own power generators at each of our manufacturing facilities, which we believe are able to provide sufficient back-up power to ensure that our manufacturing operations will not be disrupted. To date, we have not experienced any prolonged power shortages or stoppages.

Maintenance

Our own staff carries out maintenance and servicing of our production equipment on a regular basis. As a result of our regular maintenance, we have not experienced any major shutdown or disruption to our manufacturing operations.

Production Capacity and Utilization

Our production capacity is limited by our production floor area, production equipment and manpower.

The following table illustrates the maximum production capacity and the actual production volume for our production lines for the manufacture of corrugating medium paper, paperboards, flexo-printed paper cartons and color-printed cartons as of December 31, 2014 and 2013:

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        Flexo-Printed   Color-Printed  
  Corrugating   Paperboards   Paper Cartoons   Paper Cartoons  
   Medium Paper   (million square   (million square   (million square  
  (thousand tons)   meters)   meters)   meters)  
As of December 31, 2014                
Annual Production Capacity 150   545   363   182  
Actual Production Volume 118   305   223   82  
As of December 31, 2013                
Annual Production Capacity 150   545   363   182  
Actual Production Volume 57   301   214   87  

Manufacturing Process for Corrugating Medium Paper

Our corrugating medium paper is manufactured by Shuangsheng in Jiangsu Province. As of December 31, 2014, Shuangsheng has an annual production capacity of 150 thousand tons. Shuangsheng operate 24 hours a day, generally 341 days a year, with 24 days of annual planned maintenance shutdown. The production process of corrugating medium paper is illustrated below:

Manufacturing Process for Paperboards and Paper Cartons

The production process for our paperboards and paper cartons is illustrated below:

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Product Design

After receiving orders from customers, we meet with our customers to understand their products and target consumer market, and then assist them in designing packaging that is suitable for their purposes and that appeal to their consumers.

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While our customers typically provide us with their own packaging design and specifications, our production development team and our design team have also designed paper cartons for many of our customers. Our team works closely with our customers to meet their requirements with regard to the structure, function and graphic design.

Our production team then produces a sample product based on the designs. Tests will be conducted on this sample product at our in-house testing center to ensure that it meets the design specifications. Mass production begins once the sample is approved by the customer.

Corrugated Paperboard Production

Pre-heating and drying. The key raw materials used in the manufacture of our paperboards are Kraft paper and corrugating medium paper. Corrugating medium paper is fed into corrugator production machines (such as our BHS2800 corrugated paperboard production line), and pre-heated to reduce the moisture level in the corrugating process.

Corrugating, compression and gluing. The pre-heated paper is transformed into corrugated paper with different flute-depth through a corrugating process. Kraft paper is then glued to this corrugated paper to form a semi-completed paperboard.

Combination of layers of corrugated paperboards. Glue adhesive is applied to combine semi-completed paperboards with Kraft paper or other semi-completed paperboards to form single-layer, double-layer or triple-layer paperboards.

Heating and drying. The corrugated boards then pass through a heating process to dry the glue adhesive to improve the bonding strength between the layers of the corrugated boards before warehouse storage or the manufacture of paper cartons.

Paper Carton Production

Flexo-printing. Flexography (often abbreviated to flexo) is a printing process that utilizes a flexible relief plate and water based ink. It can be used for printing on almost any type of substrate including plastic, metallic films, cellophane, and paper. It is widely used for printing on the non-porous substrates required for various types of food packaging (it is also well suited for printing large areas of solid color). Our customer's approved artwork is transferred to a flexible plate with a plate making machine. Then the flexible plate is installed into a water-based ink printing machine, and the artwork is directly transferred onto the surface of the corrugated boards from the printing machine.

Color-printing. Offset color printing utilizes oil-based ink to print. The visual effect of color-printed artwork is superior to ink-printed artwork. Artwork pre-approved by customers are either captured on film and transferred onto printing plates, or transferred directly onto printing plates from the computer using the computer-to-plate, or CTP, method. CTP involves the transfer of digital images of artwork from computers directly onto printing plates without the use of film. CTP produces images that are closer to the customers’ original artwork and produces cleaner and sharper results and saves time by eliminating the use of film.

Offset printing. Offset printing involves the transfer of ink on paper via a printing plate. The image areas of the printing plates are rendered ink receptive and water repellent, while the non-image areas of the printing plates are rendered water receptive and ink repellent. The printing plates will be mounted onto a cylindrical drum on the printing machine. The printing plates are dampened, first by water rollers then by ink rollers. The image area of the printing plates picks up the ink and water keeps ink out of non-image areas of the printing plates. Each plate transfers its image onto a rubber blanket cylinder, which then transfers the image onto paper.

Lamination and varnishing. Depending on the design specifications and the customer’s requirements, the prints may need a layer of lamination or liquid varnishing. This makes the printed artwork water resistant and gives it a glossy appearance.

Gluing. The printing paper (containing the printed artwork) is then glued onto the semi-completed paperboard.

Die-Cutting, slitting, slotting and scoring. Flexo-printed and offset-printed paperboards undergo die-cutting and slitting to produce a pre-folded paper carton in accordance with the paper carton design, and also undergo slotting and scoring to create the fold-lines for folding.

Folding, and stapling or gluing. The pre-folded paper carton is then stapled or glued by the automated stapling and gluing machines to produce semi-folded paper cartons. These finished products are then prepared for delivery.

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Raw Materials and Suppliers

Raw Materials and Suppliers for Corrugating Medium Paper

The major raw materials used in the production of corrugating medium paper include recycled paperboards which is readily available from multiple domestic and foreign sources. During 2014, we purchased all of our recycled paperboards from domestic recycling stations and do not rely on any imported recycled paper.

Raw Materials for Paperboards

The key raw materials used in the manufacture of our paperboards are Kraft paper and corrugating medium paper. Raw materials are purchased only from pre-selected suppliers after evaluation by our purchasing, production and quality assurance departments based on stringent selection criteria such as pricing, the quality of raw materials and services, track record, financial condition and market reputation. Our major suppliers are all well-known PRC companies in the paper manufacturing industry with large capacities to satisfy our requirements. During 2014, Shuangsheng supplied approximately 25.8 thousand tons of corrugating medium paper internally.

Suppliers and Supplier Arrangements

Our major suppliers for the years ended December 31, 2014 and 2013 are as follows:

    Years Ended December 31,
Supplier   2014   2013
Zhejiang Jingxing Paper Group Papermaking Co., Ltd.   <5%   <5%
Wuxi Rongcheng Paper Co., Ltd.   <5%   <5%
Jiangsu Chang Feng Paper Factory   5.4%   10.2%
Jiangsu Lee & Man Paper Manufacturing Co., Ltd.   <5%   7.3%
Zhejiang Rongcheng Paper Co. Ltd.   7.7%   9.4%
Jian Group Co., Ltd.   5.2%   <5%
Anhui Shanying Paper Co., Ltd.   <5%   <5%
Jiaxing Dahua Paper Co., Ltd.   <5%   <5%

The typical term of a supply contract is less than six months. The purchase prices are generally negotiated every month or every two to three months. In some cases, the prices for raw materials per ton may be fixed in the contract. Our major suppliers generally allow us 60 to 120 days’ credit.

Our Customers

We have a diversified customer base in a broad range of end markets. In 2014, we had more than 900 customers. Our five largest customers are Hangzhou Panasonic Home Electrical Appliance Co., Ltd., Suzhou Samsung Electrical Co., Ltd, Nongfu Spring Co., Ltd., China Resources Snow Breweries Co., Ltd., and Hangzhou Cigarette Company, most of whom are Top 500 Chinese Enterprises. We strive to continually increase and diversify our customer base.

For the periods indicated, our major customers are as follows:

    Years Ended December 31,
Customer   2014   2013
Suzhou Samsung Electrical Co., Ltd.   5.3%   6.0%
Hangzhou Cigarette Company   <5%   5.0%
Nongfu Spring Co., Ltd.   5.5%   6.8%
Hangzhou Panasonic Home Electrical Appliance Co., Ltd.   <5%   7.8%
China Resources Snow Breweries Co., Ltd.   5.2%   5.5%

We generally provide customized products to our customers, so we negotiate individual contracts with our customers based on their particular requirements. We usually start with a base product price for the specific product category and quantity, then consider process requirements, technical difficulties, level of competition in the market and specific process required for the particular product to arrive at the final price for a product. We are responsible for delivery, and the transportation cost will be included in the price. We generally allow our customers 60 to 120 days’ credit. For 2014 and 2013, our accounts receivable turnover days were 99 days and 103 days, respectively.

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We have also engaged in strategic alliance relationships with ten customers, including our three largest customers, namely, Hangzhou Panasonic Home Electrical Appliance Co., Ltd., Nongfu Spring Co., Ltd. and Hangzhou Cigarette Company. We give our strategic alliance relationship customers priority in fulfilling their orders, and, in exchange, such customers give us priority as a supplier when they place their orders. We also cooperate with these customers in the development of new packaging for their products. We believe that these strategic alliances will strengthen the reliability of our services and help us maintain our key customers.

We are not aware of any information or arrangements that would lead to a cessation or termination of our current relationship with any of our major customers.

Backlog

We do not believe backlog is material to our business as our backlog generally does not have a material impact on our revenues. Most customer orders are processed with a lead time of two weeks or less. Orders for existing customers are generally processed in one week and orders for new customer are generally processed within 15 days. Therefore, the amount of our backlog is generally very small. We generally enter into framework sales contracts with most major customers every year. Pursuant to these contracts, the customers contract us as a priority supplier when they place regular orders, and, in exchange, we provide priority fulfillment of their orders.

Sales and Marketing

Our sales and marketing department has 64 sales personnel and marketing executives as of December 31, 2014. Our sales and marketing department is responsible for setting sales and marketing strategies and promoting our products.

Our sales and marketing strategies include (1) direct sales and marketing activities, (2) advertisements and publications and (3) participation in trade fairs and exhibitions.

Our sales team regularly meets with our existing customers to better understand their requirements and promote our new products. The team also reaches out to prospective customers to promote our products.

We promote our products through a variety of channels including, industry publications, such as the China Packaging Industry and the Packaging World, our corporate website, www.cnpti.com, and industry websites, such as the China Packaging website, www.pack.cn.

We participate regularly in trade fairs and exhibitions in the PRC such as the PRC Corrugated Paper Cartons and Machinery Exhibition and the PRC International Corrugated Exhibition. Those trade fairs and exhibitions provide us with a platform to showcase our new products, establish contact with potential customers and gather information on the latest products.

Customer Service

Our customer service department was comprised of 41 customer service personnel as of December 31, 2014. The customer service department provides pre-sales services such as sample designs; sales services such as production monitoring to ensure timely delivery of products; and after-sales customer service such as feedback and guidance on product usage. Our after-sales customer service is available to our customers 24 hours a day throughout the year.

Our customer service department oversees our customer service center in YRD area, where many Fortune 500 companies and Top 500 Chinese enterprises are located. These customer services centers have enabled us to provide timely service to our existing customers and have increased our presence and facilitated our sales and marketing activities in these regions.

Research and Development (R&D)

R&D is one of the key factors that has helped us to maintain our competitive strength and leading position in the industry. As of December 31, 2014, our R&D team consisted of 43 experienced professionals, many of whom are certified engineers. Our R&D team includes several key experts who have extensive knowledge about and experience in our industry. In addition to conducting our own research, our R&D department enters into collaborative agreements with reputable academic and research institutions, principally in the YRD, from time to time to carry out specific R&D projects. We have worked with Zhejiang University, China Packaging Federation and Zhejiang Province Paper Packaging Industry Technology Centre. Our current collaborative partners include Zhejiang Sci-Tech University and Zhejiang University of Technology and Science. Under such R&D collaborative partnerships, these institutions provide technical expertise to complement our existing R&D capabilities, while we provide the necessary funding for the R&D projects. We have ownership of the results of the research and the proprietary rights of the products and technology developed through these collaborative projects. We believe that we will continue to improve our research and development capabilities by leveraging our strong R&D platform and expertise of these institutions. With our in-house R&D capabilities and collaborative programs, we have developed 19 items of technical know-how, patents for all of which have been approved by the Intellectual Property Office of China.

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We have expended more effort and resources on R&D activities in recent years. R&D costs amounted to $4,065,158 and $4,069,746 for the years ended December 31, 2014 and 2013, respectively. In order to maintain our competitiveness, we will continue to strengthen our R&D capabilities through staff training, equipment upgrade and collaborations with academic and research institutions. We will focus our efforts on the expansion of our product portfolio to meet the changing needs of our customers and the growing demand for packaging products. Moreover, we intend to develop technologies that would help us improve production efficiency and product quality, while lowering production costs. For example, our ongoing research and development projects include waterproof paper cartons with low-temperature endurance and high-strength corrugated paper agglutination technique.

Competition

The packaging market in China is highly fragmented and competitive. There are over 20,000 paperboard manufacturers in China, most of which are relatively small in size. The top ten manufacturers only have an aggregate of less than 10% of the Chinese market.

Due to the geographic radius limitation, we currently only compete with domestic and international corrugated paper packaging companies located within the YRD region. Our major competitors include: Ningbo Asia Paper Tube Paper Carton Co., Ltd., Salfo Package Group Co., Ltd., Zhejiang Dahua Packaging Group Co., Ltd., Zhejiang Zhongbao Pactiv Packaging Co., Ltd., Yuen Foong Yu Paper Enterprise (Kunshan) Co., Ltd., International Paper (Shanghai) Co., Ltd. Zhejiang Jingxing Paper Co., Ltd., Jiangsu Lee & Man Paper Manufacturing Co., Ltd., Jiangsu Chang Feng Paper Factory, Zhejiang Rongcheng Paper Co., Ltd. and others.

The primary barriers to enter the market include obtaining government licenses or permits and significant capital investment in large-scale production facilities. We believe our competitive advantages over domestic players are better cost-efficiencies due to economies of scale and significant order volumes, early mover with long standing relationships with customers, advanced technologies and equipment deployed in our manufacturing process, high product quality with competitive cost structure and well-known brand name. Our competitive advantages over international players include significant production capacity, large amount of existing customer base, the flexibility to customize our products, better local knowledge and connections, lower price resulting from lower cost structure and competitive product quality.

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.

Intellectual Property

Great Shengda owns the trademark for , registered in the PRC (trademark number 1275491). The trademark expires on May 20, 2019, but may be extended.

We believe that our trademark has significant value and is important for marketing and building brand recognition. We are not aware of any third party currently using a trademark similar to our Shengda trademark in the PRC for the same types of products.

We have been granted the following patents, each of which will expire 10 years from the application date:

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Patent

  Type   Application Date   Issue Date  
Foldable water containing paper   Utility model  

April 13, 2009

 

March 31, 2010

 
Corrugated paper boxes with preservation device   Utility model  

April 13, 2009

 

March 31, 2010

 
Interior structure for circular packing   Utility model  

April 13, 2009

 

March 31, 2010

 
Spraying device for hot board of corrugated machine   Utility model  

April 13, 2009

 

March 31, 2010

 
Paper packing box for textiles   Utility model  

April 13, 2009

 

March 31, 2010

 
Movable supermarket display shelf   Utility model  

April 13, 2009

 

March 31, 2010

 
Structure of hand handler on packing box   Utility model  

April 13, 2009

 

March 31, 2010

 
Paper display shelf   Utility model  

April 13, 2009

 

March 31, 2010

 
Air abstractor box for corrugated machine   Utility model  

April 13, 2009

 

March 31, 2010

 
Double-layer paper board with inclined corrugation for
tray
  Utility model  

November 25, 2010

 

June 8, 2011

 
Packaging buffer   Utility model  

November 25, 2010

 

August 10, 2011

 
Double-layer corrugated paper board with high flat crush
strength
  Utility model  

November 25, 2010

 

August 17, 2011

 
Triple-layer corrugated paper board with high flat crush
strength
  Utility model  

November 25, 2010

 

August 17, 2011

 
Corrugated paper board with synclastic corrugation   Utility model  

November 25, 2010

 

August 24, 2011

 
Strengthened paper board for tray   Utility model  

November 25, 2010

 

August 24, 2011

 
Locating piece used for wastage clear board   Utility model  

April 13, 2009

 

January 25, 2012

 
The preparation method of water-resistant adhesive used
for corrugated paper manufacturing
  Invention
Patent
 

August 1, 2010

 

April 18, 2012

 
Stick device for automatic pull-tear tape of corrugated
paper carton
  Utility model  

December 7, 2011

 

August 1, 2012

 
Production specialized equipment of composite
corrugated paper board
  Utility model  

December 7, 2011

 

August 1, 2012

 

Environmental Matters

Our manufacturing facilities are subject to various pollution control regulations with respect to air, water, solid and noise pollution and the disposal of waste and hazardous materials. We also are subject to periodic inspections by local environmental protection authorities. We are not currently subject to any pending actions alleging any violations of applicable PRC environmental laws.

Each of Great Shengda, Shengda Color, and Hangzhou Shengming holds a pollutant discharge permit issued by the local environmental protection bureau. Shuangsheng, Suzhou AA, Shengda Concept and Shengda Zhongtian are in the process of obtaining a pollutant discharge permit. The pollutants discharged by Great Shengda, Shengda Color, and Hangzhou Shengming and Suzhou AA include solid waste, such as used printing ink containers, paper scraps and garbage, waste water, which contain chemicals such as resin, waste print ink and isopropyl alcohol, and waste chemicals, including waste print ink, and the pollutants discharged by Shuangsheng include solid waste and waste water. Also, we produce noise during manufacturing. Some of the chemicals we use for printing may be classified as potential health hazards. However, our employees generally have minimal contact with these chemicals, and the chemicals are packaged in containers that we believe meet government safety standards and are dispensed directly from the containers in the printing process (much like the ink from ink-jet printing cartridges). Also, with respect to any noise pollution produced, we have made appropriate filings with the local bureaus of health. We believe our pollutant and waste discharge processes meet government standards.

Neither existing environmental and similar laws nor the costs of our compliance with these laws has had a material adverse effect on our financial condition or results of operations, and management does not believe they will in the future. In addition, we have not incurred, and do not expect to incur, any material costs or liabilities due to environmental contamination at our facilities. However, we cannot predict the impact of new or changed laws or regulations on facilities we currently own or may acquire in the future. We have no current plans for substantial capital expenditures with respect to compliance with environmental and similar laws.

Regulation

Because our operating subsidiaries are located in the PRC, we are subject to national and local laws of the PRC.

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Industrial Laws and Regulations

We are subject to governmental regulations related to paper printing and packaging industry. The Regulations on the Administration of Printing Industry requires us to obtain a printing license before production of paper cartons. Great Shengda and Hangzhou Shengming each possess a printing license for package decoration printing and Shengda Color has a printing license for package decoration printing and printing of other printed matters. The printing license held by Great Shengda, Shengda Color and Hangzhou Shengming are valid until December 31, 2017, each of which is renewable at expiration by application to the relevant authorities. The printing license of Suzhou AA was valid until March 1, 2014 and is in the process of renewing the license with local authorities as of the reporting date of this Form 10-K. Shengda Concept and Shengda Zhongtian are in the process of applying the printing licenses with local authorities as of the reporting date of this Form 10-K.

Other rules and regulations for the printing industry that impact the packaging industry include:

  • Administrative Regulations on Fulfilling Printing Orders, which were issued by the General Administration of Press and Publication together with the Ministry of Public Security. Under these regulations, companies engaged in the printing business are required to verify clients' legal documents, such as business licenses and trademark registration certificates, and to file the printing records kept by the companies with competent authorities. We believe we are in material compliance with such requirement;

  • Interim Provisions on the Establishment of Foreign-invested Printing Enterprises jointly issued by the General Administration of Press and Publication and the former Ministry of Foreign Trade and Economic Cooperation. Under these provisions, approvals by the press and publication administration are required for the establishment of foreign invested enterprises engaging in the printing business. In addition, foreign-invested printing enterprises are not allowed to set up branches; and

  • Interim Measures on the Qualifications of Printing Operators issued by the General Administration of Press and Publication. These measures specify the qualifications required for enterprises engaged in printing operations. Printing operators must satisfy such qualification requirements in order to obtain approval for their establishment and printing licenses from the press and publication administration. The legal representative or major responsible person must obtain a Training Certificate in Printing Regulations issued by the municipal press and publication administration. The legal representative of Great Shengda, Shengda Color and Shengming, Wuxiao Fang, has obtained the Training Certificate in Printing Regulations (No.0820064) granted by Hangzhou Xiaoshan Culture, Radio, TV, Film, Press and Publication Bureau.

China also has a series of national standards regarding paper packaging production. Such national standards include, but are not limited to, National Standards on Single and Double Corrugated Paper Cartons for Transportation of Packages. These standards relate to the structure, material, size and quality requirement for classification of cartons for transporting different kinds of merchandise. These standards are not compulsory but are followed by many manufacturers.

As a paper packaging production company, we need to reproduce trademarks owned by our customers. As a consequence, the Trademark Printing Administration Measures are applicable to us, which require us to examine the trademark registration certificates and other relevant documents of our customers to verify the trademark ownership. We believe we are in material compliance with such requirement.

Environmental Regulations

Our production processes mainly generate noise, wastewater and solid wastes. The major PRC environmental regulations applicable to us include the Environmental Protection Law of the PRC, the Environmental Impact Appraisal Law of the PRC, the Law of the PRC on the Prevention and Control of Water Pollution, the Law of the PRC on Prevention and Control of Environmental Pollution Caused by Solid Waste, the Law of the PRC on Prevention and Control of Air Pollution and the Law of the PRC on Prevention and Control of Environmental Noise Pollution.

The Environmental Protection Law of the PRC sets out the legal framework for environmental protection in the PRC. The Ministry of Environmental Protection of the PRC, or the MEP, is primarily responsible for the supervision and administration of environmental protection work nationwide and formulating national waste discharge limits and standards. Local environmental protection authorities at the county level and above are responsible for environmental protection in their jurisdictions.

