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EX-32.1 - EXHIBIT 32.1 - CHINA GREEN MATERIAL TECHNOLOGIES, INC.ex32x1.htm
EX-31.2 - EXHIBIT 31.2 - CHINA GREEN MATERIAL TECHNOLOGIES, INC.ex31x2.htm
EX-31.1 - EXHIBIT 31.1 - CHINA GREEN MATERIAL TECHNOLOGIES, INC.ex31x1.htm
EX-32.2 - EXHIBIT 32.2 - CHINA GREEN MATERIAL TECHNOLOGIES, INC.ex32x2.htm
 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q/A
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2010
 
Commission File Number: 001-15683
 
CHINA GREEN MATERIAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
 
Nevada
 
88-0381646
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
No. 1 Yantai Third Road, Centralism Area, Haping Road,
Harbin Economic and Technological Development Zone,
Harbin, Heilongjiang Province, People’s Republic of China, 150060
(Address of principal executive offices) (Zip Code)

00-86-451-5175 0888
(Registrant’s telephone number, including area code)
 
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 o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes o   No o
 
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   o
 Accelerated filer   o
 Non-accelerated filer  o   (Do not check if a smaller reporting company)  
 Smaller reporting company  x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes  o  No x

As of November 8, 2010, 25,701,025 shares of common stock, par value $0.001 per share, were outstanding.
 
 
 

 
 
CHINA GREEN MATERIAL TECHNOLOGIES, INC.
 
FORM 10-Q/A
 
FOR THE QUARTER ENDED SEPTEMBER 30, 2010
 
EXPLANATORY NOTE

This quarterly report on Form 10-Q/A is being filed as Amendment No. 1 to our quarterly report on Form 10-Q which was originally filed on November 9, 2010 (the Original Filing) with the Securities and Exchange Commission (“SEC”). We are amending and restating our financial statements and notes thereto to reflect an error related to the accounting for warrants the Company issued during the quarters ended June 30, 2010 and September 30, 2010. The warrants provided for the purchase of an aggregate of 457,500 shares of common stock, at a per-share exercise price of $0.90, to firms that were retained by the Company for investor relations purposes.  The warrants include an anti-dilution provision that would adjust the warrant exercise price if the Company issues or sells any shares of common stock or securities convertible into common stock for a consideration per share of common stock less than the per-share exercise price of the warrants.

We originally accounted for the warrants as equity instruments, and recorded an expense attributable to the related investor relations services over the period in which the services were to be received from the investor relations firms, with a corresponding credit to equity (additional paid in capital).  However, this original accounting treatment by us did not correctly apply the principles set forth in Accounting Standards Codification (“ASC”) 815-15, “Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity's Own Stock” which the Financial Accounting Standards Board (the “FASB”) finalized in June 2008 and which became effective for fiscal years beginning after December 15, 2008.  Because of the anti-dilution provision described above, under ASC 815-15 the warrants should not have been considered to be indexed to the Company’s stock but instead the warrants should have been accounted for as derivative liabilities.
 
In addition to the amendment and restatement of the financial statements contained in "Item 1 - Financial Statements," we have also amended: "Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations," to revise the disclosures therein to reflect the changes in our financial results as reported in the amended and restated financial statements included in this amended quarterly report; "Item 4 - Controls Procedures," to address the impact of the above-mentioned accounting error on the effectiveness of the Company's disclosure controls and procedures as of September 30, 2010 and "Item 6 - Exhibits," to reflect the newly signed and dated certifications attached hereto as Exhibits 31.1, 31.2, 32.1 and 32.2. Except as stated in the preceding sentence we have not amended any other portion of the Original Filing. We are concurrently herewith also filing an amendment to our quarterly report on Form 10-Q for the quarter ended June 30, 2010 which was originally filed with the SEC on August 16, 2010.

 
Except as specifically referenced herein, this Amendment No. 1 to the quarterly report on Form 10-Q does not reflect any event subsequent to November 9, 2010, the filing date of the Original Filing.

   
 Page
   
Cautionary Note Regarding Forward-Looking Statements
 1
     
Note Concerning Operating and Reporting Currencies
 1
     
PART I.
FINANCIAL INFORMATION
 2
     
Item 1.
Financial Statements;
 2
     
 
Consolidated Balance Sheets
 2
     
 
Unaudited Consolidated Statements of Income and Comprehensive Income
 3
     
 
Unaudited Consolidated Statements of Cash Flows 
 4
     
 
Notes to Consolidated Financial Statements 
 5
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations. 
 23
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk. 
29
     
Item 4T.
Controls and Procedures. 
 30
     
PART II.
OTHER INFORMATION
 31
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
 31
     
Item 6.
Exhibits.
 32
 

 
 

 
 
 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
Information contained in this quarterly report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These forward-looking statements are contained principally in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology.

The forward-looking statements herein represent our expectations, beliefs, plans, intentions or strategies concerning future events, and may include, without limitation, statements concerning: our future financial performance; the continuation of historical trends; the sufficiency of our cash balances for future needs; our future operations; our sales and revenue levels and gross margins, costs and expenses; the relative cost of our production methods as compared to our competitors; new product introduction, entry and expansion into new markets and utilization of new sales channels and sales agents; improvements in, and the relative quality of, our technologies, including manufacturing practices, production processes and production capacity and the ability of our competitors to copy such technologies; the environment-friendly nature of our products; acquisition of additional equipment and manufacturing facilities, the cost associated therewith and sources of financing for such acquisitions; achieving status as an industry leader; our competitive technological advantages over our competitors; brand image, customer loyalty and expanding our client base; our ability to meet market demands; government regulations and incentives related to biodegradable products; the sufficiency of our resources in funding our operations; our intention to engage in mergers and acquisitions, technology licensing and cooperation arrangements; and our liquidity and capital needs.
 
Our forward-looking statements are based on assumptions that may be incorrect, and there can be no assurance that any projections or other expectations included in any forward-looking statements will come to pass.  Moreover, our forward-looking statements are subject to various known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements.  These risks, uncertainties and other factors include but are not limited to:

·  
Uncertainties regarding the growth or sustainability of the market for biodegradable materials.
·  
The risk we may not achieve or maintain a technological advantage over any of our competitors.
·  
Risks relating to protection of our intellectual property.
·  
Changes in consumer preferences.
·  
The risks of limited management, labor and financial resources.
·  
Risk of doing business in China, including currency value fluctuations, restrictions on remitting income to the United States and risks of diplomatic tensions between China and the United States.

Except as required by applicable laws, we undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.
 
NOTE CONCERNING OPERATING AND REPORTING CURRENCIES

Certain financial information included in this quarterly report has been derived from data originally prepared in Renminbi (“RMB” or “Renminbi”), the currency of the People’s Republic of China (“China” or “PRC”). For purposes of this quarterly report, U.S. dollar (“US$”) amounts are based on conversion at September 30, 2010 exchange rates of US$ 1.00 to RMB 6.7011 for assets and liabilities, and a weighted-average of US$ 1.00 to RMB 6.76924 and US$ 1.00 to RMB 6.806959 for revenue and expenses for the three months and nine months ended September 30, 2010, respectively.  There is no assurance that RMB amounts could have been or could be converted into U.S. dollars at such rates.
 
As used herein, “China Green,” “we,” “us,” “our” and the “Company” refers to China Green Material Technologies, Inc. and its subsidiaries.
 

1
 
 

 
 
   
  PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.
 
CHINA GREEN MATERIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
             
   
September 30, 2010
(Unaudited)
(Restated)
   
December 31,
2009
(Audited)
 
Assets
           
Current Assets:
           
        Cash and equivalents
 
$
10,751,062
   
$
7,321,276
 
        Cash - restricted
   
26,849
     
3,443
 
        Accounts receivable, net
   
8,706,659
     
6,524,510
 
        Inventories
   
794,356
     
456,970
 
        Accrued receivables
   
134,306
     
549,288
 
        Other receivables
   
363,053
     
19,210
 
        Deferred income tax assets
   
156,070
     
4,918
 
        Prepaid expenses
   
26,715
     
29,434
 
        Unamortized investors relation services expense
   
369,601
     
-
 
        Other current assets
   
-
     
78,863
 
Total Current Assets
   
21,328,671
     
14,987,912
 
                 
Deposits to suppliers of property and equipment
   
298,459
     
-
 
Property and equipment, net
   
17,117,251
     
10,394,584
 
Intangible assets, net
   
5,071,592
     
5,060,559
 
Know-how right, net
   
2,117,190
     
2,160,533
 
Investment
   
16,298
     
310,419
 
                 
Total Assets
 
$
45,949,461
   
$
32,914,007
 
                 
Liabilities and Stockholders’ Equity
               
Current Liabilities:
               
        Accounts payable and accrued expenses
 
$
364,996
   
$
302,786
 
        Customer deposits
   
2,494
     
4,213
 
        Due to stockholders/officers, net
   
311,468
     
300,793
 
        Warrants liability
   
356,610
         
        Taxes payable
   
358,129
     
430,408
 
        Other current liabilities
   
2,477,205
     
1,469,121
 
Total Current Liabilities
   
3,870,902
     
2,507,321
 
                 
Stockholders’ Equity
               
Common stock, $0.001 par value, 100,000,000 shares authorized, 25,701,025 and
18,711,388 shares issued and outstanding at September 30, 2010 and
December 31, 2009, respectively
   
25,701
     
18,711
 
Additional paid-in capital
   
25,158,616
     
17,895,324
 
Reserve funds
   
1,513,422
     
1,152,569
 
Retained earnings
   
10,995,571
     
7,709,729
 
Accumulated other comprehensive income
   
4,385,249
     
3,630,353
 
                 
Total Stockholders’ Equity
   
42,078,559
     
30,406,686
 
                 
Total Liabilities and Stockholders’ Equity
 
$
45,949,461
   
$
32,914,007
 
 
The accompanying notes are an integral part of the financial statements.
 
