UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 Form
10-Q
 (Mark
One)
 
 þ
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For the
quarterly period ended September 30, 2009
 or
 
 o
              TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For the
transition period from __________________ to
__________________________
 
 Commission
file number: 000-53468
 CHINA
ARMCO METALS, INC
 (Exact
name of registrant as specified in its charter)
 
 Nevada
              26-0491904(State
      or other jurisdiction of
                incorporation
      or organization)
              (I.R.S.
      Employer Identification No.)
 
 One
      Waters Park Drive, Suite 98, San Mateo, CA
              94403(Address
      of principal executive offices)
              (Zip
      Code)
 
 (650)
212-7620
 (Registrant's
telephone number, including area code)
 
 Not
Applicable
 (Former
name, former address and former fiscal year, if changed since last
report)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes þ
  Noo
 
 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 (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes 
 o
      No   o
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
 
 Large
      accelerated filer
              o
              Accelerated
      filer
              oNon-accelerated
      filer
                (Do
      not check if smaller reporting company)
              o
              Smaller
      reporting company
              þ
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act) Yes o Noþ
 
 Indicated
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date. 10,104,449 shares of common stock are
issued and outstanding as of November 13, 2009.
 
 
 
 TABLE
OF CONTENTS
 
 Page
      No.PART I
      - FINANCIAL INFORMATIONItem
      1.
              Financial
      Statements.
              2Item
      2.
              Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations.
              21Item
      3.
              Quantitative
      and Qualitative Disclosures About Market Risk.
              28Item
      4T.
              Controls
      and Procedures.
              28PART II - OTHER
      INFORMATIONItem
      1.
              Legal
      Proceedings.
              29Item
      1A.
              Risk
      Factors.
              29Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds.
              29Item
      3.
              Defaults
      Upon Senior Securities.
              29Item
      4.
              Submission
      of Matters to a Vote of Security Holders.
              29Item
      5.
              Other
      Information.
              29Item
      6.
              Exhibits.
              30
  INDEX
OF CERTAIN DEFINED TERMS USED IN THIS REPORT
 
 When used
in this report the terms:
 
 –
              “China
      Armco Metals”, “we”, “us” or “our” refers to China Armco Metals, Inc., a
      Nevada corporation, and our subsidiaries,–
              “Armco”
      refers to Armco & Metawise (H.K), Ltd., a limited liability company
      established under the laws of Hong Kong.–
              “Armet”
      refers to Armet (Lianyungang) Renewable Resources Co., Ltd. (a/k/a Armet
      (Lianyungang) Scraps Co., Ltd.), a limited liability company established
      under the laws of the People’s Republic of China.–
              “Henan
      Armco” refers to Henan Armco & Metawise Trading Co., Ltd., a limited
      liability company established under the laws of the People’s Republic of
      China.–
              “Lianyungang
      Armco” refers to Armco (Lianyungang) Holdings, Ltd., a wholly-owned
      foreign enterprise and limited liability company established under the
      laws of the People’s Republic of
China.
 
  
  PART
1 - FINANCIAL INFORMATION
 
 
 Item
      1.
              Financial
      Statements.
 CHINA
ARMCO METALS, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 
 
 September
      30, 2009
              
              
              December
      31, 2008(Unaudited)ASSETSCURRENT
      ASSETS:Cash
              
              $
              4,715,817
              
              
              $
              3,253,533Pledged
      deposits
              
              
              506,621
              
              
              
              -Accounts
      receivable, net
              
              
              23,258,570
              
              
              
              16,722,307Due
      from related parties
              
              
              1,511,480
              
              
              
              -Inventories
              
              
              31,324,907
              
              
              
              197,402Advance
      on purchases
              
              
              1,854,974
              
              
              
              3,680,872Deposits
      on future construction
              
              
              2,768,161
              
              
              
              -Prepayments
      and other current assets
              
              
              4,287,776
              
              
              
              379,452Total
      Current Assets
              
              
              70,228,306
              
              
              
              24,233,566Property,
      plant and equipment
              
              
              10,439,559
              
              
              
              2,439,017Accumulated
      depreciation
              
              
              (115,324
              )
              
              
              (61,201
              )PROPERTY,
      PLANT AND EQUIPMENT, net
              
              
              10,324,235
              
              
              
              2,377,816Land
      use right
              
              
              2,173,433
              
              
              
              2,266,076Accumulated
      amortization
              
              
              (91,485
              )
              
              
              (57,174
              )LAND
      USE RIGHTS, net
              
              
              2,081,948
              
              
              
              2,208,902Total
      Assets
              
              $
              82,634,489
              
              
              $
              28,820,284LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIES:Loans
      payable
              
              $
              12,975,691
              
              
              $
              2,914,345Accounts
      payable
              
              
              37,797,179
              
              
              
              6,694,534Advances
      from stockholder
              
              
              48,969
              
              
              
              236,595Customer
      deposits
              
              
              2,072,547
              
              
              
              2,613,653Taxes
      payable
              
              
              1,930,296
              
              
              
              1,039,312Accrued
      expenses and other current liabilities
              
              
              2,552,650
              
              
              
              32,899Total
      Current Liabilities
              
              
              57,377,332
              
              
              
              13,531,338LONG-TERM
      DEBT
              
              
              7,312,507
              
              
              
              -Total
      Liabilities
              
              
              64,689,839
              
              
              
              13,531,338STOCKHOLDERS'
      EQUITY:Preferred stock, $0.001 par value, 1,000,000 shares authorized , none
      issued or outstanding
              
              
              -
              
              
              
              -Common
      stock, $0.001 par value, 74,000,000 shares authorized, 10,104,449 and
      10,092,449 shares issued and outstanding, respectively
              
              
              10,104
              
              
              
              10,092Additional paid-in capital
              
              
              6,978,076
              
              
              
              6,942,588Retained
      earnings
              
              
              10,604,800
              
              
              
              7,967,064Accumulated other comprehensive income
              
              
              351,670
              
              
              
              369,202Total
      Stockholders' Equity
              
              
              17,944,650
              
              
              
              15,288,946Total
      Liabilities and Stockholders' Equity
              
              $
              82,634,489
              
              
              $
              28,820,284
 
 See
accompanying notes to unaudited consolidated financial statements
  - 2
-
 
 CHINA
ARMCO METALS, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 (UNAUDITED)
 
 For
      the Three Months ended September 30
              
              
              For
      the Nine Months ended September 302009
              
              
              2008
              
              
              2009
              
              
              2008NET
      REVENUES
              
              $
              27,312,276
              
              
              $
              20,384,974
              
              
              $
              55,207,948
              
              
              $
              43,174,787COST
      OF GOODS SOLD
              
              
              26,279,225
              
              
              
              17,937,965
              
              
              
              49,542,143
              
              
              
              38,621,088GROSS
      PROFIT
              
              
              1,033,051
              
              
              
              2,447,009
              
              
              
              5,665,805
              
              
              
              4,553,699OPERATING
      EXPENSES:Selling
      expenses
              
              
              139,503
              
              
              
              61,387
              
              
              
              551,899
              
              
              
              92,900General
      and administrative expenses
              
              
              313,268
              
              
              
              282,729
              
              
              
              905,869
              
              
              
              624,170Total
      operating expenses
              
              
              452,771
              
              
              
              344,116
              
              
              
              1,457,768
              
              
              
              717,070OPERATING
      INCOME
              
              
              580,280
              
              
              
              2,102,893
              
              
              
              4,208,037
              
              
              
              3,836,629OTHER
      (INCOME) EXPENSE:Interest
      expense (income)
              
              
              56,727
              
              
              
              16,039
              
              
              
              148,865
              
              
              
              113,375Import
      and export agency income
              
              
              -
              
              
              
              (31,750
              )
              
              
              (52,335
              )
              
              
              -Gain
      from contracts termination
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,265,501
              )Loss
      on forward foreign currency contracts
              
              
              12,079
              
              
              
              -
              
              
              
              -
              
              
              
              19,739Other
      (income) expense
              
              
              236,181
              
              
              
              353,054
              
              
              
              333,353
              
              
              
              230,342Total
      other (income) expense
              
              
              304,987
              
              
              
              337,343
              
              
              
              429,883
              
              
              
              (902,045
              )INCOME
      OPERATIONS BEFORE INCOME TAXES
              
              
              275,293
              
              
              
              1,765,550
              
              
              
              3,778,154
              
              
              
              4,738,674INCOME
      TAXES
              
              
              1,140,343
              
              
              
              409,717
              
              
              
              1,140,418
              
              
              
              795,682NET
      (LOSS) INCOME
              
              
              (865,050
              )
              
              
              1,355,833
              
              
              
              2,637,736
              
              
              
              3,942,992OTHER
      COMPREHENSIVE INCOME:Foreign
      currency translation gain (loss)
              
