CHINA GREEN MATERCOM (GREY:CAGM)

Due to 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 second quarter of 2011 decreased as compared to first quarter of 2011 as well as comparable quarter in 2010. Besides, due to the start up costs for Zhonghao Bio, the operating costs in second quarter increase from $0.51 million for three months ended March 31, 2011 to $0.64 million for three months ended June 30, 2011. Currently, we are focusing the efforts on streamlining the Company operations and enhancing efficiency at the 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 successfully 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.

• Q1 2011 revenues increased to $4.5 million, 61.4% over the comparable quarter of 2010
• Q1 2011 net income increased 112.3% to $0.9 million
• Q1 2011 EPS increased to $0.04 from $0.02 in Q1 2010
• Q1 2011 cash flow from operations of $2.4 million

"We are focused on expanding our capacity to meet the robust demand for our products. During the first quarter of 2011, our new state-of-the-art facility which is located in the Harbin Economic and Technological Development Zone has commenced production. The new facility allows us to operate more efficiently and will provide the ability to fill larger orders from our growing base of domestic and international customers. All in all, I am extremely excited about the future growth outlook for China Green Materials," concluded Mr. Su.  

Full Year 2010 Results:

• Total revenues increased 49.5% to $20.0 million for the year ended December 31, 2010 from $13.4 million in the year ended December 31, 2009.
• Gross profit increased 38.3% to $8.8 million for the year ended December 31, 2010 compared to $6.4 million in the year ended December 31, 2009
• Adjusted net income (non-GAAP) was $5.8 million, an increase of 26.5% over 2009 adjusted net income
• Adjusted net income per diluted share (non-GAAP) was $0.24 vs. $0.25.

GeoTeam Note:   2010 vs. 2009 Adjusted fourth quarter EPS was $0.07 vs. $0.06.

Mr. Su Zhonghao, Chief Executive Officer of the Company, declared, "We experienced further acceleration in our revenue growth to 49.5% for the year ended December 31, 2010. This strong momentum reflects growing demand from new and existing customers in China, particularly for the product categories of disposable cups, containers and plates. As we continue to introduce new branded products, which are stronger and less expensive than those from our competitors, we are poised to capture additional market share in the rapidly growing RMB 2.5 billion biodegradable products market in China."

During 2011 we have employed, or intend to employ, our cash resources for marketing and brand building, for completion of our new production facility, for increasing production at the new facility, and for general and corporate purposes. As part of our marketing strategy, during 2011 we intend to begin an advertising campaign in selected mass media in the area of Northeast China and in Shandong province of China, including magazines, newspapers, television and radio. We expect that total expenditures for this media campaign may total approximately RMB20 million (US$3.0 million) during 2011. During the first quarter of 2011 we made additional expenditures of approximately US$1.5 million to acquire the remaining necessary high voltage power transformers and substation equipment needed to bring our new production facility on line. During 2011 we have made investments in labor, raw materials and supplies to support the production at this 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 during 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 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 annual report under Item 1. “Business – Our Technology.” 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 annual 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.

HARBIN, China, April 7, 2011 /PRNewswire-Asia/ -- China Green Material Technologies, Inc. (CAGM), a Chinese leader in developing and manufacturing starch-based biodegradable containers, tableware and packaging materials, today announced that it recently began production at its new facility located in the Harbin Economic and Technological Development Zone ofHeilongjiang Province.  The new facility will enable the Company to:

• Increase its capacity of finished products, ultimately by more than 100%, from the current 9,000 tons per year to 20,000 tons per year;
• Manufacture products in a wider variety of sizes;
• Further automate its production processes and systems, with a resulting savings in per-unit labor costs.
• Reduce the amount of waste from the manufacturing process through an increase in the percentage of finished products that are "qualified products."

In the new facility, the Company will begin using a double layer sheet co-extrusion machine, which the Company recently developed in house, to manufacture bi-color products to increase the diversity of its finished products.

Mr. Su Zhonghao, Chief Executive Officer of China Green Material Technologies, stated, "With the new facility coming online, the quality of our products will be greatly improved and will meet the requirements of potential customers outside China. It will add to the overall competitiveness and brand recognition of the Company in the international market.  As a result, we will attempt to address more opportunities worldwide and seek additional export sales accordingly."