2
 
 
 

 
CHINA GREEN MATERIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
 UNAUDITED CONSOLIDATED STATEMENTS OF
 INCOME AND COMPREHENSIVE INCOME
             
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2010
(Restated)
   
2009
   
2010
(Restated)
   
2009
 
                         
Revenues
 
$
6,011,160
   
$
4,185,043
   
$
13,294,342
   
$
9,856,609
 
Cost of goods sold
   
3,267,745
     
2,152,844
     
7,183,850
     
5,106,128
 
                                 
Gross profit
   
2,743,415
     
2,032,199
     
6,110,492
     
4,750,481
 
                                 
Operating Expenses
                               
Selling expenses
   
47,025
     
80,751
     
134,304
     
196,358
 
General and administrative expenses
   
459,914
     
186,921
     
1,113,162
     
528,736
 
Stock based compensation
   
(31,865
   
-
     
121,397
     
-
 
Total Operating Expenses
   
475,074
     
267,672
     
1,368,863
     
725,094
 
                                 
Income From Operations
   
2,268,341
     
1,764,527
     
4,741,629
     
4,025,387
 
                                 
Other income (expense):
                               
     Interest income
   
2,404
     
1,798
     
5,343
     
3,792
 
     Net rental income/(expenses)
   
(28,343)
     
6,014
     
(94,373)
     
18,039
 
     Impairment of investment
   
(2,851)
     
-
     
(296,102)
     
-
 
 Loss on fixed assets disposal and intangible assets written off
   
-
     
(458,599
)
   
(126,025)
     
(459,611
)
     Other expenses - net
   
(1,091)
     
81
     
(18,975)
     
(375
)
Total other income (expense)
   
(29,881)
     
(450,706
)
   
(530,132)
     
(438,155
)
                                 
Income Before Income Taxes
   
2,238,460
     
1,313,821
     
4,211,497
     
3,587,232
 
                                 
Provision for income taxes
   
289,826
     
204,622
     
564,804
     
546,637
 
                                 
Net Income
   
1,948,634
     
1,109,199
     
3,646,693
     
3,040,595
 
                                 
Foreign currency translation adjustment
   
556,202
     
18,965
     
754,896
     
(12,182
)
                                 
Comprehensive Income
 
$
2,504,836
   
$
1,128,164
   
$
4,401,589
   
$
3,028,413
 
                                 
 Net Income Per Common Share
                               
       basic
 
$
0.08
   
$
0.06
   
$
0.15
   
$
0.16
 
       diluted
 
$
0.08
   
$
0.06
   
$
0.15
   
$
0.16
 
                                 
 Weighted Common Shares Outstanding
                               
       basic
   
25,650,856
     
18,711,388
     
24,046,432
     
18,711,388
 
       diluted
   
25,919,251
     
18,711,388
     
24,218,671
     
18,711,388
 
                                 
The accompanying notes are an integral part of the financial statements.
 
 3

 
 

 
CHINA GREEN MATERIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
   
   
Nine Months Ended September 30,
 
   
2010
(Restated)
   
2009
 
Cash flows From Operating Activities:
           
      Net Income
 
$
3,646,693
   
$
3,040,595
 
      Adjustments to Reconcile Net Income to Net Cash
               
      Provided by Operating Activities
               
            Depreciation and amortization
   
1,053,794
     
970,702
 
            Changes in deferred tax
   
(148,710
   
(58,980
 )
            Bad debt expenses
   
10,096
     
8,427
 
        Stock based compensation
   
121,397
     
 -
 
            Impairment of investment
   
296,102
     
-
 
            Loss on disposal of fixed assets
   
126,025
     
64,432
 
Loss on disposal of intangible assets
   
-
     
395,179
 
      Changes in operating assets and liabilities
               
            Accounts receivable
   
(2,037,616
   
(1,676,002
)
            Inventories
   
(323,686
   
7,402
 
            Accrued receivables
   
418,689
     
-
 
            Prepaid expenses and other receivables
   
(255,823
)
   
(29,060
)
            Other current assets
   
-
     
(61,357
)
            Accounts payable and accrued expenses
   
51,432
     
(46,303
            Customer deposits
   
(1,770
   
(6,991
)
            Taxes payable
   
(79,117
   
439,979
 
            Other current liabilities
   
-
     
(123,683
Net Cash Provided by Operating Activities
   
2,877,506
     
2,924,340
 
                 
Cash Flows From Investing Activities:
               
            Restricted cash
   
(23,346
)
   
(946
            Advances to suppliers of property and equipment
   
(293,817
)
   
-
 
            Purchase of property and equipment
   
(7,557,790
)
   
(64,384
)
            Deposit for purchase of patent rights
   
-
     
(146,492
)
            Proceeds from disposal of fixed assets
   
117,527
     
158,803
 
Net Cash Used in Investing Activities
   
(7,757,426
   
(53,019
)
                 
Cash Flows From Financing Activities:
               
            Payment to shareholders/officers loans
   
-
     
(1,025,441
)
            Proceeds from shareholders/officers loans
   
4,956
     
19,799
 
            Advance from third party
   
969,596
     
-
 
            Proceeds from stock issued           
   
7,135,894
     
-
 
Net Cash Provided by (Used in) Financing Activities
   
8,110,446
     
(1,005,642
                 
Effect of Exchange Rate Changes on Cash and Equivalents
   
199,260
     
2,527
 
                 
Net Increase in Cash and Equivalents
   
3,429,786
     
1,868,206
 
                 
Cash and Equivalents at Beginning of Period
   
7,321,276
     
4,243,140
 
                 
Cash and Equivalents at End of Period
 
$
10,751,062
   
$
6,111,346
 
                 
SUPPLEMENT DISCLOSURES OF CASH FLOW INFORMATION
               
            Cash paid for Interest
 
$
-
   
$
-
 
            Cash paid for Income taxes
 
$
581,158
   
$
533,673
 
 
The accompanying notes are an integral part of the financial statements.
 
4
 
 
 

 
CHINA GREEN MATERIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 (UNAUDITED) AND DECEMBER 31, 2009
 
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Principal Activities
 
China Green Material Technologies, Inc. is a Nevada corporation incorporated in December 1997 under the name Mount Merlot Estates, Inc.  When we acquired our current business in February 2007, our corporate name was “Ubrandit.com.”  On January 14, 2008, we changed our name to “China Green Material Technologies, Inc.”  References in these Notes to the “Company” refer to China Green Material Technologies, Inc. and where applicable its direct and indirect wholly owned subsidiaries.  The Company’s shares are quoted on the Over-the-Counter Bulletin Board of the National Association of Securities Dealers, Inc., under the symbol CAGM.OB, whereas before its name change in January 2008 the Company’s shares were quoted under the symbol UBDT.OB. 
 
On February 9, 2007, the Company acquired all of the outstanding capital stock of Advanced Green Materials, Inc. (“AGM”), a Nevada corporation, by merging a wholly owned subsidiary of the Company into AGM. Through AGM, the Company indirectly owns all of the outstanding capital stock of ChangFangYuan Hi-tech Environment-Friendly Industrial Co., Ltd. (“CHFY”), a corporation organized under the laws of the People Republic of China (“China” or the “PRC”). AGM has substantially no operations and substantially no assets other than the shares of CHFY and Zhonghao Bio (as defined below).  Through CHFY, the Company operates the business described in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission on April 12, 2010, and in the financial statements included in this quarterly report on Form 10-Q.  The Company’s acquisition of AGM and CHFY is sometimes herein referred to as the “2007 Business Combination.”  Immediately before the 2007 Business Combination, the Company had no material assets and no material operations and therefore it was considered a “shell company” (as defined by Rule 12b-2 of the Securities Exchange Act of 1934).  As consideration for AGM and CHFY, the Company issued to the former owners of AGM shares of the Company’s Series A Convertible Preferred Stock that were convertible into approximately 98% of the Company’s outstanding common shares, on a post-conversion basis. 
 
On January 14, 2008, concurrent with our name change, the Company effected a 1-for-150 reverse split of our common stock.  In connection with the split, the Company issued additional shares to certain shareholders so that, after the split, no shareholder owned fewer than 100 shares.  On February 29, 2008, the holders of all outstanding shares of Series A Convertible Preferred Stock converted their preferred shares into 18,150,000 shares of the Company’s common stock, and all shares of Series A Convertible Preferred Stock were cancelled. 
 
CHFY was incorporated in the Heilongjiang Province of China on May 12, 1999. It was known as Harbin TianHao Technology Co., Ltd., and changed its name to Harbin ChangFangYuan Hi-Tech Industrial Co., Ltd. on September 28, 2004, and further changed its name to Harbin ChangFangYuan Hi-Tech Environment-Friendly Industry Co., Ltd. on September 1, 2006.  AGM acquired all of the outstanding capital stock of CHFY on August 18, 2006.
 
Prior to May 2006, CHFY engaged only in product development and the establishment of manufacturing facilities and marketing relationships.  CHFY’s business realized its first revenue in May 2006.

On June 25, 2010, AGM completed the incorporation of a wholly owned subsidiary, Heilongjiang Zhonghao Starch-Based Biodegradable Materials Co., Ltd. (“Zhonghao Bio”) with registered capital of US$2.8 million in the Heilongjiang Province of China. Through Zhonghao Bio, the Company will own our proposed new manufacturing facility to be located in Harbin Economic Technological Development Zone, which will commence the business of manufacturing facilities, development, marketing and production of high-end quality biodegradable packaging materials.
 
5
 
 
 

 
Basis of Presentation
 
The accompanying interim unaudited condensed consolidated financial statements (“Interim Financial Statements”) of the Company and its subsidiaries were prepared in accordance with accounting principles generally accepted in the United State of America, or US GAAP, for interim financial information and are presented in accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these Interim Financial Statements do not include all the information and notes required by US GAAP for complete financial statements. These Interim Financial Statements should be read in conjunction with the Company’s Annual Report on Form 10-K for year ended December 31, 2009. In the opinion of management, the Interim Financial Statements included herein contain all adjustments, including normal recurring adjustments, considered necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods presented. The results of operations and cash flows of the interim periods presented herein are not necessarily indicative of the results to be expected for any other interim period or the full year.

Principles of Consolidation

The accompanying Interim Financial Statements present the financial position, results of operations and cash flows of the Company and all entities in which the Company has a controlling voting interest. These condensed consolidated financial statements include the financial statements of China Green Material Technologies, Inc. and its wholly owned subsidiaries AGM, CHFY, and Zhonghao Bio. All significant intercompany transactions and balances are eliminated in consolidation.
 
The accompanying Interim Financial Statements are prepared in accordance with US GAAP. This basis of accounting differs from that used in the statutory accounts of some of the Company’s subsidiaries, which were prepared in accordance with the accounting principles and relevant financial regulations applicable to enterprises with foreign investment in the PRC (“PRC GAAP”). Necessary adjustments were made to the subsidiaries’ statutory accounts to conform to US GAAP to be included in these Interim Financial Statements.
 
Use of Estimates
 
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.
 
Cash and Equivalents
 
The Company considers all highly liquid temporary cash investments with an original maturity of three months or less when purchased to be cash equivalents.
 
Accounts Receivable
 
Accounts receivables are recognized and carried at original invoice amount less allowance for any uncollectible amounts. The Company provides an allowance for doubtful accounts equal to the estimated losses that will be incurred in the collection of all receivables. The estimated losses are based on a review of the current status of the existing receivables.
 
Inventories
 
The Company values inventories, consisting of finished goods, work in progress, raw materials, and packaging material and other items, at the lower of cost or market. Cost of raw materials is determined on a first-in, first-out basis (“FIFO”). The cost of finished goods is determined on a weight average first-in, first out basis and comprises direct materials, direct labor, and an appropriate proportion of overhead.

6 
 
 
 

 
 Property and Equipment
 
Property and equipment are stated at cost less accumulated depreciation and amortization. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Depreciation of property and equipment is computed by the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the lease term or the useful lives of the assets. Upon sale or retirement of plant and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the Company’s Consolidated Statements of Income.
 
Impairment of Long-Lived Assets
 
The Company evaluates the recoverability of its other long-lived assets, including amortizing intangible assets, if circumstances indicate impairment may have occurred pursuant to U.S. Accounting Standards Codification topic #360, “Property, Plant and Equipment” (“ASC 360”).  This analysis is performed by comparing the respective carrying values of the assets to the current and expected future cash flows, on an undiscounted basis, to be generated from such assets. If such analysis indicates that the carrying value of these assets is not recoverable, the carrying value of such assets is reduced to fair value through a charge to the Company’s Consolidated Statements of Income.
  