              
              40,869
              
              
              
              183,363
              
              
              
              (17,532
              )
              
              
              497,236COMPREHENSIVE
      (LOSS) INCOME
              
              $
              (824,181
              )
              
              $
              1,539,196
              
              
              $
              2,620,205
              
              
              $
              4,440,228NET
      (LOSS) INCOME  PER COMMON SHARE:Total
      net income per common share -- basic and diluted
              
              $
              (0.09
              )
              
              $
              0.15
              
              
              $
              0.26
              
              
              $
              0.48Weighted
      Common Shares Outstanding - basic and diluted
              
              
              10,104,449
              
              
              
              9,227,792
              
              
              
              10,100,589
              
              
              
              8,150,576
 
 See
accompanying notes to unaudited consolidated financial statements
 
  - 3
-
  
 
 CHINA
ARMCO METALS, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 
 For
      the Nine Months ended September 302009
              
              
              2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
              
              $
              2,637,736
              
              
              $
              3,942,993Adjustments
      to reconcile net income to net cashused
      in operating activitiesDepreciation
      expenses
              
              
              54,259
              
              
              
              1,342Amortization
      expense
              
              
              34,437
              
              
              
              61,548Loss
      from disposal of property and equipment
              
              
              -
              
              
              
              5,459Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              (6,552,027
              )
              
              
              (12,847,520
              )Inventories
              
              
              (31,227,941
              )
              
              
              136,747Advance
      on purchases
              
              
              1,819,431
              
              
              
              (5,694,647
              )Prepayments
      and other current assets
              
              
              (3,829,134
              )
              
              
              (744,785
              )Other
      assets
              
              
              35,032
              
              
              
              19,739Accounts
      payable
              
              
              31,042,418
              
              
              
              2,466,568Customer
      deposits
              
              
              (535,334
              )
              
              
              1,897,107Taxes
      payable
              
              
              891,244
              
              
              
              784,719Accrued
      expenses and other current liabilities
              
              
              2,484,792
              
              
              
              442,254NET
      CASH USED IN OPERATING ACTIVITIES
              
              
              (3,145,087
              )
              
              
              (9,528,476
              )CASH
      FLOWS FROM INVESTING ACTIVITIES:Cash
      received from reverse acquisition
              
              
              -
              
              
              
              11,506Proceeds
      from release of pledged deposits
              
              
              -
              
              
              
              606,083Payment
      made towards pledged deposits
              
              
              (506,621
              )
              
              
              (803,000
              )Deposits
      toward future construction
              
              
              (2,768,161
              )
              
              
              -Purchases
      of property and equipment
              
              
              (7,918,287
              )
              
              
              (168,743
              )Payment
      to related parties
              
              
              (1,511,480
              )NET
      CASH USED IN INVESTING ACTIVITIES
              
              
              (12,704,549
              )
              
              
              (354,154
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Payment
      of forward foreign exchanage contracts
              
              
              -
              
              
              
              (344,670
              )Proceeds
      from loans payable
              
              
              12,975,691
              
              
              
              7,547,814Repayment
      of loans payable
              
              
              (2,914,345
              )
              
              
              -Proceeds
      from long-term debt
              
              
              7,312,507
              
              
              
              -Amounts
      received from (paid to) related parties
              
              
              -
              
              
              
              (921,236
              )Repayments
      to related parties
              
              
              (187,626
              )
              
              
              -Sale
      of common stock and warrants, net of offering costs
              
              
              -
              
              
              
              6,623,168Proceeds
      from exercise of warrants
              
              
              435,500
              
              
              
              -NET
      CASH PROVIDED BY FINANCING ACTIVITIES
              
              
              17,621,727
              
              
              
              12,905,076EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
              
              
              (309,807
              )
              
              
              204,345NET
      CHANGE IN CASH
              
              
              1,462,284
              
              
              
              3,226,791Cash
      at beginning of period
              
              
              3,253,533
              
              
              
              232,286Cash
      at end of period
              
              $
              4,715,817
              
              
              $
              3,459,077SUPPLEMENTAL
      DISCLOSURE OF CASH FLOWS INFORMATION:Interest
      paid
              
              $
              110,400
              
              
              $
              119,503Taxes
      paid
              
              $
              -
              
              
              $
              -
 
 See
accompanying notes to unaudited consolidated financial statements
  - 4
-
 China
Armco Metals, Inc. and Subsidiaries
 Notes to
the Consolidated Financial Statements  (Unaudited)
 September
30, 2009 and 2008
 
 NOTE
1 – ORGANIZATION AND OPERATIONS
 
 The
Company, which was originally name Cox Distributing, was founded as an
unincorporated business in January 1984 and was incorporated as Cox
Distributing, Inc., a C corporation in the State of Nevada on April 6, 2007 at
which time 9,100,000 shares of common stock were issued to the founder in
exchange for the existing unincorporated business.  No value was given
to the stock issued by the newly formed corporation.  Therefore, the shares
were recorded to reflect the $.001 par value and paid in capital was recorded as
a negative amount ($910).  The Company engaged in the distribution of
organic fertilizer products used to improve soil and growing conditions for the
potato farmers of eastern Idaho.  On June 27, 2008, the Company
amended its Articles of Incorporation, and changed its name to China Armco
Metals, Inc. (the “Company”) upon the acquisition of Armco & Metawise (H.K)
Limited and Subsidiaries (“Armco”).  The Company believes that the new
name better identifies the Company’s business of importing, exporting and
distributing ferrous and non-ferrous ores and metals, and the recycling of scrap
steel in China.  On December 30, 2008, the Company discontinued its
organic fertilizer products distribution business.
 
 Merger of
Armco
 
 On June
27, 2008, the Company entered into a share purchase agreement (the “Share
Purchase Agreement?? and consummated a share purchase (the “Share Purchase”)
with Armco and Feng Gao, who owned 100% of the issued and outstanding shares of
Armco.  In connection with the acquisition, the Company purchased from
Ms. Gao 100% of the issued and outstanding shares of Armco’s capital stock for
$6,890,000 by delivery of the Company’s purchase money promissory
note.  In addition, the Company issued to Ms. Gao a stock option
entitling Ms. Gao to purchase a total of 5,300,000 shares of the Company’s
common stock, par value $.001 per share at $1.30 per share which expires on
September 30, 2008 and 2,000,000 shares at $5.00 per share which expires on June
30, 2010.  On August 12, 2008, Ms. Gao exercised her option to
purchase and the Company issued 5,300,000 shares of its common stock in exchange
for the $6,890,000 note owed to Ms. Gao.  Accordingly, the 5,300,000
shares issued to Ms. Gao represented approximately 69.7% of the issued and
outstanding Shares of the Company giving effect to the cancellation of 7,694,000
Shares owned by Mr. Cox.  As a result of the ownership interests of
the former shareholders of Armco, for financial statement reporting purposes,
the merger between the Company and Armco has been treated as a reverse
acquisition with Armco deemed the accounting acquirer and the Company deemed the
accounting acquiree under the purchase method of accounting in accordance with
paragraph 805-40-05-2 of the FASB Accounting Standards Codification. The reverse
merger is deemed a capital transaction and the net assets of Armco (the
accounting acquirer) are carried forward to the Company (the legal acquirer and
the reporting entity) at their carrying value before the
combination.  The acquisition process utilized the capital structure
of the Company and the assets and liabilities of Armco which were recorded at
historical cost.  The equity of the Company is the historical equity
of Armco retroactively restated to reflect the number of shares issued by the
Company in the transaction.
 
 Armco was
incorporated on July 13, 2001 under the laws of the Hong Kong Special
Administrative Region of the People’s Republic of China
(“PRC”).  Armco engages in the import, export and distribution of
ferrous and non-ferrous ores and metals, and the recycling of scrap
steel.
 
 On
January 9, 2007, Armco formed Armet (Lianyungang) Renewable Resources Co, Ltd.
(“Armet”), a wholly-owned foreign enterprise subsidiary in the City of
Lianyungang, Jiangsu Province, PRC.  Armet engages in the recycling of
scrap steel.
 
 Henan
Armco and Metawise Trading Co., Ltd. (“Henan Armco”) was incorporated on June 6,
2002 in the City of Zhengzhou, Henan Province, PRC.  Henan Armco
engages in the import, export and distribution of ferrous and non-ferrous ores
and metals.
 
 Merger of Henan Armco with
Armet, Companies under Common Control
 
 On
December 28, 2007, Armco by and through its wholly owned subsidiary, Armet,
entered into a Share Transfer Agreement with Henan Armco, a company under common
control with Armco.  The acquisition of Henan Armco has been recorded
on the purchase method of accounting at historical amounts as Armet and Henan
Armco were under common control since June 2002.  The consolidated
financial statements have been presented as if the acquisition of Henan Armco
had occurred on January 1, 2007.
 