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Companies that discharge contaminants must report and register with the MEP or the relevant local environmental protection authorities. Companies discharging contaminants in excess of the discharge limits prescribed by the central or local authorities must pay discharge fees for the excess in accordance with applicable regulations and are also responsible for the treatment of the excessive discharge. Companies that directly or indirectly discharge industrial waste water into the water or are required by law to obtain the pollutant discharge permit before discharging waste water or sewage shall also obtain the pollutant discharge permit.

In addition, the Circular Economy Promotion Law and Law of Promoting Clean Production also apply to our business which requires paper packaging production companies to mitigate environmental pollution by utilizing environmentally friendly raw materials and designs. Where feasible we use recycled paper as raw material. In addition, all of our cartons are recyclable.

Regulation on Labor Protection

The Labor Contract Law of the PRC, effective on January 1, 2008, governs the establishment of employment relationships between employers and employees, and the conclusion, performance, termination of, and the amendment to employment contracts. To establish an employment relationship, a written employment contract must be signed. In the event that no written employment contract was signed at the time of establishment of an employment relationship, a written employment contract must be signed within one month after the date on which the employer starts engaging the employee.

Regulations on Protection of Intellectual Property Rights

China has adopted legislation governing protection of intellectual property rights, including copyrights, trademarks and patents. China is a signatory to the main international conventions governing protection of intellectual property rights and became a member of the Agreement on the Trade Related Aspects of Intellectual Property Rights upon its accession to the World Trade Organization in December 2001.

Patents

The PRC Patent Law, adopted in 1984 and revised in 1992, 2000 and 2008, respectively, and the Implementing Rules of the PRC Patent Law, promulgated by the State Council in 2001 and revised in 2002 and 2010 respectively, govern and protect the proprietary rights to registered patents. The State Intellectual Property Office, or SIPO, handles patent registration and grants a term of twenty years to inventions and a term of ten years to utility models and designs. The protection to patent rights may be terminated before expiry of the term granted as a result of the failure of the registrant to pay the annual registration fee accordingly. Patent license agreements and transfer agreements must be filed with the SIPO for record.

Foreign Currency Regulations

Under the PRC foreign currency exchange regulations applicable to us, RMB is convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions. Currently, our PRC operating subsidiaries may purchase foreign currencies for settlement of current account transactions, including payments of dividends to us, employee salaries (even if employees are based outside of China), and payment for equipment purchases outside of China, without the approval of the State Administration of Foreign Exchange of the People’s Republic of China, or SAFE, by complying with certain procedural requirements. Conversion of RMB for capital account items, such as direct investment, loan, security investment and repatriation of investment, however, is still subject to the approval of SAFE. In particular, if our PRC operating subsidiaries borrow foreign currency through loans from us or other foreign lenders, these loans must be registered with SAFE, and if we finance the subsidiaries by means of additional capital contributions, these capital contributions must be approved by certain government authorities, including the Ministry of Commerce, or MOFCOM, or their respective local branches. These limitations could affect our PRC operating subsidiaries’ ability to obtain foreign exchange through debt or equity financing. In the event of a liquidation of our PRC subsidiaries, SAFE approval is required before the remaining proceeds can be expatriated from China.

Taxation

On March 16, 2007, the National People’s Congress of China passed a new Enterprise Income Tax Law, or the EIT Law, and on November 28, 2007, the State Council of China passed its implementing rules, which took effect on January 1, 2008. Before the implementation of the EIT Law, foreign invested enterprises, or FIEs, established in the PRC, unless granted preferential tax treatments by the PRC government, were generally subject to an earned income tax, or EIT, rate of 33.0%, which included a 30.0% state income tax and a 3.0% local income tax. The EIT Law and its implementing rules impose a unified EIT of 25.0% on all domestic-invested enterprises and FIEs, unless they qualify under certain limited exceptions. Despite these changes, the EIT Law gives FIEs established before March 16, 2007, or Old FIEs, a five-year grandfather period during which they can continue to enjoy their existing preferential tax treatments. During this five-year grandfather period, the Old FIEs which enjoyed tax rates lower than 25% under the original EIT law will be subject to gradually increased EIT rates over a 5-year period until their tax rate reaches 25%. In addition, the Old FIEs that are eligible for other preferential tax treatments by the PRC government under the original EIT law are allowed to continue enjoying their preference until these preferential treatment periods expire.

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In addition to the changes to the current tax structure, under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a resident enterprise and will normally be subject to an EIT of 25% on its global income. The implementing rules define the term “de facto management bodies” as “an establishment that exercises, in substance, overall management and control over the production, business, personnel, accounting, etc., of a Chinese enterprise.” If the PRC tax authorities subsequently determine that we should be classified as a resident enterprise, then our organization’s global income will be subject to PRC income tax of 25%. For detailed discussion of PRC tax issues related to resident enterprise status, see Item 1A “Risk Factors—Risks Related to Doing Business in China—Under the New Enterprise Income Tax Law, we may be classified as a ‘resident enterprise’ of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC stockholders.”

In addition, the EIT Law and its implementing rules generally provide that an income tax rate of 10% will normally be applicable to dividends payable to investors that are “non-resident enterprises,” or non-resident investors, which (i) do not have an establishment or place of business in the PRC or (ii) have an establishment or place of business in the PRC, but the relevant income is not effectively connected with the establishment or place of business to the extent such dividends are derived from sources within the PRC. The State Council of the PRC or a tax treaty between China and the jurisdictions in which the non-PRC investors reside may reduce such income tax.

Pursuant to the Provisional Regulation of China on Value Added Tax and its implementing rules, all entities and individuals that are engaged in the sale of goods, the provision of repairs and replacement services and the importation of goods in China are generally required to pay value added tax, or VAT, at a rate of 17.0% of the gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayer. Further, when exporting goods, the exporter is entitled to some or all of the refund of VAT that it has already paid or borne.

Dividend Distributions

PRC regulations restrict the ability of our PRC subsidiaries to make dividends and other payments to their offshore parent company. PRC legal restrictions permit payments of dividends by our PRC subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries are also required under PRC laws and regulations to allocate at least 10% of their annual after-tax profits determined in accordance with PRC GAAP to a statutory general reserve fund until the amounts in said fund reaches 50% of our registered capital. Allocations to these statutory reserve funds can only be used for specific purposes and are not transferable to us in the form of loans, advances, or cash dividends.

Circular 37

On July 4, 2014, SAFE issued the Notice on Relevant Issues Relating to Domestic Residents’ Investment and Financing and Round-Trip Investment through Special Purpose Vehicles, or Circular 37. Circular 37 repeals and replaces the Notice on Relevant Issues Concerning Foreign Exchange Administration for Domestic Residents to Engage in Overseas Financing and Round Trip Investment via Overseas Special Purpose Vehicles, or Circular 75. Circular 37 regulates the foreign exchange matters in relation to the use of a special purpose vehicle, or SPV, by PRC residents to seek offshore equity financing and conduct “round trip investment” in China. Under Circular 37, a SPV refers to an offshore entity established or controlled, directly or indirectly, by PRC residents or PRC entities for the purpose of investing or obtaining financing, utilizing assets or interests legally held by such domestic residents. Circular 37 requires that, before establishing or controlling a SPV, PRC residents and PRC entities are required to complete foreign exchange registration with the local offices of SAFE for their overseas investments. Circular 37 further requires amendment to the registration in the event of any significant changes to the SPV. Failure to fulfill the required registration may result in being prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities.

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As we stated under Item 1A “Risk factors—Risks Related to Doing Business in China—Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident stockholders to personal liability, limit our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us or otherwise materially adversely affect us,” we have asked our stockholders, who are PRC residents as defined in Circular 75, to register with the relevant branch of SAFE, as then required, in connection with their equity interests in us and our acquisitions of equity interests in our PRC subsidiaries. Circular 37 shall apply to any subsequent amendments made by our stockholders after the effective date of Circurlar 37. However, we cannot predict how Circular 37 will affect our business operations or future strategies. For example, our present and prospective PRC subsidiaries’ ability to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with Circular 37 by our PRC resident beneficial holders.

Employee Stock Option Plans or Incentive Plans

In December 2006, the People’s Bank of China promulgated the Administrative Measures on Individual Foreign Exchange, or the Individual Foreign Exchange Regulations, setting forth the requirements for foreign exchange transactions by individuals (both PRC or non-PRC citizens) under the current account and the capital account. In January 2007, SAFE issued the implementation rules for the Individual Foreign Exchange Regulations which, among other things, specified the approval and registration requirement for certain capital account transactions such as a PRC citizen’s participation in employee share ownership and share option plans of overseas listed companies.

Pursuant to the implementation rules of Circular 37, employee share ownership plans of SPVs and employee share option plans of SPVs must be filed with the SAFE while applying for the registration for the establishment of the SPVs. After employees exercise their options, they must apply for an amendment to the registration for the SPV with the SAFE.

On February 15, 2012, SAFE promulgated the Operating Procedures on Administration of Foreign Exchange for PRC Individuals’ Participation in Employee Share Ownership Plans and Employee Share Option Plans of Overseas Listed Companies, or the Share Option Rules. Under the Share Option Rules, PRC citizens who are granted incentive stock or stock options by an overseas-listed company according to its employee stock option or stock incentive plan are required to entrust their employers (including the overseas listed companies and the subsidiaries or branch offices of such offshore listed companies in China), or engage other qualified PRC agents, to register with SAFE and complete certain other procedures related to the stock option or stock incentive plan. Foreign exchange income from the sale of stock or dividends distributed by the overseas-listed company must be remitted into China. In addition, the overseas-listed company or its PRC subsidiary or any other qualified PRC agent is required to appoint an asset manager or administrator and a custodian bank, and open foreign currency accounts to handle transactions relating to the stock option or stock incentive plan. As of the date of this report, we have not granted any incentive stock or stock options to our PRC citizen employees, however, if we do so in the future, our PRC citizen employees who are granted restricted stock or stock options will be subject to these rules upon the listing and trading of our common stock.

Our Employees

As of December 31, 2014, we had a total of 1,789 full-time employees. The following table sets forth the number of employees by function:

Department   Number of Employees
Senior Management   14
Sales and Marketing   64
Development Strategies Department   32
Engineering Department   77
Quality Control   101
Human Resources & Administration   14
Accounting   28
Manufacturing Staff   1,459
TOTAL   1,789

As required by applicable PRC law, we have entered into employment contracts with most of our officers, managers and employees. We are working towards entering employment contracts with those employees who do not currently have employment contracts with us. We believe that we maintain a satisfactory working relationship with our employees, and we have not experienced any significant disputes or any difficulty in recruiting staff for our operations. We are required under PRC law to make contributions to the employee benefit plans at specified percentages of the after-tax profit. In addition, we are required by the PRC law to cover employees in China with various types of social insurance. We believe that we are in material compliance with the relevant PRC laws.

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Our employees in China participate in a state pension scheme organized by PRC municipal and provincial governments. We are currently required to contribute to the scheme in accordance with government requirements.

In addition, companies operating in China must comply with a variety of labor laws, including certain social insurance, housing fund and other staff welfare-oriented payment obligations. While there are existing uncertainties as to the interpretation, implementation and enforcement of such obligations, we believe that we are in material compliance with the relevant PRC laws.

We do not currently pay housing fund for our employees as required under the PRC law. The local Xiaoshan housing fund authority issued a certification to us on July 6, 2010, which certifies that the housing fund system is not fully implemented in Xiaoshan district, that the local Xiaoshan housing fund authority will extend the housing fund system to us in the near future and that the local Xiaoshan housing fund authority will not require retrospect performance of our past obligations in relation to the housing fund. See Item 1A “Risk Factors—Risks Related to Doing Business in China—Our failure to fully comply with PRC labor laws exposes us to potential liability.”

Insurance

We have purchased the following insurance policies: (1) property all-risks insurance in respect of our existing fixed assets and properties under construction, and inventories; and (2) insurance against damage of selected key equipment, such as the BHS2800 paperboard production line and EMBA multi-purpose paper carton flexo-printing production lines. All of the policies are effective and the premiums have been paid. These insurance policies are reviewed annually to ensure that the coverage is adequate.

Our management believes that the coverage from these insurance policies is adequate for our present operations. However, significant damage to our operations or any of our properties, whether as a result of fire or other causes, may still have a material adverse impact on our results of operations or financial condition.

According to industry practice, we have not purchased any product liability insurance and business interruption insurance.

ITEM 1A. RISK FACTORS.

Investing in our common stock is highly speculative in nature, involves a high degree of risk and should be purchased only by persons who can afford to lose the entire amount invested in our common stock. Before purchasing any of our common stock, you should carefully consider the following factors relating to our business and prospects. You should pay particular attention to the fact that we conduct all of our operations in China and are governed by a legal and regulatory environment that in some respects differs significantly from the environment that may prevail in the U.S. and other countries. If any of the following risks actually occurs, our business, financial condition or operating results will suffer, the trading price of our common stock could decline, and you may lose all or part of your investment.

RISKS RELATED TO OUR BUSINESS

We may not be able to sustain our growth, and the continuation of growth may strain our resources.

Our business has grown and evolved rapidly since our establishment, as demonstrated by our growth in revenue from $79.1 million in 2007 to $152.6 million in 2014. Our net income attributable to our common stockholders has increased from approximately $7.9 million in 2007 to $9.6 million in 2011. However, our net income attributable to our common stockholders decreased to $5.6 million in 2012, $2.7 million in 2013 and $2.6 million in 2014. We may not be able to achieve growth in future periods. Therefore, our historical operating results may not provide a meaningful basis for evaluating our business, financial performance and prospects in the future. Our ability to achieve satisfactory operating results at higher sales volumes is unproven. In addition, our rapid expansion could significantly strain our resources, management and operational infrastructure, which could impair our ability to meet increased demand for our products and hurt our business results. You should not rely on our past results or our historical rate of growth as an indication of our future performance.

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We are vulnerable to shortages in raw paper supply and electricity, and fluctuations in raw paper prices.

The main raw material used in manufacturing our paper cartons is raw paper. The cost of raw paper has historically constituted approximately 65% to 80% of our cost of goods sold. We source our raw paper in China.

In order to ensure timely delivery of quality products to our customers at competitive prices, we need to obtain sufficient quantities of quality raw materials at acceptable prices in a timely manner. We also require a significant amount of electricity in order to maintain our operations. We have not experienced any significant shortage in raw material supply or electricity thus far. There is no assurance that we will be able to obtain sufficient quantities of raw materials of acceptable quality from our suppliers at acceptable prices in a timely manner or that we will not suffer from electricity shortages in the future.

Furthermore, as raw paper is a commodity, we are vulnerable to the risk of rising raw paper prices, which are determined by demand and supply conditions in the global and the PRC markets. Should there be any significant increases in the price of raw paper, and if we are unable to pass on such increases in costs to our customers or find alternative suppliers who are able to supply us raw paper at reasonable prices, our business and profitability would be adversely affected.

We may be adversely affected by a significant or prolonged economic downturn in the level of consumer spending in the industries and markets served by our customers.

Our business is affected by the number of orders that we are able to secure from our customers, which is determined by the level of business activity of our customers. The level of business activity of our customers is in turn determined by the level of consumer spending in the markets our customers serve.

We sell most of our products to consumer goods manufacturers in the YRD. Certain of these customers produce consumer goods for overseas markets, in addition to the PRC market. Any significant or prolonged decline of the PRC economy or economy of such other markets will affect consumers' disposable income and consumer spending in these markets, and lead to a decrease in demand for consumer products. To the extent that such decrease in demand for consumer products translates into a decline in the demand for paper packaging products such as our paper cartons, our performance will be adversely affected.

A large percentage of our sales revenue is derived from sales to a limited number of customers, and our business will suffer if sales to these customers decline.

Sales to our five major customers, Hangzhou Panasonic Home Electrical Appliance Co., Ltd., Suzhou Samsung Electrical Co., Ltd., Nongfu Spring Co., Ltd., China Resources Snow Breweries Co., Ltd., and Hangzhou Cigarette Company accounted in aggregate for approximately 23.2% of our revenue for 2014.

Our ability to retain these major customers is important to our continued success. There is, however, no assurance that these customers will continue to purchase our products at the current levels in the future. There is also no assurance that we will be able to decrease our dependence on these major customers over time. In the event that these major customers cease or reduce significantly their purchase of our products and we are unable to obtain substitute orders of comparable size, there will be a material adverse impact on our financial performance and position.

Our customers are principally located within a 500 kilometer radius from our manufacturing plant. Due to the cost of transportation and the need for timely delivery, serving customers situated outside that radius is less attractive economically for us. If we lose our major customers, we may not be able to replace these accounts with customers within the 500 kilometer radius. If we have to service accounts outside that radius, our cost may increase, thereby affecting our margins adversely.

The continuing consolidation of our customer base may intensify pricing pressures and may negatively affect our financial performance.

Over the last few years, many of our large customers have acquired, or been acquired by, companies with similar or complementary product lines. This consolidation has increased the concentration of our largest customers, and resulted in increased pricing pressures from our customers. The continuing consolidation of our customer base may negatively affect our financial performance.

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We may be unable to execute our growth plans or effectively manage our expansion.

We plan to grow externally by acquiring complementary businesses. We also plan to grow organically by increasing purchase commitments from existing clients and further penetrating existing markets. These expansion plans may strain our financial resources. They may also overstretch our management personnel and require us to restructure our management structure. We may be unsuccessful in the timely or cost-efficient expansion of our production capacity to meet anticipated increases in the demand for our products. Expansion projects may not be constructed within the anticipated timetable or within budget. Any material delay in completing such projects, or any substantial increase in costs or quality issues in connection with them, could materially and adversely affect our business, financial condition and results of operations, or result in a loss of business opportunities.

To accommodate our growth pursuant to our strategies, we will need to expand, train, manage and motivate our workforce, and effectively manage our relationships with our customers and suppliers. We will also need to expand capital resources and dedicate personnel to implement and upgrade our accounting, operational and internal management systems and to enhance our record keeping and contract tracking system. All of these endeavors will require substantial management effort and skills and the incurrence of additional expenditures. We cannot assure you that we will be able to efficiently or effectively implement our growth strategies and manage the growth of our operations, and any failure to do so may limit our future growth and hamper our business strategy.

We may require additional funding for our growth plans, and such funding may result in a dilution of your investment, limit our ability to pay dividends or otherwise restrict our business operations.

We attempted to estimate our funding requirements in order to implement our growth plans. Our growth plans include growth through acquisitions. Although the proceeds from our public offering closed in December 2010 should be sufficient for us to implement our near term acquisition strategy, we may require additional capital in order to successfully operate businesses that we acquire.

If the costs of implementing our growth plans, including the cost of operating businesses that we acquire, should exceed these estimates significantly, or if we come across opportunities to grow through expansion plans which cannot be predicted at this time, and funds generated from our operations prove insufficient for such purposes, we may need to raise additional funds.

We may raise additional funds by issuing equity, equity-linked securities or debt securities or by borrowing from banks or other resources. We cannot ensure that we will be able to obtain any additional financing on terms that are acceptable to us, or at all. If we fail to obtain additional financing on acceptable terms, we will not be able to implement such plans fully. Even if we succeed in obtaining financing, such financing may be accompanied by conditions that limit our ability to pay dividends or require us to seek lenders’ consent for payment of dividends, or restrict our freedom to operate.

Additional funding from debt financings may make it more difficult for us to operate our business because we would need to make principal and interest payments on the indebtedness and may be obligated to abide by restrictive covenants contained in the debt financing agreements. Further, if we raise additional funds by issuing new shares, any stockholders unable or unwilling to participate in such fund raising may suffer dilution in their investment.

Covenants in certain loan agreements entered into by us restrict our ability to engage in or enter into a variety of transactions, which may cause disruption to our business operations and have a material adverse effect on our business operations.

We have entered into loan agreements with banks in the PRC which contain various covenants that may limit our discretion in operating the business of our subsidiaries.

Our lenders have rights that include those that:

  • restrict us from undertaking any shareholding change or restructuring without obtaining prior approval of the lender;
  • restrict us from undertaking mergers and acquisitions or any other joint venture arrangement without prior approval of the lender;
  • restrict us from undertaking withdraw of capital, asset transfer, or equity transfer;

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  • restrict us from undertaking major investment, asset transfer, leasing, pledging or mortgaging its assets without obtaining prior approval of the lender; and
  • restrict the distribution of dividends if after tax profit for a particular fiscal year (1) equals nil or less; (2) is insufficient to offset a deficit of prior years; or (3) is insufficient to pay off principal and interest due during the fiscal year.

There is no assurance that we will be able to obtain the lenders' approval for these transactions. These restrictions on our business may cause disruption in our business operations. Our lenders may restrict us from disposing of or restructuring the ownership of our operating facilities and limit our ability to undertake any acquisition or major investment. Even if we fail to obtain their approval for any such transaction, we must give timely notice of the transaction. In the event of such technical breach, the lender may have the right to rescind the loan, which would materially and adversely affect our operations, future prospects and results of operations.

Our acquisition and investment in other businesses may be unsuccessful.

We intend to selectively pursue strategic acquisition and investment opportunities which complement or enhance our current businesses with new product lines or expand our customer base at the appropriate time. However, we may encounter strong competition during the acquisition or investment process and we may fail to select or value targets appropriately, which may result in our experiencing difficulty in completing such acquisitions or investments at reasonable cost, or at all. Even if an acquisition or investment is successful, we may have to allocate additional capital and human resources to implement the integration of the new line of business. There is no assurance that we can successfully obtain or renew licenses or national or local government approvals for operating new lines of business or successfully integrate newly acquired businesses or do so within a reasonable period of time or that the acquired businesses will generate the expected economic benefits.

One of our growth strategies is to expand our customer base by entering markets in regions outside the YRD. We may face various challenges when entering into markets in other regions. For example, we will have to understand and adjust to local business practices; the transportation infrastructure in other regions may not be as developed as the YRD, which may result in higher costs; and we may encounter difficulty in obtaining or renewing licenses and government approvals.