 March 23, 2011, CAGM restated its financial statements as of and for the quarterly periods ended June 30, 2010 and September 30, 2010. Each of those restatements was filed on a Form 10-Q/A submitted to the Securities and Exchange Commission (the “S.E.C.”) on March 23, 2011. Those quarterly financial statements were restated in response to an S.E.C. Staff comment relating to the Registrant’s accounting for warrants issued by the Registrant during April and June 2010. Because of the restatements, the Registrant needs additional time to ensure that the principles applied in the restatements are consistently applied in the audited financial statements to be included in the annual report on Form 10-K for the fiscal year ended December 31, 2010. As a result, the Registrant is unable, without unreasonable effort and expense, to file its Annual Report on Form 10-K for the fiscal year ended December 31, 2010 by the prescribed filing date. The Registrant intends to file its Annual Report on Form 10-K for the fiscal year ended December 31, 2010 prior to April 15, 2011

CAGM anticipates that it will report:
 

• Revenues of approximately $20.0 million for the fiscal year ended December 31, 2010 million as compared to revenues of approximately $13.4 million for the fiscal year ended December 31, 2009, an increase of approximately $6.6 million or 49.5%.   The anticipated increase in revenues would be attributable to increased sales to existing customers as well as sales to new customers.
   
• Costs of goods sold of approximately $11.3 million for the fiscal year ended December 31, 2010 million as compared to costs of goods sold of approximately $7.1 million for the fiscal year ended December 31, 2009, an increase of approximately $4.2 million or 59.6%.
   
• Gross profit of approximately $8.8 million for the fiscal year ended December 31, 2010 million as compared to gross margin of approximately $6.4 million for the fiscal year ended December 31, 2009, an increase of approximately $2.4 million or 38.3%.  This anticipated 2010 gross profit would reflect a decline in the gross margin percentage from approximately 47.4% to approximately 43.9%, resulting from increased raw material prices and other production costs.
   
• Net income of approximately $5.2 million for the fiscal year ended December 31, 2010 million as compared to net income of approximately $4.2 million for the fiscal year ended December 31, 2009, an increase of approximately $1.1 million or approximately 26.2%.  This anticipated 2010 net income would represent 26.2% of 2010 revenues, as compared to 2009 net income which represented 30.1% of 2009 revenues.  This anticipated decline in net income as a percentage of revenues would be attributable principally to increased raw material prices and other production costs, increased general and administrative expenses, increased stock-based compensation expense, and increases in certain other expenses.
   
• Net income per common share for the fiscal year ended December 31, 2010 million of $0.21 as compared to $0.22 for the fiscal year ended December 31, 2009, a decrease of approximately 5%.  Weighted average common shares outstanding were 24.5 million (basic) and 24.6 million (diluted) for 2010 as compared to 18.7 (basic and diluted) for 2009

HARBIN, China, March 21, 2011 /PRNewswire-Asia-FirstCall/ -- China Green Material Technologies, Inc.  today announced that it will restate its previously issued unaudited financial statements for the quarters ended June 30, 2010 and September 30, 2010 included in the Company's Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission on August 16, 2010 and November 9, 2010, respectively, due to errors identified in these financial statements. This decision was made by the company's board of directors, upon the recommendation of the audit committee and in consultation with management. As a result of this decision, investors should no longer rely upon the Company's previously issued financial statements for these periods and any related earnings releases or other communications.

The financial statement errors related to the manner in which the Company accounted for warrants issued in April and July 2010 providing for the right to purchase an aggregate of 457,500 shares of the Company's common stock at $0.90 per share.  Each of the warrants includes an anti-dilution provision that would adjust the warrant exercise price if the Company issues or sells any shares of common stock or securities convertible into common stock for a consideration per share of common stock less than the exercise price of the warrants.  The errors were discovered by management as a result of a Securities and Exchange Commission comment letter received by Company after an SEC Staff review of certain Company filings.

Third Quarter 2010:

• Revenues increased 43.6% to $6.0 million from $4.2 million in the third quarter of 2009. 

Mr. Su Zhonghao, Chief Executive Officer of the Company, declared, "We experienced further acceleration in our revenue growth which increased from 28.4% during the first half of this year to 43.6% in the third quarter. This strong momentum reflects growing demand from new and existing customers in China, particularly for the product categories of disposable cups, disposable containers and disposable plates. As we continue to introduce new branded products, which are stronger and less expensive than those from our competitors, while expanding our distribution capabilities to make our products available to more Chinese consumers, we are poised to capture additional market share in the rapidly growing RMB2.5 billion biodegradable products market in China." (Source: Degradable Plastics Committee of China Plastics Processing Industry Association)

• Gross profit in the third quarter of 2010 increased 35% to $2.7 million compared to $2.0 millionin the third quarter of last year, while gross margin was 45.6% versus 48.6% a year ago.  

• Income from operations increased 13.9% to $2.0 million from $1.8 million in the year ago period. Operating margin was 33.5% in the 2010 period versus 42.2% a year ago. Excluding the stock compensation, operating margin was 37.3%, down 4.9% compared to the same period last year.  

• Net income in the third quarter of 2010 was$1.7 compared to $1.1 millionin the third quarter of 2009.  

• Adjusted net income (non-GAAP) was $1.9 million, an increase of 22.4% versus a year ago adjusted net income.  

• Net income per diluted share was$0.07 in the third quarter of 2010 versus net income per diluted share of $0.06 in the third quarter of 2009 based on weighted average shares of 25.9 million and 18.7 million, respectively.

• Adjusted net income per diluted share (non-GAAP) was $0.07 in the third quarter of 2010 vs. $0.08  in the third quarter of 2009.

"We are focused on expanding our capacity to meet the robust demand for our products. During the third quarter, we completed construction of our new state-of-the-art facility which is located in Harbin Economic and Technological Development Zone. We completed the buildout on schedule and once fully utilized, will enable us to produce 11,000 tons of finished products each year, which expands our currently capacity by 122%. We will scale into this during the coming year as we grow our revenues and gain additional market share. More specifically, we expect to be operating at 13,000 tons of capacity by the end of this year and scaling to full capacity at 20,000 tons by the end of 2011. The new facility allows us to operate more efficiently and will provide the ability to fill larger orders from our growing base of domestic and international customers. All in all, I am extremely excited about the future growth outlook for China Green Materials," concluded Mr. Su.  

Investor Presentation for Rodman & Renshaw Annual Global Investment Conference to be held September 12-15, 2010 in New York City.

Second quarter 2010:

• Revenues increased 26.6% to $4.5 million compared to $3.5 million in the second quarter of 2009. The results reflect growing demand for the Company's products from existing customers, as well as the successful penetration of new customers and new geographic markets.
  
• Net income in the second quarter of 2010 was $1.0 compared to $1.3 million in the second quarter of 2009.
  
• Adjusted net income (non-GAAP) was $1.5 million, an increase of 24.5% versus a year ago.
  
• Net income per diluted share was $0.04 in the second quarter of 2010 versus net income per diluted share of $0.07 in the second quarter of 2009 based on weighted average shares of 24.3 million and 18.7 million, respectively. The increase in share count reflects the issuance of 5.0 million and 1.9 million common shares in private placements completed in the first and second quarters of 2010, respectively. Adjusted net income per diluted share (non-GAAP) was $0.06 in the second quarter of 2010.

Mr. Su Zhonghao, Chief Executive Officer of China Green Material Technologies, stated, "The 28% increase in revenues in the first half of 2010 reflects strong demand from new and existing customers in both China and abroad. We are beginning to see the benefits from the investments we have made to acquire intellectual properties, in addition to the expansion of our sales and marketing team which is supporting a broader distribution footprint. With a healthy pipeline of new products and the ability to produce customer orders, we are excited about our ability to become a stronger global competitor in the large and growing biodegradable products market."

"We continue to leverage our intellectual property assets and low-cost manufacturing advantage to develop more products and further expand to new geographies," continued Mr. Su Zhonghao. "We are on track to complete the construction of our new state-of-art manufacturing facility in Harbin, which will not only increase our capacity by 45% to 13,000 tons per annum, but should also improve gross margin across all product lines."

Mr. Su Zhonghao concluded, "Looking ahead, we are focused on two key areas of growth: 1) expanding our presence in China and entering key overseas markets, including the U.S., Italy, France, the U.K., Israel, Korea and Japan; and 2) developing new product categories such as disposable trash bags, shopping bags and medical products. We are especially excited about the long-term opportunity for biodegradable packaging, which is estimated by the International Association of Packaging Research Institutes to surpass $60 billion in total sales during 2010."

We are removing China Green Material Tech. from the GeoSpecial list. Yesterday's news regarding the consummation of a private placement...

On June 25, 2010, China Green Material Technologies, Inc. (the “Company”) entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with certain investor (the “Purchaser”) relating to the issuance and sale of an aggregate of 1,866,666 shares of the Company’s common stock, par value $0.001 per share (the “Shares”), in a private placement transaction (the “Private Placement”). The aggregate purchase price for the Shares was $2,800,000 (the “Aggregate Purchase Price”). 

 ...magnifies the dilution hurdle we discussed in our June 3, 2010 update.  We will revisit CAGM if the company proves it can work through dilution as it has in the past.

We view this event as extremely detrimental to establishing shareholder confidence.

Case in point: Excerpt from the 2010 first quarter 10Q:

"As of March 31, 2010, we had working capital of $18.17 million. The ratio of current assets to current liabilities was 9.1:1. The working capital includes cash and equivalents of $13.84 million and net accounts receivable of $5.71 million. Most of our receivables are owed to us by our primary customers for products purchased from us, and we consider the receivables as collectible in the ordinary course. We expect to collect substantially all of the March 31, 2010 balance of receivables during 2010."

"We believe that our current resources are sufficient to fund ongoing operations for the foreseeable future."

Added to the GeoSpecial list on November 17, 2009 @ $1.55

Catalyst: Strong margins; strong balance sheet; favorable industry; stock was selling near book; history of profitability.

Peak performance: Reached a high of $2.99 on December 28, 2009
Current Price: $2.28

Current road block: Dilution; Capacity expansion won’t be a factor until second half of the year which may hurt short-term EPS growth.

Remains on the GeoSpecial list.  The company remains bullish. CAGM has a good history of working through dilution.

"We believe there is a significant market opportunity for China Green given our early mover advantage, intellectual property, expert R&D team and low-cost manufacturing process," continued Mr. Su Zhonghao. "In 2010 we plan to significantly expand our production capacity, with a new facility expected to come on line in the second half of this year. We anticipate the additional capacity, coupled with our targeted sales and marketing programs, will result in continued increases in revenues. Additionally, increased efficiency from the new manufacturing facility should enable us to expand our gross margins across all product lines."

Mr. Su Zhonghao concluded, "Looking ahead, we are focusing on two key areas of growth:

1) further expanding our presence in China and entering key overseas markets, including the U.S., Italy, France, the U.K., Israel, Korea and Japan

2) developing new product categories such as trash bags, shopping bags and medical products. Importantly, we have a dedicated and capable team and the financial resources to execute our plans."

see release 

GeoSpecial China Green Mat Tech reported its 2009 third quarter results via a 10Q filing. No press release has been issued.  At first glance EPS growth appears to be negative.  However, after adjusting earnings for one time gains/losses and applying equal tax rates one, can see that CAGM actually experienced respectable EPS growth.

The company has not issued a press release, so we are not sure investors will see through the GAAP numbers. Furthermore, we could not find any forward looking comments.  Regardless, CAGM is still selling near its book value per share of $1.56, prompting us to keep the stock coded as a GeoSpecial.

^a Non-GAAP EPS Figures exclude certain non-operating gains and losses as well as certain non-cash items. Non-GAAP information should not be viewed in isolation or as a substitute for reported, or GAAP information . For a more complete explanation of the company's definition of non-GAAP please refer to its financial press releases. The GeoTeam® non-GAAP figures may, from time to time,  differ from company supplied figures.

^b For valuation purposes, The GeoTeam® prefers to adjust EPS to reflect a standard United Chinese tax rate of 25%.(Previously we had used a U.S. tax rate of 36%)

The GeoTeam® is somewhat intrigued by the China Green Mat Tech  story. The stock is currently selling at its book value per share.  The Company:

• is profitable
• has 43% pre-tax margins
• has no long-term debt
• has virtually no short term loans
• sports a current ratio of 11.19:1 with $5.5 million in cash
• should benefit from the Chinese government's encouragement the use biodegradable materials. "Our starch-based biodegradable technology has been included in the “863 Spark Program” sponsored by the government."

So why is the stock receiving little attention from Wall Street?

For starters, after superb growth during the first nine months, the company could not maintain EPS growth during its 2008 fourth quarter as it was impacted by the global recession. Furthermore, on the surface China Green Mat's 2009 second quarter EPS growth appears unimpressive. 

Combine this with the fact that CAGM has not issued a press release since April 2009 and has a limited operation history (2006), it can be understood why the stock has been relatively dormant.

Lets take a look and see if we have yet another opportunity to capitalize on a "diamond in the rough."

We need to discount the financial performance of CAGM's 2008 fourth quarter. In retrospect, it is just impressive that the Company was able to remain profitable. On an apples to apples comparison, further inspection of the 2009 financials will actually reveal a second quarter 2009 EPS growth of 14.6%.  This has been gleaned from the fact at in 2008 China Green Mat paid no taxes compared to 15% so far in 2009.

There was also some account receivable verbiage in the 2008 10k that may have caused concern:

"In order to spur the development of our market, we have granted our primary customers extended payment terms on a portion of their purchases from us. We expect to collect at least half of the outstanding balance in the second quarter of year ended December 31, 2009.  As our business develops, we expect to obtain payment for our products on more common commercial terms, and do not expect that it will be necessary for us to delay payments to our creditors. "

We could not find references to the above commentary in China Green Mat's latest 10Q filing, leading us to believe this minor issue has been resolved:

"As a result, as of December 31, 2008, we owed $1,294,838 to certain members of our management and shareholders. These loans are non-interest bearing, unsecured, and due on demand. Accordingly, we recorded them as current liabilities. We do not expect to repay the loans until cash from our operations is sufficient to repay the loans without interfering with the growth of our business."

As of the second quarter 10Q these short-term loans have been significantly reduced.

Finally, although the CAGM has not issued a press release since April 2009, the commentary in the release was rather uplifting and encouraging:

"If investors deal with the economic downturn properly, it is even a good time to invest Investors can take in mind that the rapid development of China's environment-friendly industry is attracting more and more attention from the international investors."

CGMT's cornstarch biodegradable packaging products are doing an excellent job in the China market, and the Chinese government is determined to develop the environment industry. These developments will attract more and more international investors, especially American investors. CGMT is bound to be the representative in the green industry to reverse the global economic situation and lead the wave of the new economy.

It is a good time for CGMT to identify itself in the tough American market and to attract investors' attention based on its excellent performance in China and its fast-moving starch biodegradable consumer products."

The GeoTeam® feels that CAGM warrants a closer look based on its strong balance sheet, ability to maintain profitability and strong company inferences that the stock is undervalued. We still need to keep in mind that current EPS growth is still well below the GeoTeam®  preferred 30% minimum.

We will attempt to interview the company to inquire about:

• Investor relation goals
• Liquidity needs and growth as detailed in 2008 10K excerpt:

"Our current resources are sufficient to fund ongoing operations for the foreseeable future. However, for competitive reasons it is crucial that we establish a substantial market presence as rapidly as is economically reasonable. In addition, we are planning to develop an additional manufacturing facility which we estimate will increase our annual production capability from 20,000 tons to 50,000 tons. The projected cost of the new facility will be $10 million. In order to achieve these two goals we are seeking sources of capital either through the sale of equity or the issuance of debt instruments.

CHFY has an annual production capacity of 16,500 tons. Due to the limit in product finishing equipment, it only has an operating rate of 40%. In 2009, we plan to acquire production plants through financing in capital market to add two semi-finished production lines and five finished product lines. Through such acquisitions, our annual production capacity shall reach 50,000 tons with an output of $70 million (this price estimate is based on RMB 18,000 per ton)."

We need to find out how the company is addressing these matters. We did not see a reference to the above statement in the most recent 10Q.

• Per the 2008 10K Four customers accounted for 71% of sales