 Formation of Armco
(Lianyungang) Holdings, Ltd.
 
 On June
4, 2009, the Company formed Armco (Lianyungang) Holdings, Ltd. (“Lianyungang
Armco”), a wholly-owned foreign enterprise subsidiary in the City of
Lianyungang, Jiangsu Province, PRC.  Lianyungang Armco engages in
marketing and distribution of the recycling of scrap
steel.  Lianyungang Armco is currently inactive.
  - 5
-
 China
Armco Metals, Inc. and Subsidiaries
 Notes to
the Consolidated Financial Statements  (Unaudited)
 September
30, 2009 and 2008 –Continued
 
 NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Basis of
presentation
 
 The
accompanying unaudited interim consolidated financial statements and related
notes have been prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”) for interim financial
information, and with the rules and regulations of the United States Securities
and Exchange Commission (“SEC”) to Form 10-Q and Article 10 of Regulation
S-X.  Accordingly, they do not include all of the information and
footnotes required by U.S. GAAP for complete financial
statements.  The unaudited interim financial statements furnished
reflect all adjustments (consisting of normal recurring accruals) which are, in
the opinion of management, necessary to a fair statement of the results for the
interim periods presented.  Interim results are not necessarily
indicative of the results for the full year.  These unaudited interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements of the Company for the year ended December 31,
2008 and notes thereto contained in the Company’s Annual Report on Form 10-K
filed with the SEC on March 27, 2009.
 
 The
consolidated financial statements include all the accounts of Armco, Armet,
Henan, and Lianyungang Armco as of September 30, 2009 and 2008 and for the
interim periods then ended.  Armco is included as of September 30,
2009 and 2008, for the interim period ended September 30, 2009 and for the
period from June 27, 2008 through September 30, 2008.  All
inter-company balances and transactions have been eliminated.
 
 Use of
estimates
 
 The
preparation of financial statements in conformity with U.S. 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 reporting amounts of revenues and
expenses during the reported period.  Significant estimates include
the estimated useful lives of property and equipment and income tax
expense.  Actual results could differ from those
estimates.
 
 Cash
equivalents
 
 The
Company considers all highly liquid investments with maturities of three months
or less at the time of purchase to be cash equivalents.
 
 Pledged
deposits
 
 Pledged
deposits consists of (i) amounts held for outstanding letters of credit maturing
in specified periods and (ii) deposits held for outstanding forward foreign
currency hedging contracts maturing in specified periods.
 
 Trade accounts
receivable
 
 Trade
accounts receivable are recorded at the invoiced amount, net of an allowance for
doubtful accounts.  The allowance for doubtful accounts is the
Company’s best estimate of the amount of probable credit losses in the Company’s
existing accounts receivable. The Company determines the allowance based on
historical write-off experience, customer specific facts and economic
conditions. Bad debt expense is included in general and administrative expenses,
if any.
 
 Outstanding
account balances are reviewed individually for
collectability.  Account balances are charged off against the
allowance after all means of collection have been exhausted and the potential
for recovery is considered remote.
 
 The
Company does not have any off-balance-sheet credit exposure to its
customers.
 
 Inventories
 
 The
Company values inventories, consisting of purchased products, at the lower of
cost or market.  Cost is determined on the First-in and First-out
method.  The Company regularly reviews its inventories on hand and,
when necessary, records a provision for excess or obsolete inventories based
primarily on current selling price and sales prices of confirmed backlog
orders.  The Company determined that there was no inventory
obsolescence as of September 30, 2009 or 2008.
  - 6
-
 China
Armco Metals, Inc. and Subsidiaries
 Notes to
the Consolidated Financial Statements  (Unaudited)
 September
30, 2009 and 2008 ?CContinued
  Advance on
purchases
 
 Advance
on purchases primarily represent amounts paid to vendors for future delivery of
products, all of which were fully or partially refundable depending upon the
terms and conditions of the purchase agreements.
 
 Property, plant and
equipment
 
 Property,
plant and equipment are recorded at cost.  Expenditures for major
additions and betterments are capitalized.  Maintenance and repairs
are charged to operations as incurred.  Depreciation of property,
plant and equipment is computed by the straight-line method (after taking into
account their respective estimated residual values) over the assets estimated
useful lives ranging from five (5) years to twenty (20) years.  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 consolidated statements of income and comprehensive
Income.  Leasehold improvements, if any, are amortized on a
straight-line basis over the term of the lease or the estimated useful lives,
whichever is shorter.  Upon becoming fully amortized, the related cost
and accumulated amortization are removed from the accounts.
 
 Land use
right
 
 Land use
right represents the cost to obtain the right to use certain parcel of land in
the City of Lianyungang, Jiangsu Province, PRC.  Land use right is
carried at cost and amortized on a straight-line basis over the life of the
right of fifty (50) years.  Upon becoming fully amortized, the related
cost and accumulated amortization are removed from the accounts.
 
 Impairment of long-lived
assets
 
 The
Company has adopted paragraph 360-10-35-17 of the FASB Accounting Standards
Codification for its long-lived assets. The Company’s long-lived assets, which
include property, plant and equipment, and land use right are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
 
 The Company assesses the recoverability
of its long-lived assets by comparing the projected undiscounted net cash flows
associated with the related long-lived asset or group of long-lived assets over
their remaining estimated useful lives against their respective carrying
amounts. Impairment, if any, is based on the excess of the carrying amount over
the fair value of those assets.  Fair value is generally determined
using the asset’s expected future discounted cash flows or market value, if
readily determinable.  If long-lived assets are determined to be
recoverable, but the newly determined remaining estimated useful lives are
shorter than originally estimated, the net book values of the long-lived assets
are depreciated over the newly determined remaining estimated useful
lives.  The Company determined that there were no impairments of
long-lived assets as of September 30, 2009 or 2008.
 
 Customer
deposits
 
 Customer deposits primarily represent
amounts received from customers for future delivery of products, all of which
were fully or partially refundable depending upon the terms and conditions of
the sales agreements.
 
 Derivatives
 
 The Company accounts for derivatives in
accordance with paragraph 810-10-05-4 of the FASB Accounting Standards
Codification (“Paragraph 810-10-05-4”). Paragraph 810-10-05-4 requires companies
to recognize all derivative instruments as either assets or liabilities in the
balance sheet at fair value.  The accounting for changes in the fair
value of a derivative instrument depends on: (i) whether the derivative has been
designated and qualifies as part of a hedging relationship, and (ii) the type of
hedging relationship.  For those derivative instruments that are
designated and qualify as hedging instruments, a company must designate the
hedging instrument based upon the exposure being hedged as either a fair value
hedge, cash flow hedge or hedge of a net investment in a foreign
operation.
 
 The Company employs foreign currency
forward contracts to convert unforeseeable foreign currency exchange rate to
fixed foreign currency exchange rate.  The Company does not use
derivatives for speculation or trading purposes.  Changes in the fair
value of derivatives are recorded each period in current earnings or through
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and the type of hedge transaction.  The
ineffective portion of all hedges is recognized in current
earnings.  The Company has sales and purchase commitments denominated
in foreign currencies.  Foreign currency forward contracts are used to
hedge against the risk of change in the fair value of these commitments
attributable to fluctuations in exchange rates.  Changes in the fair
value of the derivative instrument are generally offset in the income statement
by changes in the fair value of the item being hedged.
  - 7
-
 China
Armco Metals, Inc. and Subsidiaries
 Notes to
the Consolidated Financial Statements  (Unaudited)
 September
30, 2009 and 2008 –Continued
  Fair value of financial
instruments
 
 The
Company follows paragraph 825-10-50-10 of the FASB Accounting Standards
Codification for disclosures about fair value of its financial instruments and
has adopted paragraph 820-10-35-37 of the FASB Accounting Standards Codification
(“Paragraph 820-10-35-37”) to measure the fair value of its financial
instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair
value in U.S. GAAP, and expands disclosures about fair value measurements. To
increase consistency and comparability in fair value measurements and related
disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which
prioritizes the inputs to valuation techniques used to measure fair value into
three (3) broad levels.  The fair value hierarchy gives the highest
priority to quoted prices (unadjusted) in active markets for identical assets or
liabilities and the lowest priority to unobservable inputs.  The three
(3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are
described below:
 
 Level
      1
              
              Quoted
      market prices available in active markets for identical assets or
      liabilities as of the reporting date.Level
      2
              
              Pricing
      inputs other than quoted prices in active markets included in Level 1,
      which are either directly or indirectly observable as of the reporting
      date.Level
      3
              
              Pricing
      inputs that are generally observable inputs and not corroborated by market
      data.
 