Furthermore, our experience in serving customers in the YRD may not be applicable in other parts of China. We cannot assure you that we will be able to leverage our experience in the YRD to expand into other parts of China. In our entry into new markets, we may face competition from paper packaging companies with established experience or presence in the geographical areas in which we plan to expand and from other paper packaging companies with similar expansion targets, in addition to the uncertainties discussed in the three preceding risk factors. There is no assurance that we will have similar success in regions outside the YRD. Our failure to manage any of our planned expansion or acquisitions may have a material adverse effect on our business, financial condition and results of operations.

Our certificates, permits, and licenses related to our operations are subject to governmental control and renewal, and failure to obtain or renew such certificates, permits, and licenses will cause all or part of our operations to be terminated.

Our operations require licenses, permits and, in some cases, renewals of these licenses and permits from various governmental authorities in the PRC. Our ability to obtain, maintain, or renew such licenses and permits on acceptable terms is subject to change, as, among other things, the regulations and policies of applicable governmental authorities may change.

Great Shengda, Shengda Color and Hangzhou Shengming hold printing licenses for decorative printing on packages, valid until December 31, 2017. These printing licenses are renewable at the end of their terms by application to the relevant authorities. The printing license of Suzhou AA was valid until March 1, 2014, and is in the process of renewing the license with local authorities as of the reporting date of this Form 10-K. Each of Great Shengda, Shengda Color, and Hangzhou Shengming holds a pollutant discharge permit issued by the local environmental protection bureau. If our printing licenses are revoked or suspended or we are unable to renew a printing license for any reason, we cannot assure you that our business operations will not be stopped and, correspondingly, our financial performance would be adversely affected.

Shuangsheng, Suzhou AA, Shengda Concept, and Shengda Zhongtian are in the process of obtaining various approvals, permits and licenses, including, but not limited to, certain environmental approvals and a pollutant discharge permit. We cannot assure you that we will be successful and timely in obtaining such approvals, licenses and permits. Failure to do so may subject us to monetary fines or other penalties, including possible suspension of Shuangsheng, Suzhou AA, Shengda Concept, and Shengda Zhongtian’s operations.

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We depend heavily on qualified personnel, and loss of these personnel could harm our business.

Our future business and results of operations depend in significant part upon the continued contributions of our senior management and key technical personnel, including our Chairman, Nengbin Fang, and our Chief Executive Officer, Daliang Teng, both of whom have a long history with the Company. Turnover in our senior management could significantly deplete institutional knowledge held by our existing senior management team and impair our operations. If we lose a key employee, or if a key employee fails to perform in his or her current position, our business could suffer. We must attract, recruit and retain a sizeable workforce of technically competent employees. We face competition for qualified personnel from other companies in our industry and from other organizations. Competition for these individuals could cause us to offer higher compensation and other benefits in order to attract and retain these qualified employees, which could materially and adversely affect our results of operations. In addition, the process of hiring qualified personnel is often lengthy. If our recruitment and retention efforts are unsuccessful in the future, it may be more difficult for us to execute our business strategies.

In addition, if any of these qualified personnel joins a competitor or forms a competing company, we may lose some of our customers. We have entered into confidentiality and non-competition agreements with all of our key personnel. However, if any disputes arise between these key personnel and us, it is not clear, in light of uncertainties associated with the PRC legal system, what the court decision will be and the extent to which the court decision could be enforced in China, where all of these key personnel reside and hold most of their assets. See “—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could limit the legal protections available to you and us.”

Any future litigation could have a material adverse impact on our results of operations, financial condition and liquidity. We may incur substantial sums pursuant to our obligation to indemnify our directors and officers.

From time to time we may be subject to litigation, including potential stockholder derivative actions. Risks associated with legal liability are difficult to assess and quantify, and their existence and magnitude can remain unknown for significant periods of time. Our bylaws require us to indemnify our current and past directors and officers from reasonable expenses related to the defense of any action arising from their service to our Company, which may be substantial. Such expenditure could have a material adverse effect on our results of operation, financial condition and liquidity. The lack of D&O insurance may make it difficult for us to retain and attract talented and skilled directors and officers to serve our Company, which could adversely affect our business.

We may be unable to adequately safeguard our intellectual property or we may face claims that may be costly to resolve or that limit our ability to use such intellectual property in the future.

Our business is materially dependent on our intellectual property. Our technical know-how is the result of our research and development efforts, which we believe to be proprietary and unique. We have obtained 19 patents for utility models. We cannot, however, assure you that we will be able to prevent third parties from infringing our intellectual property rights and utilize our patented technology. Further, third parties may assert infringement claims against us with respect to our intellectual property or attempt to invalidate our patents; we cannot assure you that such claims will not be successful. Even if we succeed in establishing or protecting our intellectual property rights, we could incur substantial costs and divert significant management resources in enforcing our right or defending any claims. If any party succeeds in asserting a claim against us relating to a disputed intellectual property, we may need to obtain licenses to continue to use the relevant design or technology. We cannot assure you that we will be able to obtain these licenses on commercially reasonable terms, if at all. Failure to obtain the necessary licenses or other rights could cause our business results to suffer. We rely upon a combination of trade secrets, non-disclosure and other contractual agreements with our employees, as well as limitation of access to and distribution of our intellectual property, in our efforts to protect intellectual property. However, our efforts in this regard may be inadequate to deter misappropriation of our proprietary information or we may be unable to detect unauthorized use and take appropriate steps to enforce our rights. Policing unauthorized use of our intellectual property is difficult, and there can be no assurance that the steps taken by us will be successful. If litigation is necessary to safeguard our intellectual property rights, or to determine the validity and scope of the proprietary rights of others, we could incur substantial costs and diversion of our resources, which may have a material adverse effect on our business, financial condition, operating results or future prospects.

Infringement of our Shengda trademark may hurt our business.

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Our Shengda trademark is protected through trademark registration in the PRC. Although we do not use the trademark on the cartons we produce, which usually have the trademarks or brand-names of our customers, we have built a significant amount of goodwill around our Shengda trademark among our customers and in the industry. If third parties infringe upon our Shengda trademark by unlawfully passing off their products as our products or imitating or using our Shengda trademark, we may face considerable difficulties and costly litigation in order to fully protect our rights in the trademark. An even more serious consequence may be damage to our reputation as a manufacturer of quality products. Our brand, reputation and sales volume may be materially and adversely affected by an infringement of our trademark.

Our facilities and inventory may be affected by fire or natural calamities. Our operations are also subject to the risk of power outage, equipment failure or labor disturbances and other business interruptions. We have limited insurance coverage and do not carry any business interruption insurance.

A fire, flood or other natural calamity may result in significant damage to our production facilities and inventory. Our operations are subject to risks of various business interruptions, including power outage, equipment failure or disturbances that may result from labor unrest. If we are unable to obtain timely replacements of damaged inventory or equipment, or if we are unable to find an acceptable contract manufacturer in the event our production facilities are damaged by a catastrophic event, then major disruptions to our production could have a significant adverse effect on our operations and financial results. For example, it would take us about four months to replace our German BHS2800 paperboard production line if that line were significantly damaged. During that time, our production would be significantly hampered and our revenues would diminish significantly. Also, our property insurance may not be sufficient to cover damages to our production facilities, and we do not carry any business interruption insurance covering lost profits as a result of the disruption to our production.

We have limited insurance coverage and do not carry any third-party liability insurance or insurance that covers the risk of loss of our products in shipment.

If any of our products are defective, then we may be subject to product liability claims or we may have to engage in a product recall. Our employees or independent third parties may suffer injury from accidents at our facilities. We do not carry any product liability insurance with respect to our products or third-party liability insurance to cover claims pertaining to personal injury or property or environmental damages arising from defects in our products, product recalls or accidents on our property. We only have limited insurance coverage for property and machinery damage. Our existing insurance coverage may not be sufficient to cover all the risks associated with our business. As a result, we may be required to pay for losses, damages and liabilities, including those caused by natural disasters and other events beyond our control, out of our own funds, which could have a material adverse effect on our business, financial condition and results of operations.

Furthermore, under the shipping terms of some of our customer contracts, we bear the risk of loss in the shipment of our products. We do not insure this risk. While we believe that the transportation companies that we use carry adequate insurance or are sufficiently solvent to cover any loss in shipment, there can be no assurance that we will be adequately reimbursed upon the loss of a significant amount of our products.

Aside from impairing our financial performance, any slowdown or interruption in our production processes could negatively affect our brand.

We manufacture or assemble our products at our facilities in Hangzhou, Zhejiang, China. Our manufacturing operations are complicated and integrated; involving the coordination of raw materials sourced from third parties, internal production processes and external distribution processes. While these operations are modified on a regular basis to improve manufacturing and distribution efficiency and flexibility, we may experience difficulties in coordinating the various aspects of our manufacturing processes, thereby causing downtime and delays. We have also been steadily increasing our production capacity. However, we may not be able to obtain enough resources in time to operate our facilities at the same or higher capacity and to increase our production volume. Any interruptions in our production could result in our inability to produce our products, which would reduce our sales revenue and earnings for the affected period. If there is a stoppage in production at any of our facilities, even if only temporary, or delays in delivery times to our customers, our business and reputation could be severely affected. Any significant delays in deliveries to our customers could lead to increased returns or cancellations and cause us to lose future sales. We currently do not have business interruption insurance to offset these potential losses, delays and risks so a material interruption of our business operations could severely damage our business.

Inability to maintain our competitiveness would adversely affect our financial performance.

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We operate in a competitive environment and face competition from existing competitors and new market entrants. Companies in our industry compete with each other on quality of products, production capacity, pricing, brand name, timely delivery and customer service. Some of our competitors are large, vertically integrated companies that have greater financial and other resources and greater manufacturing economics of scale, compared to our company.

Competition in the products we manufacture could increase if our competitors begin to price their products more attractively in order to gain market share, or develop or acquire technology to reduce their cost of production.

Furthermore, our industry is currently very fragmented, with a large number of small manufacturers serving local customers. Although this provides opportunities for us to grow externally, other competitors may have the same growth strategy and may be able to execute their growth strategy more speedily than we can, thereby gaining market share at our expense.

There is no assurance that we will be able to compete successfully in the future. Any failure by us to remain competitive would adversely affect our financial performance.

We are exposed to credit risks of our customers.

We typically grant our customers credit periods ranging from 60 to 120 days. For 2014 and 2013, our accounts receivable turnover days were 99 days and 103 days, respectively. If any future event derails the economic growth in China or undermines the confidence in or puts further strains on the world financial system, we may have to extend longer credit periods or our customers may become less creditworthy, which may materially adversely affect our financial condition.

Certain of our existing stockholders have substantial influence over our company, and their interests may not be aligned with the interests of our other stockholders.

Wuxiao Fang, his son, Nengbin Fang, and his daughter, Congyi Fang, together currently own approximately 54.02% of our common stock. As a result, they have significant influence over our business, including decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions, while their interest may not always align with the interest of other stockholders. The concentration of ownership may also have the effect of discouraging, delaying or preventing a future change of control, which could deprive our stockholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our shares.

Environmental compliance and remediation could result in substantially increased capital requirements and operating costs, which could adversely affect our business.

We are subject to PRC laws and regulations relating to the protection of the environment. These laws continue to evolve and are becoming increasingly stringent. The ultimate impact of complying with such laws and regulations is not always clearly known or determinable because regulations under some of these laws have not yet been promulgated or are undergoing revision. Our business and operating results could be materially and adversely affected if we were required to increase expenditures to comply with any new environmental regulations applicable to our operations.

If we are found liable for violation of environmental regulations, our business, reputation, financial condition and results of operations may be adversely affected and our permits and licenses may be suspended or revoked by Chinese regulatory authorities.

Our operations are subject to various risks associated with our use, handling, storage and disposal of hazardous materials, some of which are corrosive and flammable. If we are found liable for contamination, injury to employees or others, or other harm related to our use, handling, storage and disposal of hazardous materials, our business, reputation, financial condition and results of operations may be adversely affected.

We use, handle, store and dispose of hazardous materials in our operations; therefore, we are required to maintain necessary filings with the local competent authority and we have made such filings with the local safety supervision authority as required by law. However, any future failure to maintain or update effective filings with the local safety supervision authority may subject us to monetary fines or suspension or revocation of licenses or permits. In addition, in operating our business we use and store certain materials that may be regarded as occupational hazards. Therefore, we are also required to maintain necessary filings with the local hygiene authority for use and storage of those occupational hazardous materials. We have made filings with the local hygiene authority for use of xylene in our production. However, any failure to maintain or update effective filings with the local hygiene authority may subject us to monetary fines or orders to cease operation at our manufacturing facilities.

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We cannot completely eliminate the risks of contamination, injury to employees or others, or other harms related to our use, handling, storage and disposal of hazardous materials. Although we have not experienced incidents in the past, there can be no assurance that we will not experience fires, leakages and other accidents. In the event of future incidents, we could be liable for any damages that may result, including potentially significant monetary damages for any civil litigation or government proceedings related to a personal injury claim, as well as fines, penalties and other consequences, including suspension or revocation of our licenses or permits, suspension of production, and cessation of operations at our manufacturing facilities, all of which would have a material adverse effect on our business, reputation, financial condition and results of operations. Furthermore, we currently do not carry any insurance coverage for potential liabilities relating to the release of hazardous materials.

We may be exposed to potential risks relating to our internal controls over financial reporting and our ability to have the operating effectiveness of our internal controls attested to by our independent auditors.

Companies that file reports with the SEC, including us, are subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404. SOX 404 requires management to establish and maintain a system of internal control over financial reporting and annual reports on Form 10-K filed under the Exchange Act to contain a report from management assessing the effectiveness of a company’s internal control over financial reporting. Separately, under SOX 404, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, public companies that are large accelerated or accelerated filers must include in their annual reports on Form 10-K an attestation report of their regular auditors attesting to and reporting on management’s assessment of internal control over financial reporting. Non-accelerated filers and smaller reporting companies are not required to include an attestation report of their auditors in annual reports.

A report of our management is included under Item 9A “Controls and Procedures” of this report. We are a smaller reporting company and, consequently, are not required to include an attestation report of our auditor in this annual report. Although our management believes that our internal control over financial reporting was effective as of December 31, 2014, we can provide no assurance that we will comply with all of the requirements imposed thereby and we will receive a positive attestation from our independent auditors in the future, when required. In the event we identify significant deficiencies or material weaknesses in our internal controls that we cannot remediate in a timely manner or we are unable to receive a positive attestation from our independent auditors with respect to our internal controls, investors and others may lose confidence in the reliability of our financial statements.

Our holding company structure may limit the payment of dividends.

We have no direct business operations, other than our ownership of our subsidiaries. While we have no current intention of paying dividends, should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries and other holdings and investments. In addition, our operating subsidiaries, from time to time, may be subject to restrictions on their ability to make distributions to us, including as a result of restrictive covenants in debt financing agreements, restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions as discussed below. If future dividends are paid in RMB, fluctuations in the exchange rate for the conversion of RMB into U.S. dollars may reduce the amount received by U.S. stockholders upon conversion of the dividend payment into U.S. dollars.

Chinese regulations currently permit the payment of dividends only out of accumulated profits as determined in accordance with Chinese accounting standards and regulations. Our subsidiaries in China are also required to set aside a portion of their after tax profits according to Chinese accounting standards and regulations to fund certain reserve funds. Currently, our subsidiaries in China are the only sources of revenues or investment holdings for the payment of dividends. If they do not accumulate sufficient profits under Chinese accounting standards and regulations to first fund certain reserve funds as required by Chinese accounting standards, we will be unable to pay any dividends.

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RISKS RELATED TO DOING BUSINESS IN CHINA

Adverse changes in political, economic and other policies of the Chinese government could have a material adverse effect on the overall economic growth of China, which could materially and adversely affect the growth of our business and our competitive position.

Our business operations are conducted in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The Chinese economy differs from the economies of most developed countries in many respects, including:

  • the degree of government involvement;
  • the level of development;
  • the growth rate;
  • the control of foreign exchange;
  • the allocation of resources;
  • an evolving regulatory system; and
  • a lack of sufficient transparency in the regulatory process.

While the Chinese economy has experienced significant growth in the past 30 years, growth has been uneven, both geographically and among various sectors of the economy. The Chinese economy has also experienced certain adverse effects due to the recent global financial crisis. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.

The Chinese economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in China is still owned by the Chinese government. The continued control of these assets and other aspects of the national economy by the Chinese government could materially and adversely affect our business. The Chinese government also exercises significant control over Chinese economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.

Any adverse change in the economic conditions or government policies in China could have a material adverse effect on overall economic growth, which in turn could lead to a reduction in demand for our products and consequently have a material adverse effect on our businesses.

Uncertainties with respect to the PRC legal system could limit the legal protections available to you and us.

We conduct all of our business through our subsidiaries in the PRC. Our subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to FIEs. The PRC legal system is based on written statutes, and prior court decisions may be cited for reference but have limited precedential value. Since 1979, a series of new PRC laws and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since the PRC legal system continues to evolve rapidly, the interpretations of many laws, regulations, and rules are not always uniform, and enforcement of these laws, regulations, and rules involve uncertainties, which may limit legal protections available to you and us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. In addition, most of our executive officers and directors are residents of China and not of the United States, and substantially all the assets of these persons are located outside the United States. As a result, it could be difficult for investors to affect service of process in the United States or to enforce a judgment obtained in the United States against our Chinese operations and subsidiaries.

You may have difficulty enforcing judgments against us.

Most of our assets are located outside of the United States and most of our current operations are conducted in the PRC. In addition, most of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons is located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce in U.S. courts judgments on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, most of whom are not residents in the United States and the substantial majority of whose assets are located outside of the United States. In addition, there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts. Our counsel as to PRC law has advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. Courts in China may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China does not have any treaties or other arrangements that provide for the reciprocal recognition and enforcement of foreign judgments with the United States. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates basic principles of PRC law or national sovereignty, security, or the public interest. So it is uncertain whether a PRC court would enforce a judgment rendered by a court in the United States.

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The PRC government exerts substantial influence over the manner in which we must conduct our business activities.

The PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property, and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.

Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.

Our legal right to certain leased properties could be challenged by governmental authorities or third parties due to our lessors' lack of proper land use rights or building ownership over such properties and mortgages on those properties.

We lease most land and buildings from related parties and third parties. Our lessors are required to comply with various land- and property-related laws and regulations to enable them to lease their properties for industrial use. For example, properties used for productive entities and the underlying land should be approved for industrial use purposes by competent governmental authorities and should have appropriate building ownership certificates. In addition, before any properties located on land owned by collective organizations may be leased to third parties, lessors are required to obtain appropriate approvals from the competent governmental authorities. We lease a parcel of land of approximately 3,328 square meters from Heshang Town Xiangheqiao Village Economic Cooperative, but we were not provided with the land use right certificate in respect of the leased land or any other evidence issued by the proper and competent authority showing that Heshang Town Xiangheqiao Village Economic Cooperative has obtained appropriate approvals to lease the land use rights to us. This failure may subject the lessor or us to monetary fines or other penalties and may lead to the invalidation or termination of our lease by the competent governmental authorities, thereby adversely affecting our ability to operate our manufacturing business. While Heshang Town Xiangheqiao Village Economic Cooperative has agreed to indemnify us against any loss incurred by us related to the title or nature of the use of this land, we cannot assure you that we will be able to successfully enforce the indemnity of the lessor. As a result, we may suffer losses resulting from the lessor's failure to obtain the required approvals to the extent that we could not be fully indemnified by the lessor.

We lease buildings with a total area of approximately 23,568 square meters from SD Group, which does not hold any building ownership certificates related to these buildings. We were informed that SD Group is applying for building ownership certificates for those buildings. We also lease the buildings with total area of approximately 63,536 square meters from Hangzhou Xin Shengda Investment Co. Ltd., or Xin Shengda. Xin Shengda only has building ownership certificates covering approximately 53,180 square meters of the leased buildings. Xin Shengda has advised us that it is applying for building ownership certificates for the remaining areas. However, there can be no assurance that these two lessors will successfully obtain the requisite building ownership certificates. As a result, we cannot assure you that our rights under those leases will not be challenged by competent governmental authorities. Any challenge to our legal rights to the properties under the leases used for our manufacturing operations, if successful, could impair or adversely affect our business and operations on those properties.

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The buildings we lease from Xin Shengda are also subject to a mortgage. Xin Shengda did not obtain the required consent to the lease from the mortgagee. As a result, the lease may not be binding on the mortgagee or a transferee who acquires the property upon any foreclosure under the mortgage. While Xin Shengda, as the lessor, has agreed to indemnify us for any loss incurred as a result of the mortgagee's foreclosure on the mortgage, we cannot assure you that we will be able to successfully enforce the lessor's indemnity to the full extent. As a result, we may suffer losses to the extent we are not fully indemnified by the lessor.

Under PRC laws, all lease agreements are required to be registered with the local housing bureau, while as set forth above, not all our lease have been registered. This may expose both our lessors and our subsidiaries to potential monetary fines. Some of our rights under the unregistered leases may also be subordinated to the rights of third parties.

Future inflation in China may inhibit our ability to conduct business in China.

In recent years, the Chinese economy has experienced periods of rapid expansion and highly fluctuating rates of inflation. During the past ten years, the rate of inflation in China has been as high as 6.5% and as low as -0.8% . These factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products and our company.

Restrictions on currency exchange may limit our ability to receive and use our sales effectively.

The majority of our sales will be settled in RMB, and any future restrictions on currency exchanges may limit our ability to use revenue generated in RMB to fund any future business activities outside China or to make dividend or other payments in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the RMB for current account transactions, significant restrictions still remain, including primarily the restriction that FIEs may only buy, sell or remit foreign currencies after providing valid commercial documents, at those banks in China authorized to conduct foreign exchange business. In addition, conversion of RMB for capital account items, including direct investment and loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items. The Chinese regulatory authorities may impose more stringent restrictions on the convertibility of the RMB.