Intangible Assets
 
At September 30, 2010 (unaudited) and December 31, 2009, intangible assets consist of a land use right. With the adoption of ASC 350 (“Intangibles-Goodwill and Other”), intangible assets with a definite life are amortized on a straight-line basis. The land use right is amortized over its estimated life of 50 years.
 
Intangible assets with a definite life are tested for impairment whenever events or circumstances indicate that a carrying amount of an asset (asset group) may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows used in determining the fair value of the asset. The amount of the impairment loss to be recorded is calculated by the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis. Costs related to internally develop intangible assets are expensed as incurred.
 
Revenue Recognition
 
The Company recognizes revenue in accordance with ASC 605, Revenue Recognition, when persuasive evidence of an arrangement exists, the price is fixed or determined, collection is reasonably assured and delivery of products has occurred or services have been rendered. Revenue includes sales of products and services. Products revenue represents the invoiced value of goods sold recognized upon the delivery of goods to customers, net of allowance for estimated returns, when both title and risk of loss transfer to the customer, provided that no significant obligations remain. Deferred revenue represents the undelivered portion of invoiced value of goods sold to customers. Service income is recognized when services are provided. Revenue does not include value added taxes (“VAT”) for the sales revenue from PRC subsidiaries. Before paid to the government, the amounts of VAT are recorded as short term liabilities.

Rental income recognition
 
Rental income from operating leases related to our unused factory facilities with 21,132 square meters of floor space is recognized on a straight-line basis over the lease period. The Company recognized $66,460 and $109,797 of gross rental income for the three months ended September 30, 2010 and 2009, respectively and recognized $198,325 and $329,316 of gross rental income for the nine months ended September 30, 2010 and 2009, respectively.


7
 
 

 
 
Research and development costs
 
Research and development cost is charged to operations when incurred and is included in operating expenses.  Research and development cost was immaterial for the three months and nine months ended September 30, 2010 and 2009.

Advertising and marketing costs
 
Advertising and marketing costs, except for costs associated with direct-response advertising and marketing, are charged to operations when incurred. The costs of direct-response advertising are capitalized and amortized over the period during which future benefits are expected to be received. Advertising and marketing expense were $3,238 and $50,866 for three months ended September 30, 2010 and 2009, respectively and were $28,593 and $93,511 for nine months ended September 30, 2010 and 2009, respectively.  

Share-Based Payments

The Company adopted ASC 718, “Compensation-Stock Compensation” (“ASC No. 718”) effective January 1, 2006. ASC No. 718 amends existing accounting pronouncements for share-based payment transactions in which an enterprise receives employee and certain non-employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. ASC No.718 generally requires such transactions to be accounted for using a fair-value-based method.
 
Income Taxes
 
The Company’s PRC subsidiary files income tax returns under the Income Tax Law of the PRC concerning Foreign Investment Enterprises and Foreign Enterprises and local income tax laws.

The Company follows the method of accounting for income taxes prescribed by ASC 740  –”Accounting for Income Taxes”, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

Comprehensive Income
 
ASC 220, “Reporting Comprehensive Income”, established standards for the reporting and display of comprehensive income, its components and accumulated balances in a full set of general purpose financial statements. ASC 220 defines comprehensive income to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, ASC 220 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is presented with the same prominence as other financial statements. The Company’s only current component of comprehensive income is the foreign currency translation adjustment.
 
Foreign Currency Translation
 
The Renminbi ("RMB"), the national currency of the PRC, is the primary currency of the economic environment in which the operations of CHFY and Zhonghao Bio are conducted. The Company uses the United States Dollar ("U.S. Dollars") for financial reporting purposes.

In accordance with ASC No. 830, “Foreign Currency Matters,” the Company’s results of operations and cash flows are translated at the average exchange rates during the period, assets and liabilities are translated at the exchange rates at the balance sheet dates, and equity is translated at the historical exchange rates. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.

8
 
 
 

 

Basic and diluted net income per share
 
The Company accounts for net income per common share in accordance with ASC 260, “Earnings per Share” (“EPS”).  ASC 260 requires the disclosure of the potential dilution effect of exercising or converting securities or other contracts involving the issuance of common stock. Basic net income per share is determined based on the weighted average number of common shares outstanding for the period.  Diluted net income per share is determined based on the assumption that all dilutive convertible shares and stock options were converted or exercised into common stock.
 
Concentration of Credit Risk
 
The Company’s financial instruments consist primarily of cash and equivalents, which are invested in money market accounts, and accounts receivable. The Company considers the book value of these instruments to be indicative of their respective fair value. The Company places its temporary cash investments with high credit quality institutions to limit its risk exposure. Most of the Company’s sales are credit sales which are primarily to customers whose ability to pay is dependent upon the industry economics prevailing in their respective areas; however, concentrations of credit risk with respect to trade accounts receivable is limited due to generally short payment terms. The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk.
 
Fair Value of Financial Instruments
 
For certain of the Company’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, other receivables, accounts payable, accrued liabilities and short-term debt, the carrying amounts approximate their fair values due to their short maturities.

ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures.  The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
 
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
 
The Company analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities from Equity,” and ASC 815. 

As of September 30, 2010 (unaudited) and December 31, 2009, the Company did not identify any assets and liabilities that are required to be presented on the balance sheet at fair value.
 
Segment Reporting
 
ASC 280, “Disclosure about Segments of an Enterprise and Related Information”, requires disclosure of reportable segments used by management for making operating decisions and assessing performance. Reportable segments are categorized by products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. ASC 280 has no effect on the Company’s financial statements as substantially all of the Company’s operations and managements are conducted as a single operating segment.

9

 
 
 

 
Reclassifications  

Certain prior year amounts were reclassified to conform to the manner of presentation in the current period. 

Recent Accounting Pronouncements
 
On February 25, 2010, the FASB issued ASU No. 2010-09 Subsequent Events Topic 855 “Amendments to Certain Recognition and Disclosure Requirements,” effective immediately. The amendments in the ASU remove the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of US GAAP. The FASB believes these amendments remove potential conflicts with the SEC’s literature. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

On March 5, 2010, the FASB issued ASU No. 2010-11 Derivatives and Hedging Topic 815 “Scope Exception Related to Embedded Credit Derivatives.” This ASU clarifies the guidance within the derivative literature that exempts certain credit related features from analysis as potential embedded derivatives requiring separate accounting. The ASU specifies that an embedded credit derivative feature related to the transfer of credit risk that is only in the form of subordination of one financial instrument to another is not subject to bifurcation from a host contract under ASC 815-15-25, Derivatives and Hedging — Embedded Derivatives — Recognition. All other embedded credit derivative features should be analyzed to determine whether their economic characteristics and risks are “clearly and closely related” to the economic characteristics and risks of the host contract and whether bifurcation is required. The ASU is effective for the Company on July 1, 2010. Early adoption is permitted. The adoption of this ASU will not have a material impact on the Company’s consolidated financial statements.
 
In April 2010, the FASB codified the consensus reached in Emerging Issues Task Force Issue No. 08-09, “Milestone Method of Revenue Recognition.” FASB ASU No. 2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research and development transactions. FASB ASU No. 2010 – 17 is effective for fiscal years beginning on or after June 15, 2010, and is effective on a prospective basis for milestones achieved after the adoption date. The Company does not expect that this ASU will have a material impact on its financial position or results of operations when it adopts this update on January 1, 2011.

2. Restatement

The financial statements for the quarter ended September 30, 2010 filed with the SEC on November 9, 2010 contained an error related to the accounting for warrants the Company issued during the nine months ended September 30, 2010.  The warrants provided for the purchase of an aggregate of 457,500 shares of common stock, at a per-share exercise price of $0.90, to two firms that were retained by the Company for investor relations purposes.  The warrants include an anti-dilution provision that would adjust the warrant exercise price if the Company issues or sells any shares of common stock or securities convertible into common stock for a consideration per share of common stock less than the exercise price of the warrants.

We originally accounted for the warrants as equity instruments, and recorded an expense attributable to the related investor relations services over the period in which the services were to be received from the investor relations firms, with a corresponding credit to equity (additional paid in capital).  However, this original accounting treatment by us did not correctly apply the principles set forth in ASC 815-15, “Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity's Own Stock” which the FASB finalized in June 2008 and which became effective for fiscal years beginning after December 15, 2008.  Because of the anti-dilution provision described above, under ASC 815-15 the warrants should not have been considered to be indexed to the Company’s stock but instead the warrants should have been accounted for as derivative liabilities.

At September 30, 2010, the derivative liabilities associated with these warrants had a fair value of $356,610, which was determined using the Black Scholes Option Pricing Model with the following assumptions: discount rate – 0.19%; dividend yield – 0%; expected volatility – 89.46% and expected term of 0.5 year. The initial fair value of the expense resulting from such warrants is amortized on a straight line basis over the period of service under the agreement with the recipient of the warrants.  Any changes in the fair values of the warrants will be charged to expense or credited to income, as applicable, in the period of change.

10
 
 
 

 

The Company’s consolidated balance sheet as of September 30, 2010, as previously reported and as restated, is as follows:
 
   
September 30, 2010
 
   
As previously
Reported
   
Adjustment
   
As
Restated
 
Assets
                 
Current Assets:
                 
        Cash and equivalents
  $ 10,751,062     $       $ 10,751,062  
        Cash - restricted
    26,849               26,849  
        Accounts receivable, net
    8,706,659               8,706,659  
        Inventories
    794,356               794,356  
        Accrued receivables
    134,306               134,306  
        Other receivables
    363,053               363,053  
        Deferred income tax assets
    156,070               156,070  
        Prepaid expenses
    26,715               26,715  
        Unamortized investors relation services expenses
    -       369,601       369,601  
Total Current Assets
    20,959,070               21,328,671  
                         
Deposits to suppliers of property and equipment
    298,459               298,459  
Property and equipment, net
    17,117,251               17,117,251  
Intangible assets, net
    5,071,592               5,071,592  
Know-how right, net
    2,117,190               2,117,190  
Investment
    16,298               16,298  
                         
Total Assets
  $ 45,579,860       369,601     $ 45,949,461  
                         
Liabilities and Stockholders’ Equity
                       
Current Liabilities:
                       
        Accounts payable and accrued expenses
  $ 364,996             $ 364,996  
        Customer deposits
    2,494               2,494  
        Due to stockholders/officers, net
    311,468               311,468  
        Taxes payable
    358,129               358,129  
        Warrant liabilities
    -       356,610       356,610  
        Other current liabilities
    2,477,205               2,477,205  
Total Current Liabilities
    3,514,292       356,610       3,870,902  
                         
Stockholders’ Equity
                       
Common stock, $0.001 par value, 100,000,000 shares authorized,
25,629,515 and 18,711,388 shares issued and outstanding at
June 30, 2010 and December 31, 2009, respectively
    25,701               25,701  
Additional paid-in capital
    25,721,674       (563,058 )     25,158,616  
Reserve funds
    1,513,422               1,513,422  
Retained earnings
    10,419,522       576,049       10,995,571  
Accumulated other comprehensive income
    4,385,249               4,385,249  
                         