 The
carrying amounts of the Company’s financial assets and liabilities, such as
cash, accounts receivable, prepayments and other current assets, accounts
payable, taxes payable, accrued expenses and other current liabilities,
approximate their fair values because of the short maturity of these
instruments.  The Company’s loan payable approximates the fair value
of such instrument based upon management’s best estimate of interest rates that
would be available to the Company for similar financial arrangement at September
30, 2009 and 2008.
 
 The
Company does not have any assets or liabilities measured at fair value on a
recurring or a non-recurring basis, consequently, the Company did not have any
fair value adjustments for assets and liabilities measured at fair value at
September 30, 2009 or 2008, nor gains or losses are reported in the statement of
operations that are attributable to the change in unrealized gains or losses
relating to those assets and liabilities still held at the reporting date for
the interim period then ended.
 
 Revenue
recognition
 
 The Company applies paragraph
605-10-S99-1 of the FASB Accounting Standards Codification for revenue
recognition.  The Company recognizes revenue when it is realized or
realizable and earned less estimated future doubtful accounts.  The
Company considers revenue realized or realizable and earned when all of the
following criteria are met: (i) persuasive evidence of an arrangement exists,
(ii) the product has been shipped or the services have been rendered to the
customer, (iii) the sales price is fixed or determinable, and (iv)
collectability is reasonably assured.  In addition to the
aforementioned general policy, the following are the specific revenue
recognition policies for each major category of revenue:
 
 (i) Import, exportand distribution of ferrous and
non-ferrous ores and metals:  The Company derives its revenues
from sales contracts with customers with revenues being generated upon the
shipment of goods.  Persuasive evidence of an arrangement is
demonstrated via invoice, product delivery is evidenced by warehouse shipping
log as well as a signed bill of lading from the trucking or rail company and
title transfers upon shipment, based on free on boardwarehouse terms; the sales
price to the customer is fixed upon acceptance of the purchase order and there
is no separate sales rebate, discount, or volume incentive.  When the
Company recognizes revenue, no provisions are made for returns because,
historically, there have been very few sales returns and adjustments that have
impacted the ultimate collection of revenues.
 
 (ii) Import and exportagent
services:  Revenue from import and export agent services is
recognized as the services are provided.  The import and export agent
services are considered provided when the goods to be imported or exported by
the customer are delivered to the designated port specified by the service
contract.  The Company follows paragraph 605-45-45-15 to paragraph
605-45-45-18 of the FASB Accounting Standards Codification for revenue
recognition to report revenue net for its import and export agent services since
(1) the Company’s supplier is the primary obligor in the arrangement, (2) the
amount the Company earns is fixed, and (3) the Company’s supplier has credit
risk.
 
 Net sales
of products represent the invoiced value of goods, net of value added taxes
(“VAT”).  The Company is subject to VAT which is levied on the
majority of the Company’s products at the rate of 13% on the invoiced value of
sales for the interim period ended March 31, 2008 and 17% on the invoiced value
of sales as of January 1, 2009.  Sales or Output VAT is borne by
customers in addition to the invoiced value of sales and Purchase or Input VAT
is borne by the Company in addition to the invoiced value of purchases to the
extent not refunded for export sales.
  - 8
-
 China
Armco Metals, Inc. and Subsidiaries
 Notes to
the Consolidated Financial Statements  (Unaudited)
 September
30, 2009 and 2008 –Continued
  Shipping and handling
costs
 
 The
Company accounts for shipping and handling fees in accordance with paragraph
605-45-45-19 of the FASB Accounting Standards Codification.  While
amounts charged to customers for shipping products are included in revenues, the
related costs are classified in cost of goods sold as incurred.
 
 Foreign currency
transactions
 
 The
Company applies the guidelines as set out in Section 830-20-35 of the FASB
Accounting Standards Codification (Section 830-20-35) for foreign currency
transactions.  Pursuant to Section 830-20-35 of the FASB Accounting
Standards Codification, foreign currency transactions are transactions
denominated in a currency other than U.S. Dollar, the Company’s reporting
currency or Chinese Yuan or Reminbi, the Company’s functional
currency.  Foreign currency transactions may produce receivables or
payables that are fixed in terms of the amount of foreign currency that will be
received or paid.  A change in exchange rates between the functional
currency and the currency in which a transaction is denominated increases or
decreases the expected amount of functional currency cash flows upon settlement
of the transaction. That increase or decrease in expected functional currency
cash flows is a foreign currency transaction gain or lossthat generally shall be
included in determining net income for the period in which the exchange rate
changes. Likewise, a transaction gain or loss (measured from the transaction
dateor the most
recent intervening balance sheet date, whichever is later) realized upon
settlement of a foreign currency transaction generally shall be included in
determining net income for the period in which the transaction is settled. The
exceptions to this requirement for inclusion in net income of transaction gains
and losses pertain to certain intercompany transactions and to transactions that
are designated as, and effective as, economic hedges of net investments and
foreign currency commitments.  Pursuant to Section 830-20-25 of the
FASB Accounting Standards Codification, the following shall apply to all foreign
currency transactions of an enterprise and its investees: (a) At the date the
transaction is recognized, each asset, liability, revenue, expense, gain, or
loss arising from the transaction shall be measured and recorded in the
functional currency of the recording entity by use of the exchange rate in
effect at that date as defined in section 830-10-20 of the FASB Accounting
Standards Codification; and (b) At each balance sheet date, recorded balances
that are denominated in a currency other than the functional currency of the
recording entity shall be adjusted to reflect the current exchange
rate.
 
 Stock-based compensation for
obtaining employee servicesand equity instruments
issued to parties other than employees for acquiring goods or
services
 
 The
Company accounts for its stock based compensation in which the Company obtains
employee services in share-based payment transactions under the recognition and
measurement principles of the fair value recognition provisions of section
718-10-30 of the FASB Accounting Standards Codification and accounts for equity
instruments issued to parties other than employees for acquiring goods or
services under guidance of section 505-50-30 of the FASB Accounting Standards
Codification. Pursuant to paragraph 718-10-30-6 of the FASB Accounting Standards
Codification, all transactions in which goods or services are the consideration
received for the issuance of equity instruments are accounted for based on the
fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more reliably measurable.  The
measurement date used to determine the fair value of the equity instrument
issued is the earlier of the date on which the performance is complete or the
date on which it is probable that performance will occur.  The fair
value of each option grant estimated on the date of grant uses the Black-Scholes
option-pricing model.  We used the following weighted-average
assumptions to value options granted on June 27, 2008 under the Share Purchase
Agreement:
 
 June
      27, 2008Expected
      option life (year)
              
              
              2.00Expected
      volatility
              
              
              0.00%Risk-free
      interest rate
              
              
              2.65%Dividend
      yield
              
              
              0.00%
 
 The
expected life of the options has been determined using the simplified method as
prescribed in paragraph 718-10-S99-1 FN77 of the FASB Accounting Standards
Codification.  The Company’s policy is to recognize compensation cost
for awards with only service conditions and a graded vesting schedule on a
straight-line basis over the requisite service period for the entire
award.  Additionally, the Company’s policy is to issue new shares of
common stock to satisfy stock option exercises.
  - 9
-
 China
Armco Metals, Inc. and Subsidiaries
 Notes to
the Consolidated Financial Statements  (Unaudited)
 September
30, 2009 and 2008 –Continued
  The fair
value of each option award is estimated on the date of grant using a
Black-Scholes option-pricing valuation model.  The ranges of
assumptions for inputs shown in the table are as follows:
 
 ·
              The
      Company uses historical data to estimate employee termination
      behavior.  The expected life of options granted is derived from
      paragraph 718-10-S99-1 of the FASB Accounting Standards Codification and
      represents the period of time the options are expected to be
      outstanding.
 
 ·
              The
      expected volatility is based on a combination of the historical volatility
      of the comparable companies’ stock over the contractual life of the
      options.
 
 ·
              The
      risk-free interest rate is based on the U.S. Treasury yield curve in
      effect at the time of grant for periods within the contractual life of the
      option.
 
 ·
              The
      expected dividend yield is based on the Company’s current dividend yield
      as the best estimate of projected dividend yield for periods within the
      contractual life of the option.
 
  Income
taxes
 The
Company accounts for income taxes under Section 740-10-30 of the FASB Accounting
Standards Codification, 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.  Deferred tax assets are reduced by a valuation allowance to
the extent management concludes it is more likely than not that the assets will
not be realized.  Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled.  The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the Consolidated Statements of Income and
Comprehensive Income in the period that includes the enactment
date.
 
 The
Company adopted section 740-10-25 of the FASB Accounting Standards Codification
(“Section 740-10-25”). Section 740-10-25 addresses the determination of whether
tax benefits claimed or expected to be claimed on a tax return should be
recorded in the financial statements.  Under Section 740-10-25, the
Company may recognize the tax benefit from an uncertain tax position only if it
is more likely than not that the tax position will be sustained on examination
by the taxing authorities, based on the technical merits of the
position.  The tax benefits recognized in the financial statements
from such a position should be measured based on the largest benefit that has a
greater than fifty (50) percent likelihood of being realized upon ultimate
settlement.  Section 740-10-25 also provides guidance on
de-recognition, classification, interest and penalties on income taxes,
accounting in interim periods and requires increased disclosures.  The
Company had no material adjustments to its liabilities for unrecognized income
tax benefits according to the provisions of Section 740-10-25.
 
 Foreign currency
translation
 
 Transactions
and balances originally denominated in U.S. dollars are presented at their
original amounts.  Transactions and balances in other currencies other
than Chinese Yuan or Renminbi, its functionary currency, or U.S. Dollar, its
reporting currency are converted into U.S. dollars in accordance with Section
830-10-55 of the FASB Accounting Standards Codification and are included in
determining net income or loss.
 
 The
financial records of the Company are maintained in their local currency, the
Renminbi (“RMB”), which is the functional currency.  Assets and
liabilities are translated from the local currency into the reporting currency,
U.S. dollars, at the exchange rate prevailing at the balance sheet
date.  Revenues and expenses are translated at weighted average
exchange rates for the period to approximate translation at the exchange rates
prevailing at the dates those elements are recognized in the consolidated
financial statements.  Foreign currencytranslation gain (loss)
resulting from the process of translating the local currency financial
statements into U.S. dollars are included in determining accumulated other
comprehensive income in the consolidated statement of stockholders’
equity.
 
 RMB is
not a fully convertible currency.  All foreign exchange transactions
involving RMB must take place either through the People’s Bank of China (the
“PBOC”) or other institutions authorized to buy and sell foreign
exchange.  The exchange rate adopted for the foreign exchange
transactions are the rates of exchange quoted by the PBOC.  Commencing
July 21, 2005, China adopted a managed floating exchange rate regime based
on market demand and supply with reference to a basket of
currencies.  The exchange rate of the US dollar against the RMB was
adjusted from approximately RMB 8.28 per US dollar to approximately RMB
8.11 per US dollar on July 21, 2005.  Since then, the PBOC
administers and regulates the exchange rate of the US dollar against the RMB
taking into account demand and supply of RMB, as well as domestic and foreign
economic and financial conditions.
  - 10
-
 China
Armco Metals, Inc. and Subsidiaries
 Notes to
the Consolidated Financial Statements  (Unaudited)
 September
30, 2009 and 2008 –Continued
  Unless
otherwise noted, the rate presented below per U.S. $1.00 was the interbank rate
as quoted by OANDA Corporation (www.oanda.com) for
the period from January 1, 2009 through September 30, 2009 and the noon buying
rate for RMB in New York City as reported by the Federal Reserve Bank of New
York on the date of its balance sheets contained in this consolidated financial
statements.  The management believes that the difference between RMB
vs. US$ exchange rate quoted by the PBOC and RMB vs. US$ exchange rate reported
by OANDA Corporation or the Federal Reserve Bank of New York were
immaterial.  Translations do not imply that the RMB amounts actually
represent, or have been or could be converted into, equivalent amounts in U.S.
dollars.  Translation of amounts from RMB into United States dollars
(“US$”) has been made at the following exchange rates for the respective
periods:
 
 September 30, 2009Balance
      sheet
              RMB
      6.8376 to US$1.00Statement
      of income and comprehensive income
              RMB
      6.8425 to US$1.00December 31, 2008Balance
      sheet
              RMB
      6.8225 to US$1.00September 30, 2008Balance
      sheet
              RMB
      7.232 to US$1.00Statement
      of income and comprehensive income
              RMB
      7.582 to US$1.00December 31, 2007Balance
      sheet
              RMB
      7.2946 to US$1.00
 
 Net gains
and losses resulting from foreign exchange transactions, if any, are included in
the Consolidated Statements of Income and Comprehensive Income.  The
foreign currency translation gain (loss) was $(17,532) and $497,236 and the
effect of exchange rate changes on cash flows were ($309,808) and $204,345 for
the interim period ended September 30, 2009 and 2008, respectively.
 
 Comprehensive
income
 
 The
Company has applies section 220-10-45 of the FASB Accounting Standards
Codification. This statement establishes rules for the reporting of
comprehensive income and its components.  Comprehensive income, for
the Company, consists of net income and foreign currency translation adjustments
and is presented in the Consolidated Statements of Income and Comprehensive
Income and Stockholders’ Equity.
 
 Commitments and
contingencies
 
 The
Company follows subtopic 450-20 of the FASB Accounting Standards Codification to
report accounting for contingencies.  Liabilities for loss
contingencies arising from claims, assessments, litigation, fines and penalties
and other sources are recorded when it is probable that a liability has been
incurred and the amount of the assessment can be reasonably
estimated.
 
 Net income per common
share
 
 Net
income per common share is computed pursuant to section 260-10-45 of the FASB
Accounting Standards Codification.   Basic net income per common
share is computed by dividing net income by the weighted average number of
shares of common stock outstanding during each period.  Diluted net
income per common share is computed by dividing net income by the weighted
average number of shares of common stock and potentially outstanding shares of
common stock during each period to reflect the potential dilution that could
occur from common shares issuable through stock options and
warrants.
  - 11
-
 China
Armco Metals, Inc. and Subsidiaries
 Notes to
the Consolidated Financial Statements  (Unaudited)
 September
30, 2009 and 2008 –Continued
  The
following table shows the weighted-average number of potentially outstanding
dilutive shares excluded from the diluted net loss per share calculation for the
interim period ended September 30, 2009 and 2008 as they were
anti-dilutive:
 
 For
      the Interim Period Ended
                September
      30, 2009
              
              For
      the Interim Period Ended
                September
      30, 2008Stock
      options issued on June 27, 2008 in connection with the acquisition of
      Armco Hong Kong
              
              2,000,000
              
              
              2,000,000Warrants
      issued on August 1, 2008 in connection with the Company’s August 1, 2008
      equity financing
              
              2,723,913
              
              
              -Total
      potentially outstanding dilutive shares
              
              4,723,913
              
              
              2,000,000
 
 Cash flows
reporting
 
 The
Company adopted paragraph 230-10-45-24 of the FASB Accounting Standards
Codification for cash flows reporting, classifies cash receipts and payments
according to whether they stem from operating, investing, or financing
activities and provides definitions of each category, and uses the indirect or
reconciliation method (“Indirect method”) as defined by paragraph 230-10-45-25
of the FASB Accounting Standards Codification to report net cash flow from
operating activities by adjusting net income to reconcile it to net cash flow
from operating activities by removing the effects of (a) all deferrals of past
operating cash receipts and payments and all accruals of expected future
operating cash receipts and payments and (b) all items that are included in net
income that do not affect operating cash receipts and payments.  The
Company reports the reporting currency equivalent of foreign currency cash
flows, using the current exchange rate at the time of the cash flows and the
effect of exchange rate changes on cash held in foreign currencies is reported
as a separate item in the reconciliation of beginning and ending balances of
cash and cash equivalents and separately provides information about investing
and financing activities not resulting in cash receipts or payments in the
period pursuant to paragraph 830-230-45-1 of the FASB Accounting Standards
Codification.
 
  Recently issued accounting
pronouncements
 On June
5, 2003, the United States Securities and Exchange Commission (“SEC”) adopted
final rules under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”),
as amended by SEC Release No. 33-9072 on October 13, 2009.  Commencing
with its annual report for the year ending December 31, 2010, the Company will
be required to include a report of management on its internal control over
financial reporting. The internal control report must include a
statement
 
 ·
              Of
      management’s responsibility for establishing and maintaining adequate
      internal control over its financial
reporting;
 
 ·
              Of
      management’s assessment of the effectiveness of its internal control over
      financial reporting as of year end;
and
 
 ·
              Of
      the framework used by management to evaluate the effectiveness of the
      Company’s internal control over financial
  reporting.
 
 Furthermore,
it is required to file the auditor’s attestation report separately on the
Company’s internal control over financial reporting on whether it believes that
the Company has maintained, in all material respects, effective internal control
over financial reporting.
 
 In
June 2009, the FASB approved the “FASB Accounting Standards Codification”
(the “Codification”) as the single source of authoritative nongovernmental U.S.
GAAP to be launched on July 1, 2009.  The Codification does not
change current U.S. GAAP, but is intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative literature related to
a particular topic in one place.  All existing accounting standard
documents will be superseded and all other accounting literature not included in
the Codification will be considered non-authoritative. The Codification is
effective for interim and annual periods ending after September 15,
2009.
  - 12
-
 China
Armco Metals, Inc. and Subsidiaries
 Notes to
the Consolidated Financial Statements  (Unaudited)
 September
30, 2009 and 2008 –Continued
  In
August 2009, the FASB issued the FASB Accounting Standards Update No.
2009-04 “Accounting for
Redeemable Equity Instruments - Amendment to Section 480-10-S99” which
represents an update to section 480-10-S99, distinguishing liabilities from
equity, per EITF Topic D-98, Classification and Measurement of
Redeemable Securities.  The Company does not expect the
adoption of this update to have a material impact on its consolidated financial
position, results of operations or cash flows.
 
 In
August 2009, the FASB issued the FASB Accounting Standards Update No.
2009-05 “Fair Value
Measurement and Disclosures Topic 820 – Measuring Liabilities at Fair
Value”, which provides amendments to subtopic 820-10, Fair Value
Measurements and Disclosures – Overall, for the fair value measurement of
liabilities.  This update provides clarification that in circumstances
in which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using one or
more of the following techniques: 1. A valuation technique that uses: a. The
quoted price of the identical liability when traded as an asset b. Quoted prices
for similar liabilities or similar liabilities when traded as assets. 2. Another
valuation technique that is consistent with the principles of topic 820; two
examples would be an income approach, such as a present value technique, or a
market approach, such as a technique that is based on the amount at the
measurement date that the reporting entity would pay to transfer the identical
liability or would receive to enter into the identical liability. The amendments
in this update also clarify that when estimating the fair value of a liability,
a reporting entity is not required to include a separate input or adjustment to
other inputs relating to the existence of a restriction that prevents the
transfer of the liability. The amendments in this update also clarify that both
a quoted price in an active market for the identical liability when traded as an
asset in an active market when no adjustments to the quoted price of the asset
are required are Level 1 fair value measurements.  The Company does
not expect the adoption of this update to have a material impact on its
consolidated financial position, results of operations or cash
flows.
 
 In
September 2009, the FASB issued the FASB Accounting Standards Update No.
2009-08 “Earnings Per Share –
Amendments to Section 260-10-S99”,which represents technical corrections
to topic 260-10-S99, Earnings per share, based on EITF Topic D-53, Computation of Earnings Per Share
for a Period that includes a Redemption or an Induced Conversion of a Portion of
a Class of Preferred Stock and EITF Topic D-42, The Effect of the Calculation of
Earnings per Share for the Redemption or Induced Conversion of Preferred
Stock. The Company does not expect the adoption of this update to have a
material impact on its consolidated financial position, results of operations or
cash flows.
 
 In
September 2009, the FASB issued the FASB Accounting Standards Update No.
2009-09 “Accounting for
Investments-Equity Method and Joint Ventures and Accounting for Equity-Based
Payments to Non-Employees”.  This update represents a
correction to Section 323-10-S99-4, Accounting by an Investor for
Stock-Based Compensation Granted to Employees of an Equity Method
Investee. Additionally, it adds observer commentAccounting Recognition for Certain
Transactions Involving Equity Instruments Granted to Other Than Employees
to the Codification. The Company does not expect the adoption to have a material
impact on its consolidated financial position, results of operations or cash
flows.
 
 In
September 2009, the FASB issued the FASB Accounting Standards Update No.
2009-12 “Fair Value
Measurements and Disclosures Topic 820 – Investment in Certain Entities That
Calculate Net Assets Value Per Share (or Its Equivalent)”, which provides
amendments to Subtopic 820-10, Fair Value Measurements and Disclosures-Overall,
for the fair value measurement of investments in certain entities that calculate
net asset value per share (or its equivalent). The amendments in this update
permit, as a practical expedient, a reporting entity to measure the fair value
of an investment that is within the scope of the amendments in this update on
the basis of the net asset value per share of the investment (or its equivalent)
if the net asset value of the investment (or its equivalent) is calculated in a
manner consistent with the measurement principles of Topic 946 as of the
reporting entity’s measurement date, including measurement of all or
substantially all of the underlying investments of the investee in accordance
with Topic 820. The amendments in this update also require disclosures by major
category of investment about the attributes of investments within the scope of
the amendments in this update, such as the nature of any restrictions on the
investor’s ability to redeem its investments at the measurement date, any
unfunded commitments (for example, a contractual commitment by the investor to
invest a specified amount of additional capital at a future date to fund
investments that will be make by the investee), and the investment strategies of
the investees. The major category of investment is required to be determined on
the basis of the nature and risks of the investment in a manner consistent with
the guidance for major security types in U.S. GAAP on investments in debt and
equity securities in paragraph 320-10-50-1B. The disclosures are required for
all investments within the scope of the amendments in this update regardless of
whether the fair value of the investment is measured using the practical
expedient. The Company does not expect the adoption to have a material impact on
its consolidated financial position, results of operations or cash
flows.
 
 Management
does not believe that any other recently issued, but not yet effective
accounting pronouncements, if adopted, would have a material effect on the
accompanying consolidated financial statements.
  - 13
-
 China
Armco Metals, Inc. and Subsidiaries
 Notes to
the Consolidated Financial Statements  (Unaudited)
 September
30, 2009 and 2008 –Continued
  NOTE
3 – PLEDGED DEPOSITS
 
 Pledged
deposits at September 30, 2009 and December 31, 2008 consisted of the
following:
 
 September
      30, 2009
              
              
              December
      31, 2008Pledged
      deposits for letter of credit (1)
              
              $
              506,621
              
              
              $
              -Total
              
              $
              506,621
              
              
              $
              -
 
 (1)
              The
      Company made the pledged deposits with financial institutions as
      collateral for the issuances of letters of credit, which will be released
      to pay vendors upon receipt of
goods.
 
 NOTE
4 – INVENTORIES
 
 Inventories
at September 30, 2009 and December 31, 2008 consisted of the
following:
 
 September
      30, 2009
              
              
              December
      31, 2008Goods
      purchased
              
              $
              31,324,907
              
              
              $
              197,402Total
              
              $
              31,324,907
              
              
              $
              197,402
 
 NOTE
5 – SHORT-TERM LOANS PAYABLE
 
 Short-term
loans payable at September 30, 2009 and December 31, 2008 consisted of the
following:
 
 September
      30, 2009
              
              
              December
      31, 2008Loan
      payable to a financial institution, guaranteed by the Company’s chairman
      and Chief Executive Officer, with interest at 7.80% per annum payable
      monthly, with principal due and paid January 15, 2009.
              
              $
              -
              
              
              $
              1,414,345Loan
      payable to a financial institution, guaranteed by the Company’s chairman
      and Chief Executive Officer, with interest at 7.85% per annum payable
      monthly, with principal due and paid January 15, 2009.
              
              
              -
              
              
              
              1,500,000Loan
      payable to a financial institution, guaranteed by the Company’s chairman
      and Chief Executive Officer, with interest at 3.30% per annum payable
      monthly, with principal due and paid November 13,
    2009.
              
              
              7,637,615
              
              
              
              -Loan
      payable to a financial institution, collateralized by the Company's
      inventory, with interest at 6.30% per annum payable monthly, with
      principal due and payable on January 26, 2010.  None of the principal
      has been repaid as of November 23, 2009
              
              
              5,338,076$
              12,975,691
              
              
              $
              2,914,345
  - 14
-
 China
Armco Metals, Inc. and Subsidiaries
 Notes to
the Consolidated Financial Statements  (Unaudited)
 September
30, 2009 and 2008 –Continued
  NOTE
6 – RELATED PARTY TRANSACTIONS
 
 Advances fromstockholder
 
 Advances
from stockholder at September 30, 2009 and December 31, 2008 consisted of the
following:
 
 September
      30, 2009
              
              
              December
      31, 2008Advances
      from chairman, chief executive officer and stockholder
              
              $
              48,969
              
              
              $
              236,595Total
              
              $
              48,969
              
              
              $
              236,595
 
 The
advances bear no interest and have no formal repayment terms.
 
 NOTE
7 –LONG-TERM DEBT
 
 Long-term
debt at September 30, 2009 and December 31, 2008 consisted of the
following:
 
 September
      30, 2009
              
              
              December
      31, 2008Loan
      payable to a financial institution, collateralized by Armet’s building and
      land use right, with interest at 5.40% per annum payable monthly, with
      principal due September 7, 2012
              
              $
              7,312,507
              
              
              $
              -Less:
      Current maturities
              
              
              -
              
              
              
              -LONG-TERM DEBT, net current maturities
              
              $
              7,312,507
              
              
              $
              -
 
 NOTE
8 – STOCKHOLDERS’ EQUITY
 
 Sale of common
stock
 
 On July
25, 2008 and July 31, 2008, the Company closed the first and second rounds of a
private placement by raising $6,896,229 from eighty-two (82) investors through
the sale of 22.9 units of its securities at an offering price of $300,000 per
unit. Each unit sold in the offering consisted of 100,000 shares of the
Company’s common stock, $.001 par value per share at a per share purchase price
of $3.00, and five (5) year warrants to purchase 100,000 shares of common stock
with an exercise price of $5.00 per share.
 
 On August
8, 2008 the Company closed the third round of the offering by raising $523,500
from ten (10) investors through the sale of 1.745 units of its securities at an
offering price of $300,000 per unit.
 
 On August
11, 2008 the Company closed the fourth round of the offering by raising $40,200
from five (5) investors through the sale of 0.134 units of its securities at an
offering price of $300,000 per unit.
 
 The
Company paid (i) FINRA member broker-dealers cash commissions of $162,660 and
issued those firms five (5) year warrants to purchase a total of 99,650 shares
of its common stock at $5.00 per share as compensation for services to the
Company, (ii) due diligence fees to certain investors or their advisors in
connection with the offering aggregating $579,316 in cash and issued those firms
five (5) year warrants to purchase a total of 142,614 shares of its common stock
at $5.00 per share as compensation for services to the Company, and (iii)
professional fees in the amount of $97,689 paid in cash in connection with the
Offering.  The recipients of these fees included China Direct
Investments, Inc., a subsidiary of China Direct, Inc. and a principal
stockholder of the Company.
  - 15
-
 China
Armco Metals, Inc. and Subsidiaries
 Notes to
the Consolidated Financial Statements  (Unaudited)
 September
30, 2009 and 2008 –Continued
  In
aggregate, the Company raised $7,459,929 in the offering from ninety-seven (97)
investors through the sale of 24.87 units and after payment of cash commissions,
broker dealer fee, due diligence fees and other costs associated with the
offering, the Company received net proceeds of $6,620,681, all of which will be
used for construction of a scrap steel recycling facility in China as previously
disclosed by the Company and general corporate working capital
purposes.
 
 Issuance of common stock for
services
 
 On
October 15, 2008, the Company issued 6,000 shares of its common stock for
services rendered valued at $3.00 per share for $18,000 (the estimated fair
value on the date of grant).
 
 On May 7,
2009, the Company issued 7,000 shares to Hayden Communications as consideration
for early cancellation of an agreement to provide investor relations
services.  These shares were issued at $1.50 per share for total
consideration of $10,500.
 
 Stock
options
 
 On June
27, 2008, the Company entered into the Share Purchase Agreement and consummated
the Share Purchase with Armco and Feng Gao, who owned 100% of the outstanding
shares of Armco.  Under the Share Purchase Agreement, the Company
purchased from Ms. Gao, the sole shareholder of Armco, 100% of the issued and
outstanding shares of Armco’s capital stock for $6,890,000 by delivery of the
Company’s purchase money promissory note.  In addition, the Company
issued to Ms. Gao a stock option entitling Ms. Gao to purchase 5,300,000 shares
of our common stock, par value $.001 per share  at $1.30 per share
expiring on September 30, 2008 and 2,000,000 shares at $5.00 per share expiring
on June 30, 2010, vested immediately.  On August 12, 2008, Ms. Gao
exercised her option to purchase and the Company issued 5,300,000 Shares in
exchange for the $6,890,000 note owed to Ms. Gao.  Accordingly, the
5,300,000 shares issued to Ms. Gao represented approximately 69.7% of the issued
and outstanding Shares of the Company giving effect to the cancellation of
7,694,000 Shares owned by Mr. Cox.
 
 The fair
value of the stock options issued in June 2008 under Share Purchase Agreement
using the Black-Scholes option pricing model was $0 at the date of
grant.  For the interim period ended September 30, 2009, the Company
did not record any stock-based compensation for shares vested.
 
 The table
below summarizes the Company’s stock option activity for the interim period
ended September 30, 2009:
 
  Number of
                Option Shares
              
              Exercise Price Range
                Per Share
              
              Weighted Average
      Exercise Price
              
              Fair
      Value
                at
      Date of Grant
              
              Aggregate
                Intrinsic
                ValueBalance,
      December 31, 2007
              
              
              -
              
              
              
              $
              -
              
              
              
              $
              -
              
              
              
              -
              
              
              
              $
              -Granted
              
              
              2,000,000
              
              
              
              
              5.00
              
              
              
              
              5.00
              
              
              
              *
              
              
              
              
              *Canceled
              
              
              -
              
              
              
              
              -
              
              
              
              
              -
              
              
              
              
              
              
              
              
              -Exercised
              
              
              -
              
              
              
              
              -
              
              
              
              
              -
              
              
              
              
              
              
              
              
              -Expired
              
              
              -
              
              
              
              
              -
              
              
              
              
              -
              
              
              
              
              
              
              
              
              -Balance,
      December 31, 2008
              
              
              2,000,000
              
              
              
              $
              5.00
              
              
              
              $
              5.00
              
              
              
              *
              
              
              
              $
              -Granted
              
              
              -
              
              
              
              
              -
              
              
              
              
              -
              
              
              
              
              
              
              
              
              -Canceled
              
              
              -
              
              
              
              
              -
              
              
              
              
              -
              
              
              
              
              
              
              
              
              -Exercised
              
              
              -
              
              
              
              
              -
              
              
              
              
              -
              
              
              
              
              
              
              
              
              -Expired
              
              
              -
              
              
              
              
              -
              
              
              
              
              -
              
              
              
              
              
              
              
              
              -Balance,
      September 30, 2009
              
              
              2,000,000
              
              
              
              $
              5.00
              
              
              
              $
              5.00
              
              
              
              *
              
              
              
              $
              -Vested
      and exercisable, September 30, 2009
              
              
              2,000,000
              
              
              
              $
              5.00
              
              
              
              $
              5.00
              
              
              
              *
              
              
              
              $
              -Unvested,
      September 30, 2009
              
              
              -
              
              
              
              $
              5.00
              
              
              
              $
              5.00
              
              
              
              *
              
              
              
              $
              -
 
 * - Less
than $1.00
  - 16
-
 China
Armco Metals, Inc. and Subsidiaries
 Notes to
the Consolidated Financial Statements  (Unaudited)
 September
30, 2009 and 2008 –Continued
  The
following table summarizes information concerning outstanding and exercisable
stock options as of September 30, 2009:
 
 Options
      Outstanding
              
              Options
      ExercisableRange
      of Exercise Prices
              
              Number
      Outstanding
              
              Average
      Remaining Contractual Life  (in years)
              
              Weighted
      Average Exercise Price
              
              Number
      Exercisable
              
              Average
      Remaining Contractual Life  (in years)
              
              Weighted
      Average Exercise Price$
              5.00
              
              
              2,000,000
              
              0.75
              
              $
              5.00
              
              2,000,000
              
              1.50
              
              $
              5.00$
              5.00
              
              
              2,000,000
              
              0.75
              
              $
              5.00
              
              2,000,000
              
              1.50
              
              $
              5.00
 
 Warrants
 
 In
connection with the four (4) rounds of private placements from July 25, 2008
through August 8, 2008, the Company issued (i) warrants for 2,486,649 shares to
the investors and (ii) warrants for 242,264 shares to the brokers, or 2,728,913
shares in aggregate with an exercise price of $5.00 per share and an expiration
date of August 8, 2014, all of which have been earned upon
issuance.  The fair value of these warrants granted, estimated on the
date of grant, was $5,097,404, which has been recorded as additional paid-in
capital, using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
 
 Expected
      option life (year)
              
              
              5.00Expected
      volatility
              
              
              89.00%Risk-free
      interest rate
              
              
              3.23%Dividend
      yield
              
              
              0.00%
 
 The
remaining balance of the net proceeds of $1,523,277 has been assigned to common
stock.
 
 On
January 30, 2009, the Company issued 5,000 shares of its common stock for cash
at $5.00 per share and received cash payment of $25,000 in connection with the
exercise of the warrant for 5,000 shares with an exercise price of $5.00 per
share by one investor and warrants holder on February 2, 2009.
 
 The table
below summarizes the Company’s warrants activity for the interim period ended
September 30, 2009:
 
 Number of
                Warrant Shares
              
              Exercise Price Range
                Per Share
              
              Weighted Average
      Exercise Price
              
              Fair
      Value at Date of Issuance
              
              Aggregate
                Intrinsic
                ValueBalance,
      December 31, 2007
              
              
              -
              
              
              
              $
              -
              
              
              
              $
              -
              
              
              $
              -
              
              
              
              $
              -Granted
              
              
              2,728,913
              
              
              
              
              5.00
              
              
              
              
              5.00
              
              
              
              5,092,970
              
              
              
              
              -Canceled
              
              
              -
              
              
              
              
              -
              
              
              
              
              -
              
              
              
              -
              
              
              
              
              -Exercised
              
              
              -
              
              
              
              
              -
              
              
              
              
              -
              
              
              
              -
              
              
              
              
              -Expired
              
              
              -
              
              
              
              
              -
              
              
              
              
              -
              
              
              
              -
              
              
              
              
              -Balance,
      December 31, 2008
              
              
              2,728,913
              
              
              
              $
              5.00
              
              
              
              $
              5.00
              
              
              $
              5,092,970
              
              
              
              $
              -Granted
              
              
              -
              
              
              
              
              -
              
              
              
              
              -
              
              
              
              -
              
              
              
              
              -Canceled
              
              
              -
              
              
              
              
              -
              
              
              
              
              -
              
              
              
              -
              
              
              
              
              -Exercised
              
              
              (5,000
              )
              
              
              
              5.00
              
              
              
              
              5.00
              
              
              
              (9,331
              )
              
              
              
              -Expired
              
              
              -
              
              
              
              
              -
              
              
              
              
              -
              
              
              
              -
              
              
              
              
              -Balance,
      September 30, 2009
              
              
              2,723,913
              
              
              
              $
              5.00
              
              
              
              $
              5.00
              
              
              $
              5,083,639
              
              
              
              $
              -Earned
      and exercisable, September 30, 2009
              
              
              2,723,913
              
              
              
              $
              5.00
              
              
              
              $
              5.00
              
              
              $
              5,083,639
              
              
              
              $
              -Unvested,
      September 30, 2009
              
              
              -
              
              
              
              $
              5.00
              
              
              
              $
              5.00
              
              
              $
              -
              
              
              
              $
              -
 
  - 17
-
 China
Armco Metals, Inc. and Subsidiaries
 Notes to
the Consolidated Financial Statements  (Unaudited)
 September
30, 2009 and 2008 –Continued
  The
following table summarizes information concerning outstanding and exercisable
warrants as of September 30,
2009:
 
 Warrants
      Outstanding
              
              Warrants
      ExercisableRange
      of Exercise Prices
              
              Number
      Outstanding
              
              Average
      Remaining Contractual Life  (in years)
              
              Weighted
      Average Exercise Price
              
              Number
      Exercisable
              
              Average
      Remaining Contractual Life  (in years)
              
              Weighted
      Average Exercise Price$
              5.00
              
              
              2,723,913
              
              4.0
              
              $
              5.00
              
              2,723,913
              
              4.0
              
              $
              5.00$
              5.00
              
              
              2,723,913
              
              4.0
              
              $
              5.00
              
              2,723,913
              
              4.0
              
              $
              5.00
 
 NOTE
9 – COMMITMENTS AND CONTINGENCIES
 
 Line of credit
facility
 
 On
September 3, 2009, the Company entered into a RMB 70 million (equivalent to
$8,931,306 at September 30, 2009) line of credit facility (“Line of Credit”)
with the Bank of China.  The proceeds from the Line of Credit are
designated for property, plant and equipment expenditures related to the
Company’s scrap metal recycling facility and is secured by these assets in
addition to our land use right on which this facility is being
constructed.  The Line of Credit expires on September 3,
2012.  As of September 30, 2009, the Company drew RMB 50 million
(equivalent to U.S. $7,312,507) of the Line of Credit with RMB 20 million
(equivalent to U.S. $1,618,799 at September 30, 2009) remaining
available.  See Note 7 – Long Term Debt.
 
 NOTE
10 – CONCENTRATIONS AND CREDIT RISK
 
 Customers and Credit
Concentrations
 
 Customer
concentrations for the interim period ended September 30, 2009 and 2008 and
credit concentrations at September 30, 2009 and December 31, 2008 are as
follows:
 
 Net
      Sales
                for
      the Interim Period Ended
              
              
              Accounts
      receivable
                AtSeptember
      30, 2009
              
              
              September
      30, 2008
              
              
              September
      30, 2009
              
              
              December
      31, 2008Customer
      #206038 Yuanhai
              
              12.7
              %
              
              
              -
              
              
              
              -
              
              
              
              -Customer
      #206010 LianYunGang Jiaxin
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              50.9
              %Customer
      #122015 ZheJiang GuXiong
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              21.9
              %Customer
      #206039 Longfengshan
              
              21.2
              %
              
              
              -
              
              
              
              -
              
              
              
              -Customer
      #122007 QingDao HuaQing
              
              -
              
              
              
              -
              
              
              
              88.3
              %
              
              
              23.8
              %Customer
      #206030 Tanjin Zhiyi
              
              -
              
              
              
              96.9
              %
              
              
              -
              
              
              
              -Customer
      #206036 Hanzhong Yinlong
              
              -
              
              
              
              -
              
              
              
              11.0
              %
              
              
              -Customer
      #206013 TianJin tianxin
              
              34.8
              %
              
              
              -
              
              
              
              -
              
              
              
              -68.7
              %
              
              
              96.9
              %
              
              
              99.3
              %
              
              
              96.6
              %
 
 A
reduction in sales from or loss of such customers would have a material adverse
effect on the Company’s results of operations and financial
condition.
  - 18
-
 China
Armco Metals, Inc. and Subsidiaries
 Notes to
the Consolidated Financial Statements  (Unaudited)
 September
30, 2009 and 2008 ?CContinued
  Vendor
Concentrations
 
 Vendor
purchase concentrations for the interim period ended September 30, 2009 and 2008
and accounts payable concentration at September 30, 2009 and December 31, 2008
and are as follows:
 
 Net
      Purchases
                for
      the Interim Period Ended September 30
              
              
              Accounts
      Payable
                at2009
              
              2008
              
              
              September
      30, 2009
              
              
              December
      31, 2008Vendor
      #126010 ZhongJi NingBo
              -
              
              -
              
              
              34.5
              %
              
              
              59.3
              %Vendor
      #126011 TianJinxinglei
              -
              
              -
              
              
              20.4
              %
              
              
              -Vendor
      #206010 Jiaxin
              15.7
              %
              -
              
              
              -
              
              
              
              -Vendor
      #204006 BestonHoldings
              -
              
              -
              
              
              18.7
              %
              
              
              32.2
              %Vendor
      #204014 Mineracao
              32.6
              %
              -
              
              
              25.4
              %
              
              
              -Vendor
      #204019 Sipex
              -
              
              85.0
              %
              
              -
              
              
              
              -Vendor
      #126024 SMS GROUP
              12.2
              %
              -
              
              
              -
              
              
              
              -Vendor
      #126025 Qingdaoxinxing
              24.2
              %
              -
              
              
              -
              
              
              
              -Vendor
      #126023 Nanfangjiancai
              13.7
              %
              -
              
              
              -
              
              
              
              -98.4
              %
              85.0
              %
              
              99.0
              %
              
              
              91.5
              %
 
 Credit
Risk
 
 Financial
instruments that potentially subject the Company to significant concentration of
credit risk consist primarily of cash and cash equivalents.  As of
September 30, 2009, all of the Company’s cash and cash equivalents were held by
major financial institutions located in the PRC, none of which are
insured.  However, the Company has not experienced losses on these
accounts and management believes that the Company is not exposed to significant
risks on such accounts.
 
 Foreign currency
risk
 
 The
Company is exposed to fluctuations in foreign currencies for transactions
denominated in currencies other than its functional currency, the RMB, because a
majority of the Company’s purchasing activities are transacted in foreign
currencies.  The Company had no foreign currency hedges in place at
September 30, 2009 to reduce such exposure.  The Company’s previous
forward foreign currency exchange contracts expired on August 2, 2008 and the
loss in fair value on foreign currency hedges outstanding as of September 30,
2008 was $19,739.
 
 NOTE
10 - FOREIGN OPERATIONS
 
 Operations
 
 Substantially
all of the Company’s operations are carried out and all of its assets are
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.
 
 Dividends and
Reserves
 
 Under the
laws of the PRC, net income after taxation can only be distributed as dividends
after appropriation has been made for the following: (i) cumulative prior years’
losses, if any; (ii) allocations to the “Statutory Surplus Reserve” of at least
10% of net income after tax, as determined under PRC accounting rules and
regulations, until the fund amounts to 50% of the Company’s registered capital;
(iii) allocations of 5% to 10% of income after tax, as determined under PRC
accounting rules and regulations, to the Company’s “Statutory Common Welfare
Fund”, which is established for the purpose of providing employee facilities and
other collective benefits to employees in PRC; and (iv) allocations to any
discretionary surplus reserve, if approved by stockholders.
 
 As of
September 30, 2009, the Company had no Statutory Surplus Reserve and the
Statutory Common Welfare Fund established and segregated in retained
earnings.
  - 19
-
 China
Armco Metals, