CHINA GREEN MATERIAL TECHNOLOGIES, INC. - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - CHINA GREEN MATERIAL TECHNOLOGIES, INC.	Financial_Report.xls
EX-32.1 - EXHIBIT 32.1 - CHINA GREEN MATERIAL TECHNOLOGIES, INC.	ex32x1.htm
EX-32.2 - EXHIBIT 32.2 - CHINA GREEN MATERIAL TECHNOLOGIES, INC.	ex32x2.htm
EX-31.1 - EXHIBIT 31.1 - CHINA GREEN MATERIAL TECHNOLOGIES, INC.	ex31x1.htm
EX-31.2 - EXHIBIT 31.2 - CHINA GREEN MATERIAL TECHNOLOGIES, INC.	ex31x2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

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 Technical Development Zone,

Harbin, Heilongjiang Province, People’s Republic of China 150060

(Address of principal executive offices) (Zip Code)

00-86-451-5751 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 x 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 21, 2011, 25,756,025 shares of common stock, par value $0.001 per share, were outstanding.

CHINA GREEN MATERIAL TECHNOLOGIES, INC.

FORM 10-Q

SEPTEMBER 30, 2011

		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 as of September 30, 2011 (Unaudited) and December 31, 2010	2

	Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months ended September 30, 2011 (Unaudited) and 2010 (Unaudited)	3

	Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2011 (Unaudited) and 2010 (Unaudited)	4

	Notes to Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	24

Item 4.	Controls and Procedures.	31

PART II.	OTHER INFORMATION	32

Item 1A	Risk Factors	32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	32

Item 6.	Exhibits.	33

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 those identified in Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010, which included:

·	Uncertainties regarding the growth or sustainability of the market for biodegradable materials.
·	The risk that we may not be able to 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 amounts are based on conversion at September 30, 2011 exchange rates of US$1.00 to RMB6.3549 for assets and liabilities, and a weighted-average of US$1.00 to RMB6.4176 and US$1.00 to RMB6.4988 for revenue and expenses for the three months and nine months ended September 30, 2011, respectively. There is no assurance that RMB amounts could have been or could be converted into U.S. dollars at such rates.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

CHINA GREEN MATERIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	September 30, 2011		December 31, 2010
	(Unaudited)
Assets
Current Assets:
Cash and equivalents	$	21,025,097	$	12,090,345
Restricted cash		180		4,266
Accounts receivable, net of allowance for bad debt of $0 and $0, respectively		3,046,982		10,097,506
Inventories		261,694		684,534
Accrued rental receivables		141,623		203,844
Advance to suppliers		318,848		-
Deferred consulting expense		-		108,036
Other current assets		142,509		570,596
Total Current Assets		24,936,933		23,759,127

Deposits for construction		1,258,871		301,992
Property, plant and equipment, net		15,300,289		17,372,325
Intangible assets, net		1,051,018		5,103,278
Technology and patent right, net		1,907,977		2,000,695
Investment		15,793		15,154
Deferred income taxes		153,411		147,207
Total Assets	$	44,624,292	$	48,699,778

Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses	$	720,552	$	539,275
Deferred revenue		46,185		14,695
Advance from a third party		642,024		1,371,042
Due to stockholder/officer		224,739		208,404
Warrants liability		-		95,085
Taxes payable		114,018		738,647
Other payables for technology and patent right purchase		1,573,589		1,509,958
Total Current Liabilities		3,321,107		4,477,106

Commitments and contingencies

Stockholders' Equity
Preferred stock, $0.001 par value, 20,000,000 shares authorized
and 0 shares issued and outstanding		-		-
Common stock, $0.001 par value, 100,000,000 shares authorized,
25,756,025 and 25,701,025 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively		25,756		25,701
Additional paid-in capital		25,276,628		25,191,392
Statutory reserves		1,837,926		1,699,062
Retained earnings		7,496,154		12,405,789
Accumulated other comprehensive income		6,666,721		4,900,728
Total Stockholders’ Equity		41,303,185		44,222,672
Total Liabilities and Stockholders’ Equity	$	44,624,292	$	48,699,778

See notes to unaudited consolidated financial statements.

CHINA GREEN MATERIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF

INCOME AND COMPREHENSIVE INCOME



	(Unaudited) Three Months Ended September 30,						(Unaudited) Nine Months Ended September 30,
	2011			2010			2011			2010

Net sales	$	1,622,694		$	6,011,160		$	9,167,128		$	13,294,342
Cost of sales		1,360,129			3,267,745			6,072,627			7,183,850

Gross profit		262,565			2,743,415			3,094,501			6,110,492

Operating Expenses
Selling		48,458			47,025			127,271			134,304
General and administrative		361,539			488,257			1,542,918			1,207,535
Loss on impairment of land use right and building		5,818,002			-			5,818,002			-
Stock based compensation		40,142			(31,865	)		98,244			121,397
Total Operating Expenses		6,268,141			503,417			7,586,435			1,463,236

(Loss) Income from Operations		(6,005,576	)		2,239,998			(4,491,934	)		4,647,256

Other income (expense):
Interest income		6,460			2,404			14,799			5,343
Interest expenses		(13	)		-			(2,232	)		-
Loss on investment		-			(2,851	)		-			(296,102	)
Loss on disposal of property, plant and equipment		-			-			-			(126,025	)
Other expenses - net		(281	)		(1,091	)		(2,278	)		(18,975	)
Total other expense		6,166			(1,538	)		10,289			(435,759	)

(Loss) Income Before Income Taxes		(5,999,410	)		2,238,460			(4,481,645	)		4,211,497

Provision for income taxes		32,471			289,826			289,127			564,804

Net (Loss) Income		(6,031,881	)		1,948,634			(4,770,772	)		3,646,693

Gain from foreign currency translation adjustment		716,402			556,202			1,765,993			754,896

Comprehensive (Loss) Income	$	(5,315,479	)	$	2,504,836		$	(3,004,779	)	$	4,401,589

Net (Loss) Income Per Common Share
basic	$	(0.234	)	$	0.076		$	(0.185	)	$	0.152
diluted	$	(0.234	)	$	0.075		$	(0.185	)	$	0.151

Weighted Common Shares Outstanding
basic		25,748,525			25,650,856			25,734,436			24,046,432
diluted		25,748,525			25,919,251			25,734,436			24,218,671

See notes to unaudited consolidated financial statements.

CHINA GREEN MATERIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months Ended September 30,
	2011			2010
	(Unaudited)			(Unaudited)
Cash Flows From Operating Activities:
Net (Loss) Income	$	(4,770,772)		$	3,646,693
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation of plant and equipment		1,370,727			888,406
Amortization of intangible assets		86,676			82,752
Amortization of technology and patent right		173,109			82,636
Stock based compensation for shares issued to director and CFO		85,292			42.706
Amortization of deferred consulting expenses		108,036			693,904
Changes in warrants fair value		(95,085	)		(615,213	)
Loss on impairment of land use right and building		5,818,002			-
Changes in deferred tax		-			(148,710	)
Bad debt expenses		-			10,096
Loss on long-term investment		-			296,102
Loss on disposal of fixed assets		-			126,025
Changes in operating assets and liabilities
Accounts receivable		7,736,817			(2,037,616	)
Inventories		441,685			(323,686	)
Accrued rental receivable		69,244			418,689
Advance to suppliers		(311,788	)		-
Other current assets		15,805			(255,823	)
Accounts payable and accrued expenses		163,172			51,432
Deferred revenue		30,187			(1,770	)
Taxes payable		(639,847	)		(79,117	)

Net Cash Provided by Operating Activities		10,281,260			2,877,506

Cash Flows From Investing Activities:
Restricted cash		4,172			(23,346	)
Deposit for construction		(923,247	)		(293,817	)
Purchase of property, plant and equipment		(360,551	)		(7,557,790	)
Proceeds from disposal of property, plant and equipment		-			117,527
Net Cash Used in Investing Activities		(1,279,626	)		(7,757,426	)

Cash Flows From Financing Activities:
Proceeds from shareholder/officer loan		7,386			4,956
Repayment to/Advance from third party		(769,373	)		969,596
Proceeds from issuance of common stock		-			7,135,894
Net Cash Provided by (Used in) Financing Activities		(761,987	)		8,110,446

Effect of Exchange Rate Changes on Cash and Equivalents		695,105			199,260

Net Increase in Cash and Equivalents		8,934,752			3,429,786

Cash and Equivalents at Beginning of Period		12,090,345			7,321,276

Cash and Equivalents at End of Period	$	21,025,097		$	10,751,062

SUPPLEMENT DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for Interest	$	2,232		$	-
Cash paid for Income taxes	$	609,464		$	581,158

See notes to unaudited consolidated financial statements.

CHINA GREEN MATERIAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Principal Activities

China Green Material Technologies, Inc. (“China Green”) is a Nevada corporation incorporated in December 1997 under the name Mount Merlot Estates, Inc. China Green acquired its current business in February 2007 which at that time was called “Ubrandit.com.” On January 14, 2008, Urbandit.com changed its 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. On April 21, 2011 and since then, the Company’s shares have been quoted on the OTC Bulletin Board (the “Bulletin Board”) operated by the Financial Industry Regulatory Authority under the symbol CAGM.OB. From February 25, 2011 to April 20, 2011, the Company’s shares were quoted on the OTCQB market operated by Pink OTC Markets Inc. under the symbol CAGM.PK. Prior to such time, the Company’s shares were traded on the Bulletin Board under the symbol CAGM.OB, whereas before its name change in January 2008 the Company’s shares were quoted on the Bulletin Board 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. Through CHFY, the Company operates the business described in this annual report on Form 10-K and in the financial statements included herein. The Company’s acquisition of AMG 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 the acquisition of 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 an after-converted basis.

On January 14, 2008, concurrent with our name change, 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 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 $2.8 million in the Heilongjiang Province of China. Through Zhonghao Bio, the Company owns our new 5,921 square-meter corporate head office and manufacturing facility located in the Harbin Economic and Technological Development Zone, which commenced manufacturing, development, marketing and production of biodegradable packaging materials in the first quarter of 2011.

Basis of Presentation

The accompanying interim unaudited consolidated financial statements (“Interim Financial Statements”) of the Company and its subsidiaries were prepared in accordance with accounting principles generally accepted in the United States 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, 2010. 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.

Certain reclassifications have been made to the accompanying 2010 condensed consolidated financial statements to conform them to the 2011 presentation.

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 unaudited consolidated financial statements include the financial statements of China Green Material Technologies, Inc. and its wholly owned subsidiaries AGM, CHFY, and Zhonghao Bio (collectively referred as the “Company”). 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. Significant estimates include the estimate of useful lives of property and equipment, intangible asset and technology and patent right, the deferred tax valuation allowance and the fair value of stock warrants and stock awards. Estimates, by their nature, are based on judgment and available information. Accordingly, 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.

Restricted Cash

Commencing from 2008, in accordance with the relevant Harbin local tax regulations, the Company is subjected to labor union fees at 2% of total payroll. The general union of city government will return 40% of the paid labor union fees back to the Company, and requires that the returned amount should be deposited into a special bank account that is restricted to be used only for employees’ welfare purpose by the labor union department of the Company. As of September 30, 2011 and December 31, 2010, the amounts of cash - restricted were $180 and $4,266, respectively.

Accounts Receivable

Accounts receivable are recognized and carried at original invoice amount less allowance for doubtful accounts based on a review of all outstanding amounts at period end. Management determines the allowance for doubtful accounts by using historical experience applied to an aging account with specific identification on case by case and the estimated losses are based on a review of the current status of the existing receivables. The Company provides an allowance for doubtful accounts equal to the estimated losses that will be incurred in the collection of all 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 is determined on the weighted average cost method. Cost of raw materials is determined on a first-in, first-out basis (“FIFO”). Finished goods are determined on a weighted average basis and are comprised of direct materials, direct labor, and an appropriate proportion of overhead costs.

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation 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 property, 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 Unaudited Consolidated Statements of Income and Comprehensive Income.

Estimated useful lives of property, plant and equipment are as follows:

	Estimated Life
Building	20 years
Equipment and machinery	5 to 10 years
Vehicles	5 years
Office equipments	5 years
Leasehold improvements	lower of term of lease or 5 years

Repairs and maintenance expenditures which do not extend the useful lives of the related assets are expended as incurred, whereas significant renewals and betterments are capitalized.

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 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, 2011 and December 31, 2010, 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 being amortized over its estimated life of 50 years. The Company’s interests in the patent rights and related technology acquired by the Company in 2009 are accounted for on the balance sheets as “Technology and patent right, net”.

Intangible assets 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.

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, the price is fixed or determinable, collection is reasonably assured and delivery of products has occurred or services have been rendered. Revenue includes sales of products. 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. The Company does not provide unconditional right of return, price protection or any other concessions to its customers.

Sales revenue represents the invoiced value of goods, net of value-added tax ("VAT"). All of the Company’s products sold in the PRC are subject to VAT of 17% of gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing finished product. The Company recorded VAT payable and VAT receivable net of payments in the financial statements. The VAT tax return is filed offsetting the payables against the receivables.

Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent for the government.

Rental income recognition

Rental income from operating leases to a third party related to the Company’s 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 $70,103 and $66,460 of gross rental income for the three months ended September 30, 2011 and 2010, respectively, and recognized $207,730 (equivalent to RMB1.35 million) and $198,325 (equivalent to RMB 1.35 million) gross rental income for the nine months ended September 30, 2011 and 2010, respectively. Rental income is included as general and administrative expense in the Unaudited Statements of Income and Comprehensive Income net of related rental expense which amounted to $167,168 and $94,803 for the three months ended September 30, 2011 and 2010, respectively, and $471,224 and $292,698 for the nine months ended September 30, 2011 and 2010, respectively.

Advertising Costs

Advertising costs are charged to operations when incurred. Advertising expenses were $28 and $3,238 for three months ended September 30, 2011 and 2010, respectively, and were $4,616 and $28,593 for the nine months ended September 30, 2011 and 2010, respectively.

Employee Welfare Benefit

The Company has established an employee welfare plan in accordance with Chinese law and regulations. The Company’s China subsidiary recorded all employee welfare benefit expense as incurred. The total expense amounted to $6,493 and $973 for the three months ended September 30, 2011 and 2010, respectively, and $14,123 and $5,282 for the nine months ended September 30, 2011 and 2010, respectively.

Research and development costs

Research and development costs are expensed when incurred and are included in operating expenses. The amounts expensed for the three months ended September 30, 2011 and 2010 were $2,146 and $3,213, respectively, and for the nine months ended September 30, 2011 and 2010 were $13,116 and $3,287, respectively.

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 allowance are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (“FIN 48”), codified in FASB ASC Topic 740, on January 1, 2007. As a result of the implementation of FIN 48, the Company made a comprehensive review of its portfolio of tax positions in accordance with recognition standards established by FIN 48, and the Company recognized no material adjustments to liabilities or stockholders’ equity. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest associated with unrecognized tax benefits is classified as interest expense and penalties are classified in selling, general and administrative expenses in the statements of income. The adoption of FIN 48 did not have a material impact on the Company’s financial statements. At September 30, 2011 (unaudited) and December 31, 2010, the Company did not take any uncertain positions that would necessitate recording of tax related liability.

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 Company’s financial statements are presented in the U.S. dollar ($), which is the Company’s reporting currency, while its functional currency is the Renminbi (RMB), the national currency of the PRC and the primary currency of the economic environment in which the operations of CHFY and Zhonghao Bio are conducted. Transactions in foreign currencies are initially recorded at the functional currency rate prevailing at the date of transaction. Any differences between the initially recorded amount and the settlement amount are recorded as a gain or loss on foreign currency transaction in the unaudited consolidated statements of income. Monetary assets and liabilities denominated in foreign currency are translated at the functional currency rate of exchange prevailing at the balance sheet date. Any differences are taken to profit or loss as a gain or loss on foreign currency translation in the unaudited consolidated statements of income. The Company did not incur any significant foreign currency transaction income or loss for the three and nine months ended September 30, 2011 and 201.

The Company translates the assets and liabilities into $ using the rate of exchange prevailing at the balance sheet date and the statements of income and cash flows are translated at an average rate during the reporting period, 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. Adjustments resulting from the translation from RMB into $ are recorded in stockholders’ equity as part of accumulated other comprehensive income. The exchange rates used for financial statements are as follows:

	Average Rate for nine months ended September 30
	2011			2010
Renminbi (RMB)			6.4988			6.80696
United States dollar ($)		$	1.00			1.00

	Average Rate for three months ended September 30,
	2011			2010
Renminbi (RMB)			6.4176			6.76924
United States dollar ($)			1.00			1.00

	Exchange Rate at
		September 30, 2011			December 31, 2010
Renminbi (RMB)			6.3549			6.6227
United States dollar ($)		$	1.00			1.00

Basic and Diluted Net (Loss) 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.


	Three Months Ended September 30,					Nine Months Ended September 30,
	2011 (Unaudited)			2010 (Unaudited)		2011 (Unaudited)			2010 (Unaudited)
Numerator:
Net (loss) income	$	(6,031,881	)	$	1,948,634	$	(4,770,772	)	$	3,646,693
Denominator:
Weighted average number of common shares outstanding
- Basic		25,748,525			25,650,856		25,734,436			24,046,432
- Diluted		25,748,525			25,919,251		25,734,436			24,218,671
Earning per share
- Basic	$	(0.234	)	$	0.076	$	(0.185	)	$	0.152
- Diluted	$	(0.234	)	$	0.075	$	(0.185	)	$	0.151

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. Diluted net income per share is determined based on the assumption that all dilutive stock awards were converted or exercised.

As of September 30, 2011, the Company had 504,000 non-vested shares awards that could potentially dilute basic income per share in the future, but which were excluded in the computation of diluted earnings per share in the periods presented, as their effect would have been anti-dilutive since the grant price of these restricted shares and the exercise price of these option were higher than the average market price during period presented.

Concentration of Credit Risk

The Company’s financial instruments consist primarily of cash and equivalents, which are invested in non-interest bearing bank deposit accounts, 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.

As of September 30, 2011 and 2010, the Company did not identify any assets and liabilities that are required to be presented on the balance sheet at fair value, other than the warrants liabilities discussed in Note 14.

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.

Share-Based Payments

The Company adopted ASC 718, “Compensation-Stock Compensation” (“ASC No. 718”). 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

Recent Accounting Pronouncements

Since the filing of 2010 Form 10-K, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-01 through No. 2011-03. These ASUs entail technical corrections to existing guidance or affect guidance related to specialized industries or entities and therefore have minimal, if any, impact on the Company.

2. Inventories

Inventories at September 30, 2011 and December 31, 2010 consisted of the following:

		September 30, 2011	December 31, 2010
		(Unaudited)
Raw materials	$	154,517	$	572,788
Work in process		-		18,421
Finished goods		81,604		60,711
Packaging and other		25,573		32,614
Total	$	261,694	$	684,534

3. Accrued Rental Receivable and Rental Income (Loss)

As of September 30, 2011 and December 31, 2010, accrued rental receivable consisted of accrued rental income for leasing out unused factory space.

The Company leases out certain unused building with land use right, and building under operating leases agreements, and the lease terms had been extended to December 31, 2011. Its annual rental is RMB 1,800,000 or $ 283,246 per year. The rental revenue and cost for the nine months ended September 30, 2011 and 2010 consisted of the following:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011 (Unaudited)			2010 (Unaudited)			2011 (Unaudited)			2010 (Unaudited)

Rental income	$	70,103		$	66,460		$	207,730		$	198,325
Less: depreciation and amortization		167,168			94,803			471,224			292,698
Total income (loss) from rental	$	(97,065	)	$	(28,343	)	$	(263,494	)	$	(94,373)

4. Other current assets

As of September 30, 2011 and December 31, 2010, other current assets consisted of the following:

	September 30, 2011		December 31, 2010
	(Unaudited)
Advance to employees	$	139,834	$	514,402
Prepaid utilities		-		38,772
Prepaid rent		2,675		17,422
Total	$	142,509	$	570,596

The advance to employee is for business trips and marketing.

5. Deposits for construction

As of September 30, 2011 and December 31, 2010, deposits to supplier for construction mainly consisted of a renovation deposit of RMB8,000,000 or $1,258,871 and RMB2,000,000 or $301,992, respectively, for total contract value of RMB5,200,000 or $818,266 subject to value of variation orders of at least RMB3,000,000 or $472,077 which the final settlement amount will be agreed upon by both parties for the Company’s new administrative offices and new manufacturing facilities after completion of quality assurance during Harbin winter season.

6. Property, Plant and Equipment, Net

The Company did not incur or capitalize any significant repairs and maintenance expenditures in the three and nine months ended September 30, 2011 and 2010, respectively. The Company recorded $1,731,851 of impairment loss on building during the three and nine months ended September 30, 2011, which is the difference between the book value and the estimated fair value of the building. In the nine months ended September 30, 2010, the Company disposed of equipment and machinery of $242,903 which the Company determined will not be used in future operations. A loss on such disposition of $126,025 is included within other expenses.

As of September 30, 2011 and December 31, 2010, property, plant and equipment consisted of the following:

	September 30, 2011		December 31, 2010
	(Unaudited)
Building	$	7,567,871	$	8,961,302
Equipment and machinery		14,002,128		12,750,125
Vehicles		186,002		178,481
Office equipments		197,866		189,671
Leasehold improvements		186,479		178,938
		22,140,346		22,258,517
Less: Accumulated depreciation		6,840,057		5,218,383
Subtotal	$	15,300,289	$	17,040,134
Construction-in-progress		-		332,191
Total	$	15,300,289	$	17,372,325

For the three months ended September 30, 2011 and 2010, depreciation expense was $542,425 and $326,536, respectively, and for the nine months ended September 30, 2011 and 2010, depreciation expense was $1,370,727 and $888,406, respectively.

7. Intangible Assets, net

Intangible assets represent a land use right. All land in China is owned by the State or collectives. Individuals and companies are permitted to acquire land use rights for general or specific purposes. In the case when land is used for industrial purposes, the land use rights are granted for a period of 50 years. The rights may be renewed at the expiration of the initial and any subsequent terms according to the relevant Chinese laws. Granted land use rights are transferable and may be used as security for borrowings and other obligations.

The Company acquired the land use right at September 9, 2005. The intangible assets associated with this land use right were contributed by unrelated parties in exchange for shares of the Company’s common stock. 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 Company recorded $4,086,151 of impairment loss on land use right during the three and nine months ended September 30, 2011, which is the difference between the book value and the estimated fair value of the land use right

The intangible assets at cost less amortization consisted of the following as of September 30, 2011 and December 31, 2010:

	September 30, 2011		December 31, 2010
	(Unaudited)
Land use right	$	1,730,584	$	5,670,310
Less: Accumulated amortization		679,566		567,032
Total	$	1,051,018	$	5,103,278

For the three months ended September 30, 2011 and 2010, amortization expense was $29,251 and $27,730, respectively and for the nine months ended September 30, 2011 and 2010, amortization expense was $86,676 and $82,752, respectively.

The amortization expense from September 30, 2011 for the next five years is expected to be as follows:

For the Year Ending December 31,	Amount
2011 (from October 1 to December 31)	$	29,546
2012	$	118,185
2013	$	118,185
2014	$	118,185
2015	$	118,185
Thereafter	$	548,732
Total	$	1,051,018

8. Technology and patent right, net

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. Pursuant to the sales agreement, Mr. Zhonghao Su agreed to contribute his interest in the technologies without any consideration. The total amount payable for these two technologies was RMB15 million which was the fair value of the technology and patent right ($2,360,383), of which the Company paid RMB5 million ($786,794). The remaining RMB10 million ($1,573,589), which was recorded as other payables, 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 RMB15 million ($2,360,383) payable to Mr. Yingjie Qiao and Mrs. Dongyen Tang, of which the Company has already paid RMB5 million ($786,794). The remaining RMB10 million ($1,573,589), which was recorded as other payables, 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. The Company began using this technology for manufacturing in late 2009, and amortizes it over its estimated useful life of 10 years.

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 RMB15 million ($2,360,383). This technology is the subject of a patent application filed with, and presently under review by, the PRC State Intellectual Property Office.

The technology and patent right at cost less amortization consisted of the following as of September 30, 2011 and December 31, 2010:

	September 30, 2011		December 31, 2010
	(Unaudited)
Technology and patent right	$	2,360,383	$	2,264,937
Less: Accumulated amortization		452,406		264,242
Total	$	1,907,977	$	2,000,695

For the three months ended September 30, 2011 and 2010, amortization expense was $58,420 and $27,692, respectively, and for the nine months ended September 30, 2011 and 2010, amortization expense for technology and patent right was $173,109 and $82,636, respectively.

The amortization expense from September 30, 2011 for the next five years is expected to be as follows:

For the Year Ending December 31,	Amount
2011 (from October 1 to December 31)	$	59,010
2012	$	236,038
2013	$	236,038
2014	$	236,038
2015	$	236,038
Thereafter	$	904,815
Total		1,907,977

9. 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. The Company accounts for this investment using the cost method. As of September 30, 2011 and December 31, 2010, the investment amounts at net were approximately $15,793 and $15,154. The company recorded $2,851 and $296,102 of impairment loss on this investment during the three months and nine months ended September 30, 2010, respectively, which is the difference between the book value and the estimated fair value of the investment.

10. Accounts payable and accrued expenses

As of September 30, 2011 and December 31, 2010, accounts payable and accrued expenses consisted of following:

	September 30, 2011		December 31, 2010
	(Unaudited)
Accounts payable	$	18,580	$	53,651
Other payables		1,152		6,265
Salary payables		417,532		180,152
Accrued expenses		283,288		299,207
Total	$	720,552	$	539,275

Inclusive in salary payables, there were amount of US$216,667 and US$66,667 payable to Mr. Zhonghao Su, Chief Executive Officer of the Company as of September 30, 2011 and December 31, 2010, respectively

11. Advance from a third party

Advance from a third party is amount due to a third party to be used in the purchase of new facility. The amount due is unsecured, non-interest bearing and repayable within next twelve months.

12. Due to Stockholder/Officer

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. During the year 2009, the Company repaid a significant amount of these loans to one of its stockholders. As a result, the net amounts due to the stockholders/officers were $224,739 and $208,404 as of September 30, 2011 and December 31, 2010, respectively. All the amount due to officer above are payable to Mr. Zhonghao Su, Chief Executive Officer of the Company.

13. Income and Other Taxes

a. Corporation Income Taxes (“CIT”)

The Company will file a federal consolidated income tax return with its US subsidiary and state franchise tax individually with the State of Nevada. The Company’s PRC subsidiaries file income tax returns under the Income Tax Law of the PRC concerning Foreign Investment Enterprises and Foreign Enterprises and local income tax laws.

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, CHFY had begun to be charged CIT at a 15% rate

In accordance with the relevant PRC tax laws and regulations, the Company’s PRC subsidiary, Zhonghao Bio, is subject to CIT at 25%.

The deferred income tax assets result from impairment of investment and are deductible when the actual loss on investment is incurred.

The components of the provisions for income taxes were as follows for the three months and nine months ended September 30, 2011 and 2010:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2011 (Unaudited)		2010 (Unaudited)		2011 (Unaudited)		2010 (Unaudited)

Current taxes:
Current income taxes in the PRC	$	32,471	$	352,990	$	289,127	$	713,514
Deferred income taxes benefits				(63,164)				(148,710)
Total provision for income taxes	$	32,471	$	289,826	$	289,127	$	564,804

The following is a reconciliation of tax computed by applying the statutory income tax rate to PRC operations to income tax expenses for the three months and nine months ended September 30, 2011 and 2010 respectively:


	Three Months Ended September 30,					Nine Months Ended September 30,
	2011 (Unaudited)			2010 (Unaudited)		2011 (Unaudited)			2010 (Unaudited)
PRC statutory tax rate		25%			25%		25%			25%
Accounting (loss) income before tax	$	(5,999,410	)	$	2,238,460	$	(4,481,645	)	$	4,211,497
Computed expected income tax expenses		-			559,615		-			1,052,874
Loss from subsidiaries		32,471			-		289,127			-
Less: tax exemption		-			269,789		-			488,070
Income tax expenses	$	32,471		$	289,826	$	289,127		$	564,804

b. Value Added Tax (“VAT”)

The Company’s PRC subsidiary, CHFY, is subject to VAT of 17% on merchandises sales in the PRC. Since the CHFY is located in Heilongjiang province and classified as a Hi-Tech Manufacturing Company, the China National Tax Authority had authorized CHFY to offset the VAT tax paid for purchasing equipment and machineries with the regular VAT tax collected from sales products of CHFY. This authorization began in December 2007.

The Company’s PRC subsidiary, Zhonghao Bio, is classified as a small-scale tax payer which is subject to VAT of 3% on merchandise. Zhonghao Bio has commenced its production in March 2011 and its sales in May 2011.

c. Taxes Payable

As of September 30, 2011 and December 31, 2010, taxes payable consisted of the following:

	September 30,		December 31,
	2011		2010
	(Unaudited)
Value-added taxes	$	65,275	$	377,066
Income taxes payable		47,625		360,043
Individual income taxes withholdings		1,118		1,538
Total	$	114,018	$	738,647

14. Stock-based compensation

Stock Warrants

Pursuant to the January 11, 2010 Securities Purchase Agreement, in April 2010, the Company issued Investor Relations Warrants to two investor relations firms to purchase 437,500 shares of Common Stock, and in July 2010, the Company issued Investor Relations Warrants to one other investor relations firm to purchase 20,000 shares of Common Stock. Pursuant to their terms, the warrants expired in April and July 2011, respectively. The initial fair value of the warrants issued in April 2010 was $1,025,812 and was recorded on the balance sheet as deferred consulting expense (i.e., an asset) and a corresponding amount was recorded as a warrants liability. The initial fair 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 value of the warrants issued in July 2010 was $37,693 and was recorded on the balance sheet as deferred consulting expense 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 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. The amortized consulting expenses were $0 and $259,599 for the three months ended September 30, 2011 and 2010, respectively and were $108,036 and $693,904 for the nine months ended September 30, 2011 and 2010, respectively. $0 and $324,239 of income were recorded for the three months ended September 30, 2011 and 2010, respectively and $95,085 and $615,213 of income were recorded for the nine months ended September 30, 2011 and 2010 resulted from the changes in the fair values of the warrants.

87,500 warrants to purchase shares of common stock were exercised on cashless basis at $0.90 per share pursuant to the warrants' terms during year ended December 31, 2010.

A summary of stock warrants for the period ended September 30, 2011 is as follows:

Stock Warrants	Shares		Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term (Months)		Aggregate Intrinsic Value
Outstanding at January 1, 2011		370,000	$	0.90		3		-
Granted		-		-		-		-
Exercised or converted		-		-		-		-
Forfeited or expired		(370,000)		0.90		3		-
Outstanding at September 30, 2011		-	$	-		-	$	-
Exercisable at September 30, 2011		-	$	-		-	$	-

Share Awards

On May 19, 2010, the Company and Mr. William Wang Dongxiang and Mr. Lianjun Luo, the Independent Directors of the Company, entered into services agreements. Pursuant to the terms of the services agreement, Mr. Wang and Mr. Luo were granted 10,000 of common stock each of the Company at the beginning of each year based on annual services in the Company. The shares award has a term of one year and vests in equal time services basis of services agreement over a one-year period beginning on January 1, 2011.

On July 1, 2010, the Company and Mr. Yan Seong Low, the Chief Financial Officer of the Company, entered into an employment services agreement.

Pursuant to the terms of the employment services agreement, Mr. Low was granted a shares award on July 1, 2010 of 25,000 shares of restricted common stock of the Company at price of $2.34 per share, which was the closing price per share of the Company’s common stock as reported on the OTC Bulletin Board on such date. The shares award will be vested immediately upon completion of annual Executive’s services in the Company beginning on July 1, 2010.

On July 12, 2011, the Company and Mr. Yan Seong Low entered into a revision employment agreement. Pursuant to the terms of the revision employment agreement, Mr. Low was granted a shares award on July 12, 2011 of 576,000 shares of restricted common stock of the Company at price of $0.3367 per share, which was the closing price per share of the Company’s common stock as reported on the OTC Bulletin Board on such date. The share award will vest at a rate of 24,000 shares per month over the next 24 months. The revision employment agreement will expire in two years; except that employment shall be continue thereafter on an at-will basis. The Company may terminate Mr. Low’s employment during the initial two years term, but all unvested shares will vest upon such termination. The compensation expenses will be recorded on the market value on the date of grant, which is $0.3367 per share and amortized over the service period with $8,081 for each month over the next 24 months.

On December 16, 2010, the Company and Mr. Johnson Shun-Pong Lau, the Independent Directors of the Company, entered into a services agreement. Pursuant to the terms of the services agreement, Mr. Lau was granted a shares award 10,000 of common stock each of the beginning of each year of the Company based on annual services in the Company. The shares award has a term of one year and vests in equal time services basis of services agreement over a one-year period beginning on January 1, 2011.

On July 13, 2011 Mr. Dongxiang Wang, Mr. Johnson Shun-Pong Lau and Mr. Lianjun Luo resigned from their positions as members of the Registrant’s Board of Directors. A total of 12,500 shares of common stock that had been issued to them but had not vested were not cancelled as of the date of resignation. The Board of Directors decided to give all unvested shares as vested upon their resignation in recognition of their past services in the Company.

The following table details the Company’s non-vested share awards activity:

	Shares			Weighted- Average Grant- Date Fair Value
Balance at January 1, 2011		12,500		$	2.34
Granted		606,000			0.3725
Vested		(114,500	)		0.7449
Cancelled or Forfeited		-			-
Balance at September 30, 2011		504,000		$	0.3367

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. Total recognized compensation cost was $40,142 and $32,775 for three months ended September 30, 2011 and 2010, respectively and was $85,292 and $42,706 for nine months ended September 30, 2011 and 2010, respectively. Total unrecognized compensation costs were $169,697 as of September 30, 2011, which are expected to be recognized over a weighted average period of 1.75 years.

15. Statutory Reserves

The Company’s subsidiaries in the PRC are required to maintain certain statutory reserves by appropriating from the profit after taxation 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 statutory reserve fund can be used to increase the registered capital and eliminate future losses of the subsidiary, but it cannot be distributed to shareholders except in the event of a solvent liquidation of the subsidiaries.

The appropriation to the statutory surplus reserve and statutory common welfare fund reserve represent 10 percent and 5 percent of the profits after taxation, respectively. In accordance with the laws and regulations in the PRC, the appropriations to statutory reserve cease when the balances of the reserve reach 50 percent of the registered capital of the subsidiary. Commencing from year 2006, the appropriation to statutory common welfare fund reserve is not required. Thus, the Company had ceased the reservation of statutory common welfare fund from January 2009.

The statutory reserves consisted of the following as of September 30, 2011 and December 31, 2010:


		September 30, 2011	December 31, 2010
		(Unaudited)
Statutory reserve fund	$	1,593,748	$	1,454,885
Statutory common welfare fund reserve		244,177		244,177
Total	$	1,837,925	$	1,699,062

16. Foreign Subsidiary Operations

Substantially all of the Company’s operations are carried out through its subsidiaries located 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.

17. Related Party Balances and Transactions

a. Stockholders transactions

In 2009, the Company purchased technology and patent rights from individuals, including two related parties, Mr. Zhonghao Su, Chief Executive Officer of the Company, and Mr. Yingjie Qiao, technical director of the Company. Pursuant to the sales agreement, Mr. Zhonghao Su agreed to contribute his interest in the technologies without any consideration. The total purchase price is RMB15 million ($2,360,383), the Company has already paid RMB5 million ($786,794) to Mr. Yingjie Qiao and a unrelated third party. The remaining RMB10 million ($1,573,589) was recorded as other payables. (See note 8)

b. Stockholders balances (see note 12)

	September 30, 2011		December 31, 2010
	(Unaudited)
Due to stockholders/officers:
Mr. Zhonghao Su	$	224,739	$	208,404

18. 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

The following table summarizes sales to major customers (each 10% or more of revenues):

	Nine months ended September 30,
	2011					2010
	(Unaudited)					(Unaudited)
Largest customers	Amount of sales		% of total sales			Amount of sales		% of total sales
Customer A	$	1,944,162		21.2	%	$	3,129,653		23.5	%
Customer B	$	1,799,954		19.6	%	$	3,564,142		26.8	%
Customer C	$	1,691,300		18.4	%	$	2,589,105		19.5	%

	Three months ended September 30,
	2011					2010
	(Unaudited)					(Unaudited)
Largest customers	Amount of sales		% of total sales			Amount of sales		% of total sales
Customer A	$	345,603		21.3	%	$	1,030,146		17.5	%
Customer B	$	209,947		12.9	%	$	1,800,291		29.9	%
Customer C	$	346,300		21.3	%	$	1,290,480		21.5	%

The following table summarizes accounts receivable outstanding from major customers (each 10% or more of revenues):


	September 30, 2011					December 31, 2010
	(Unaudited)
Largest customers	Accounts receivable		% of total accounts receivable balance			Accounts receivable		% of total accounts receivable balance
Customer A	$	868,354		28.5	%	$	3,492,095		34.6	%
Customer B	$	1,130,938		37.1	%	$	3,367,962		33.4	%
Customer C	$	1,017,907		33.4	%	$	3,110,514		30.8	%

c. Major Suppliers

The table following summarizes purchases from major suppliers (each 10% or more of purchases):

	Nine months ended September 30,
	2011					2010
	(Unaudited)					(Unaudited)
Largest suppliers	Amount of purchase		% of total purchases			Amount of purchase		% of total purchases
Supplier A	$	2,194,475		48.3	%	$	3,178,864		51.4	%
Supplier B	$	1,970,360		43.4	%	$	2,756,003		44.6	%

	Three months ended September 30,
	2011					2010
	(Unaudited)					(Unaudited)
Largest suppliers	Amount of purchase		% of total purchases			Amount of purchase		% of total purchases
Supplier A	$	370,668		47.7	%	$	1,556,734		55.0	%
Supplier B	$	329,580		42.4	%	$	1,150,166		40.7	%

Accounts payable of top suppliers balance is $0 as of September 30, 2011 and December 31, 2010 and advance to above top suppliers balance is $318,848 as of September 30, 2011 and $0 as of December 31, 2010.

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.

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 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, 2010.

Business Overview

We manufacture and sell starch-based biodegradable and disposable food trays, containers, tableware and packaging materials. Our starch-based material is a substitute to conventional petroleum-based plastic and paper materials used to make food trays, containers, tableware and packaging products. We produce the starch-based material for our products using a proprietary manufacturing method which we refer to as dry-powder blending and we believe this method reduces our processing time and costs, as compared to conventional liquid solvents methods. We believe that our products are competitively priced as compared to petroleum-based plastic food containers and paper food containers in China. We market our products through our internal marketing and distribution personnel, currently located at our new corporate office in Harbin, China, as well as through third-party distributors. Beginning in January 2010, we began selling our products to a customer in Italy and a customer from Dubai in May 2011. We attempt to improve our products and production processes through our internal research and development personnel with assistance from personnel in our production department.

Our starch-based material is potentially a substitute for the oil-based plastics and papers used in a wide variety of products. The Company’s starch-based products are an alternative to conventional petroleum-based plastic polymers such as polypropylene “PP” and polystyrene “PS” which are widely used to produce disposable take-away containers, disposable cups, plates, trays and cutlery. We currently manufacture and sell disposable food trays, containers, tableware and packaging materials and we are actively researching the introduction of additional product lines. During 2010 we developed food trays to hold frozen dumplings, which we produce in various sizes, including food containers with height of 8 cm and width of A4 paper size and a starch-based cup which we produce in sizes up to 17 cm tall. In addition, during 2010 we also designed dual purpose, customized biodegradable and disposable tableware products for operational personal in the Railway Bureau of Harbin, potentially one of our major customers.

We manufacture and sell customized starch-based biodegradable disposal tableware to retail consumers via supermarket chain operators, and customized food packaging products to frozen food manufacturers and railway bureaus in China. We also manufacture and sell food and beverage containers and utensils made from our starch-based biodegradable material, including cups, plates and bowls to our distributors. Within the area of food and beverage containers and utensils, we produce a “Enjoy Dinner without Dish Washing” and set of “Four-pieces disposable tableware” series, which is a traveling, hotel and restaurant, 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, a proprietary water-free production process in the production of the biodegradable, starch-based material used to manufacture our 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 materials. And because of fossil fuel’s detrimental impact on the environment and in order to reduce the deposit of solid waste and plastics in the environment, we believe that there is a growing trend for government incentives and restrictions favoring the use of alternatives to products made from oil-based plastics and paper materials. The Chinese government has deemed environmental protection an important national interest, and since 2001 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. For example, in 2001 the PRC’s State Economic and Trade Commission announced a ban on production and use of disposable expanded plastic food containers throughout China; in 2007, the PRC’s General Office of the State Council announced a ban on the production, sale and use of plastic shopping bags thinner than 0.025 millimeters; effective June 1, 2008, under the PRC’s State Council Decree, it prohibited retailers from providing free plastic bags to customers; and on June 1, 2009, the PRC Food Safety Law (which also applies to food packaging materials and food containers) established an enhanced monitoring and supervision system, a product-recall system and a set of national safety standards. The Food Safety Law will apply stricter tests on raw materials and higher control over the manufacturing processes of foods and food packaging materials.

Our goal is to provide products that address the opportunities created by these developments. Because our products are made from sustainable resources, renewable ingredients and are biodegradable, we believe they are environment 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 biodegradable plastic replacement products.

Possible Future Products

We believe our starch-based material may be suited for additional uses and we are actively considering the introduction of additional product lines including:

●

Trash bags and shopping bags. We believe our starch-based material would be an alternative to conventional plastic polymers such as high density polyethylene “HDPE” and low density polyethylene “LDPE” which widely used to produce trash bags and shopping bags. Use of our material in these products will help reduce the use of non-biodegradable plastic polymers and landfill impact attributable to the disposal of petroleum and petroleum-based plastics.

●

Packaging materials. We are evaluating the use of our starch-based material as an alternative to plastic polymer such as low density polyethylene (“LDPE”) which is widely used for various packaging products. We have produced and used this starch-based material as packaging material for our products sold to a customer in Italy.

If we determine that the market opportunities exist for us to expand our business through introduction of either or both of these new products, we may consider acquiring or constructing an additional production facility, either in the area of the city of Harbin or in other areas of China near large consumer markets and with good access to key raw materials such as corn starch. In addition, we may consider acquisitions of businesses with complementary product lines or in related industries. Either of these strategies are likely to require that we obtain substantial additional amounts of financial resources, and there is no assurance that adequate additional capital would be available to us for these or any other purposes on satisfactory terms if at all.

Third Quarter Financial Performance Highlights

Due to decreased demand from our major distributors as a result of selling price renegotiation process and the overall economic uncertainties in the global economy, credit tightening in China and under current circumstances of rising raw material prices and labor costs, the demand for our products in third quarter of 2011 decreased as compared to first and second quarter of 2011 as well as comparable quarter in 2010. Currently, we are focusing our efforts on streamlining the Company’s operations and enhancing efficiency at our new production facility in Harbin. The new production facility in Harbin Economic and Technological Development zone has commenced production in March 2011 and we have consolidated the existing manufacturing facility from other location to this location. We believe that our manufacturing efficiency, quality and productivity will be enhanced dramatically to a higher competitive level.

We believe that the starch-based biodegradable, disposable and compostable materials industry in China is still in the process of 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 sales of our products.

The following are some financial highlights for the third quarter of 2011:

●	Net Sales – Net sales were $1.6 million for the third quarter of 2011, a decrease of 73.0% from the comparable quarter of 2010, due to tonnage sale decrease by 77.9% offset with average selling price in RMB term increase by 15.9%.

●

Gross Margin – Gross margin was 16.2% for the third quarter of 2011, as compared to 45.6% for the comparable quarter of 2010, due to increase in overall production costs by 78.6% in local currency term. The increase mainly caused by increase in raw materials prices, utilities and packaging costs, and more importantly coupled with higher average costs per ton for fixed overhead such as depreciation charges for plant and equipment, amortization costs for technology and patent right due to lower tonnages produced. Our increased average selling price during third quarter of 2011 reduced the impact of the increase in production costs so that the costs of goods sold percentage increased by 54.0% from 54.4% in the three months ended September 30, 2010 to 83.8% in the three months ended September 30, 2011.

●	Loss from operations – Loss from operations was $6.0 million for the third quarter of 2011, a decrease of 368.1% from income from operations of $2.3 million for the comparable quarter of 2010.

●	Net Loss – Net loss was $6.0 million for the third quarter of 2011, a decrease of 409.5% from net income of $1.9 million of the comparable quarter of 2010.

Results of Operations for the Three Months Ended September 30, 2011 and 2010

The following table presents selected items in our consolidated statements of operations for the three months ended September 30, 2011 and 2010.

		Three Months Ended September 30,
	2011					2010
	$			% of Sales		$		% of Sales
Net Sales		1,622,694		100.0%		6,011,160		100.0%
Cost of sales		1,360,129		83.8%		3,267,745		54.4%
Gross Profit		262,565		16.2%		2,743,415		45.6%
Operating Expenses		6,268,141		386.3%		503,417		8.4%
(Loss) Income from Operations		(6,005,576	)	370.1%		2,239,998		37.3%
Other Income (Expenses), net		6,166		0.3%		(1,538	)	(0.0%	)
Income tax expense		32,471		2.0%		289,826		4.8%
Net (Loss) Income		(6,031,881	)	(371.7%	)	1,948,634		32.4%

Net Sales Net sales were $1.62 million for the three months ended September 30, 2011 compared to $6.01 million for the comparable period of 2010, a decrease of $4.39 million or 73.0%. The decrease in net sales resulted from a combination of decrease in demand from our major distributors and slow development of a new customer base. We believe that the decrease was a result of the selling price increase negotiation process with our major distributors, who withheld orders due to the current steep hike in raw materials prices, especially corn starch, which we are attempting to pass along in part to our customers. We believe that there is 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 and internationally. We will 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 via major advertisement campaign in selected television media in the area of Northeast and Shandong province in China as well as developing new biodegradable products. For the three months ended September 30, 2011, the volume of our products sold decreased by 77.9% and our average selling price increased by 15.9% in local currency term as compared to the comparable period in 2010.

Cost of Sales and Gross Profit Margin Cost of sales for the three months ended September 30, 2011 was $1.36 million, compared to $3.27 million for the comparable period of 2010, a decrease of $1.91 million or 58.4%. Gross profit margin was 16.2% for the three months ended September 30, 2011 and 45.6% for the comparable period of 2010. The 29.4% decline in gross profit margin during the third quarter of 2011 compared with the comparable period in 2010 was due to increased in overall production costs by 78.6% in local currency term, which was mainly caused by increases in corn starch price, the main ingredient in our products, coupled with higher average costs per ton for fixed overhead such as depreciation charges for plant and equipment as well as amortization costs for technology and patent right due to lower tonnages produced in 2011 as compared to 2010.

Operating Expenses Operating expenses (which consist of selling expenses and general and administrative expenses) were $6.27 million for the three months ended September 30, 2011, compared to $0.50 million for the comparable period of 2010, an increase of $5.76 million or 1145.1%. Selling expenses were relatively stable at approximately $0.05 million for the three months ended September 30, 2011, compared to $0.05 million for the comparable period of 2010. General and administrative expenses were $6.22 million for the three months ended September 30, 2011, compared to $0.46 million for the comparable period of 2010, an increase of approximately $5.76 million or 1262.8%. The increase was primarily due to increase in impairment loss of $5.82 million from the Company’s land use right and building, increase in stock based compensation of $0.07 million and net loss from leasing our of the Company’s unused land use right. Offsetting by the decreases in Zhonghao Bio start-up costs of $0.01 million and corporate related professional fees and travelling costs of $0.18 million in the third quarter of 2011.

Other Income (Expense) Total other income were $0.006 million for the three months ended September 30, 2011, compared to total other expenses of $0.002 million for the comparable period of 2010, an increase of income of $0.008 million, or 500.9%. The increase was primarily due to increase in interest income for the three months ended September 30, 2011as compared to September 30, 2010.

Net (Loss) Income Our net loss was $6.03 million for the three months ended September 30, 2011 compared to net income of $1.95 million for the same period of 2010, a decrease of $7.98 million or 409.5%. Net (loss) income as percentage to revenue was 371.7% for the third quarter of 2011 compared to 32.4% in the same period of 2010. This decrease in net income and net income margin was primarily due to impairment loss from the Company land use right and building and decreased revenue and gross profit margin in 2011, as compared to corresponding period in 2010.

Results of Operations for the Nine Months Ended September 30, 2011 and 2010

The following table presents selected items in our consolidated statements of operations for the nine months ended September 30, 2011 and 2010.

		Nine Months Ended September 30,
	2011					2010
	$			% of Sales		$		% of Sales
Net Sales		9,167,128		100.0%		13,294,342		100.0%
Cost of sales		6,072,627		66.2%		7,183,850		54.0%
Gross Profit		3,094,501		33.8%		6,110,492		46.0%
Operating Expenses		7,586,435		82.8%		1,463,236		11.0%
(Loss) Income from Operations		(4,491,934	)	(49.0%	)	4,647,256		35.0%
Other Income (Expenses), net		10,289		0.1%		(435,759	)	(3.3%)
Income tax expense		289,127		3.2%		564,804		4.2%
Net (Loss) Income		(4,770,772	)	(52.0%	)	3,646,693		27.4%

Net Sales - Net sales decreased $4.13 million or 31.0% to $9.17 million for the nine months ended September 30, 2011 from $13.29 million for the comparable period in 2010. The decrease was mainly attributable to the decreased sales of our products which resulted from decreased demand from our existing customers as well as new customers. We believe that the decrease was a result of the selling price increase negotiation process with our major distributors, who withheld orders due to the current steep hike in raw materials prices, especially corn starch, which we are attempting to pass along in part to our customers. For the nine months ended September 30, 2011, the volume of our products sold decreased by 35.4% and our average selling price increased by 1.9% in local currency term as compared to the comparable period in 2010.

Cost of Sales - Cost of sales decreased $1.11 million or 15.5% to $6.07 million for the nine months ended September 30, 2011 from $7.18 million for the comparable period in 2010. This decrease was generally in line with the decrease in our revenues and as a percentage of revenues, the cost of revenues increased to 66.2% during the nine months ended September 30, 2011 from 54.0% in the comparable period in 2010.

Gross Profit - Gross profit decreased $3.02 million or 49.4% to $3.09 million for the nine months ended September 30, 2011 from $6.11 million for the comparable period in 2010. Gross profit as percentage of revenues was 33.8% for the nine months ended September 30, 2011, a decrease of 12.2% from 46.0% during the comparable period in 2010. The decline in gross profit margin during the nine months ended September 30, 2011 compared with the comparable period in 2010 was due to increased in overall production costs by 24.9% in local currency term, which was mainly caused by increases in corn starch price, the main ingredient in our products, coupled with higher average costs per ton for fixed overhead such as depreciation charges for plant and equipment as well as amortization costs for technology and patent right due to lower tonnages produced in 2011 as compared to 2010.

Operating Expenses - Operating expenses including selling expenses and general and administrative expenses increased $6.12 million or 418.5% to $7.59 million for the nine months ended September 30, 2011 from $1.46 million during the comparable period in 2010. Although our revenues decreased during the nine months ended September 30, 2011, selling expenses were relatively stable at approximately $0.13 million for the nine months ended September 30, 2011 and $0.13 for the comparable period in 2010. General and administrative expenses were $7.46 million for the nine months ended September 30, 2011 as compared to $1.33 million for the comparable period in 2010, an increase of approximately $6.13 million or 461.3%. The increase was primarily resulted from impairment loss on land use right and building of $5.82 million, increases in Zhonghao start-up costs of $0.21 million and loss from rental of $0.17 million for the nine months ended September 30, 2011 offset by decrease in stock based compensation of $0.02 million.

Other Income (Expense) - Total other income were $0.01 million for the nine months ended September 30, 2011, compared to total other expenses of $0.44 million for the comparable period of 2010, an increase of income of $0.45 million, or 102.4%. The increase primarily resulted from interest income of $0.015 million for the nine months ended September 30, 2011 as compared to a loss on fixed assets disposal of $0.13 million, a loss of $0.29 million from long-term investment of Longjun and loss from rental of $0.09 million for the nine months ended September 30, 2010.

Net (Loss) Income Our net loss was $4.77 million for the nine months ended September 30, 2011 compared to net income of $3.65 million for the comparable period of 2010, a decrease of $8.42 million or 230.8%. Net loss as percentage to revenues was 52.0% for the first nine months of 2011 compared to net income as percentage to revenue of 27.4% in the comparable period of 2010. This decrease in net income and net income margin was primarily due to decrease in gross profit margin from 46.0% in September 30, 2010 to 33.8% in September 30, 2011, and more importantly coupled with increased in impairment loss from land use right and building of $5.8 million and start-up costs for Zhonghao of $0.24 million.

Liquidity and Capital Resources

Our operations were initially capitalized by the combination of cash contributed to CHFY and a manufacturing facility and intellectual property contributed by our stockholders prior to 2008. Since that time we have funded operations, including capital expenditures, primarily from cash generated by operations, by sales of our common stock in private placement transactions, by loans from third parties, and by loans from certain of our stockholders and management. We repaid approximately $0.1 million of loans to one of the stockholders for year ended December 31, 2010 and $1.0 million for year ended December 31, 2009; as a result, as of September 30, 2011, we owed approximately $0.2 million in related party debt. These loans are non-interest bearing, unsecured, and due on demand. Accordingly, we include them as current liabilities. We may make further repayments of these loans from time to time without interfering with the operation of our business.

As of September 30, 2011, we had working capital of $24.9 million. The working capital includes cash and equivalents of $21.0 million and net accounts receivable of $3.0 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, 2011 balance of receivables within next twelve months. The ratio of current assets to current liabilities was 7.5:1.

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, 2011 and 2010:

	Nine Months ended September 30, 2011			Nine Months ended September 30, 2010
	(Unaudited)			(Unaudited)
Cash provided by (used in):
Operating Activities	$	10,281,260		$	2,877,506
Investing Activities		(1,279,626	)		(7,757,426	)
Financing Activities		(761,987	)		8,110,446

We incurred positive cash in-flow from our operations of $10.3 million for the nine months ended September 30, 2011. This was primarily attributable to a $7.7 million reduction in our accounts receivable balance, loss on impairment of land use right and building of $5.8 million and non-cash items adjustments for depreciation and amortization of $1.6 million offset by net loss of $4.8 million and outflow from changes in operating assets and liabilities. We incurred cash in-flow from our operations of $2.9 million for the nine months ended September 30, 2010. This was primarily attributable to our net income of $3.6 million, non-cash items adjustment for depreciation of plant and equipment and amortization of intangible assets of $1.1 million, loss on long-term investment and intangible assets of $0.4 million offset by outflow from changes in account receivables of $2.0 million and other current assets and liabilities.

During the nine months ended September 30, 2011, we had cash outflow of $1.3 million from investing activities. This was mainly attributable to the additional $0.9 million deposits for construction or the Company’s new manufacturing facility, which have a total contract value of $0.8 million or RMB5,200,000 and value of variation orders subject to agreement by both parties, $0.4 million cash paid to purchase property, plant and equipment for the Company’s new corporate office and manufacturing facility. In the first nine months of 2010, we advanced $0.3 million to suppliers of property and equipment and $7.6 million for purchase of property and equipment offset by $0.1 million of proceeds from disposal of fixed assets.

Under financing activities, we repaid advance from a third party of $0.8 million to a third party contractor for nine months ended September 30, 2011 and we had cash inflows from financing activities of $8.1 million for the nine months ended September 30, 2010, mainly due to proceeds of $4.3 million and $2.8 million from the issuance of 5.05 million and 1.87 million shares of common stock at $0.90 per share and $1.5 per share in connection with the January 2010 Private Placement and June 2010 Private Placement, respectively, and $1.0 million of construction deposit received from third party to secure satisfactory completion of construction of the new manufacturing facility property in Harbin Economic Technological Development Zone.

We intended to apply $2 million to $3 million of our cash resources to further development of our new facility, in order to increase production there. The remainder of cash resources will be utilized for marketing and brand building, and for general and corporate purposes. As part of our marketing strategy in 2011, we intend to begin an advertising campaign in selected television media in the area of Northeast China and in Shandong province of China. We expect that total expenditures for this media campaign may total approximately RMB20 million (US$3.1 million) in 2011. In 2011 we have made investments in labor, raw materials and supplies to support the production at the new facility; in addition, we anticipate additional investments in labor, raw materials and supplies to support higher levels of production at the new facility as we continue to expand our sales in China and internationally. We may recover substantially all of the investments necessary for production at the new facility after 2011 in the normal cycle of business through collection of receivables generated by the sale of the finished products from the new facility. In addition, in the event that our patent application is granted, we will be required to pay approximately RMB10 million (US$1.5 million) to the sellers of the underlying technology; and in the event we decide to purchase the technology underlying the other patent subject to the supplemental agreement described elsewhere in this interim report under Note 8 – Technology and patent right, we will be required to pay approximately RMB15 million (US$2.3 million). We believe our current resources are sufficient to fund ongoing operations as well as our currently projected cash need for the foreseeable future.

We believe that our present capacity will adequately serve the demand we currently project for our products during 2011 and beyond. However, in the event we determine to expand our product lines to include grocery and shopping bags, as discussed elsewhere in this report, or other products, we anticipate that additional production capacity would be required. In that case, we would need to purchase or construct additional facilities, and we anticipate that we would likely need additional financial resources for such purpose. There is no assurance that we would be able to secure such additional financial resources on terms that would be acceptable to us, if at all.

We have never declared or paid any cash dividends on shares of our common stock. We intend to retain any future earnings, if any, to support operations and to finance the growth and development of our business. Therefore, we do not expect to pay any dividends on our common stock for the foreseeable future. The payment of dividends will be contingent upon future revenues and earnings, if any, capital requirements and overall financial conditions. The payment of any future dividends will be within the discretion of our Board of Directors.

Impact of Accounting Pronouncements

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 4. CONTROLS AND PROCEDURES.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

As of September 30, 2011, management of the Company, with the participation of the Company’s Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), evaluated the effectiveness of our “disclosure controls and procedures,” as defined in Rule 13a-15(e) under the Exchange Act. Disclosure controls and procedures are defined as the controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act are accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, these officers concluded that, as of September 30, 2011, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

During the first quarter of 2011 we implemented certain improvements in our Company’s internal control over financial reporting. These improvements were in response to the conclusion by our Certifying Officers that, as of June 30 and September 30, 2010, there existed a material weakness 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 described in more detail in our Form 10-Q/A for June 30, 2010 and September 30, 2010, each of which was filed with the SEC on March 23, 2011, in response to comments raised by the SEC Staff, we determined that an error was contained in the initial filing of the reports on Form 10-Q as of and for the quarterly periods ended June 30 and September 30, 2010. 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 believe we have remediated the material weakness identified above. Because the 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 employee within our accounting department has helped to remediate this material weakness. The CFO, 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.

During the quarter ended September 30, 2011 there was no change to the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors included in the Annual Report on Form 10-K for the year ended December 31, 2010.

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

Sales of Unregistered Securities

None.

ITEM 6. EXHIBITS.

Exhibit Number	Description of Exhibit

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).
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.
101.INS*	XBRL Instance
101.SCH*	XBRL Schema
101.CAL*	XBRL Calculation
101.DEF*	XBRL Definition
101.LAB*	XBRL Label
101.PRE*	XBRL Presentation

* Filed/furnished herewith.

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: November 21, 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)

Attached files

CHINA GREEN MATERIAL TECHNOLOGIES, INC. Reports

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