Total Stockholders’ Equity
    42,065,568       12,991       42,078,559  
                         
Total Liabilities and Stockholders’ Equity
  $ 45,579,860       369,601     $ 45,949,461  

11
 
 
 
 

 
 
The Company’s consolidated statements of operations for the three months ended September 30, 2010, as previously reported and as restated, are as follows:

   
Three months ended September 30, 2010
 
   
As Previously Reported
   
Adjustment
   
As
Restated
 
                   
Revenues
 
$
6,011,160
   
$
-
   
$
6,011,160
 
Cost of revenues
   
3,267,745
     
-
     
3,267,745
 
                         
Gross profit
   
2,743,415
     
-
     
2,743,415
 
                         
Operating Expenses
                       
        Selling expenses
   
47,025
     
-
     
47,025
 
General and administrative expenses
   
459,914
     
-
     
459,914
 
Stock based compensation
   
225,845
     
(257,710
   
(31,865
Total Operating Expenses
   
732,784
     
(257,710
   
475,074
 
                         
Income From Operations
   
2,010,631
     
257,710
     
2,268,341
 
                         
Other income (expense):
                       
     Interest income
   
2,404
     
-
     
2,404
 
     Net rental income/(expenses)
   
(28,343
)
   
-
     
(28,343
)
     Loss on investment
   
(2,851
   
-
     
(2,851
)
     Loss on disposal of property and equipment
   
-
     
-
     
-
 
     Other expenses - net
   
(1,091
   
-
     
(1,091
)
Total other income (expense)
   
(29,881
   
-
     
(29,881
)
                         
Income Before Income Taxes
   
1,980,750
     
257,710
     
2,238,460
 
                         
Provision for income taxes
   
289,826
     
-
     
289,826
 
                         
Net Income
   
1,690,924
     
257,710
     
1,948,634
 
                         
Foreign currency translation adjustment
   
556,202
     
-
     
556,202
 
                         
Comprehensive Income
 
$
2,247,126
   
$
257,710
   
$
2,504,836
 
                         
 Net Income Per Common Share
                       
       basic
 
$
0.07
   
$
0.01
   
$
0.08
 
       diluted
 
$
0.07
   
$
0.01
   
$
0.08
 
                         
 Weighted Common Shares Outstanding
                       
       basic
   
25,650,856
     
-
     
25,650,856
 
       diluted
   
25,919,251
     
-
     
25,919,251
 
                         

12

 
 
 

 
The Company’s consolidated statements of operations for the nine months ended September 30, 2010, as previously reported and as restated, are as follows:

   
Nine months ended September 30, 2010
 
   
As Previously
Reported
   
Adjustment
   
As
Restated
 
                   
Revenues
 
$
13,294,342
   
$
-
   
$
13,294,342
 
Cost of revenues
   
7,183,850
     
-
     
7,183,850
 
                         
Gross profit
   
6,110,492
     
-
     
6,110,492
 
                         
Operating Expenses
                       
        Selling expenses
   
134,304
     
-
     
134,304
 
General and administrative expenses
   
1,113,162
     
-
     
1,113,162
 
Stock based compensation
   
697,446
     
(576,049
   
121,397
 
Total Operating Expenses
   
1,944,912
     
(576,049
   
1,368,863
 
                         
Income From Operations
   
4,165,580
     
576,049
     
4,741,629
 
                         
Other income (expense):
                       
     Interest income
   
5,343
     
-
     
5,343
 
     Net rental income/(expenses)
   
(94,373
)
   
-
     
(94,373
)
     Loss on investment
   
(296,102
   
-
     
(296,102
)
     Loss on disposal of property and equipment
   
(126,025
)
   
-
     
(126,025
)
     Other expenses - net
   
(18,975
   
-
     
(18,975
)
Total other income (expense)
   
(530,132
   
-
     
(530,132
)
                         
Income Before Income Taxes
   
3,635,448
     
576,049
     
4,211,497
 
                         
Provision for income taxes
   
564,804
     
-
     
564,804
 
                         
Net Income
   
3,070,644
     
576,049
     
3,646,693
 
                         
Foreign currency translation adjustment
   
754,896
     
-
     
754,896
 
                         
Comprehensive Income
 
$
3,825,540
   
$
576,049
   
$
4,401,589
 
                         
 Net Income Per Common Share
                       
       basic
 
$
0.13
   
$
0.02
   
$
0.15
 
       diluted
 
$
0.13
   
$
0.02
   
$
0.15
 
                         
 Weighted Common Shares Outstanding
                       
       basic
   
24,046,432
     
-
     
24,046,432
 
       diluted
   
24,218,671
     
-
     
24,218,671
 
                         

13

 
 
 

 
3. Cash – Restricted
 
As of September 30, 2010 (unaudited), restricted cash represented $23,651 held in an escrow account to be paid to investor relations firms for investor relation expenses and $3,198 represented a labor union fee that was deposited into a special bank account that is restricted to be used only for employee welfare purposes.  As of December 31, 2009, restricted cash of $3,443 represented a labor union fee that was deposited into a special bank account that is restricted to be used only for employee welfare purposes. Subsequent to September 30, 2010 the restricted cash held in an escrow account of $23,651 was released to the Company in accordance to Securities Purchase Agreement dated on January 11, 2010.
 
4. Accounts Receivable
 
The Company generally provides its major customers with short term credit pursuant to which the customers are required to make payment between three months and six months after delivery, depending on the customer’s payment history.  The Company does not require collateral or other security to support these receivables. The Company conducts periodic reviews of its clients’ financial condition and customer payment practices to minimize collection risk on accounts receivable. 

The accounts receivable amounts included in the consolidated balance sheets at September 30, 2010 (unaudited) and December 31, 2009   were as follows:
 
   
2010
   
2009
 
 Accounts receivable
 
$
8,731,964
   
$
6,557,296
 
 Note receivable
   
 18,355
     
 -
 
 Less: Allowance for doubtful accounts
   
43,660
     
32,786
 
 Accounts receivable, net
 
$
8,706,659
   
$
6,524,510
 
 
5. Inventories
 
Inventories at September 30, 2010 (unaudited) and December 31, 2009 consisted of the following:

     
2010
   
2009
 
Raw materials
 
667,858
   
$
357,156
 
Work in process
   
16,130
     
12,297
 
Finished goods
   
93,496
     
66,072
 
Packaging and other
   
16,872
     
21,445
 
Total
 
$
794,356
   
$
456,970
 
 
 6. Deposits to Suppliers of Property and equipment
 
As of September 30, 2010 (unaudited), deposits to suppliers of property and equipment mainly consisted of a renovation deposit of RMB 2,000,000 or US$ 298,459 for total contract value of RMB 5,200,000 or US$ 775,992 for the Company’s new administrative offices adjoining the new manufacturing facilities.


14
  
 
 

 
 
7. Accrued Receivable and Rental Income (Loss)
 
As of September 30, 2010 (unaudited) and December 31, 2009, accrued receivables consist of accrued rental income for an unused factory.
 
The Company leases certain unused building and land use right, and equipment and machinery under operating leases with terms that have been extended to December 31, 2010. The rental revenue and cost (unaudited) for the nine months ended September 30, 2010 and 2009 consisted of the following:
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
 
2009
 
Rental income
  $ 66,460     $ 109,797     $ 198,325     $ 329,316  
Less: depreciation and amortization
    94,803       103,783       292,698       311,277  
Total Income (loss) from rental
  $ (28,343 )   $ 6,014     $ (94,373 )   $ 18,039  
 
8. Property and Equipment, Net
 
Property and equipment are stated at cost less accumulated depreciation. Depreciation is determined using the straight-line method over the estimated useful lives listed below:
 
 
Estimated Life
Building
20 years
Equipment and machinery
5 to 10 years
Vehicles
5 years
Office equipments
5 years
Leasehold improvements
lower of lease terms or 5 years

In the three months and nine months ended September 30, 2010 (unaudited), the Company disposed of equipment and machinery of $0 and $243,552, respectively which the Company determined will not be used in future operations. A loss on such disposition of $0 and $126,025 for three months and nine months ended September 30, 2010 (unaudited) is included within other expenses.
 
As of September 30, 2010 (unaudited) and December 31, 2009, property and equipment at cost, less accumulated depreciation, consisted of the following:
       
   
2010
   
2009
 
Building
 
$
8,856,458
   
$
5,484,256
 
Equipment and machinery
   
12,470,728
     
8,477,728
 
Vehicles
   
176,393
     
44,601
 
Office equipments
   
179,219
     
121,086
 
Leasehold improvements
   
176,845
     
173,583
 
Subtotal
   
21,859,643
     
14,301,254
 
Less: Accumulated depreciation
   
4,742,392
     
3,906,670
 
Total
 
$
17,117,251
   
$
10,394,584
 
 
For the three months ended September 30, 2010 and 2009, depreciation was $326,536 and $287,332, respectively. For the nine months ended September 30, 2010 and 2009, depreciation was $888,406 and $872,450, respectively.
 
15  
 
 
 

 
9. Intangible Assets, Net
 
Intangible assets represent a land use right. All land in the PRC is government owned and cannot be sold to any individual or company. However, the government grants the user a “land use right” to use the land. The Company has the right to use the land for 50 years and amortizes the right on a straight-line basis for 50 years. The land use right will be expiring by 2056.
 
The intangible assets are recorded at cost less amortization and consisted of the following as of September 30, 2010 (unaudited) and December 31, 2009:
             
   
2010
   
2009
 
Land use right
 
$
5,603,970
   
$
5,500,608
 
Less: Accumulated amortization
   
532,378
     
440,049
 
Total
 
$
5,071,592
   
$
5,060,559
 
 
For the three months ended September 30, 2010 and 2009, amortization expenses were $27,730 and $31,441, respectively. For the nine months ended September 30, 2010 and 2009, amortization expenses were $82,752 and $98,252, respectively.
 
The amortization expense from September 30, 2010 for the next five years is expected to be as follows:
 
   
Amount
 
2011
 
$
112,079
 
2012
 
$
112,079
 
2013
 
$
112,079
 
2014
 
$
112,079
 
2015
 
$
112,079
 
 
10.   Know-how Right

On September 17, 2009, to acquire technology for use in the manufacture of the Company’s starch-based material, the Company entered into an agreement to purchase two technologies from four individuals including two related parties, Mr. Zhonghao Su, Chief Executive Officer of the Company, and Mr. Yingjie Qiao, technical director of the Company.  The total amount payable for these two technologies was RMB 15 million which was the fair value of the know-how right (US$ 2,238,438), of which the Company paid RMB 5 million (US$ 746,146).  The remaining RMB 10 million (US$ 1,492,292), which was recorded as other current liabilities, will be paid by the Company upon receipt of the patent rights certificates for these two technologies and transfer of the ownership of these patent rights to the Company.  
 
On December 17, 2009, the Company entered into a supplemental agreement with three owners of these technologies, Mr. Yingjie Qiao, Mr, Zhonghao Su, and Mrs. Dongyan Tang, to amend the agreement for the purchase price of the technologies. Pursuant to the supplemental agreement, the Company would only acquire one technology for the total purchase price of RMB 15 million (US$ 2,238,438) payable to Mr. Yingjie Qiao and Mrs. Dongyen Tang, of which the Company has already paid RMB 5 million (US$ 746,146). The remaining RMB 10 million (US$ 1,492,292), which was recorded as other current liabilities, will be paid by the Company when it receives the patent right certificate for the technology and the ownership of patent right has been completely transferred to the Company. Since the Company began using this technology for manufacturing in September 2009, the Company began to amortize this technology over 20 years from that date.

Pursuant to the supplemental agreement, the Company also obtained the right to use the other technology which was the subject of the original agreement and which the Company currently applies in its dry-powder blending process to produce its starch-based material.  The supplemental agreement provides the Company with a royalty-free right to use this other technology as long as it is owned by the current owners, a right of first refusal on any proposed transfers of the technology by the current owners and an option to purchase the technology for RMB 15 million (US$ 2,238,438). This technology is the subject of a patent application filed with, and presently under review by, the PRC State Intellectual Property Office.  
 
16
 
 
 

 
 The know-how right is recorded at cost less amortization and consisted of the following as of September 30, 2010 (unaudited) and December 31, 2009:
             
   
2010
   
2009
 
Know-how right
 
$
2,238,438
   
$
2,197,152
 
Less: Accumulated amortization
   
121,248
     
36,619
 
Total
 
$
2,117,190
   
$
2,160,533
 
 
For the three months ended September 30, 2010 and 2009, amortization expense for know-how right was approximately $27,692 and $0, respectively. For the nine months ended September 30, 2010 and 2009, amortization expense for know-how right was approximately $82,636 and $0, respectively.
  
The amortization expense from September 30, 2010 for the next five years is expected to be as follows:
 
   
Amount
 
2011
 
$
111,922
 
2012
 
$
111,922
 
2013
 
$
111,922
 
2014
 
$
111,922
 
2015
 
$
111,922
 
 
11. Investment
 
The Company, through CHFY, indirectly owns a 16% equity interest in Harbin Longjun Trade Co., Ltd. (“Longjun”), a corporation organized in Heilongjiang Province of the PRC on June 1, 2006.  Prior to May 22, 2007, the Company was the majority owner of Longjun.  The Company accounts for this investment using the cost method. As of September 30, 2010 (unaudited) and December 31, 2009, the investment amounts at cost were $16,298 and $310,419.  The company recorded $296,102 of impairment loss on this investment during the nine months ended September 30, 2010, which is the difference between the book value and the estimated fair value of the investment.

12. Due to Stockholders/Officers, Net
 
Since 2005, certain of our principal stockholders have advanced necessary working capital to the Company to support its research, development and operations. These amounts are unsecured, non-interest bearing and have no set repayment date.
 
13. Income and Other Taxes
 
a. Corporation Income Taxes (“CIT”)
 
The Company’s PRC subsidiary CHFY files income tax returns under the Income Tax Law of the PRC. In accordance with the relevant PRC tax laws and regulations, since CHFY became a foreign wholly-own company on August 18, 2006, CHFY has been authorized to reduce its income tax rate by 3%, to 30% from the regular 33% tax rate.  Commencing in January 2008, the PRC government reduced the regular CIT tax rate from 33% to 25%. However, the current CIT rate applicable to CHFY is 15%, as explained in the following paragraph.
 
In accordance with the relevant tax laws and regulations of the PRC, CHFY is entitled to full exemption from CIT for the first two years and a 50% reduction in CIT for the next three years, commencing from the first profitable year after offsetting all tax losses carried forward from the previous five years. As 2007 was the Company’s first profitable year, CHFY was entitled to a full exemption from CIT for the years 2007 and 2008. Commencing from January 2009 to December 31, 2011, CHFY is entitled to calculate its CIT at a 15% rate, which is the 50% reduction from the original 30% CIT.
 
17  
 
 
 

 
The deferred income tax assets results from impairment loss on investment and bad debt allowance which are deductible when they are incurred.

The components of the provisions for income taxes were as follows for the nine months ended September 30, 2010 and 2009:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
 
2009
 
Current taxes:
                     
Current income taxes in the PRC
  $ 352,990     $ 263,602     $ 713,514     $ 605,617  
Deferred income tax (benefits)
    (63,164 )     (58,980 )     (148,710 )     (58,980 )
Total provision for income taxes
  $ 289,826     $ 204,622     $ 564,804     $ 546,637  
 
The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the nine months ended September 30, 2010 (unaudited) and 2009:

     
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
     
2010
 
2009
 
2010
   
2009
 
US statutory rates
   
34.0%
 
34.0%
   
34.0%
     
34.0%
 
Tax rate difference
   
(9.0)%
 
(9.0)%
   
(9.0)%
     
(9.0)%
 
Effect of tax holiday
   
(10.0)%
 
(10.0)%
   
(10.0)%
     
(10.0)%
 
Other
   
(2.1)%
 
0.6%
   
(1.6%)
     
0.2%
 
Tax per financial statements
   
12.9%
 
15.6%
   
 13.4%
     
15.2%
 
 
b. Value Added Tax (“VAT”)
 
The Company’s PRC subsidiary, CHFY, is subjected to VAT on merchandises sales in the PRC. Commencing from March 1, 2007, the general VAT tax rate of 17% was applicable. Since the CHFY belongs to Hi-Tech Manufacturing Company, China National Tax Authority had authorized CHFY to offset the VAT tax paid for purchasing equipments and machineries with the regular VAT tax collected from sales of products by CHFY. This authorization began in December 2007.

c. Taxes Payable
 
As of September 30, 2010 (unaudited) and December 31, 2009, taxes payable consists of the following:
 
     
2010
   
2009
 
Value-added taxes
 
10,776
   
$
202,280
 
Income taxes
   
332,108
     
209,240
 
Individual income taxes withholdings
   
15,245
     
18,888
 
Total
 
358,129
   
$
430,408
 
 

18  
 
 
 

 
14. Stockholders’ Equity
 
Holders of Common Stock are entitled to one vote for each share in the election of directors and in all other matters to be voted on by the stockholders. There is no cumulative voting in the election of directors. Holders of Common Stock are entitled to receive such dividends as may be declared from time to time by the Board of Directors (“BOD”) with respect to the Common Stock out of funds legally available therefore and, in the event of liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities. The holders of Common Stock have no preemptive or conversion rights and is not subject to further calls or assessments. There are no redemption or sinking fund provisions applicable to the Common Stock. The Common Stock currently outstanding is validly issued, fully paid and non-assessable. The Company is also authorized to issue 20,000,000 shares of Preferred Stock, $0.001 par value. The Articles of Incorporation give the BOD the authority to divide Preferred Stock into series, and to designate the rights and preferences of each series.
 
In the 2007 Business Combination which the Company completed on February 9, 2007, the Company acquired all of the outstanding capital stock of AGM by merging a wholly owned subsidiary of the Company into AGM.  Through AGM, the Company indirectly owns all of the outstanding capital stock of CHFY.  AGM has substantially no operations and substantially no assets other than the shares of CHFY.  As consideration for the acquisition of AGM and CHFY, the Company issued to the former owners of AGM shares of its Series A Convertible Preferred Stock that were convertible into approximately 98% of the Company’s outstanding common shares, on an after-converted basis.  On January 14, 2008 the Company effected a 1-for-150 reverse split of its common stock.  In connection with the split, the Company issued additional shares to certain shareholders so that, after the split, no shareholder owned fewer than 100 shares.  The following month, on February 29, 2008, the holders of all outstanding shares of Series A Convertible Preferred Stock converted their preferred shares into a total of 18,150,000 shares of the Company’s common stock, and all shares of Series A Convertible Preferred Stock were cancelled. 
 
On January 11, 2010, the Company entered into a Securities Purchase Agreement with certain accredited investors (the “Purchasers”) relating to the issuance and sale of up to 5,300,000 shares of the Company’s common stock, par value $0.001 per share (the “Shares”), in a private placement transaction (the “January 2010 Private Placement”). On January 25, 2010, the Company closed the January 2010 Private Placement. The Company sold 5,051,461 Shares in the January 2010 Private Placement at $0.90 per Share. The net proceeds received by the Company in the January 2010 Private Placement were $4,381,913 excluding $100,000 held in an escrow account for future investor relations expense purposes. Accordingly, the number of shares of common stock, par value $.001 per share, outstanding and issued as of January 25, 2010 and December 31, 2009 were 23,762,849 and 18,711,388, respectively.
 
Pursuant to the Securities Purchase Agreement, (i) $100,000 of the net proceeds was held in escrow to be paid to investor relations firms designated by a representative of certain of the Purchasers and approved by the Company (the “IR Cash”) and (ii) the Company deposited with an escrow agent warrants to purchase 700,000 shares of common stock of the Company at $0.90 per share with cashless exercise rights to be exercisable for one year from the date that such warrants were issued (the “IR Warrants”) to investor relations firms designated by a representative of certain of the Purchasers and approved by the Company. The investor relations firms proposed to receive the IR Cash and the IR Warrants were required to be designated (subject to Company approval) on or before September 30, 2010. On April 6, 2010 and July 12, 2010, the Company issued IR Warrants to purchase 437,500 and 20,000 shares of Common Stock, respectively, and as a result, IR Warrants in respect of 242,500 shares remain in escrow for future issuance by the Company. Subsequent to September 30, 2010 and in accordance with the Company’s agreements under the Securities Purchase Agreement dated January 11, 2010, the remaining IR Warrants in escrow, representing the potential right to purchase 242,500 shares, were cancelled.  Restricted cash equal to of $23,651 remained in escrow undisbursed to investor relations firms as of September 30, 2010 and, as a result and in accordance with the terms of the Securities Purchase Agreement, such cash has been returned to the Company.

On June 25, 2010, the Company entered into a Securities Purchase Agreement with an investor (the “Purchaser”) relating to the issuance and sale of 1,866,666 shares of the Company’s common stock, par value $0.001 per share (the “Shares”), in a private placement (the “June 2010 Private Placement”). The purchase price for the Shares was $2,800,000. The June 2010 Private Placement was closed on June 25, 2010. The Purchaser has also entered into a Lock-Up agreement whereby the Purchaser agrees not to sell any of its shares in the Company for 24 months from the date of the closing (the “Lock-Up Agreement”).

19
 
 
 

 
 
15. Stock-Based Compensation
 
Stock Warrants
 
On January 11, 2010, pursuant to the Securities Purchase Agreement, the Company placed in escrow (i) $100,000 of the net proceeds from the January 2010 Private Placement to be issued to investor relations firms designated by a representative of certain of the Purchasers and approved by the Company (the “IR Cash”) and (ii) warrants to purchase 700,000 shares of common stock of the Company at $0.90 per share with cashless exercise rights and which will be exercisable for one year beginning on the date that such warrants are issued (the “IR Warrants”) to investor relations firms designated by a representative of certain of the Purchasers and approved by the Company. The investor relations firms proposed to receive the IR Cash and the IR Warrants must be designated (subject to Company approval) on or before September 30, 2010.  In April 2010, the Company issued IR Warrants to two investor relations firms to purchase 437,500 shares of Common Stock; and in July 2010, the Company issued IR Warrants to one other investor relations firm to purchase 20,000 shares of Common Stock.  Pursuant to their terms, the warrants will expire in April and July 2011, respectively.  The initial fair market value of the warrants issued in April 2010 was $1,025,812 and was recorded on the balance sheet as an unamortized expense (i.e., an asset) and a corresponding amount was recorded on the balance sheet as a warrant liability. The initial fair market value was estimated on the date of grant using the Black-Scholes Option Pricing Model in accordance with ASC 718, Compensation - Stock Compensation, using the following assumptions: expected dividend yield 0%, risk-free interest rate of 0.49%, volatility of 289.07%, and an expected term of one year.  The initial fair market value of the warrants issued in July 2010 was $37,693 and was recorded on the balance sheet as an unamortized expense (i.e., an asset) and a corresponding amount was recorded on the balance sheet as a warrant liability. The initial fair value of these warrants was determined by using the Black-Scholes Options Pricing Model with the following assumptions: discount rate – 0.3%; dividend yield – 0%; expected volatility – 111.31% and term of 1 year.
 
The warrants have a reset provision that would reduce the exercise price to any amount below $0.90 if the Company issues shares below that price.  In accordance with ASC 815, we have accounted for these warrants as derivative liabilities. The initial fair market value of the expense resulting from such warrants is amortized on a straight line basis over the period of service under the agreement with the recipient of the warrants.  Any changes in the fair values of the warrants will be charged to expense or credited to income, as applicable, in the period of change.
 
A summary of stock warrants for the nine months ended September 30, 2010 (unaudited) is as follows:

Stock Warrants
 
Shares
   
Weighted-
Average
Exercise Price
   
Weighted-Average Remaining
Contractual Term (Months)
   
Aggregate
Intrinsic
Value
 
Outstanding at January 1, 2010
   
-
   
$
-
     
-
     
-
 
Granted
   
457,500
     
0.90
     
12
     
-
 
Exercised or converted
   
(87,500
)
   
0.90
     
6
     
-
 
Forfeited or expired
   
-
     
-
     
-
     
-
 
Outstanding at September 30, 2010
   
370,000
   
$
0.90
     
6
   
$
333,000
 
Exercisable at September 30, 2010
   
370,000
   
$
0.90
     
6
   
$
333,000
 
 

20
   
 
 

 
 
The following table details the Company’s non-vested share awards activity:
 
 Share Awards
 
Shares
   
Weighted-
Average Grant-
Date Fair
Value
 
Balance at January 1, 2010
   
-
   
$
-
 
Granted
   
44,167
     
2.38
 
Vested
   
(18,229)
     
2.35
 
Cancelled or Forfeited
   
-
     
-
 
Balance at September 30, 2010
   
25,938
   
$
2.39
 
 
The weighted-average grant-date fair value of non-vested share awards is the quoted market value of the Company’s common stock on the date of grant, as shown in the table above. As of September 30, 2010 (unaudited), total unrecognized compensation costs related to unvested stock awards was $62,025. Unvested shares are expected to be recognized over a weighted average period of 0.75 years.

16. Reserve Funds
 
The Company’s subsidiary in the PRC is required to maintain certain statutory reserves by appropriating from profit after taxes in accordance with the relevant laws and regulations in the PRC and articles of association of the subsidiary before declaration or payment of dividends. The reserves form part of the equity of the Company.
 
The appropriations to the statutory surplus reserve and statutory common welfare fund reserve represent 10 percent and 5 percent of the profit after taxes, respectively. In accordance with the laws and regulations in the PRC, the appropriations to statutory reserves cease when the balances of the reserves reach 50 percent of the registered capital of the Company.  Appropriations to the statutory common welfare fund have not been required since 2006, and the Company ceased such appropriations in January 2009.
 
The reserve funds consisted of the following as of September 30, 2010 (unaudited) and December 31, 2009:
 
     
2010
   
2009
 
Statutory reserve fund
 
1,269,245
   
$
908,392
 
Statutory common welfare fund reserve
   
244,177
     
244,177
 
Total
 
1,513,422
   
$
1,152,569
 
 
17.  Lease Commitments
 
The company leases certain general and administrative office, warehouse, and factory space under various one-year, non-cancelable, options to renew operating leases.
 
The following is a schedule of future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms as of September 30, 2010 (unaudited):
       
Total minimum payments required
 
$
26,755
 
The total rental expenses for the three months ended September 30, 2010 and 2009 were $50,807 and $45,093, respectively and for the nine months ended September 30, 2010 and 2009 were $142,605 and $136,697, respectively.
 

21
 
 
 

 
18. Basic and Diluted Income per Common Share
 
The Company accounts for net income per common share in accordance with ASC 260, “Earnings per Share” (“EPS”). ASC 260 requires the disclosure of the potential dilutive effect of exercising or converting securities or other contracts involving the issuance of common stock. Basic net income (loss) per share is determined based on the weighted average number of common shares outstanding. Diluted net income (loss) per share is determined based on the assumption that all dilutive convertible shares, stock options and warrants were converted or exercised. Except for 370,000 outstanding warrants to purchase Company common stock at exercise price of $0.90 per share, the Company did not have any outstanding convertible shares or share options as of September 30, 2010 (unaudited).
 
19. Foreign Subsidiary Operations
 
Substantially all of the Company’s operations are carried out through its subsidiaries in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic, and legal environments in the PRC. The Company’s business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency fluctuation and remittances and methods of taxation, among other things.
 
20. Concentration of Business
 
a. Financial Risks
 
The Company provides credit in the normal course of business. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information.
  
b. Major Customers
 
Three customers accounted for 68.5% and 69.8% of the Company’s net revenue for the three months and nine months ended September 30, 2010 (unaudited), respectively.  Each customer accounted for about 24.4%, 22.7% and 21.5% for three months ended September 30, 2010 (unaudited) and 26.8%, 23.5%, and 19.5% for nine months ended September 30, 2010 (unaudited) of the revenues. Four customers accounted for 64.6% and 72.8% of the Company’s net revenue for the three months and nine months ended September 30, 2009, respectively.  Each customer accounted for about 25.4%, 23.4%, 10.9% and 4.9% for three months ended September 30, 2009 and 27%, 19.2%, 16.4% and 10.3% for nine months ended September 30, 2009 of the revenues.  At September 30, 2010 (unaudited), the accounts receivable from these three customers was $8,518,318.

c. Major Suppliers
 
Two vendors provided 96% and 93% of the Company’s purchases of raw materials for the three months and nine months ended September 30, 2010 (unaudited), respectively.  Each vendor accounted for 55% and 41% for three months ended September 30, 2010 (unaudited) and 50%, and 43% for nine months ended September 30, 2010 (unaudited) of the purchases.  Two vendors provided 99% and 100% of the Company’s purchases of raw materials for the three months and nine months ended September 30, 2009, respectively.  Each vendor accounted for 49% and 50% for three months ended September 30, 2009 and 56%, and 44% for nine months ended September 30, 2009 of the purchases.  At September 30, 2010 (unaudited), the accounts payable to these vendors was $0.
 
21. Subsequent Events
 
Subsequent to September 30, 2010 and pursuant to Securities Purchase Agreement dated January 11, 2010, the restricted cash held in escrow of $23,651 was released to the Company and the remaining IR Warrants of 242,500 shares in escrow were cancelled.


22
 
 

 
 
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
As used herein, “China Green,” “we,” “us,” “our” and the “Company” refers to China Green Material Technologies, Inc. and where applicable its direct and indirect wholly owned subsidiaries.
 
Special Note Regarding Forward Looking Statements
 
This Quarterly Report on Form 10-Q, including the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements that are based on the beliefs of our management, and involve risks and uncertainties, as well as assumptions, that, if they ever materialize (in the case of the risks and uncertainties) or prove incorrect (in the case of the assumptions), could cause actual results to differ materially from those expressed or implied by such 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, including statements regarding new and existing products, technologies and opportunities; statements regarding market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; uncertainties related to conducting business in China; and any statements of belief or intention. As such, they are subject to risks and uncertainties that could cause our results to differ materially from those expressed or implied by such forward looking statements. Such risks and uncertainties include any of the factors and risks mentioned in the “Risk Factors” sections of our Annual Report on Form 10-K for the year ended December 31, 2009 and subsequent SEC filings, and any statements of assumptions underlying any of the foregoing. All forward-looking statements included in this report are based on information available to us on the date of this report. We assume no obligation and do not intend to update these forward-looking statements, except as required by law.

Certain Terms
 
Except where the context otherwise requires and for the purposes of this report only:

“China Green,” “the Company,” “we,” “us,” and “our” refer to China Green Material Technologies, Inc., and where applicable its direct and indirect wholly owned subsidiaries, and, in the context of describing our operations and business, and consolidated financial information;
 
“China,” “Chinese” and “PRC” refer to the People’s Republic of China and do not include Taiwan and special administrative regions of Hong Kong and Macao;
 
“SEC” refers to the United States Securities and Exchange Commission;
 
“Securities Act” refers to the Securities Act of 1933, as amended;
 
“Exchange Act” refers to the Securities Exchange Act of 1934, as amended;
 
“RMB” refers to Renminbi, the legal currency of China; and
 
“U.S. Dollar,” “$” and “US$” refer to the legal currency of the United States.
 
The following discussion and analysis of our financial condition and results of operations includes information with respect to our plans and strategies for our business and should be read in conjunction with our interim unaudited condensed consolidated financial statements and related notes included herein and our consolidated financial statements and related notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Form 10-K for the year ended December 31, 2009.

23
 
 
 
 

 
Business Overview
 
We manufacture and sell starch-based biodegradable, disposable containers, tableware and packaging materials in China. In making the starch-based material for our products, we use proprietary manufacturing methods that reduce processing time. We market our products through our internal sales force located at our new manufacturing facility in the Harbin Economic and Technological Development Zone, located in Heilongjiang Province, China. Since the formation of our Company, we have sold our products in other foreign countries through distributors. In January 2009, we began to market and sell our products in other countries directly. We continually attempt to improve our products and production processes through research and development

Our starch-based material is potentially a substitute for the oil-based plastics used in a wide variety of products. We currently manufacture and sell food packaging products and disposable tableware consumer goods, and we are actively researching the introduction of additional product lines. We manufacture and sell biodegradable disposal tableware to consumers and food packaging products to manufacturers of retail frozen food items. We also manufacture and sell food and beverage containers and utensils made from our biodegradable material, including cups, plates and bowls. Within the area of food and beverage containers and utensils, we produce a “Go Home without Dish Washing” series, which is a traveling, picnic and outdoor series of tableware products.

We produce a starch-based material using corn starch as the principal ingredient, and we manufacture all our products using this starch-based material. Our starch-based material is non-toxic, harmless, fire-resistant, heat-resistant and odor-free, can be used in microwave ovens and retains its structural integrity at temperatures between -40°C and +150°C.

We utilize “dry-powder blending” technology in the production of the biodegradable, starch-based material used to manufacture products.  At present, both in China and elsewhere, the formulation of starch-based biodegradable products often involves the use of liquid solvents to modify the property of starch through mixed liquid polymerization. We believe that our dry-powder blending technology helps us to reduce the time and, as a result, the cost to produce our material compared with production methods using liquid solvents.

Market Opportunity

We believe that, because of concerns over environmental safety, health and renewability of resources, there is an increasing demand worldwide for products made from materials other than oil-based plastics and paper products.  We also believe that there is a growing trend for government incentives and restrictions favoring the use of alternatives to oil-based plastics and paper based products.  For example, the Chinese government has deemed environmental protection an important national interest, and since 1996 has promulgated a series of laws aimed at increasing the use of biodegradable materials, including mandates for the use of recyclable materials in certain packaging and has severely limited the use of disposable polystyrene bags, cutlery and tableware.  Our goal is to provide products that address the opportunities created by these developments.  Because our products are made from renewable ingredients and are biodegradable, we believe they are environmental friendly and consistent with the “4R” environmental goals of “Reduce,” “Recycle,” “Reuse”, and “Recover.” We focus our research and development efforts on improving our current lines of disposable consumer goods in the catering, frozen food and home and personal use areas, and on the development and introduction of new plastic replacement products.
 
24
 
 

 
 
Third Quarter Financial Performance Highlights

We continued to experience strong demand for our products during the third quarter of 2010, which resulted in continued growth in our revenues. Despite the overall economic uncertainties in the global economy, the starch-based biodegradable, disposable and compostable materials industry in China is still in the process of rapid and continuous development with the increase of awareness and demand for environmentally friendly containers, tableware and packaging materials by the Chinese government and public. This trend is supported by the favorable governmental policies in the biodegradable materials sector. We believe this trend will continue to result in the growth in sales of our products.

The following are some financial highlights for the third quarter of 2010:

Revenues – Revenues were $6.01 million for the third quarter of 2010, an increase of 43.6% from the comparable quarter of 2009, due to tonnage sold increase by 32.4% and average selling price increase by 8.5%.
 
Gross Margin – Gross margin was 45.6% for the third quarter of 2010, as compared to 48.6% for the comparable quarter of 2009, due to increase in overall production costs by 14.6% mainly caused by increase in raw materials price, amortization costs for know-how, utilities and packaging costs.
 
Income from operations – Income from operations was $2.27 million for the third quarter of 2010, an increase of 28.6% from $1.76 million of the comparable quarter of 2009.
 
Net Income – Net income was $1.95 million for the third quarter of 2010, an increase of 75.7% from the comparable quarter of 2009.
 
RESULTS OF OPERATIONS

Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
 
The following table sets forth selected items from our unaudited consolidated statements of operations by dollar and as a percentage of our revenues for the periods indicated:
 
             
   
2010
   
2009
 
   
$
   
% of
Revenues
   
$
   
% of Revenues
 
Revenues
   
6,011,160
     
100.0%
     
4,185,043
     
100.0%
 
Cost of revenues
   
3,267,745
     
54.4%
     
2,152,844
     
51.4%
 
Gross Profit
   
2,743,415
     
45.6%
     
2,032,199
     
48.6%
 
Operating Expenses
   
475,074
     
7.9%
     
267,672
     
6.4%
 
Income from Operations
   
2,268,341
     
37.7%
     
1,764,527
     
42.2%
 
Other Income (Expenses), net
   
(29,881)
     
(0.5)%
     
(450,706)
 
   
10.8%
 
Income tax expense
   
289,826
     
4.8%
     
204,622
     
4.9%
 
Net Income
   
1,948,634
     
32.4%
     
1,109,199
     
26.5%
 
 
Revenues - Revenues increased $1.83 million or 43.6% to $6.01 million for the three months ended September 30, 2010 from $4.19 million for the comparable period in 2009. The increase was mainly attributable to the increased sales of our products which resulted from increased demand from our existing customers as well as new customers. We believe that such revenues increased as a result of growing recognition of our starch based biodegradable products and their environmental friendly advantages as well as the rapidly developing market opportunities in this sector in China. We continue our efforts to increase revenues by improving our marketing strategy, increasing our sales channels, increasing the geographical presence of our products within China and overseas and developing new biodegradable products. For the three months ended September 30, 2010, the tonnage sold increased by 32.4% and average selling price increased by 8.5% as compared to the comparable period in 2009. 
 
 25
 
 

 
Cost of Revenues - Cost of revenues increased $1.11 million or 51.8% to $3.27 million for the three months ended September 30, 2010 from $2.15 million for the comparable period in 2009. This increase was mainly due to the increase in the costs of packaging and raw materials, which were in line with the increase in our revenues. As a percentage of revenues, the cost of revenues increased to 54.4% during the three months ended September 30, 2010 from 51.4% in the comparable period in 2009 due to the increase in raw materials price, depreciation charges for plant and equipment, amortization costs for know-how, utilities and packaging costs.
 
Gross Profit – Gross profit increased $0.71 million or 35.0% to $2.74 million for the three months ended September 30, 2010 from $2.03 million for the comparable period in 2009. Gross profit as percentage of revenues was 45.6% for the three months ended September 30, 2010, a decrease of 3.0% from 48.6% during the comparable period in 2009. The decrease in gross margin was mainly due to the increase in overall production costs by 14.6% which mainly caused by increase in raw material price, depreciation charges for plant and equipment, amortization costs for know-how, utilities and packaging costs for September 30, 2010 as compared to the corresponding period in 2009.
 
Operating Expenses - Operating expenses including selling expenses and general and administrative expenses increased $0.21 million or 77.5% to $0.48 million for the three months ended September 30, 2010 from $0.27 million during the comparable period in 2009. Although our revenues increased during the third quarter of 2010, selling expenses were relatively stable at $0.04 million for the three months ended September 30, 2010 and $0.08 million for the comparable period in 2009, due to closure of certain marketing representative offices.  General and administrative expenses were $0.43 million for the three months ended September 30, 2010 as compared to $0.19 million for the comparable period in 2009, an increase of $0.24 million or 129.0%. The increase was primarily due to increases in overall salary and related costs by $0.08 million, reversal from stock compensation costs of $0.03 million, IR and travelling expenses of $0.10 million and professional fees of $0.09 million incurred for proposed corporate exercise for the third quarter in 2010.
 
Other Income (Expense) - Total other expenses were $0.03 million for the three months ended September 30, 2010, compared to total other expenses of $0.45 million for the comparable period of 2009, a decrease of expenses of $0.42 million.  The decrease primarily resulted from a loss of $0.46 million on intangible assets written off for the period ended September 30, 2009.

Net Income - Our net income was $1.95 million for the three months ended September 30, 2010 compared to net income of $1.11 million for the comparable period of 2009, an increase of $0.84 million or 75.7%. Net income as percentage to revenues was 32.4% for the third quarter of 2010 compared to 26.5% in the comparable period of 2009. This increase in net income and net income margin was primarily due to increase in revenues outrace the increase in cost of revenues and operating expenses for three months ended September 30, 2010.
 
Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
 
The following table sets forth selected items from our unaudited condensed consolidated statements of operations by dollar and as a percentage of our revenues for the periods indicated:
 
   
2010
   
2009
 
   
$
   
% of
Revenues
   
$
   
% of Revenues
 
Revenues
   
13,294,342
     
100.0%
     
9,856,609
     
100.0%
 
Cost of revenues
   
7,183,850
     
54.0%
     
5,106,128
     
51.8%
 
Gross Profit
   
6,110,492
     
46.0%
     
4,750,481
     
48.2%
 
Operating Expenses
   
1,368,863
     
10.3%
     
725,094
     
7.4%
 
Income from Operations
   
4,741,629
     
35.7%
     
4,025,387
     
40.8%
 
Other Income (Expenses), net
   
(530,132)
 
   
(4.0%)
     
(438,155)
     
(4.4%)
 
Income tax expense
   
564,804
     
4.2%
     
546,637
     
5.5%
 
Net Income
   
3,646,693
     
27.4%
     
3,040,595
     
30.8%
 
 

 
26
 
 
 

 
Revenues - Revenues increased $3.44 million or 34.9% to $13.29 million for the nine months ended September 30, 2010 from $9.86 million for the comparable period in 2009. The increase was mainly attributable to the increased sales of our products which resulted from increased demand from our existing customers as well as new customers; they contributed 27.2% and 7.7%, of increase in revenues, respectively. We believe that such revenues increased as a result of growing recognition of our starch based biodegradable products, their environmentally friendly advantages and the rapidly developing market opportunities in this sector in China. We continue our efforts to increase revenues by improving our marketing strategy, increasing our sales channels, increasing the geographical presence of our products within China and overseas and developing new biodegradable products. For the nine months ended September 30, 2010, the tonnages sold increased by 29.5% and average selling price increased by 4.2% as compared to the comparable period in 2009. 
 
Cost of Revenues - Cost of revenues increased $2.08 million or 40.7% to $7.18 million for the nine months ended September 30, 2010 from $5.11 million for the comparable period in 2009. This increase was mainly due to the increase in the costs of packaging and raw materials, which were generally in line with the increase in our revenues as well as amortization costs for know-how right. As a percentage of revenues, the cost of revenues increased to 54.0% during the nine months ended September 30, 2010 from 51.8% in the comparable period in 2009.
 
Gross Profit – Gross profit increased $1.36 million or 28.6% to $6.11 million for the nine months ended September 30, 2010 from $4.75 million for the comparable period in 2009. Gross profit as percentage of revenues was 46.0% for the nine months ended September 30, 2010, a decrease of 2.2% from 48.2% during the comparable period in 2009. The slight decline in gross margin was mainly due to the increase in overall production costs by 8.7% which mainly caused by increase in raw material price, depreciation charges for plant and equipment, amortization costs for know-how right, utilities and packaging costs in September 30, 2010 as compared to corresponding period in 2009.
 
Operating Expenses - Operating expenses including selling expenses and general and administrative expenses increased $0.64 million or 88.8% to $1.37 million for the nine months ended September 30, 2010 from $0.73 million during the comparable period in 2009. Although our revenues increased during the third quarter of 2010, selling expenses were relatively stable at approximately $0.13 million for the nine months ended September 30, 2010 and $0.20 million for the comparable period in 2009, mainly due to closure of some marketing representative offices.  General and administrative expenses were $1.23 million for the nine months ended September 30, 2010 as compared to $0.53 million for the comparable period in 2009, an increase of approximately $0.71 million or 133.4%. The increase was primarily due to increases in overall salary and related costs by $0.20 million, stock compensation costs of $0.12 million, Zhonghao Bio start-up costs of $0.02 million, IR and travelling expenses of $0.12 million and professional fees of $0.24 incurred for proposed and completed corporate exercise for the nine months ended September 30, 2010.
 
Other Income (Expense)  Total other expenses were $0.53 million for the nine months ended September 30, 2010, compared to other expenses of $0.44 million for the comparable period of 2009, an increase of expenses of $0.09 million or 21.0%.  The increase primarily resulted from a loss on fixed assets disposal of $0.13 million, an impairment loss of $0.30 million from long-term investment of Longjun and loss from rental of $0.09 million in nine months ended September 30, 2010 as compared to intangible assets of $0.46 million written off in the corresponding period in 2009.
 
Net Income   Our net income was $3.65 million for the nine months ended September 30, 2010 compared to net income of $3.04 million for the comparable period of 2009, an increase of $0.61 million or 19.9%. Net income as percentage to revenues was 27.4% for the nine months of 2010 compared to 30.8% in the comparable period of 2009. This increase in net income and decrease in net income margin was primarily due to increased in raw materials price, packaging material costs, operating expenses, stock compensation costs, loss on disposal of fixed assets and impairment loss on investment in Longjun.

Liquidity and Capital Resources
 
Our operations were initially capitalized by the combination of cash, a manufacturing facility and intellectual property contributed to CHFY by our stockholders prior to 2008.   Since that time to the extent our operations did not generate sufficient cash flow, we obtained the necessary additional liquidity from loans by our stockholders and management.  During 2009 we repaid approximately $1 million of loans to one of the stockholders, and, as a result, as of September 30, 2010, we owed approximately $311,000 in related party debts.  Because these loans are non-interest bearing, unsecured, and due on demand, we include them as current liabilities.  We may make further repayments of these loans from time to time with cash we determine not necessary for the growth of our business.
 
27
 
 
 

 
As of September 30, 2010, we had working capital of $17.45 million. The ratio of current assets to current liabilities was 5.5:1. The working capital includes cash and equivalents of $10.75 million and net accounts receivable of $8.71 million.  Most of our receivables are owed to us by our primary customers for products purchased from us, and we consider the receivables as collectible in the ordinary course.  We expect to collect substantially all of the September 30, 2010 balance of receivables in the following six months.
 
The following is a summary of cash provided by or used in each of the indicated types of activities during the nine months ended September 30, 2010 and 2009:
 
   
2010
   
2009
 
Cash provided by (used in):
           
Operating Activities
 
$
2,877,506
   
$
2,924,340
 
Investing Activities
   
(7,757,426)
 
   
(53,019)
 
Financing Activities
   
8,110,446
     
(1,005,642)
 

We incurred cash in-flow from our operations of $2.88 million for the nine months ended September 30, 2010. This was primarily attributable to our net income and non-cash items adjustments for depreciation and amortization, stock-based compensation, impairment loss on long-term investment and loss on disposal of intangible assets..
 
During the nine months ended September 30, 2010, we had cash outflow of $7.76 million from investing activities.  This was mainly attributable to $0.29 million renovation deposit to a supplier for the Company’s new manufacturing facility, which has a total contract value of $0.78 million or RMB 5,200,000, $7.56 million cash paid to purchase property, plant and equipment for the Company’s new manufacturing facility and offset by the cash proceeds of $0.12 million received from disposal of fixed assets in the nine months of 2010. While in the comparable period of 2009, we paid $64,384 for purchasing fixed assets.
 
 We completed the purchase of our new manufacturing facility in July 2010, which is located in Harbin Economic and Technological Development Zone, located in Heilongjiang Province, China. The new manufacturing facility will increase our production capacity from existing 9,000 tones per annum to estimated 20,000 tones per annum by 2011.  We intend to bring the facility on line in stages beginning in December 2010 with a production line having a capacity of 4,000 tons per year, bringing our total capacity to 13,000 tons per year by the end of 2010. When fully operational by the end of 2011, the new 11,000-ton facility will complement our existing 9,000-ton facility and will allow us to operate more efficiently and fill larger orders from our customers.  Expenditures associated with the new facility accounted for substantially all of the cash flow in investing activities for the nine months ended September 30, 2010. We believe we will have sufficient cash to pay for the remaining capital commitments for this new facility from our existing resources.
 
We had cash inflows from financing activities for the nine months ended September 30, 2010 of $8.11 million as compared to $1.01 million cash outflow from financing activities for the comparable period of 2009. The increase was mainly due to proceeds of $4.33 million and $2.8 million from the issuance of 5.05 million and 1.87 million shares of common stock in connection with the January 2010 Private Placement and June 2010 Private Placement, respectively, and $0.97 million of advance from third party to facilitate our purchase of the new manufacturing facility property in Harbin Economic Technological Development Zone.
 
We believe our current resources are sufficient to fund ongoing operations for the foreseeable future.
 
28
 
 
 

 
Application of Critical Accounting Policies
 
 In preparation of our Interim Financial Statements, we are required to formulate working policies regarding valuation of our assets and liabilities and to develop estimates of those values.  In our preparation of the Interim Financial Statements for the nine months ended September 30, 2010, there was no estimate made which was (a) subject to a high degree of uncertainty, and (b) material to our results.  
 
 We made no material changes to our critical accounting policies in connection with the preparation of our Interim Financial Statements for the nine months ended September 30, 2010.
 
Impact of Accounting Pronouncements
 
 There were certain recent accounting pronouncements that may have a material effect on our Company’s financial position or results of operations. All of them described under the caption “Recent Accounting Pronouncements” of Note 3 “Summary of Significant Accounting Policies” in the “Notes of Consolidated Financial Statement” listed under the Financial Statements Section which is included in Item 1 hereof.
 
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 or results of operations.
 
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

29
   
 
 
 

 
 
ITEM 4T.  CONTROLS AND PROCEDURES.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
 
Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that is designed to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Pursuant to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation with the participation of the Company’s management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of September 30, 2010.  Based upon that evaluation, our management concluded that, as of such date, a material weakness existed in respect of our internal control over financial reporting, specifically in our control over the adoption of ASC 815-15, “Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity's Own Stock” which the FASB finalized in June 2008 and which became effective for fiscal years beginning after December 15, 2008.  As discussed elsewhere in this Form 10-Q/A, in response to comments raised by the Staff of the Securities and Exchange Commission, the Company determined that an error was contained in the initial filing of this quarterly report on Form 10-Q.  Such error related to the accounting for certain warrants issued during April 2010 and July 2010 and our failure to properly apply the accounting principles set forth in ASC 815-15 with respect to such warrants.  Based on the impact of the aforementioned accounting error, we determined to restate our consolidated financial statements as of June 30, 2010 and September 30, 2010.  As a result of this material weakness, our CEO and CFO concluded that, as of such date, our disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, or that such information is accumulated and communicated to the Company’s management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

We are committed to remediating the material weakness identified above. Because this material weakness was related to a lack of sufficient technical accounting expertise and knowledge of accepted accounting principles in the United States of America (“U.S. GAAP”) that are relevant to the Company’s financial reporting requirements, we believe our addition of an additional employee within our accounting department will help to remediate this material weakness.  This employee, who has 14 years of accounting experience, was hired during 2010 and has been assigned the task (among others) of helping to establish and carry out internal audit procedures and assisting with certain other accounting and related finance matters.  Since August 2010, we also have conducted several internal training sessions for various members of our accounting staff relating to various subjects including understanding and application of US GAAP and communication skills such as English-language report writing.  We believe that the hiring of an additional accounting department employee will permit our senior financial management team, led by our CFO, to increase its focus on the implementation of new accounting pronouncements such as ASC 815-15, and on our compliance with U.S. GAAP generally, and enhance our ability to properly account and report on complex material or non-routine transactions.  In addition, we believe our greater emphasis on the training of our internal accounting staff and our new internal audit procedures will also improve the effectiveness and reliability of our internal control over financial reporting. 

Changes in Internal Control Over Financial Reporting
 
Other than as disclosed above, there were no changes in our internal controls over financial reporting during the quarter ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 

30
 
 
 
 

 
 

PART II.  OTHER INFORMATION
 
ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Sales of Unregistered Securities
 
On August 26, 2010, we issued a total of 1,302 shares of common stock to 14 of our existing shareholders. These shares were issued without consideration in order to correct certain clerical errors in the computation of the number of shares we issued in the reverse merger transaction we completed in 2007.  Issuance of these 1,302 shares was in a private transaction exempt from registration under section 5 of the Securities Act of 1933 by virtue of the exemption from such registration provided in section 4(2) of the Securities Act of 1933.

On September 27, 2010, we issued 51,041 shares of common stock to American Capital Ventures (the "ACV") pursuant to the exercise by ACV of a warrant we issued to ACV during 2010. Issuance of these 51,041 shares was in a private transaction exempt from registration under section 5 of the Securities Act of 1933 by virtue of the exemption from such registration provided in section 4(2) of the Securities Act of 1933.
 
On July 6, 2010, we issued 5,833 shares to Yi Liu, 6,667 shares to Dongxiang Wang, and 6,667 shares to Lianjun Luo.  The 19,167 shares were granted in connection with the appointment of these individuals as members of our board of directors.  Issuance of these 19,167 shares was in a private transaction exempt from registration under section 5 of the Securities Act of 1933 by virtue of the exemption from such registration provided in section 4(2) of the Securities Act of 1933.


 

31
 
 
 

 
ITEM 6.  EXHIBITS.

Exhibit Number
 
Description of Exhibit
 
       
2.1
 
Agreement and Plan of Merger dated February 8, 2007 by and among Advanced Green Materials, Inc., AGM Acquisition Corp. and Ubrandit.com (incorporated by reference to Exhibit 10-a to the Company’s Current Report on Form 8-K filed on February 9, 2007).
 
       
3.1
 
Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed on April 12, 2010).
 
       
3.2
 
Amended and Restated By-laws (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on April 12, 2010).
 
       
4.1
 
Certificate of Designation of Series A Convertible Preferred Stock (incorporated by reference to Exhibit 3-a to the Company’s Current Report on Form 8-K filed on February 9, 2007).
 
       
10.1
 
Employment Agreement effective July 1, 2010 between the Company and Low Yan Seong (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 6, 2010).
 
       
14.1
 
Restated Code of Business Conduct & Ethics dated August 31, 2010 (incorporated by reference to Exhibit 14.1 to the Company’s Current Report on Form 8-K filed on September 7, 2010).
 
       
31.1*
 
Certification of Chief Executive Officer under Section 302 of Sarbanes-Oxley Act of 2002.
 
       
31.2*
 
Certification of Chief Financial Officer under Section 302 of Sarbanes-Oxley Act of 2002.
 
       
32.1*
 
Certification of Chief Executive Officer under Section 906 of Sarbanes-Oxley Act of 2002.
 
       
32.2*
 
Certification of Chief Financial Officer under Section 906 of Sarbanes-Oxley Act of 2002.
 
 
 
* Filed/furnished herewith.  

^ Indicates a management contract or compensatory plan or arrangement.
 
 
32
 
 
 
 

 
 
 
SIGNATURES

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

 
CHINA GREEN MATERIAL TECHNOLOGIES, INC.
 
Date:  March 23, 2011
   
     
     
 
By:
/s/ Zhonghao Su
 
 
Name:
Title:
Zhonghao Su
Chief Executive Officer
(principal executive officer)
     
     
 
By:
/s/ Yan Seong Low
 
 
Name:
Title:
Yan Seong Low
Chief Financial Officer
(principal accounting and financial officer)
 
     
 
 
 
 
33