In addition, the Notice of the General Affairs Department of the State Administration of Foreign Exchange on the Relevant Operating Issues concerning the Improvement of the Administration of Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, issued by SAFE and effective as of August 29, 2008, or Circular 142, regulates the conversion by FIEs of foreign currency into RMB by restricting how the converted RMB may be used. Circular 142 requires that RMB converted from the foreign currency-dominated capital of a FIE may only be used for purposes within the business scope approved by the relevant government authority and may not be used to make equity investments in PRC, unless specifically provided otherwise. SAFE further strengthened its oversight over the flow and use of RMB funds converted from the foreign currency-dominated capital of a FIE. The use of such RMB may not be changed without approval from SAFE, and may not be used to repay RMB loans if the proceeds of such loans have not yet been used. Any violation of Circular 142 may result in severe penalties, including substantial fines.

Fluctuations in exchange rates could adversely affect our business and the value of our securities.

The value of our common stock will be indirectly affected by the foreign exchange rate between the U.S. dollar and RMB and between those currencies and other currencies in which our sales may be denominated. Appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend we issue that will be exchanged into U.S. dollars, as well as earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.

Since July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the People’s Bank of China, or PBOC, regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.

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Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.

Restrictions under PRC law on our PRC subsidiaries’ ability to make dividends and other distributions could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise fund and conduct our business.

All of our sales are earned by our PRC subsidiaries. However, as discussed more fully under Item 1 “Business —Regulation—Dividend Distributions,” PRC regulations restrict the ability of our PRC subsidiaries to make dividends and other payments to their offshore parent company. Any limitations on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.

Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident stockholders to personal liability, limit our ability to acquire PRC companies or to inject capital into PRC subsidiaries, limit our PRC subsidiaries' ability to distribute profits to us or otherwise materially adversely affect us.

On July 4, 2014, SAFE issued the Notice on Relevant Issues Relating to Domestic Residents’ Investment and Financing and Round-Trip Investment through Special Purpose Vehicles, or Circular 37. Circular 37 repeals and Circular 75. Circular 37 regulates the foreign exchange matters in relation to the use of a SPV by PRC residents to seek offshore equity financing and conduct “round trip investment” in China. See Item 1 “Business—Regulation—Circular 37” for a detailed discussion of Circular 37 and its implementation.

We have asked our stockholders, who are PRC residents as defined in Circular 75, to register with the relevant branch of SAFE as then required in connection with their equity interests in us and our acquisitions of equity interests in our PRC subsidiaries. Circular 37 shall apply to any subsequent amendments made by our stockholders after the effective date of Circurlar 37.However, we cannot provide any assurances that they can obtain the above SAFE registrations required by Circular 37. Moreover, we cannot predict how it will affect our business operations or future strategies. For example, our present and prospective PRC subsidiaries’ ability to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with Circular 37 by our PRC resident beneficial holders.

In addition, such PRC residents may not always be able to complete the necessary registration procedures required by Circular 37. We also have little control over either our present or prospective direct or indirect stockholders or the outcome of such registration procedures. A failure by our PRC resident beneficial holders or future PRC resident stockholders to comply with Circular 37, if SAFE requires it, could subject these PRC resident beneficial holders to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.

We may be unable to complete a business combination transaction efficiently or on favorable terms due to complicated merger and acquisition regulations.

On August 8, 2006, six PRC regulatory agencies promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rule, which became effective on September 8, 2006 and was amended on June 22, 2009. The M&A Rule governs the approval process by which a Chinese company may participate in an acquisition of assets or equity interests. Depending on the structure of the transaction, the M&A Rule will require the parties to the transaction to make a series of applications to certain government agencies. In some instances, the application process may require the presentation of economic data concerning a transaction, including appraisals of the target business and evaluations of the acquirer, which are designed to allow the government to assess the transaction. Government approvals will have expiration dates by which a transaction must be completed and reported to the government agencies. Compliance with the M&A Rule is likely to be more time consuming and expensive than in the past, and the government can now exert more control over the combination of two businesses. Accordingly, due to the M&A Rule, our ability to engage in business combination transactions has become significantly more complicated, time consuming and expensive, and we may not be able to negotiate a transaction that is acceptable to our stockholders or sufficiently protect their interests in a transaction. The M&A Rule allows Chinese government agencies to assess the economic terms of a business combination transaction. Parties to a business combination transaction may have to submit to MOFCOM and other relevant government agencies an appraisal report and the acquisition agreement, all of which form part of the application for approval, depending on the structure of the transaction. The M&A Rule also prohibits a transaction at an acquisition price obviously lower than the appraised value of the Chinese business or assets and, in certain transaction structures, requires that consideration must be paid within defined periods, generally not in excess of a year. The M&A Rule also limits our ability to negotiate various terms of the acquisition, including aspects of the initial consideration, contingent consideration, holdback provisions, indemnification provisions and provisions relating to the assumption and allocation of assets and liabilities. Transaction structures involving trusts, nominees and similar entities are prohibited. Therefore, the M&A Rule may impede our implementation of our growth strategy.

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Under the Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC stockholders.

On March 16, 2007, the National People’s Congress of China passed the EIT Law, and on November 28, 2007, the State Council of China passed its implementing rules, which took effect on January 1, 2008. Under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. See Item 1 “Business—Regulation—Taxation” for a detailed discussion of the EIT Law.

It remains unclear whether the PRC tax authorities would require or permit our overseas registered entities to be treated as PRC resident enterprises. We do not currently consider our company to be a PRC resident enterprise. However, if the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest on offering proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries may qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC stockholders and with respect to gains derived by our non-PRC stockholders from transferring our stock.

We face uncertainty from China’s Circular on Strengthening the Administration of Enterprise Income Tax on NonResident Enterprises' Share Transfer that was released in December 2009 with retroactive effect from January 1, 2008.

The Chinese State Administration of Taxation, or SAT, released a circular on December 15, 2009 that addresses the transfer of shares by nonresident companies, generally referred to as Circular 698. Circular 698, which was effective retroactively to January 1, 2008, may have a significant impact on many companies that use offshore holding companies to invest in China. Circular 698, which provides parties with a short period of time to comply with its requirements, indirectly taxes foreign companies on gains derived from the indirect sale of a Chinese company. Where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise by selling the shares in an offshore holding company, and the latter is located in a country or jurisdiction where the effective tax burden is less than 12.5% or where the offshore income of his, her, or its residents is not taxable, the foreign investor is required to provide the tax authority in charge of that Chinese resident enterprise with the relevant information within 30 days of the transfers. Moreover, where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise through an abuse of form of organization and there are no reasonable commercial purposes such that the corporate income tax liability is avoided, the PRC tax authority will have the power to re-assess the nature of the equity transfer in accordance with PRC’s “substance-over-form” principle and deny the existence of the offshore holding company that is used for tax planning purposes. There is uncertainty as to the application of Circular 698. For example, while the term "indirectly transfer" is not defined, it is understood that the relevant PRC tax authorities have jurisdiction regarding requests for information over a wide range of foreign entities having no direct contact with China. Moreover, the relevant authority has not yet promulgated any formal provisions or formally declared or stated how to calculate the effective tax in the country or jurisdiction and to what extent and the process of the disclosure to the tax authority in charge of that Chinese resident enterprise. In addition, there are not any formal declarations with regard to how to decide “abuse of form of organization” and “reasonable commercial purpose,” which can be utilized by us to balance if our Company complies with the Circular 698. As a result, we may become at risk of being taxed under Circular 698 and we may be required to expend valuable resources to comply with Circular 698 or to establish that we should not be taxed under Circular 698, which could have a material adverse effect on our financial condition and results of operations.

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The new provisions of the PRC Employment Contract Law may substantially increase our labor-related costs in the future.

The PRC Employment Contract Law, which became effective as of January 1, 2008, contains many more provisions favorable to employees than prior labor regulations in effect in China. This may substantially increase our labor-related costs in our future operations. According to the new law, an employee is entitled to terminate his or her employment relationship with his or her employer for certain causes, such as delay in payment of wages or social insurance contribution or dissatisfactory labor protection, and under such circumstances the employer is liable to pay compensation to the employee. The amount of such compensation payment shall be one month's salary for each year that the employee has served the employer. If the monthly wage of an employee is three times greater than the average monthly wage in the previous year for employees as announced by the people's government at the municipal level directly under the central government or at the city with district level authority where the employer is located, the rate for the financial compensation paid to him shall be three times the average monthly wage of employees and shall be for not more than 12 years of work. In contrast to at-will employment arrangements, most employment arrangements in China are for a fixed term. An employer may also be liable to compensate an employee when the employer decides to terminate an existing employment before its expiration. In addition, if the labor market tightens in China or in the YRD, our labor costs may experience further increase.

Our failure to fully comply with PRC labor laws exposes us to potential liability.

Companies operating in China must comply with a variety of labor laws, including social insurance, housing fund and other employee welfare payment obligations. Uncertainties exist as to the interpretation, implementation and enforcement of these obligations. We believe we have paid all necessary social insurance contributions for all the employees of Great Shengda, Shengda Color and Hangzhou Shengming in accordance with applicable law. Further, we intend to pay all relevant social insurance contributions for all the employees of Suzhou AA, which recently obtained its social insurance registration certificate, in accordance with applicable law. However, if relevant governmental authorities determine that we have not complied fully with these obligations, we may be in violation of applicable PRC labor laws and we cannot assure you that PRC governmental authorities will not impose penalties on us for our failure to comply with these regulations. In addition, if any current or former employee files a complaint with the relevant governmental authorities, we may be subject to fulfilling employee welfare obligations as well as paying administrative fines.

Currently, we do not pay housing fund for our employees as required under the PRC law. The local Xiaoshan housing fund authority issued a certification to us on July 6, 2010, which certifies that the housing fund system is not fully implemented in Xiaoshan district, that the local Xiaoshan housing fund authority will extend the housing fund system to us in the near future and that the local Xiaoshan housing fund authority will not require us to fulfill our past housing fund contribution obligations retroactively. However, there can be no assurance that we will not be challenged by our employees for failure to pay housing fund as required by law and that we will not be punished by the local housing fund authority in the future.

We must comply with the Foreign Corrupt Practices Act and Chinese anti-corruption laws.

We are required to comply with the United States Foreign Corrupt Practices Act, or FCPA, which prohibits U.S. companies from engaging in bribery or making other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some of our competitors, are not subject to these prohibitions. The PRC also strictly prohibits bribery of government officials. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time to time in China. If our competitors engage in these practices, they may receive preferential treatment from some companies and gain an advantage in securing business, or from government officials who might give them priority in obtaining new licenses, thus putting us at a disadvantage. Our employees, agents, representatives and consultants may not always be subject to our control. If any of them violates the FCPA or other anti-corruption laws, we might be held responsible, and we could be subject to severe penalties as a result. In addition, the U.S. government may seek to hold us liable for successor liability for FCPA violations committed by companies in which we invest or which we acquire.

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If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations, stock price and reputation and could result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.

Recently, U.S. public companies that have substantially all of their operations in China, particularly companies like us which have completed so-called reverse merger transactions, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits, SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on our Company, our business and our stock price. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our company. This situation will be costly and time consuming and distract our management from growing our company. If such allegations are not proven to be groundless, our company and business operations will be severely and your investment in our stock could be rendered worthless.

The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the PRC. Accordingly, our public disclosure should be reviewed in light of the fact that no governmental agency that is located in China where substantially all of our operations and business are located have conducted any due diligence on our operations or reviewed or cleared any of our disclosure.

We are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under the Securities Act and the Exchange Act. Unlike public reporting companies whose operations are located primarily in the United States, however, substantially all of our operations are located in China. Since substantially all of our operations and business takes place in China, it may be more difficult for the Staff of the SEC to overcome the geographic and cultural obstacles that are present when reviewing our disclosure. These same obstacles are not present for similar companies whose operations or business take place entirely or primarily in the United States. Furthermore, our SEC reports and other disclosure and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review of the China Securities Regulatory Commission, a PRC regulator that is tasked with oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has done any due diligence on our company and with the understanding that none of our SEC reports, other filings or any of our other public pronouncements has been reviewed or otherwise been scrutinized by any local regulator.

RISKS RELATED TO THE MARKET FOR OUR STOCK GENERALLY

Our common stock is subject to price volatility related and unrelated to our operations.

The market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of other companies in the same industry, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our common stock.

Our common stock may be delisted from The NASDAQ Capital Market, which could negatively impact the price of our common stock and our ability to access the capital markets.

The listing standards of The NASDAQ Capital Market provide that a company, in order to qualify for continued listing, must maintain a minimum stock price, satisfy standards relative to minimum stockholders' equity, minimum market value of publicly held shares and various additional requirements. If we fail to comply with all listing standards applicable to issuers listed on The NASDAQ Capital Market, our common stock may be delisted. If our common stock is delisted, it could reduce the price of our common stock and the levels of liquidity available to our stockholders. In addition, the delisting of our common stock could materially adversely affect our access to the capital markets and any limitation on liquidity or reduction in the price of our common stock could materially adversely affect our ability to raise capital. Delisting from The NASDAQ Capital Market could also result in other negative consequences, including the potential loss of confidence by suppliers, customers and employees, the loss of institutional investor interest and fewer business development opportunities.

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We may be subject to penny stock regulations and restrictions.

The SEC has adopted regulations which generally define so-called "penny stocks" to be an equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. If our common stock were delisted and became a "penny stock," we may become subject to Rule 15g-9 under the Exchange Act, or the Penny Stock Rule. This rule imposes additional sales practice requirements on broker-dealers. For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our securities in the secondary market.

For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule prepared by the SEC relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

There can be no assurance that our common stock will qualify for exemption from the Penny Stock Rule. In any event, even if our common stock were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of penny stock, if the SEC finds that such a restriction would be in the public interest.

Provisions in our Articles of Incorporation and Bylaws or Nevada law might discourage, delay or prevent a change of control of us or changes in our management and, therefore, depress the trading price of the common stock.

Our Articles of Incorporation authorize our Board of Directors to issue up to 100,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by our Board without further action by the stockholders. These terms may include voting rights including the right to vote as a series on particular matters, preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of any preferred stock could diminish the rights of holders of our common stock, and therefore could reduce the value of such common stock. In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our Board of Directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change-in-control, which in turn could prevent our stockholders from recognizing a gain in the event that a favorable offer is extended and could materially and negatively affect the market price of our common stock.

In addition, Nevada corporate law and our Articles of Incorporation and Bylaws contain other provisions that could discourage, delay or prevent a change in control of our Company or changes in its management that our stockholders may deem advantageous. These provisions:

  • deny holders of our common stock cumulative voting rights in the election of directors, meaning that stockholders owning a majority of our outstanding shares of common stock will be able to elect all of our directors;
  • require any stockholder wishing to properly bring a matter before a meeting of stockholders to comply with specified procedural and advance notice requirements; and
  • allow any vacancy on the Board, however the vacancy occurs, to be filled by the directors.

We do not intend to pay dividends in the foreseeable future.

We intend to retain any earnings to finance the development and expansion of our business in the foreseeable future, and we do not anticipate paying any cash dividends on our common stock. Accordingly, investors must be prepared to rely on sales of their common stock after price appreciation to earn an investment return, which may never occur. Investors seeking cash dividends should not purchase our common stock. Any determination to pay dividends in the future will be made at the discretion of our Board of Directors and will depend on our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board deems relevant.

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ITEM 1B. UNRESOLVED STAFF COMMENTS.

Not Applicable.

ITEM 2. PROPERTIES.

There is no private land ownership in China. Individuals and companies are permitted to acquire land use rights for specific purposes. We currently do not have any land use rights. We are currently in the process of acquiring land use rights from Shuangdeng Paper Industrial Company Limited for land of approximately 166,533 square meters in area located in Yancheng City, Jiangsu Province. The land use rights have a term of 50 years expiring in December 2058. The following is a summary of principle properties owned or leased by us.

Great Shengda leases 110,894 square meters land use right at No. 2 Beitang Road, Xiaoshan Economic and Technological Development Zone from Xin Shengda. Our directors, Nengbin Fang and Congyi Fang, are two of the owners of Xin Shengda. The lease term is from January 1, 2014 to December 31, 2014 and the annual rental rate is RMB 1.2 million (approximately $0.19 million). Great Shengda leases additional property, also located No. 2 Beitang Road, Xiaoshan Economic and Technological Development Zone, from Xin Shengda consisting of office buildings and warehouses. The annual rental rate is RMB 2.4 million (approximately $0.39 million).

Shengda Color leases 33,500 square meters land use right from Zhejiang Shuang Ke Da Weaving Co., Ltd.(“Shuang Ke Da”). This property is located at Xiang He Qiao Village, Heshan Town, Xiaoshan District, Hangzhou, Zhejiang Province (“Xiang He Qiao Village”). The lease term is from January 1, 2014 to December 31, 2014 and the annual rental rate is RMB 0.5 million (approximately $0.08 million). Shengda Color also leases 30,661 square meters, consisting of buildings and a plant, from from Shuang Ke Da at Xiang He Qiao Village under a lease that began January 1, 2014 and ends December 31, 2014. The annual rental rate is RMB 1.5 million (approximately $0.24 million).

Hangzhou Shengming, as lessee, maintains a 47,942 square meter land use right lease with SD Group, as lessor, at Xiang He Qiao Village. The lease term began January 1, 2014 and expires December 31, 2014. The annual rental rate is RMB 1 million (approximately $0.16 million). Hangzhou Shengming also leases 23,568 square meters, consisting of buildings and a plant, from SD Group at Xiang He Qiao Village under a lease that began January 1, 2014 and ends December 31, 2014. The annual rental rate is RMB 1.5 million (approximately $0.24 million).

As of December 31, 2014, our major equipment includes (i) one BHS2800 paperboard production line from BHS, a German manufacturer; (ii) one Taiwan made XieXu 2500 paperboard production line; (iii) one BHS2500 paperboard production line; (iv) two Taiwan made XieXu 1800 paperboard production line; (v) one 7-color pre-printing production line; (vi) one computer-to-plate (CTP) system; (vii) one corrugating medium paper production line. The BHS2800 paperboard production line is among the world's most advanced paperboard production equipment.

We believe that all our properties have been adequately maintained, are generally in good condition, and are suitable and adequate for our business.

ITEM 3. LEGAL PROCEEDINGS.

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

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information

Our common stock is listed on the NASDAQ Capital Market and trades under the symbol “CPGI.” Our common stock was formerly quoted on the OTC Bulletin Board under the symbol “CPAK.” Prior to our underwritten public offering on December 10, 2010, there had never been an active public market for shares of our common stock.

The following table sets forth, for the fiscal quarters indicated, the high and low sales prices for our common stock as quoted on the NASDAQ Capital Market.

    Closing Bid Prices  
    High     Low  
Year Ended December 31, 2014            
1st Quarter $  1.47   $  0.84  
2nd Quarter   1.09     0.90  
3rd Quarter   1.02     0.90  
4th Quarter   1.14     0.73  
             
Year Ended December 31, 2013            
1st Quarter $  1.23   $  1.02  
2nd Quarter   1.65     1.04  
3rd Quarter   1.30     0.96  
4th Quarter   1.56     0.84  

Approximate Number of Holders of Our Common Stock

As of March 29, 2015, there were approximately 29 holders of record of our common stock. This number excludes the shares of our common stock owned by stockholders holding stock under nominee security position listings.

Dividends

Great Shengda declared a dividend distribution to Evercharm in 2008 totaling RMB 45.0 million (approximately $6.6 million). Other than this dividend, we have never declared or paid a cash dividend. Any future decisions regarding dividends will be made by our Board of Directors. We currently intend to retain and use any future earnings for the development and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Our Board of Directors has complete discretion on whether to pay dividends, subject to compliance with Nevada law governing the payment of dividends and any applicable contractual restrictions on payments of dividends. See Item 1A “Risk Factors—Risks Related to Our Business—Our holding company structure may limit the payment of dividends,” “—Risks Related to Our Business—Covenants in certain loan agreements entered into by Great Shengda and Hangzhou Shengming restrict our ability to engage in or enter into a variety of transactions, which may cause disruption to our business operations and have a material adverse effect on our business operations,” “—Risks Related to Doing Business in China—Restrictions under PRC law on our PRC subsidiaries’ ability to make dividends and other distributions could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise fund and conduct our business” and Item 1 “Business—Regulation—Dividend Distribution” and for more information regarding restrictions on our payment of dividends. Even if our Board of Directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the Board may deem relevant.

Securities Authorized for Issuance under Equity Compensation Plans

We do not have any compensation plans in effect under which our equity securities are authorized for issuance.

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Recent Sales of Unregistered Securities

We have not sold any equity securities during the fiscal year ended December 31, 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 2014 fiscal year.

Purchases of Equity Securities

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

ITEM 6. SELECTED FINANCIAL DATA.

Not applicable.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following management’s discussion and analysis should be read in conjunction with our financial statements and the notes thereto and the other financial information appearing elsewhere in this report. In addition to historical information, the following discussion contains certain forward-looking information. See “Special Note Regarding Forward Looking Statements” above for certain information concerning those forward looking statements.

Overview

We provide paper packaging solutions to a wide variety of industries, including food, beverage, cigarette, household appliance, consumer electronics, pharmaceuticals, chemicals, 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 sales volume of paper cartons and corrugating medium paper in 2014 reached 304.9 million square meters and 117.7 thousand tons respectively, with an annual production capacity of 545 million square meters and 150 thousand tons in 2014.

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 seven manufacturing facilities in the provinces of Zhejiang and Jiangsu, we have established a sales network with customer service center 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.

Our total revenues for the year ended December 31, 2014 were $152.6 million, an increase of $18.4 million, or 13.7%, from $134.2 million for the year ended December 31, 2013. Our net income attributable to the Company’s common stockholders for the year ended December 31, 2014 was $2.6 million, a decrease of $0.1 million, or 5.7%, from $2.7 million for the year ended December 31, 2013.

Significant Events

On June 12, 2014, we received a letter from The Nasdaq Stock Market ("NASDAQ") notifying it of its failure to maintain a minimum closing bid price of $1.00 over the then preceding 30 consecutive trading days for its common stock as required by NASDAQ Listing Rule 5550(a)(1) (the "Bid Price Rule"). The letter stated that the Company had until December 9, 2014 to demonstrate compliance by maintaining a minimum closing bid price of at least $1.00 for a minimum of 10 consecutive trading days.

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On December 10, 2014, NASDAQ notified the Company that while the Company had not regained compliance with the Bid Price Rule, it was eligible for an additional 180-day grace period, until June 8, 2015 (the “Expiration Date”), to regain compliance with the Bid Price Rule. NASDAQ’s determination was based on the Company having met the continued listing requirement for market value of publicly held shares and all other applicable requirements for initial listing on the NASDAQ Capital Market, with the exception of the Bid Price Rule, and on the Company’s written notice to NASDAQ of its intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary. NASDAQ also informed the Company that if the Company chooses to implement a reverse stock split, it must complete the split no later than ten business days prior to the Expiration Date in order to timely regain compliance.

The letter also disclosed that in the event the Company does not regain compliance with the Bid Price Rule by the Expiration Date, NASDAQ will provide written notification that the Company’s securities will be delisted. At that time, the Company may appeal NASDAQ's determination to delist its common stock to a NASDAQ Hearings Panel. The Company will monitor the closing bid price of its common stock and will consider various possible options, and, if necessary, it intends to affect a reverse stock split, to regain compliance by the Expiration Date.

Executive Overview of Financial Results

Financial Performance Highlights

The following are some financial highlights for the year:

Revenues: Revenues increased by $18.4 million, or 13.7%, to $152.6 million for 2014 from $134.2 million for 2013.
   
Gross profit: Our gross profit increased by $2.4 million, or 12.4%, to $21.9 million for 2014 from $19.5 million for 2013. Gross profit as a percentage of revenues was 14.3% for 2014, as compared to 14.5% for 2013.
   
Net income applicable to common stockholders: Net income applicable to our common stockholders decreased by $0.1 million, or 5.7%, to $2.6 million for 2014 from $2.7 million for 2013.
   
Fully diluted net income per share: Fully diluted net income per share was $0.07 for 2014 approximately same for 2013.

Principal Factors Affecting Our Financial Performance

We believe that the following factors will continue to affect our financial performance:

Rising Consumer Purchasing Power and Growth of the Chinese Economy. Rising consumer purchasing power in China and growth of the Chinese economy in the last few years has translated into an increasing demand for, and sales of, consumer products, such as food products, household electrical appliances and furniture. We believe this increase in demand for consumer products has led, and will continue to lead, to increasing demand for paper packaging products. While the export sector may not achieve growth rates as strong as those experienced in the past decade, we believe consumer spending in China will help keep the Chinese economy buoyant in view of the Chinese government's stated goal of stimulating domestic consumer spending.
   
Ability to Maintain Margin. We have flexibility in pricing our products. We negotiate prices with over 900 customers for their orders based on order size and product requirements. We believe most of our customers are willing to pay us higher prices for our high quality products, timely delivery and strong production capacity that meets their requirements, which we expect will allow us to maintain high profit margins for our products. We also strive to diversify our products and have started to develop high gross margin products such as some color-printed cartons. The trends favoring high-quality and environmentally friendly packaging solutions, as discussed below, also should allow us to maintain our profit margins.
   
Fluctuation in Raw Material Costs. Historically, approximately 70% to 85% of our cost of goods sold has been comprised of raw materials, mainly raw paper and recycled paperboards. Thus our cost of goods sold is sensitive to the price of raw paper and recycled paperboards. We have experienced fluctuation in raw material costs in the last couple of years as a result of world economic conditions. We anticipate that raw paper prices will stabilize throughout 2015.

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Dependence on the YRD Region. The YRD, which includes Xiaoshan, the location of our subsidiaries, is an important manufacturing base in China with a highly developed transportation infrastructure. Given the relatively high cost of transporting paper, our sales have been limited to areas within 300-500 kilometers of our manufacturing facilities. Therefore, most of our customers are in the YRD region and we are dependent on the region's continued economic growth. The YRD accounts for signification portion of China’s GDP and China’s imports and exports. We do not believe any of our key customers will relocate out of the region in the foreseeable future.

Industry Trends. We believe we benefit from a number of favorable trends. With environmental concern becoming an increasingly important topic around the world, packaging materials are expected to be energy saving, toxic-free, reusable, degradable and multi-functional. Government mandate as well as consumer preference make paper a more environmentally-friendly substitute for metal, plastic, glass or wood as packaging material. All of the foregoing translates into significant growth potential for the corrugated paper packaging industry in the PRC. Furthermore, as the standard of living rises, consumers are becoming more discerning about product image and presentation. The increased consumer sophistication translates into growing demand for high-quality and aesthetically pleasing packaging. We are well positioned to take advantage of these market trends as we expand our capacity for color-printed cartons.

Expansion Plans. We intend to grow our business through further penetration of existing markets, entry into new markets and acquisition of complementary businesses or competitors. In June, 2013, Shuangsheng’s paper mill went into production. On June 16, 2014, Shengda Concept, Great Shengda’s 100% wholly-owned subsidiary, was incorporated in Yangcheng city, Jiangsu province, PRC, engaging in manufacturing and sale of paper cartons and paperboard as well as research and development of paper packing technology. On December 2, 2014, Great Shengda incorporated a joint venture Shengda Zhongtian with Chengdu Zhongtian Chengxin Packaging Co., Ltd., a Chinese company, for manufacturing and sale of corrugated paper cardboards and cartons. Shengda Zhongtian is the first subsidiary outside our traditional marketing radius in the YRD. It is located in Chengdu, a major hub of southwest China with dense population and great demand for consumer products. On December 15, 2014, Shuangsheng incorporated Xiaosheng for sale of paper products. We expect to gain new customers in the surrounding markets.

Taxation

China Shengda Packaging Group Inc. is subject to United States tax at a tax rate of 34%. No provision for income tax in the United States has been made as China Shengda Packaging Group Inc. had no U.S. taxable income for 2014 and 2013, and accumulated earnings from its PRC subsidiaries will be permanently reinvested in the PRC.

Evercharm was incorporated in the BVI and under the current laws of the BVI, is not subject to income tax.

In October 2010, Great Shengda qualified as a National High-Tech Enterprise, a status recognized by China’s Ministry of Science and Technology, Ministry of Finance, and State Administration of Taxation. In December 2010, the status was approved by the local tax bureau. As a result, Great Shengda is entitled to a preferential tax rate of 15%, retroactively effective as of January 1, 2010. Such status is subject to review by government authorities every three years. In February 2014, Great Shengda passed the status review, thus Great Shengda is entitled to a preferential tax rate of 15% for another three years, retroactively effective as of January 1, 2013. We cannot assure that we will continue to have such status after 2015 or that the PRC government will continue the preferential tax treatment of designated high-tech enterprises.

Hangzhou Shengming, Shengda Color, Suzhou AA, Shuangsheng, Shengda Concept, Shengda Zhongtian and Xiaosheng are not entitled to any tax holidays or preferential tax treatment. Therefore, they are each subject to the uniform income tax rate of 25% for calendar years 2014 and 2013.

The EIT Law and its implementing rules generally provide that a 10% withholding tax applies to China-sourced income derived by non-resident enterprises for PRC enterprise income tax purposes unless the jurisdiction of incorporation of such enterprises’ stockholder has a tax treaty with China that provides for a different withholding arrangement.

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Results of Operations

The following table sets forth key components of our results of operations during the fiscal years ended December 31, 2014 and 2013, both in dollars and as a percentage of our revenues.

    December 31, 2014     December 31, 2013  
          %              
          of           %  
    Dollars     Revenues     Dollars     of Revenues  
Revenues $  152,575,962     100.0%   $  134,182,900     100.0%  
Cost of goods sold   130,700,669     85.7%     114,729,483     85.5%  
Gross profit   21,875,293     14.3%     19,453,417     14.5%  
Operating expenses                        
     Selling expenses   6,418,734     4.2%     5,774,715     4.3%  
     General and administrative expenses   12,287,026     8.1%     11,535,135     8.6%  
Total operating expenses   18,705,760     12.3%     17,309,850     12.9%  
Other income (expenses)                        
     Interest income   689,176     0.5%     847,575     0.6%  
     Interest expense   (1,240,557)     (0.8)%     (835,975)     (0.6)%  
     Subsidy income   308,262     0.2%     813,213     0.6%  
     Other   (579,2940     (0.4)%     (211,121)     (0.2)%  
Total other income (expenses)   (822,413)     (0.5)%     613,692     0.5%  
                         
Non-operating (income) expense   (190,619)     (0.1)%     202,529     0.2%  
                         
Income before income tax expense and noncontrolling interest   2,537,739     1.7%     2,554,730     1.9%  
     Income tax expense (benefit)   37,680     0.0%     (79,579)     (0.1)%  
Net income   2,500,059     1.6%     2,634,309     2.0%  
     Net loss attributable to noncontrolling interest   86,546     0.1%     109,637     0.1%  
Net income attributable to common stockholders $  2,586,605     1.7%   $  2,743,946     2.0%  

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

    December 31, 2014     December 31, 2013  
             
    Dollars     Dollars  
Paper cartons and other paper products $  119,772,604   $  119,449,834  
Corrugating medium paper   42,139,734     18,502,587  
Elimination of inter-segment transactions   (9,336,376)     (3,769,521)  
Revenues $  152,575,962   $  134,182,900  

Revenues of paper cartons and other paper products

Our revenues of paper cartons and other paper products increased by $0.4 million, or 0.3%, to $119.8 million for the year ended December 31, 2014, from $119.4 million for the year ended December 31, 2013. The average price was approximately $0.39 per square meter in the year ended December 31, 2014, as compared to $0.40 in 2013. Sales volume increased by 3.7 million square meters, or 1.2 %, to 304.9 million square meters for the year ended December 31, 2014, from 301.2 million square meters for 2013.

For the year ended December 31, 2014, color cartons accounted for 21.1% of our revenues and flexo cartons accounted for 57.4% of our revenues, compared to 26.3% and 62.7%, respectively, in the year ended December 31, 2013. Average per square meter prices for our color cartons and flexo cartons during the year ended December 31, 2014 were approximately $0.40 and $0.39, respectively, as compared to approximately $0.41 and $0.39, respectively, for the year ended December 31, 2013.

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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 20.3% and 17.2%, respectively, of our revenues for the year ended December 31, 2014, as compared to 23.6% and 24.3%, respectively, of our revenues for the year ended December 31, 2013.

Revenues of corrugating medium paper

Our revenues of corrugating medium paper increased by $23.6 million, or 127.8%, to $42.1 million for the year ended December 31, 2014, from $18.5 million for the year ended December 31, 2013. The increase was mainly because Shuangsheng’s paper mill officially went into production in June 2013. Sales volume of corrugating medium paper was approximately 117.7 thousand tons and the average price was approximately $358 per ton in the year ended December 31, 2014, as compared with 51.5 thousand tons and the average price was approximately $359 per ton for the year ended December 31, 2013.

Elimination of inter-segment transaction

Inter-segment transactions represented the transactions that Shuangsheng supplied corrugating medium paper to paper cartons and other paper products segment, which was eliminated in consolidated financial statements.

Cost of goods sold. Our cost of goods sold is comprised of raw materials, labor cost for production-related workers, depreciation and amortization of production-related equipment, utilities consumption costs and overhead allocation. Cost of goods sold from external customer by segment was as follows:

    December 31, 2014     December 31, 2013  
             
    Dollars     Dollars  
Paper cartons and other paper products $  95,319,601   $  96,948,962  
Corrugating medium paper   44,717,444     21,550,042  
Elimination of inter-segment transactions   (9,336,376)     (3,769,521)
Cost of goods sold $  130,700,669   $  114,729,483  

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 $1.6 million, or 1.7%, to $95.3 million for the year ended December 31, 2014, from $96.9 million for the year ended December 31, 2013. Average cost of goods sold per square meter during the year ended December 31, 2014 was approximately $0.31, a decrease of approximately $0.01, as compared to approximately $0.32 for the year ended December 31, 2013. This decrease was primarily due to the decreased cost of raw materials. Management will keep monitoring raw material prices for cost control.

Cost of goods sold of corrugating medium paper

Our cost of goods sold of corrugating medium paper increased by $23.1 million, or 107.5%, to $44.7 million for the year ended December 31, 2014, from $21.6 million for the year ended December 31, 2013. The increase was mainly because Shuangsheng’s paper mill officially went into production in June 2013. Sales volume of raw paper was approximately 117.7 thousand tons and the average cost was approximately $380 per ton in the year ended December 31, 2014, a decrease of approximately $39, as compared to approximately $419 per ton for the year ended December 31, 2013. The high average per ton cost in 2013 was mainly attributable to the high consumption of material and energy in the pilot phase of the paper mill production started in June 2013. Management will keep monitoring for cost control.

Gross profit. Gross profit from external customers by segment was as follows:

    December 31, 2014     December 31, 2013  
             
    Dollars     Dollars  
Paper cartons and other paper products $  24,453,003     $ 22,500,872  
Corrugating medium paper   (2,577,710)   (3,047,455)  
Gross profit $ 21,875,293   $ 19,453,417  

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Gross profit of paper cartons and other paper products

Our gross profit of paper cartons and other paper products increased by $2.0 million, or 8.7%, to $24.5 million for the year ended December 31, 2014, from $22.5 million for the year ended December 31, 2013. Gross profit from flexo cartons increased by $2.3 million, or 14.8%, to $17.5 million for the year ended December 31, 2014, from $15.2 million for the year ended December 31, 2013. Gross profit from color cartons decreased by $0.3 million, or 4.1%, to $7.0 million for the year ended December 31, 2014, from $7.3 million in the year ended December 31, 2013. Gross profit as a percentage of revenues was 20.4% for the year ended December 31, 2014, as compared to 18.8% for the year ended December 31, 2013. The increase in our gross profit was mainly due to decreased cost of goods sold as noted above.

Gross profit of corrugating medium paper

Gross profit of corrugating medium paper was negative $2.6 million in the year ended December 31, 2014 as compared to negative $3.0 million in the year ended December 31, 2013. The high negative gross profit in 2013 was mainly attributable to the high consumption of material and energy in the pilot phase of the paper mill production started in June 2013. The increase of the gross profit was mainly due to economical scale effect along with increased sales volume. Management 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 advertising expenses. Our selling expenses increased by $0.6 million, or 11.2%, to $6.4 million for the year ended December 31, 2014, from $5.8 million for the year ended December 31, 2013. Such increase was primarily attributable to the increased freight expenses. As a percentage of revenues, selling expenses for the year ended December 31, 2014 was 4.2% compared with 4.3% for the year ended December 31, 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 $0.8 million, or 6.5%, to $12.3 million for the year ended December 31, 2014, from $11.5 million for the year ended December 31, 2013. This was mainly attributable to the increase in staff costs, which includes salary, benefits, social insurance and other relevant staff expenses. As a percentage of revenues, general and administrative expenses for the year ended December 31, 2014 decreased to 8.1%, as compared to 8.6% for the year ended December 31, 2013.

Subsidy income. We received local government funds in support of our R&D activities and hi-tech development in the amounts of $0.3 million and $0.8 million for the years ended December 31, 2014 and 2013, respectively. Such subsidies are recognized as income in the period in which funds were received from the government.

Net income attributable to common stockholders. Our net income attributable to our common stockholders decreased by $0.1 million, or 5.7%, to $2.6 million for the year ended December 31, 2014, from $2.7 million for the year ended December 31, 2013, as a result of the cumulative effect of the above factors.

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 December 31, 2014, we had cash and cash equivalents of $10.9 million and restricted cash of $13.8 million. We anticipate that cash on hand, and cash generated from our operations will be sufficient to satisfy our obligations for at least the next 12 months.

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

Cash Flows

    Years Ended December 31,  
    2014     2013  
Net cash provided by (used in) operating activities $  23,961,930   $ (7,987,904)  
Net cash used in investing activities   (13,220,178)   (4,771,022)  
Net cash provided by (used in) financing activities   (6,361,570)     7,126,357  
Effect of exchange rate fluctuation on cash and cash equivalents   (40,130)     298,127  
Net increase (decrease) in cash and cash equivalents   4,340,052     (5,334,442)  
Cash and cash equivalents at beginning of the year   6,569,495     11,903,937  
Cash and cash equivalents at end of the year $  10,909,547   $  6,569,495  

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Operating Activities

Net cash provided by operating activities was $23.9 million for the year ended December 31, 2014, as compared to $8.0 million net cash used in operating activities for the year ended December 31, 2013. This was attributable to our net income of $2.5 million, adjusted by depreciation and amortization expenses of $7.6 million, and a net increase in cash from accounts and notes payable of 10.4 million, and a net increase in cash from other working capital items of $3.4 million.

Investing Activities

Net cash used in investing activities was $13.2 million for the year ended December 31, 2014, as compared to $4.8 million for the year ended December 31, 2013. The $13.2 million net cash used in investing activities during the year ended December 31, 2014 was attributable to the purchases of property, plant and equipment, primarily related to the capital expenditure of property, plant, and equipment of $6.7 million as well as plant construction of $6.8 million, which was mainly for Shengda Concept, and cash generated from the disposal of property, plant and equipment of 0.3 million.

Financing Activities

Net cash used in financing activities was $6.4 million for the year ended December 31, 2014, as compared to $7.1 million net cash provided by financing activities for the year ended December 31, 2013. During the year ended December 31, 2014, we received loan proceeds amounting to $17.2 million, repaid $23.7 million loans and received restricted cash of $0.1 million for the notes payable and loans as collateral.

As of December 31, 2014, we were party to a Loan Agreement, dated June 4, 2014, between Great Shengda, as borrower, and Paris Branch of Bank of China, pursuant to which the bank provided a loan in the principal amount of $3.5 million. The agreement’s maturity date was June 3, 2015. The interest rate was London Interbank Offer Rates plus 2.7%, which will be re-priced on March 4, June 4, September 4 and December 4 each year before the maturity date. The agreement contains restrictive covenants restricting us during the term of the loan from undertaking any disposal of assets in a manner that is detrimental to our ability to repay the loan. The agreement also contains covenants that restrict us from making dividend distributions if we are unable to pay principal and interest or if our after tax profit for a particular fiscal year (1) equals nil or less; or (2) is insufficient to offset deficits of prior years.

As of December 31, 2014, we were party to a Loan Agreement, dated February 27, 2014, between Great Shengda, as borrower, and Frankfurt Branch of Bank of China, pursuant to which the bank provided a loan in the principal amount of $4.5 million. The agreement’s maturity date is February 17, 2016. The interest rate is London Interbank Offer Rates (USD) plus 2.3%, which will be re-priced on February 27, May 27, August 27, and November 27 each year before the maturity date. The agreement contains restrictive covenants restricting us during the term of the loan from undertaking any disposal of assets in a manner that is detrimental to our ability to repay the loan.

We are currently in compliance with the covenants and other requirements with respect to our outstanding debt.

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.

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Off-Balance Sheet Arrangements

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

Critical Accounting Policies

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

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.

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.

Accounts and Notes Receivable

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

Accounts receivable are reviewed periodically as to whether they are past due based on contractual terms and their carrying value has become impaired. An allowance for doubtful accounts is recorded in the period in which loss is determined to be probable based on an assessment of specific evidence indicating doubtful collection, historical experience, account balance aging and prevailing economic conditions. Accounts receivable balances are written off after all collection efforts have been exhausted. No significant account receivable balance was written off for the years ended December 31, 2014 and 2013. Based on our collection experience, management does not believe that bad debt reserve is warranted at this time.

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

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.

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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 December 31, 2014 and December 31, 2013.

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.

Current Vulnerability Due To Certain Other Concentrations

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

We transact the majority of our business in RMB, which is not freely convertible into foreign currencies. On January 1, 1994, the PRC government abolished the dual rate system and introduced a single rate of exchange as quoted daily by the PBOC. However, the unification of the exchange rates does not imply that RMB may be readily convertible into dollars 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.

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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.

Recent Accounting Pronouncements

See Note 2(t) (recently issued accounting standards) to our consolidated financial statements included elsewhere in this report.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The full text of our audited consolidated financial statements as of December 31, 2014 and 2013 begins on page F-1 of this annual report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

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

As required by Rule 13a-15(e), our management has carried out an evaluation, with the participation and under the supervision of our Chief Executive Officer, Mr. Daliang Teng and our Chief Financial Officer, Mr. Ken He, of the effectiveness of the design and operation of our disclosure controls and procedures, as of December 31, 2014. Based upon, and as of the date of this evaluation, Messrs. Teng and He determined that our disclosure controls and procedures were effective.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP, and includes those policies and procedures that:

(1)

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

   
(2)

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors; and

46



(3)

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2014. In making this evaluation, management used the framework set forth in the report entitled Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. Based on our evaluation we determined that, as of December 31, 2014, our internal control over financial reporting is effective at the reasonable assurance level based on those criteria.

Because the Company is a smaller reporting company, this annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the fourth quarter of fiscal year 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION.

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Directors and Executive Officers

The following table sets forth the name and position of each of our current directors and executive officers.

NAME   AGE   POSITION
Nengbin Fang   45   Chairman of the Board of Directors and President of Great Shengda
Daliang Teng   46   Chief Executive Officer
Ken He   35   Chief Financial Officer
Congyi Fang   37   Director and Vice President and General Manager of Marketing of Great Shengda
Zhen Yuan   42   Independent Director
Angel Yanki Wong   44   Independent Director
Yaoquan Zhang   69   Independent Director

Mr. Nengbin Fang. Mr. Fang became our Chairman on April 8, 2010, the day we consummated our reverse acquisition of Evercharm, and has served as the Chief Executive Officer of our subsidiary Great Shengda since 2005, formulating the business strategies and overseeing the management and operation of Great Shengda. He resigned from his position as the Chief Executive Officer of the Company on April 8, 2010. Concurrently, Mr. Fang also serves as president of Great Shengda and as a director of Evercharm, Wealthcharm, Shengda Holdings, the SD Group, Great Shengda, and our subsidiaries Shengda Color and Hangzhou Shengming. Mr. Fang has more than 20 years of experience in the paper packaging industry. From 1989 to 1999, Mr. Fang was a marketing manager at Xiaoshan Packaging Factory. Mr. Fang joined Zhejiang New Shengda as general manager where he was responsible for the management of that company’s day-today operations from 1999 until 2004, when New Shengda sold all of its assets to Great Shengda. Mr. Fang has received several prestigious awards such as the “China Prominent Packaging Entrepreneur,” on April 20, 2006 from China Packaging Federation, the “Asia Brand Innovation Personality” on September 9, 2008 at the Organizing Committee of Asia Brand Ceremony, and the “Hangzhou Working Model” in April 2010 from the Hangzhou government. Mr. Fang holds a college diploma in business administration from Zhejiang Radio & TV University and a Master’s degree in packaging engineering from Zhejiang University. Mr. Fang has also completed post-graduate business administration courses at Tsinghua University.

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Mr. Daliang Teng. Mr. Teng became our Chief Executive Officer on April 8, 2010, the day we consummated our reverse acquisition of Evercharm. He is also the General Manager of our subsidiary Great Shengda. He is responsible for overseeing and managing our day-to-day operations as well as implementing our business strategies and policies. He joined Great Shengda in October 2004 as Vice President and General Manager and was responsible for product management, as well as technology and product development. From 1990 to 1995, Mr. Teng was employed by Shaoxing Xinhua Printing Co., Ltd. in various capacities, including as head of technology. In December 1995, Mr. Teng was promoted to vice general manager where he was responsible for production management until December 1998. From 1998 to 2004, Mr. Teng was employed by Zhejiang New Shengda. Mr. Teng holds a Bachelor’s degree in engineering, majoring in electronics engineering, from Beijing University of Aeronautics and Astronautics.

Mr. Ken He. Mr. He became our Chief Financial Officer on August 19, 2011. Before joining us, Mr. He was an Investment Director of Wealthcharm Investments Limited, a private investment company, from September 2009. Prior to that, Mr. He spent five years at PricewaterhouseCoopers Australia and China. Having several years of experience in the accounting field, Mr. He is experienced and familiar with Chinese accounting standards, Hong Kong accounting standards, international accounting standards and U.S. GAAP, as well as the differences among them. Mr. He holds a Master’s degree in applied finance from Macquarie University. Mr. He is an U.S. Certified Public Accountant, and he also holds a Certified Public Accountant designation from the Chinese Institute of CPA, a Certified Public Accountant designation from the Hong Kong Institute of CPA, a Certified Practicing Accountant designation from the CPA Australia and a Chartered Financial Analyst designation from the CFA Institute.

Ms. Congyi Fang. Ms. Fang became a member of our Board of Directors on April 8, 2010, the day we consummated our reverse acquisition of Evercharm. She is also a director of Wealthcharm and Evercharm. She has been Great Shengda’s Vice President and General Manager of Marketing since 2004 and is responsible for sales and marketing. Ms. Fang has 13 years of experience in the packaging industry. From 1999 to 2004, Ms. Fang was employed by Zhejiang New Shengda as vice manager in charge of daily operations.

Mr. Zhen Yuan. Mr. Yuan became our independent director on July 25, 2014. Mr. Yuan has extensive experience in securities, investment banking and mutual fund management. Since December 2012, Mr. Yuan has been the Vice General Manager of Investment Bank Department of Beijing Bank’s Shanghai Branch. Between March 2011 and December 2012, he was a standing director and the chief of Finance and Investment Department of Shanghai Industrial Corporative Association. From August 2009 to February 2011, Mr. Yuan was the Senior Vice President of Investment Banking Department of China Investment Securities. From September 2008 and July 2009, Mr. Yuan was the Executive Vice President of Investment Banking Department of Guodu Securities Investment Corp. From 2003 to January 2008, Mr. Yuan was the Senior Manager of Boshi Mutual Fund Management Company’s Shanghai office. Mr. Yuan also worked at Ruisui Finance Group and as project manager and senior project manager of Investment Banking Department of Haitong Securities Corp. Mr. Yuan holds a bachelor’s degree of economics from the Accounting Department of Shanghai University. Mr. Yuan possesses extensive knowledge and experience in securities and investment.

Ms. Angel Yanki Wong. Ms. Wong became our independent director on August 12, 2014. Ms. Wong has been the president and executive director of Advanced Capital Limited since January 2008, where she provides consultancy services for both listed companies and companies preparing for listing. Since March 2013, Ms Wong has been an independent non-executive director of Hengxing Gold Holding Company Limited which was listed on the Hong Kong Stock Exchange(Stock Code: 2303) at 29 May 2014. Form June 2011 to September 2014, Ms. Wong was an independent non-executive director of China Best Group Holding Limited, a company listed on the Hong Kong Stock Exchange (Stock Code: 0370) . Ms. Wong has been an independent non-executive director of China Best Group Holding Limited, a company listed on the Hong Kong Stock Exchange (Stock Code: 0370) since June 2011. From October 2011 to May 2013, Ms. Wong was an independent non-executive director of Oriental Unicorn Agricultural Group Limited, a company listed on the Growth Enterprise Market of the Hong Kong Stock Exchange (Stock Code: 8120). From August 2009 to January 2011, she was a non-executive director of Duty Free International Limited, a company listed on SESDAQ of the Singapore Exchange Limited (Stock Code: DutyFree), and she was the chairman of the board from February 2010 to January 2011. From April to November 2005, she was the Chief Financial Officer of Shengda (Group) Holdings Ltd., a company controlled by the founders of the Company and later dissolved in 2011. Ms. Wong also worked for Deloitte Touché Tohmatsu in Hong Kong office from September 1995 to November 1999.

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Ms. Wong obtained a Bachelor of Arts in international accounting from Xiamen University in July 1994, a post-graduate certificate in professional accounting from the City University of Hong Kong in November 2000 and a master degree in business administration from Cheung Kong Graduate School of Business in China in October 2009. Ms. Wong also obtained a certificate in taxation and accounting from the China Business Center of The Hong Kong Polytechnic University in October 2002. Ms. Wong has been admitted as fellow member of the Institute of Financial Accountants in the United Kingdom since October 2003, full member of the Society of Registered Financial Planners in Hong Kong since November 2003 and full member of the Singapore Institute of Directors since October 2009. Ms. Wong was also the honorary secretary (from 2007 to 2008) and council member (from 2008 to 2009) of Institute of Financial Accountants in the United Kingdom, and a part-time professor at Xiamen University from April 2006 to June 2009.

Mr. Yaoquan Zhang. Mr. Zhang became a member of our Board of Directors on November 1, 2010. Mr. Zhang has more than 20 years of experience in the paper packaging industry. He is currently the Vice President of China Packaging Federation and President of Zhejiang Province Paper Packaging Industry Technology Center. He has held these positions since 2005. Mr. Zhang graduated from Huadong Institute of Technology with a Bachelor’s degree.

Except as set forth in our discussion below in Item 13 “Certain Relationships and Related Transactions, and Director Independence—Transactions with Related Persons,” none of our directors, director nominees or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.

Pursuant to the Securities Purchase Agreement dated April 29, 2010, as amended, we agreed that so long as Envision Capital Partners, the lead investor, holds at least 1/3 of the shares issued to it in the private placement, it shall be entitled to nominate one independent member of our Board of Directors.

Directors are elected annually and serve until their successors are duly elected and qualified.

Director Qualifications

Directors are responsible for overseeing our business consistent with their fiduciary duty to stockholders. This significant responsibility requires highly-skilled individuals with various qualities, attributes and professional experience. The Board believes that there are general requirements for service on our Board of Directors that are applicable to all directors and that there are other skills and experience that should be represented on the board as a whole but not necessarily by each director. The Board considers the qualifications of directors and director candidates individually and in the broader context of the Board’s overall composition and our current and future needs.

Qualifications for All Directors

In its assessment of each potential candidate, including those recommended by stockholders, the Board considers the nominee’s judgment, integrity, experience, independence, understanding of our business or other related industries and such other factors the Board determines are pertinent in light of the current needs of the Board. The Board also takes into account the ability of a director to devote the time and effort necessary to fulfill his or her responsibilities to the Company.

The Board requires that each director be a recognized person of high integrity with a proven record of success in his or her field. Each director must demonstrate innovative thinking, familiarity with and respect for corporate governance requirements and practices, an appreciation of multiple cultures and a commitment to sustainability and to dealing responsibly with social issues. In addition to the qualifications required of all directors, the Board assesses intangible qualities including the individual’s ability to ask difficult questions and, simultaneously, to work collegially.

The Board does not have a specific diversity policy, but considers diversity of race, ethnicity, gender, age, cultural background and professional experiences in evaluating candidates for Board membership. Diversity is important because a variety of points of view contribute to a more effective decision-making process.

Qualifications, Attributes, Skills and Experience to be Represented on the Board as a Whole

The Board has identified particular qualifications, attributes, skills and experience that are important to be represented on the Board as a whole, in light of our current needs and business priorities. We are a leading paper packaging company in China listed on the NASDAQ Capital Market. Therefore, the Board believes that a diversity of professional experiences in China’s paper packaging industry, specific knowledge of key geographic growth areas, and knowledge of U.S. capital markets and of U.S. accounting and financial reporting standards should be represented on the Board.

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Summary of Qualifications of Directors

Set forth below is a narrative disclosure that summarizes some of the specific qualifications, attributes, skills and experiences of our directors. For more detailed information, please refer to the biographical information for each director set forth above.

Mr. Nengbin Fang. Mr. Fang’s 20-plus years of experience in the paper packaging industry and his extensive institutional knowledge of the Company and its business are invaluable to our Company. He has also received several prestigious awards from industry associations and local governments and he is well-respected by employees, business partners and government officials within his community. Integrity and modesty are among the several personal attributes that have facilitated Mr. Fang’s leadership success and we believe will continue to do so.

Ms. Congyi Fang. Ms. Fang’s 15 years of experience in the packaging industry and her extensive institutional knowledge of the Company and its business are invaluable to our Company. Her professional knowledge of the industry and her hands-on experience enable her to facilitate effective management and communication, which we believe is very important.

Mr. Zhen Yuan. Mr. Yuan’s 18 years of experience in investment banking, securities and fund management brings important value to the Board and strengthens the Board’s collective qualifications, skills and experience.

Ms. Angel Yanki Wong. Ms. Wong’s 20 years of experience in auditing and accounting and her work experience with listing companies will help us comply with our financial reporting requirements and other compliance requirements. Ms. Wong possesses extensive knowledge of accounting and financial reporting procedures and she is qualified, as determined by the Board, as an audit committee financial expert as defined in Item 407 of Regulation S-K.

Mr. Yaoquan Zhang. Mr. Zhang’s more than 20 years of experience in the paper packaging industry will be invaluable to our Company in its business, operations and future plans for growth. His knowledge and experience will provide direction and advice that few others in the Chinese paper packaging industry could provide.

Family Relationships

Nengbin Fang is the brother of Congyi Fang. There are no other family relationships between any of our directors or executive officers.

Involvement in Certain Legal Proceedings

To the best of our knowledge, none of our directors or executive officers has, during the past ten years:

been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offences);

 

had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;

 

been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;

 

been found by a court of competent jurisdiction in a civil action or by the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;

 

been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or

50


been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

Section 16(A) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our executive officers, directors and beneficial owner of more than 10% of a registered class of our equity securities to file with the SEC statements of ownership and changes in ownership. The same persons are required to furnish us with copies of all Section 16(a) forms they file. Due to administrative oversight, the Form 3s of Mr. Yuan and Ms. Wong in connection with their election and appointment to the board of directors were not timely filed.

In making these statements, we have relied upon examination of the copies of all Section 16(a) forms provided to us and the written representations of our executive officers, directors and beneficial owner of more than 10% of a registered class of our equity securities.

Code of Ethics

Our Board of Directors has adopted a code of ethics that applies to all employees, including our principal executive officer, principal accounting officer or controller or persons performing similar functions. A copy of the code of ethics has been filed as Exhibit 14.1 to our Current Report on Form 8-K filed on November 2, 2010. The code of ethics is available on our website at www.cnpti.com. Amendments to, or waivers from, a provision of the code of ethics that applies to our directors, executive officers or employees will be posted to our website within four business days following the date of such amendment or waiver.

Board Composition and Committees

The Company is governed by a Board of Directors that currently consists of five members: Mr. Nengbin Fang, Ms. Congyi Fang, Mr. Zhen Yuan, Ms. Angel Yanki Wong and Mr. Yaoquan Zhang. Mr. Zhen Yuan, Ms. Angel Yanki Wong and Mr. Yaoquan Zhang are “independent” directors, within the meaning of the NASDAQ Marketplace Rules. All actions of the Board of Directors require the approval of a majority of the directors in attendance at a meeting at which a quorum is present.

The Board has established three standing committees: the Audit Committee, the Compensation Committee and the Governance and Nominating Committee. Each of the Audit Committee, Compensation Committee and Governance and Nominating Committee are comprised entirely of independent directors. From time to time, the Board may establish other committees. The Board has adopted a written charter for each of the Committees which are available on the corporate governance page of our website at www.cnpti.com.

Audit Committee and Audit Committee Financial Expert

Our Audit Committee is currently composed of three members: Mr. Zhen Yuan, Ms. Angel Yanki Wong and Mr. Yaoquan Zhang. Our Board of Directors determined that each member of the Audit Committee meets the independence criteria prescribed by applicable regulation and the rules of the SEC for Audit Committee membership and is an “independent” director within the meaning of the NASDAQ Marketplace Rules. Each Audit Committee member also meets NASDAQ’s financial literacy requirements. Ms. Wong serves as Chair of the Audit Committee.

The Audit Committee, established in accordance with section 3(a)(58)(A) of the Exchange Act, oversees our financial reporting process on behalf of the Board of Directors. The Audit Committee’s responsibilities include the following functions:

approving and retaining the independent auditors to conduct the annual audit of our books and records;
reviewing the proposed scope and results of the audit;

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reviewing and pre-approving the independent auditors’ audit and non-audited services rendered;
approving the audit fees to be paid;
reviewing accounting and financial controls with the independent auditors and our internal auditors and financial and accounting staff;
reviewing and approving transactions between us and our directors, officers and affiliates;
recognizing and preventing prohibited non-audit services; and
meeting separately and periodically with management and our internal auditor and independent auditors.

Our Board of Directors has determined that Ms. Wong is the “audit committee financial expert” as such term is defined in Item 407(d) of Regulation S-K promulgated by the SEC and also meets NASDAQ’s financial sophistication requirements.

Compensation Committee

Our Compensation Committee is currently composed of three members: Mr. Zhen Yuan, Ms. Angel Yanki Wong and Mr. Yaoquan Zhang, each of whom is “independent” within the meaning of the NASDAQ Marketplace Rules. Mr. Yuan serves as Chair of the Compensation Committee.

The Compensation Committee is responsible for making recommendations to the Board concerning salaries and incentive compensation for our officers and employees and administers our stock option plans. The Compensation Committee’s responsibilities include the following functions:

reviewing and recommending policy relating to the compensation and benefits of our officers and employees, including reviewing and approving corporate goals and objectives relevant to the compensation of our Chief Executive Officer and other senior officers;

evaluating the performance of these officers in light of those goals and objectives and setting compensation of these officers based on such evaluations;

administering our benefit plans and the issuance of stock options and other awards under our stock plans;

reviewing and establishing appropriate insurance coverage for our directors and executive officers;

recommending the type and amount of compensation to be paid or awarded to members of our Board of Directors, including consulting, retainer, meeting, committee and committee chair fees and stock option grants or awards; and

reviewing and approving the terms of any employment agreements, severance arrangements, change-of-control protections and any other compensatory arrangements for our executive officers.

Management will play a role in the compensation-setting process. The most significant aspects of management’s role include evaluating employee performance, establishing business performance targets and objectives and recommending salary levels and any equity awards. The Chief Executive Officer will work with the Compensation Committee to provide background information regarding the Company’s strategic objectives, his evaluation of the performance of the senior executive officers and compensation recommendations as to senior executive officers (other than himself). Although our Chief Executive Officer may recommend to the Compensation Committee the compensation package and awards to our executive officers, the Compensation Committee will approve the compensation packages.

The Compensation Committee may retain a compensation consultant from time to time to assist the Compensation Committee in researching and evaluating executive officer and director compensation and compensation programs. The Company did not engage any independent compensation consultants in 2014.

Governance and Nominating Committee

Our Governance and Nominating Committee is currently composed of three members: Mr. Zhen Yuan, Ms. Angel Yanki Wong and Mr. Yaoquan Zhang, each of whom is “independent” within the meaning of the NASDAQ Marketplace Rules. Mr. Yaoquan Zhang serves as Chair of the Governance and Nominating Committee.

The Governance and Nominating Committee is responsible for identifying potential candidates to serve on our Board of Directors and its committees. The Governance and Nominating Committee’s responsibilities include the following functions:

making recommendations to the Board regarding the size and composition of the Board;

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identifying and recommending to the Board nominees for election or re-election to the Board, or for appointment to fill any vacancy;

establishing procedures for the nomination process;

advising the Board periodically with respect to corporate governance matters and practices, including periodically reviewing corporate governance guidelines to be adopted by the Board; and

establishing and administering a periodic assessment procedure relating to the performance of the Board as a whole and its individual members.

The Governance and Nominating Committee will also consider director nominees recommended by stockholders and will evaluate such director candidates in the same manner as it evaluates director candidates recommended by our directors, management or employees. There have been no material changes to the procedures by which stockholders may recommend nominees to our Board of Directors during the fiscal year ended December 31, 2014.

ITEM 11. EXECUTIVE COMPENSATION.

Summary Compensation Table

The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to the named persons for services rendered in all capacities during the noted periods. Except as noted below, no other executive officer received total annual salary and bonus compensation in excess of $100,000.

        All Other  
    Salary Bonus Compensation Total
Name and Principal Position Year ($) ($) ($) ($)
Daliang Teng, 2014 100,000 - - 100,000
Chief Executive Officer 2013 100,000 - - 100,000

Agreements with Executive Officers

All of our employees, including Mr. Daliang Teng, our Chief Executive Officer, Mr. Nengbin Fang, President of Great Shengda, Ms. Congyi Fang, Vice President and General Manager of Marketing of Great Shengda, and Mr. Ken He, our Chief Financial Officer, have executed our standard employment agreement. The employment agreements with Messrs. Teng, Fang and Ms. Fang do not provide for an annual salary; however, for 2012, our Board of Directors established an annual salary of $100,000 for Mr. Teng, annual salary of RMB 60,000 (approximately $8,876) and cash bonus of RMB 250,000 (approximately $36,985) for Mr. Fang, and annual salary of $80,000 for Ms. Fang. On August 19, 2011, the Company and Mr. He entered into an employment agreement which is effective as of August 19, 2011. Mr. He’s employment agreement provides him a salary of $8,000 per month. Our employment agreements do not provide for the term of employment, thus the parties can terminate such agreements in accordance with PRC labor laws. We expect our compensation committee will review all of our executive officers’ compensation and make any adjustments it deems necessary and appropriate and may recommend new employment agreements with the executive officers.

Each of our executive officers has entered into our form of non-disclosure and non-compete agreement. Such agreement provides that while employed by us and thereafter, the employee may not disclose our confidential information to any third party and within two years after termination of the employment, the employee may not compete in the same business in China (including Hong Kong, Macao and Taiwan) as us. In addition, the employee shall not solicit our employees. For an employee’s performance of the non-compete obligation, we will pay monthly compensation to such employee for the post-employment period of the non-compete term. If the employee breaches the agreement, such employee shall be required to repay the amount of the compensation received and pay liquidated damages of up to two times of such total compensation.

Other than the salary and necessary social benefits required by the government, which are defined in the employment agreement, we currently do not provide other benefits to our officers at this time. Our executive officers are not entitled to severance payments upon the termination of their employment agreements or following a change in control.

Outstanding Equity Awards at Fiscal Year End

None of our executive officers received any equity awards, including, options, restricted stock or other equity incentives during the fiscal year ended December 31, 2014.

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Compensation of Directors

The following table sets forth the total compensation earned by our directors during fiscal year ended December 31, 2014:



Name
Fees earned or
paid in cash
($)
All other
compensation
($)

Total
($)
Zhihai Mao(1) 17,358 - 17,358
Michael Zhang(2) 11,667 - 11,667
Zhen Yuan 8,419 - 8,419
Angel Yanki Wong 10,945 - 10,945
Yaoquan Zhang 15,865 - 15,865

(1) Zhihai Mao did not receive a majority of votes cast from stockholders at the Company’s 2014 Annual Meeting of Stockholders. As part of the requirements of the Company’s bylaws, his term as a director expired on August 9, 2014.

(2) Michael Zhang did not stand for re-election as a director on the Company’s Board at the Company’s 2014 Annual Meeting of Stockholders and his term as a director expired at the Annual Meeting on July 25, 2014.

Our independent directors, Mr. Zhen Yuan, Ms. Angel Yanki Wong and Mr. Yaoquan Zhang, each entered into independent director agreements dated as of August 12, 2014. Pursuant to such agreements, Mr. Yuan, Ms. Wong and Mr. Zhang are entitled to $18,000, $23,400 and $16,150, respectively, as an annual director fee, which is payable quarterly.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Security Ownership of Certain Beneficial Owners and Management

The following table sets forth information regarding beneficial ownership of our common stock as of March 29, 2015 (1) by each person who is known by us to beneficially own more than 5% of our common stock; (2) by each of our officers and directors; and (3) by all of our officers and directors as a group. Unless otherwise specified, the address of each of the persons set forth below is in care of the Company, No. 2 Beitang Road, Xiaoshan Economic and Technological Development Zone, Hangzhou, Zhejiang Province, People’s Republic of China.



 Name and Address of Beneficial 
 Owner



 Office, If Any



 Title of Class
Amount and
Nature of
Beneficial
Ownership(1)


Percent of
Class(2)
Officers and Directors
 Nengbin Fang  Chairman of the Board  Common Stock 5,206,308 13.42%
 Daliang Teng  Chief Executive Officer  Common Stock 150,000 *
 Ken He  Chief Financial Officer  Common Stock 0 *
 Congyi Fang  Director  Common Stock 4,200,000 10.83%
 Zhihai Mao(3)  Director  Common Stock 0 *
 Michael Zhang(4)  Director  Common Stock 0 *
 Zhen Yuan  Director  Common Stock 0 *
 Angel Yanki Wong  Director  Common Stock 0 *
 Yaoquan Zhang  Director  Common Stock 0 *
 All officers and directors as a group (7 persons)    Common Stock 9,556,308 24.64%
5% Security Holders
 Wuxiao Fang(5)    Common Stock 11,550,000 29.78%

* Less than 1%

(1) Beneficial Ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Each of the beneficial owners listed above has direct ownership of and sole voting power and investment power with respect to the shares of our common stock.

54


(2) A total of 38,790,811 shares of our common stock are considered to be outstanding pursuant to SEC Rule 13d-3(d)(1) as of March 29, 2015.

(3) Zhihai Mao did not receive a majority of votes cast from stockholders at the Company’s 2014 Annual Meeting of Stockholders. As part of the requirements of the Company’s bylaws, his term as a director expired on August 9, 2014.

(4) Michael Zhang did not stand for re-election as a director on the Company’s Board at the Company’s 2014 Annual Meeting of Stockholders and his term as a director expired at the Annual Meeting on July 25, 2014.

(5) Wuxiao Fang is the father of Nengbin Fang, our Chairman, and also serves as a consultant, for no compensation, to our company. Mr. Fang has approximately 28 years of experience in the paper packaging industry and has been appointed as the vice chairman of the China Packaging Federation. He provides consulting services on our overall business strategies and policies.

Changes in Control

We do not currently have any arrangements which if consummated may result in a change of control of our Company.

Securities Authorized for Issuance Under Equity Compensation Plans

We presently do not have any equity based or other long-term incentive programs.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Transactions with Related Persons

The following includes a summary of transactions since the beginning of the 2014 fiscal year, or any currently proposed transaction, in which we were or are to be a participant and the amount involved exceeded or exceeds the lesser of $120,000 or one percent of the average of our total assets at year end for the last two completed fiscal years, and in which any related person had or will have a direct or indirect material interest (other than compensation described under Item 11 “Executive Compensation”). We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions.

A number of transactions described below are between one or another of our subsidiaries and SD Group or its related parties. SD Group is owned 30.69% by Wuxiao Fang, our consultant, principal stockholder and the father of Nengbin Fang, our Chairman and our executive officer, 29.49% by Xinya Qu, the spouse of Wuxiao Fang, and 39.82% by Xin Shengda. Xin Shengda, in turn, is owned 55% by Xinya Qu, 25% by Nengbin Fang and 20% by Congyi Fang, one of our directors and our executive officer.

On January 1, 2014, Great Shengda entered into a land use right lease agreement under which it leased 110,894 square meters from Xin Shengda at No. 2 Beitang Road, Xiaoshan Economic and Technological Development Zone. The lease term was from January 1, 2014 to December 31, 2014 and the annual rental rate was RMB 1.2 million (approximately $0.19 million).
   
On January 1, 2015, Great Shengda entered into a land use right lease agreement under which it leased 110,894 square meters from Xin Shengda at No. 2 Beitang Road, Xiaoshan Economic and Technological Development Zone. The lease term was from January 1, 2015 to December 31, 2015 and the annual rental rate was RMB 1.2 million (approximately $0.19 million).
   
On January 1, 2014, Great Shengda entered into a building and plant lease agreement under which it leased 63,536 square meters from Xin Shengda at No. 2 Beitang Road, Xiaoshan Economic and Technological Development Zone. The lease term was from January 1, 2014 to December 31, 2014 and the annual rental rate is RMB 2.4 million (approximately $0.39 million).

55



On January 1, 2015, Great Shengda entered into a building and plant lease agreement under which it leased 63,536 square meters from Xin Shengda at No. 2 Beitang Road, Xiaoshan Economic and Technological Development Zone. The lease term was from January 1, 2015 to December 31, 2015 and the annual rental rate is RMB 2.4 million (approximately $0.39 million).
   
On January 1, 2014, Shengda Color entered into a building and plant lease agreement under which it leased 30,661 square meters from Shuang Ke Da at Xiang He Qiao Village, Heshan Town, Xiaoshan District, Hangzhou, Zhejiang Province (“Xiang He Qiao Village”). The lease term was from January 1, 2014 to December 31, 2014 and the annual rental rate is RMB 1.5 million (approximately $0.24 million).
   
On January 1, 2015, Shengda Color entered into a building and plant lease agreement under which it leased 30,661 square meters from Shuang Ke Da at Xiang He Qiao Village, Heshan Town, Xiaoshan District, Hangzhou, Zhejiang Province (“Xiang He Qiao Village”). The lease term was from January 1, 2015 to December 31, 2015 and the annual rental rate is RMB 1.5 million (approximately $0.24 million).
   
On January 1, 2014, Hangzhou Shengming entered into a land use right lease agreement under which it leased 47,942 square meters from SD Group at Xiang He Qiao Village. The lease term was from January 1, 2014 to December 31, 2014. The annual rental rate was RMB 1 million (approximately $0.16 million).
   
On January 1, 2014, Hangzhou Shengming entered into a building and plant lease agreement under which it leased 23,568 square meters from SD Group at Xiang He Qiao Village. The lease term was from January 1, 2014 to December 31, 2014 and the annual rental rate was RMB 1.5 million (approximately $0.24 million).
   
On January 1, 2015, Hangzhou Shengming entered into a land use right lease agreement under which it leased 47,942 square meters from SD Group at Xiang He Qiao Village. The lease term was from January 1, 2015 to December 31, 2015. The annual rental rate was RMB 1 million (approximately $0.16 million).
   
On January 1, 2015, Hangzhou Shengming entered into a building and plant lease agreement under which it leased 23,568 square meters from SD Group at Xiang He Qiao Village. The lease term was from January 1, 2015 to December 31, 2015 and the annual rental rate is RMB 1.5 million (approximately $0.24 million).
   
On December 1, 2014, Shengda Zhongtian entered into a building and plant lease agreement under which it leased 24,285 square meters from Chengdu Zhongtian Chengxin Packaging Co., Ltd at Chendu Wenjiang Economic and Technological Development Zone. The lease term was from January 1, 2015 to December 31, 2024 and the annual rental rate is RMB 3.79 million (approximately $0.62 million) at first two years and increase RMB 0.19 million on annual rental in each following years.
   
On October 8, 2014, SD Group entered into a maximum debt guarantee contract with Xiaoshan Branch Bank of China, under which SD Group agreed to act as guarantor for loans borrowed by Great Shengda from Xiaoshan Branch Bank of China. The maximum guaranteed amount is RMB 80.0 million (approximately $13.0 million) for any loans borrowed by Great Shengda from the bank from October 8, 2014 to September 21, 2015.
   
On December 17, 2014, SD Group entered into a maximum debt guarantee contract with Xiaoshan Branch Industrial and Commercial Bank of China, under which SD Group agreed to act as guarantor for loans borrowed by Great Shengda from Xiaoshan Branch Industrial and Commercial Bank of China. The maximum guaranteed amount is RMB 55.0 million (approximately $8.9 million) for any loans borrowed by Great Shengda from the bank from December 17, 2014 to December 14, 2016.
   
On June 4, 2014, Great Shengda entered into a loan agreement with Paris Branch Bank of China, pursuant to which provided a loan of $3.5 million in principal amount. According to Xiaoshan Branch Bank of China, SD Group guaranteed the loan.

56



As ending balance of December 31, 2014, Great Shengda entered into several commercial bill acceptance agreements with Xiaoshan Branch Bank of China. With total amount RMB 40.0 million (approximately $6.5 million), those agreements came with 50% time deposits as mortgage. The other 50% notes payable were guaranteed by SD Group.
   
As ending balance of December 31, 2014, Great Shengda entered into a commercial bill acceptance agreement with Xiaoshan Branch Agricultural Bank of China. With total amount RMB 58.0 million (approximately $9.4 million), this agreement came with 50% time deposits as mortgage. The notes payable were also 100% guaranteed by SD Group.
   
As ending balance of December 31, 2014, Great Shengda entered into several commercial bill acceptance agreements with Xiaoshan Branch Industrial and Commercial Bank of China. With total amount RMB 10.0 million (approximately $1.6 million), those agreements came with 50% time deposits as mortgage. The other 50% notes payable were guaranteed by SD Group.
   
During 2014, we purchased water, electricity and steam from Zhejiang Shuang Ke Da Weaving Co., Ltd. amounting $1.3 milliom and from Shuangdeng Paper Industrial Company Limited amounting $2.6 million
   
During 2014, we made sales to Shuangdeng Paper Industrial Company Limited amounting $0.3 million, and sales to Shengda Xiang Wei Chemical Company Limited amounting $0.1 million.
   
During 2014, Zhejiang Shuangsheng Logistic Company Limited provided transportation service to us amounting $0.6 million.

Other than as set forth above, none of our directors, director nominees or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates that are required to be disclosed pursuant to the rules and regulations of the SEC.

Director Independence

Each of Mr. Yuan, Ms. Wong and Mr. Zhang serves on our board as an “independent” director as defined by the applicable rules of the SEC and the NASDAQ Marketplace Rules.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

Independent Auditors’ Fees

The following is a summary of the fees billed to the Company by its principal accountants for professional services rendered for the fiscal years ended December 31, 2014 and 2013:

    Year Ended December 31,  
    2014     2013  
Audit Fees $  260,320   $  282,625  
Audit-Related Fees   -     -  
Tax Fees   5,000     5,000  
All Other Fees   -     -  
TOTAL $  265,320   $  287,625  

“Audit Fees” consisted of the aggregate fees billed for professional services rendered for the audit of our annual financial statements and the reviews of the financial statements included in our Forms 10-Q and for any other services that were normally provided in connection with our statutory and regulatory filings or engagements.

“Audit Related Fees” consisted of the aggregate fees billed for professional services rendered for assurance and related services that were reasonably related to the performance of the audit or review of our financial statements and were not otherwise included in Audit Fees.

57


“Tax Fees” consisted of the aggregate fees billed for professional services rendered for tax compliance, tax advice and tax planning. Included in such Tax Fees were fees for preparation of our tax returns and consultancy and advice on other tax planning matters.

“All Other Fees” consisted of the aggregate fees billed for products and services provided and not otherwise included in Audit Fees, Audit Related Fees or Tax Fees.

Pre-Approval Policies and Procedures

Under the Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by our auditors must be approved in advance by our Board of Directors to assure that such services do not impair the auditors’ independence from us. In accordance with its policies and procedures, our Board of Directors pre-approved the audit service performed by Marcum Bernstein & Pinchuk LLP for our financial statements as of and for the year ended December 31, 2014.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

Financial Statements and Schedules

The financial statements are set forth under Item 8 of this annual report on Form 10-K. Financial statement schedules have been omitted since they are either not required, not applicable, or the information is otherwise included.

Exhibit List

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

58


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: March 30, 2015

CHINA SHENGDA PACKAGING GROUP INC.

By: /s/ Daliang Teng
  Daliang Teng
  Chief Executive Officer
   
By: /s/ Ken He
  Ken He
  Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature   Title Date
       
/s/ Daliang Teng   Chief Executive Officer March 30, 2015
Daliang Teng   (Principal Executive Officer)  
       
/s/ Ken He   Chief Financial Officer March 30, 2015
Ken He   (Principal Financial and Accounting Officer)  
       
/s/ Nengbin Fang   Chairman March 30, 2015
Nengbin Fang      
       
/s/ Congyi Fang   Director March 30, 2015
Congyi Fang      
       
/s/ Zhen Yuan   Director March 30, 2015
Zhen Yuan      
       
/s/ Angel Yanki Wong   Director March 30, 2015
Angel Yanki Wong      
       
/s/ Yaoquan Zhang   Director March 30, 2015
Yaoquan Zhang      

59



CHINA SHENGDA PACKAGING GROUP INC.
 
 
 
Consolidated Financial Statements
 
December 31, 2014 and 2013
 
 

F-1


CHINA SHENGDA PACKAGING GROUP INC. AND SUBSIDIARIES

CONTENTS

  Page
Consolidated financial statements:  
         Report of independent registered public accounting firm F-3
         Consolidated balance sheets F-4
         Consolidated statements of income and comprehensive income F-5
         Consolidated statements of change in equity F-6
         Consolidated statements of cash flows F-7
         Notes to the consolidated financial statements F-8~F-25

F-2



 F-3



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

    December 31,  
  2014     2013  

ASSETS

           

   Current assets

           

         Cash and cash equivalents

$  10,909,547   $  6,569,495  

         Restricted cash

  13,764,420     10,129,756  

         Accounts and notes receivable, net

  40,385,615     42,710,653  

         Inventories

  16,197,839     18,605,074  

         Prepayments and other receivables

  1,714,052     1,583,203  

         Amount due from related parties

  51,093     225,822  

         Deductable value added tax payable

  867,869     3,056,867  

   Total current assets

  83,890,435     82,880,870  

 

           

   Non-current assets

           

         Property, plant and equipment, net

  72,274,052     68,481,643  

         Land use right

  11,650,850     11,988,879  

         Deferred tax assets

  2,965,241     1,505,981  

         Goodwill

  180,373     181,481  

Total assets

$  170,960,951   $  165,038,854  

 

           

LIABILITIES AND EQUITY

           

   Current liabilities

           

         Accounts and notes payable

$  41,954,268   $  32,820,222  

         Amounts due to related parties

  2,961,704     2,131,846  

         Accrued expenses and other payables

  2,964,988     2,889,933  

         Taxes payable

  1,826,922     1,215,127  

         Short-term loans

  3,500,000     10,048,000  

         Current portion of long-term loans

  -     4,500,000  

   Total current liabilities

  53,207,882     53,605,128  

 

           

   Non-current liabilities

           

         Long-term loans

  4,500,000     -  

   Total liabilities

$  57,707,882   $  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 December 
31, 2014 and December 31, 2013)

  38,791     38,791  

         Additional paid-in capital

  43,036,464     43,036,464  

         Appropriated retained earnings

  8,293,281     7,240,218  

         Unappropriated retained earnings

  49,894,124     48,360,582  

         Accumulated other comprehensive income

  11,778,550     12,459,426  

         Total equity for stockholders of China Shengda Packaging

  113,041,210     111,135,481  

         Noncontrolling interest

  211,859     298,245  

Total equity

  113,253,069     111,433,726  

Total liabilities and equity

$  170,960,951   $  165,038,854  

See notes to the consolidated financial statements

F-4



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

    Years ended December 31,  
    2014     2013  
             

Revenues

$  152,575,962   $  134,182,900  

Cost of goods sold

  130,700,669     114,729,483  

Gross profit

  21,875,293     19,453,417  

Operating expenses

           

     Selling expenses

  6,418,734     5,774,715  

     General and administrative expenses

  12,287,026     11,535,135  

 

  18,705,760     17,309,850  

Other income (expenses)

           

     Interest income

  689,176     847,575  

     Interest expense

  (1,240,557 )   (835,975 )

     Subsidy income

  308,262     813,213  

     Other expense

  (579,294 )   (211,121 )

 

  (822,413 )   613,692  

 

           

Non operating expenses (income)

  (190,619 )   202,529  

 

           

Income before income tax expense and noncontrolling interest

  2,537,739     2,554,730  

 

           

     Income tax expense (benefit)

  37,680     (79,579 )

Net income

  2,500,059     2,634,309  

     Net loss attributable to noncontrolling interest

  86,546     109,637  

Net income attributable to Company’s common stockholders

$  2,586,605   $  2,743,946  

 

           

Basic and diluted earnings per share

$  0.07   $  0.07  

Weighted-average number of shares outstanding - basic and diluted

  38,790,811     38,790,811  

 

           

Comprehensive income:

           

Net income

$  2,500,059   $  2,634,309  

     Foreign currency translation adjustment

  (680,716 )   3,356,293  

Comprehensive income

  1,819,343     5,990,602  

     Comprehensive loss attributable to noncontrolling interest

  86,386     111,131  

Net comprehensive income attributable to the Company’s common stockholders

$  1,905,729   $  6,101,733  

See notes to the consolidated financial statements

F-5



CHINA SHENGDA PACKAGING GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Amounts in US$, except shares)

                Common           Additional     Appropriated     Unappropriated     Accumulated other        
                stock     Treasury     paid-in     retained     retained     comprehensive     Noncontrolling  
    Total equity     Shares     Amount     stock     capital     earnings     earnings     income     interest  

Balance as of January 1, 2013

$ 105,443,124     39,456,311   $ 39,456   $  (729,444 ) $ 43,765,243   $ 6,997,530   $ 45,859,324   $ 9,101,639   $ 409,376  

Net income

  2,634,309                         2,743,946         (109,637 )

Other comprehensive income

  3,356,293                             3,357,787     (1,494 )

Transfer to statutory reserves

                      242,688     (242,688 )        

Treasury stock retirement

      (665,500 )   (665 )   729,444     (728,779 )                

Balance as of December 31, 2013

$ 111,433,726     38,790,811   $ 38,791       $ 43,036,464   $ 7,240,218   $ 48,360,582   $ 12,459,426   $ 298,245  

Net income

  2,500,059                         2,586,605         (86,546 )

Other comprehensive income

  (680,716 )                           (680,876 )   160  

Transfer to statutory reserves

                      1,053,063     (1,053,063 )        

Balance as of December 31, 2014

$ 113,253,069   $ 38,790,811   $ 38,791     -   $ 43,036,464   $ 8,293,281   $ 49,894,124   $ 11,778,550   $ 211,859  

See notes to the consolidated financial statements

F-6



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

    Years ended December 31,  
    2014     2013  
             

 

           

Cash flows from operating activities

           

Net income

$  2,500,059   $  2,634,309  

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

       

   Depreciation and amortization expenses

  7,644,922     6,024,574  

   Deferred tax

  (1,468,460 )   (1,094,535 )

   Loss from disposal of property, plant and equipment

  579,294     211,121  

Change in operating assets and liabilities:

           

   Restricted cash

  (3,842,974 )   7,932,880  

   Accounts and notes receivable

  2,059,672     (8,325,237 )

   Inventories

  2,293,582     (2,537,833 )

   Prepayments and other receivables

  (136,062 )   (611,783 )

   Accounts and notes payable

  10,384,545     (13,660,440 )

   Amount due from(to) related party

  1,016,230     1,816,916  

   Accrued expenses and other payables

  141,580     93,132  

   Tax payables

  2,789,542     (471,008 )

Net cash provided by (used in) operating activities

  23,961,930     (7,987,904 )

 

           

Cash flows from investing activities

           

   Purchase of property, plant and equipment

  (6,678,773 )   (4,877,444 )

   Prepayment paid for construction in progress

  (6,827,523 )   -  

   Proceeds from disposal of property, plant and equipment

  286,118     106,422  

Net cash used in investing activities

  (13,220,178 )   (4,771,022 )

 

           

Cash flows from financing activities

           

   Proceeds from short-term loans

  12,666,190     6,460,000  

   Proceeds from long-term loans

  4,500,000     -  

   Repayment of short-term loans

  (19,160,318 )   (4,420,893 )

   Repayment of long-term loans

  (4,513,872 )   -  

   Restricted cash

  146,430     5,087,250  

Net cash flows provided by(used in) financing activities

  (6,361,570 )   7,126,357  

 

           

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

  (40,130 )   298,127  

   Net changes in cash and cash equivalents

  4,340,052     (5,334,442 )

Cash and cash equivalents, beginning of year

  6,569,495     11,903,937  

Cash and cash equivalents, end of year

$  10,909,547   $  6,569,495  

 

           

Cash paid during the year for:

           

Interest paid

$  1,058,950   $  826,842  

Income taxes paid

$  1,641,923   $  1,248,707  

F-7



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”), Jiangsu Great Shengda Concept Packaging Development Co., Ltd. (“Shengda Concept”), Chendu Shengda Zhongtian Packaging Co., Ltd (“Shengda Zhongtian”) and Hangzhou Xiaoshan Xiaosheng Paper Co., Ltd (“Xiaosheng”). 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 December 31, 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.

F-8



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

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

Shuangsheng was incorporated in Yancheng city, Jiangsu province, PRC on September 22, 2011. Shuangsheng has registered capital amounting to RMB280 million, 99.06% held by Great Shengda and 0.94% 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 with actually invested capital of RMB29.45 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 December 31, 2014.

Shengda Zhongtian, a joint venture 55% held by Great Shengda and 45% held by Chengdu Zhongtian Chengxin Packaging Co., Ltd, was incorporated in Chengdu city, Sichuan province, PRC on December 2, 2014, with registered capital of RMB42.86 million with actually invested capital of nil. Zhongtian is engaged in the manufacturing and sale of paper cartons and paper boxes. It was at the development stage as of December 31, 2014.

Xiaosheng, Shuangsheng’s 100% wholly-owned subsidiary, was incorporated in Hangzhou city, Zhejiang province, PRC on December 15, 2014, with registered capital of RMB38 million with actually invested capital of nil. Xiaosheng is engaged in the sale of raw paper. It was at the development stage as of December 31, 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.

   

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 accounting principles generally accepted in the United States of America (“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-9



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$13,764,420 and US$10,129,756 as of December 31, 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 December 31, 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 were no outstanding amounts from customers that individually represent greater than 10% of the total balance of accounts receivable as of December 31, 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 December 31, 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 amortization. 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-10



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-11



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 December 31, 2014 and December 31, 2013, the statutory reserve recorded by the Company’s subsidiaries incorporated in the PRC amounted to US$8,293,281 and US$7,240,218, respectively.

   

As of December 31, 2014, the statutory reserve balances of Great Shengda, Hangzhou Shengming, Shengda Color, Suzhou AA and Shuangsheng accounted for approximately 15.5%, 15.0%, 50.0%, 33.2% 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-12



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$4,065,158 and US$4,069,746 were recorded in general and administrative expenses for the years ended December 31, 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$1,563,668 and US$1,324,246 for the years ended December 31, 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 December 31, 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-13



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. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

   

Except for the ASU above, in the period from January 1, 2014 to March 31, 2015, the FASB has issued ASU No. 2014-01 through ASU 2015-02, which are not expected to have a material impact on the consolidated financial statements upon adoption.

F-14



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

(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 December 31, 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 years ended December 31, 2014 and 2013.

   

Concentration of Suppliers

   

There are no purchases from suppliers that individually represent greater than 10% of the total purchases during the year ended December 31, 2014. The Company purchased its products from one major supplier during the year ended December 31, 2013, accounting for 10% of the total purchases.

   

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-15



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:

      December 31,  
      2014     2013  
               
  Accounts receivable $  32,401,827   $  36,902,846  
  Notes receivable   7,983,788     5,807,807  
    $  40,385,615   $  42,710,653  

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

4.

INVENTORIES

Inventories consist of the following:

      December 31,  
      2014     2013  
               
  Raw materials $  12,321,396   $  14,529,545  
  Finished goods   3,862,363     4,054,453  
  Work in process   14,080     21,076  
    $  16,197,839   $  18,605,074  

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

5.

PREPAYMENTS AND OTHER RECEIVABLES

Prepayments and other receivables consist of the following:

      December 31,  
      2014     2013  
               
  Prepayments $  1,530,041   $  1,323,926  
  Other receivables   184,011     259,277  
    $  1,714,052   $  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:

      December 31,  
      2014     2013  
               
  Buildings and improvements $  27,890,275   $  27,685,361  
  Machinery   62,781,607     59,891,529  
  Office equipment and furnishing   968,721     864,976  
  Motor vehicles   1,470,979     1,586,513  
  Construction in progress   7,212,504     153,647  
      100,324,086     90,182,026  
  Less: accumulated depreciation   (28,050,034 )   (21,700,383 )
    $  72,274,052   $  68,481,643  

The Group recorded depreciation expenses of US$7,177,582 and US$5,475,956 for the years ended December 31, 2014 and 2013, respectively.

F-16



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

The property, plant and equipment with net book value amounting to US$8,404,050 and US$9,010,726 were pledged as collateral for bank loans as of December 31, 2014 and December 31, 2013, respectively.

7.

LAND USE RIGHT

   

In October 2010, 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 December 31, 2014, the Group recorded amortization expense of US$264,792 and US$262,839 for the years ended December 31, 2014 and 2013, respectively. However, the certificate of land use right is still awaiting the local government’s authorization.


      December 31,  
      2014     2013  
               
  Land use right $  12,202,500   $  12,277,500  
  Less: accumulated depreciation   (551,650 )   (288,621 )
    $  11,650,850   $  11,988,879  

The future amortization is as follows:

Year    

Amount

 
2015    $ 264,792  
2016     264,792  
2017     264,792  
2018     264,792  
2019     264,792  
2020 and thereafter     10,326,890  
Total    $ 11,650,850  

8.

LOANS

   

Short-term loans

   

Short-term loans consist of the following:


      31-Dec-14     31-Dec-13  
  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%*     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  
 

Total

            $  3,500,000               $  10,048,000  

Note 1 the effective interest rate was 2.93% and 2.3% as of December 31, 2014 and December 31, 2013, respectively.

All of short-term loans were denominated in RMB or USD for working capital purpose, with weighted average balances of US$8,821,926 and US$6,933,534; with weighted average interest rates of 5.55% and 5.33% for the years ended December 31, 2014 and 2013, respectively.

F-17



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

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 December 31, 2014.

Current portion of long-term loans

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

      December 31,2014     December 31,2013  
            Maturity                          
  Lender   Interest rate     date     Balance     Interest rate     Maturity 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$727,397 and US$8,975,342, with weighted average interest rates of 4.05% and 4.05% for the years ended December 31, 2014 and 2013, respectively.

Long-term loans

Long-term loans consist of the following:

      December 31,2014     December 31,2013  
            Maturity                          
  Lender   Interest rate     date     Balance     Interest rate     Maturity 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 December 31, 2014.

The long term loans were denominated in USD for working capital purpose, with weighted average balances of US$3,797,260 and nil, with weighted average interest rates of 3.27% and nil for the years ended December 31, 2014 and 2013, respectively.

The loan was pledged with restricted cash amounting to US$4,978,620 as of December 31, 2014. The following table summarizes the unused lines of credit:

      December 31, 2014     December 31, 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

  Oct.8, 2014     Sep.21, 2015     13,016,000     6,262,000     Sep.5, 2013     Sep.4, 2014     13,096,000     11,459,000  
 

Industrial and Commercial Bank of China

  Dec.17, 2014     Dec.14, 2016     8,948,500     8,135,000     Nov.15, 2012     Nov.15,2014     11,459,000     8,185,000  
 

Jiangsu Sheyang Rural Commercial Bank

  Mar.25, 2013     Mar.24, 2016     3,254,000     3,254,000     Mar.25, 2013     Mar.24, 2016     3,274,000     3,274,000  
 

Jiangsu Sheyang Rural Commercial Bank

  Dec.30, 2013     Dec.20, 2016     3,254,000     3,254,000     Dec.30, 2013     Dec.20, 2016     3,274,000     -  
 

           Total

            $ 28,472,500   $ 20,905,000               $ 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).

F-18



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

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:


      December 31,  
      2014     2013  
               
  Notes payable $  17,571,600   $  9,658,300  
  Accounts payable   24,382,668     23,161,922  
    $  41,954,268   $  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$8,785,800 and US$4,829,150 as of December 31, 2014 and December 31, 2013, respectively. The notes payable from Agriculture Bank of China was guaranteed by SD Group (Note 11).

10.

ACCRUED EXPENSES AND OTHER PAYABLES

   

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


      December 31,  
      2014     2013  
               
  Advance from customers $  875,352   $  725,563  
  Payroll and welfare payable   1,083,186     726,550  
  Other payables   597,884     1,054,544  
  Accrued expenses   408,566     383,276  
    $  2,964,988   $  2,889,933  

11.

RELATED PARTY TRANSACTION

   

Related party balances are as follows:


            December 31,  
  Related parties   Relationship     2014     2013  
 

Amounts due from related parties

             
 

Zhejiang Shuangsheng Logistic Company Limited (“Shuangsheng Logistic”)

  Controlled by the same ultimate stockholders   $  -   $  97,887  
 

Shuangdeng Paper

  Controlled by the same ultimate stockholders     46,825     127,935  
 

Shengda Xiang Wei Chemical Co., Limited(“Shengda Xiang Wei”)

  Controlled by the same ultimate stockholders     4,268     -  
 

 

      $  51,093   $  225,822  
 

 

                 
 

Amounts due to related parties

             
 

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

  Controlled by the same ultimate stockholders   $  442,285   $  216,992  
 

Shuangdeng Paper

  Controlled by the same ultimate stockholders     2,040,435     1,361,307  
 

Shuangsheng Logistic

  Controlled by the same ultimate stockholders     2,420     2,435  
 

Hangzhou New Shengda Investment Limited (“New Shengda”)

  Controlled by the same ultimate stockholders     466,395     551,112  
 

Yancheng Zhaosheng Shiye Co., Ltd (“Yancheng Zhaosheng”)

      10,169     -  
 

 

    $  2,961,704   $  2,131,846  

F-19



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

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. The amount due from Shengda Xiang Wei 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 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. The amount due to Yancheng Zhaosheng represents the payable for land lease from Yancheng Zhaosheng. 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:

            Years ended December 31,  
  Related parties   Relationship     2014     2013  
                     
 

Lease from related parties

                 
 

New Shengda Investment

  Controlled by the same ultimate stockholders   $  585,720   $  271,853  
 

Shuang Ke Da

  Controlled by the same ultimate stockholders     273,336     274,550  
 

SD Group

  Controlled by the same ultimate stockholders     406,750     290,700  
 

Yancheng Zhaosheng

  Controlled by the same ultimate stockholders     10,169     -  
 

 

      $  1,275,975   $  837,103  
 

 

                 
 

Transportation service from related party

           
 

Shuangsheng Logistic

  Controlled by the same ultimate stockholders   $  579,745   $  576,886  
 

 

                 
 

Sales to related parties

                 
 

Shuangdeng Paper

  Controlled by the same ultimate stockholders   $  268,916   $  210,947  
 

Shengda Xiang Wei

  Controlled by the same ultimate stockholders     98,804     224,653  
 

 

      $  367,720   $  435,600  
 

 

                 
 

Purchase of water, electricity, and steam from related parties

           
 

Shuang Ke Da

  Controlled by the same ultimate stockholders   $  1,279,705   $  1,086,128  
 

Shuangdeng Paper

  Controlled by the same ultimate stockholders     2,617,556     2,347,137  
 

 

      $  3,897,261   $  3,433,265  

F-20



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

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$9,436,600 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(l), 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$51,368,536 and US$50,315,473 as of December 31, 2014 and December 31, 2013, respectively.


13.

TAXATION

   

Taxes payable are composed of the following:


      December 31,  
      2014     2013  
               
  VAT payable $  1,227,056   $  617,708  
  Income tax payable   400,163     512,552  
  Other taxes payable   199,703     84,867  
    $  1,826,922   $  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$867,869 and US$3,056,867 as of December 31, 2014 and December 31, 2013, respectively. The deductible VAT will be used to offset future VAT required to pay.

F-21



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

2)

Income tax

   

United States

   

China Shengda Packaging is subject to United States tax at a tax rate of 34%. In the year ended December 31, 2014 and 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 Shengda is 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, Shengda Zhongtian and Xiaosheng 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.

   

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


      Years ended December 31,  
      2014     2013  
               
 

Expected enterprise income tax at statutory tax rate

$  634,435   $  640,238  
 

Effect of tax holiday

  (505,328 )   (776,551 )
 

Others

  (91,427 )   56,734  
 

Effective enterprise income tax

$  37,680   $  (79,579 )

The significant components of income tax expense are as follows:

      Years ended December 31,  
      2014     2013  
               
  Current tax expenses $  1,506,140   $  1,014,956  
  Deferred tax benefits   (1,468,460 )   (1,094,535 )
  Income tax expenses $  37,680   $  (79,579 )

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

F-22



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

 

 

  December 31,  
 

 

  2014     2013  
 

 

           
 

Net operating loss carried forward

$  2,744,172   $  1,215,612  
 

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

  221,069     290,369  
 

Total Deferred tax assets

$  2,965,241   $  1,505,981  

Shuangsheng, one of the Group's subsidiaries, incurred a pretax loss of approximately US$10.9 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 operating lease agreements for land, offices and plants. The estimated annual rental expense for lease commitment is as follows:


Year    

Amount

 
2015   $  2,324,566  
2016     657,045  
2017     677,694  
2018     678,007  
2019 and thereafter     4,715,229  
Total   $  9,052,541  

As of December 31, 2014, material capital commitment under non-cancellable equipment construction and factory construction contracts is US$1,551,688.

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 December 31, 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-23



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

      Paper cartons and other paper products     Corrugating medium paper     Elimination of inter-segment     Total  
      For the years ended December 31     For the years ended December 31     For the years ended December 31     For the years ended December 31  
 

 

  2014     2013     2014     2013     2014     2013     2014     2013  
 

Revenues

$  119,772,604   $  119,449,834   $  42,139,734   $  18,502,587   $  (9,336,376 ) $  (3,769,521 ) $ 152,575,962   $ 134,182,900  
 

Depreciation & amortization

  4,222,370     4,212,351     3,422,552     1,812,223     -     -     7,644,922     6,024,574  
 

Interest revenue

  687,748     838,469     1,428     9,106     -     -     689,176     847,575  
 

Interest expense

  447,881     552,053     792,676     283,922     -     -     1,240,557     835,975  
 

Income tax expense (benefit)

  1,573,666     1,062,963     (1,535,986 )   (1,142,542 )   -     -     37,680     (79,579 )
 

Profit (loss)

  7,108,017     6,551,708     (4,607,958 )   (3,917,399 )   -     -     2,500,059     2,634,309  
 

Capital expenditure

  8,948,816     1,038,379     4,557,480     450,808     -     -     13,506,296     1,489,187  
 

Total assets

  127,233,589     146,814,887     65,927,824     54,818,477     (22,200,462 )   (36,594,510 )   170,960,951     165,038,854  

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 the years ended December 31, 2014 and 2013:


      Years ended December 31,  
      2014     2013  
               
 

Net income attributable to China Shengda Packaging’ common stockholders

$  2,586,605   $  2,743,946  
 

Weighted average number of common shares outstanding – basic and diluted

  38,790,811     38,790,811  
 

Earnings per share – basic and diluted

$  0.07   $  0.07  

17.

SUBSEQUENT EVENT

   

The Group has evaluated subsequent events through the issuance of the consolidated financial statements and identified the following subsequent event:

F-24



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

The Group subsequently enters into several purchase agreements for property, plant and equipment for the new subsidiary, Shengda Zhongtian. Therefore, there will be material capital commitment under non-cancellable equipment construction and factory construction contracts amounting to $1,044,225.

F-25


EXHIBIT INDEX

Exhibit No. Description
2.1 Share Exchange Agreement, dated April 8, 2010, by and among the Company, Evercharm Holdings Limited and its sole stockholder (incorporated herein by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by the Company on April 13, 2010).
3.1 Articles of Incorporation of the Company, as amended (incorporated herein by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by the Company on April 13, 2010 and Exhibit 99.2 to the Current Report on Form 8-K filed by the Company on November 2, 2010).
3.2 Bylaws of the Company, as amended (incorporated herein by reference to Exhibit 3.2 to the Current Report on Form 8-K filed by the Company on April 13, 2010).
4.1 Form of Registration Rights Agreement, dated April 29, 2010 (incorporated herein by reference to Exhibit 4.1 to the Current Report on Form 8-K filed by the Company on May 5, 2010).
10.1 Form of Securities Purchase Agreement, dated as of April 29, 2010, by and between the Company and the Investors thereto (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on May 5, 2010).
10.2 Amendment Number 1 to Securities Purchase Agreement, dated as of August 13, 2010, by and among the Company, the Investors thereto and Nengbin Fang (incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 filed by the Company on August 16, 2010).
10.3 Amendment Number 2 to Securities Purchase Agreement, dated as of October 28, 2010, by and between the Company and Envision Capital Partners, L.P. (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Company on October 29, 2010).
10.4 Form of Stock Purchase Agreement, dated as of April 5, 2010 (incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended on March 31, 2010 filed by the Company on May 12, 2010).
10.5 Joint Venture Agreement, dated December 28, 2008, by and between Zhejiang Shengda Color Pre-Printing Co., Ltd. and Cheng Loong (Hangzhou) Investment Co., Ltd. (incorporated herein by reference to Exhibit 10.32 to the Registration Statement on Form S-1 filed by the Company on July 29, 2010).
10.6 Share Transfer Agreement (English translation), dated July 1, 2010, by and between Evercharm Holdings Limited and Cheng Loong (Hangzhou) Investment Co., Ltd. (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Company on July 7, 2010).
10.7 Equity Transfer Agreement (English summary), dated August 16, 2010, by and among Meiying Dai, Caocheng Qu, Wuxiao Fang, Zhejiang Great Shengda Packaging Co., Ltd. and Suzhou Asian & American Paper Products Co., Ltd. (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8- K filed by the Company on August 19, 2010).
10.8 Lease Agreement (English summary), dated January 1, 2007, between Hangzhou Shengming Paper Co., Ltd. and Shengda Group Co., Ltd. (incorporated herein by reference to Exhibit 10.29 to the Current Report on Form 8-K filed by the Company on April 13, 2010).
10.9 Lease Agreement (English summary), dated January 1, 2010, between Zhejiang Shengda Color Pre-Printing Co., Ltd. and Zhejiang Shuang Ke Da Weaving Co., Ltd. (incorporated herein by reference to Exhibit 10.31 to the Current Report on Form 8-K filed by the Company on April 13, 2010).
10.10 Lease Agreement (English summary), dated January 1, 2010, between Zhejiang Great Shengda Packaging Co., Ltd. and Xin Shengda (incorporated herein by reference to Exhibit 10.32 to the Current Report on Form 8-K filed by the Company on April 13, 2010).
10.11 Property Lease Agreement (English summary), dated January 1, 2012, between Hangzhou Shengming Paper Co., Ltd. and Shengda Group Co., Ltd. (incorporated herein by reference to Exhibit 99.1 to the Current Report on Form 8-K filed by the Company on March 20, 2012).
10.12 Property Lease Agreement (English summary), dated January 1, 2012, between Hangzhou Shengming Paper Co., Ltd. and Shengda Group Co., Ltd. (incorporated herein by reference to Exhibit 99.2 to the Current Report on Form 8-K filed by the Company on March 20, 2012).


Exhibit No.

Description

10.13

Employment Agreement (English translation), dated March 28, 2010, between Zhejiang Great Shengda Packaging Co., Ltd. and Daliang Teng (incorporated herein by reference to Exhibit 10.33 to the Current Report on Form 8-K filed by the Company on April 13, 2010).

10.14

Employment Agreement (English translation), dated April 8, 2010, between Zhejiang Great Shengda Packaging Co., Ltd. and Nengbin Fang (incorporated herein by reference to Exhibit 10.37 to Amendment No. 2 to the Registration Statement on Form S-1 filed by the Company on October 8, 2010).

10.15

Employment Agreement (English translation), dated November 22, 2004, between Zhejiang Great Shengda Packaging Co., Ltd. and Congyi Fang (incorporated herein by reference to Exhibit 10.38 to Amendment No. 2 to the Registration Statement on Form S-1 filed by the Company on October 8, 2010).

10.16

Employment Agreement (English translation), dated August 19, 2011, between China Shengda Packaging Group Inc. and Ken He (incorporated herein by reference to Exhibit 10.14 to the Annual Report on Form 10-K for the year ended December 31, 2011, filed by the Company on March 22, 2012).

10.17

Form of Confidentiality and Non-Compete Agreement (incorporated herein by reference to Exhibit 10.34 to the Registration Statement on Form S-1 filed by the Company on July 29, 2010).

10.18

Independent Director Agreement, dated as of November 16, 2010, by and between the Company and Zhihai Mao (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K/A filed by the Company on November 17, 2010).

10.19

Indemnification Agreement, dated as of November 16, 2010, by and between the Company and Zhihai Mao (incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K/A filed by the Company on November 17, 2010).

10.20

Independent Director Agreement, dated as of November 1, 2010, by and between the Company and Michael Zhang (incorporated herein by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, filed by the Company on November 5, 2010).

10.21

Independent Director Agreement, dated as of November 1, 2010, by and between the Company and Yaoquan Zhang (incorporated herein by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, filed by the Company on November 5, 2010).

10.22

Building Lease Agreement, dated as of January 1, 2015, between Great Shengda and Xin Shengda (a form of the lease agreement incorporated herein by reference to Exhibit 10.22 to the Annual Report on Form 10- K for the year ended December 31, 2012, filed by the Company on March 29, 2013)

10.23

Land Lease Agreement, dated as of January 1, 2015, between Great Shengda and Xin Shengda (a form of the lease agreement incorporated herein by reference to Exhibit 10.23 to the Annual Report on Form 10-K for the year ended December 31, 2012, filed by the Company on March 29, 2013)

10.24

Building Lease Agreement, dated as of January 1, 2015, between Hangzhou Shengming and SD Group (a form of the lease agreement incorporated herein by reference to Exhibit 10.24 to the Annual Report on Form 10-K for the year ended December 31, 2012, filed by the Company on March 29, 2013)

10.25

Land Lease Agreement, dated as of January 1, 2015, between Hangzhou Shengming and SD Group (a form of the lease agreement incorporated herein by reference to Exhibit 10.25 to the Annual Report on Form 10- K for the year ended December 31, 2012, filed by the Company on March 29, 2013)

10.26

Building Lease Agreement, dated January 1, 2015, between Shengda Color and Shuang Ke Da (a form of the lease agreement incorporated herein by reference to Exhibit 10.26 to the Annual Report on Form 10-K for the year ended December 31, 2012, filed by the Company on March 29, 2013)

10.27

Land Lease Agreement, dated January 1, 2015, between Shengda Color and Shuang Ke Da (a form of the lease agreement incorporated herein by reference to Exhibit 10.27 to the Annual Report on Form 10-K for the year ended December 31, 2012, filed by the Company on March 29, 2013)

14

Code of Ethics of the Company (incorporated herein by reference to Exhibit 14.1 to the Current Report on Form 8-K filed by the Company on November 2, 2010).

21*

Subsidiaries of the Company.




Exhibit No.

Description

31.1*

Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*

Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*

Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*

Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

99.1

China Shengda Packaging Group Inc. Audit Committee Charter (incorporated herein by reference to Exhibit 99.3 to the Current Report on Form 8-K filed by the Company on November 2, 2010).

99.2

China Shengda Packaging Group Inc. Compensation Committee Charter (incorporated herein by reference to Exhibit 99.4 to the Current Report on Form 8-K filed by the Company on November 2, 2010).

99.3

China Shengda Packaging Group Inc. Governance and Nominating Committee Charter (incorporated herein by reference to Exhibit 99.5 to the Current Report on Form 8-K filed by the Company on November 2, 2010).

101*

Interactive data files pursuant to Rule 405 of Regulation S-T (furnished herewith).

*Filed herewith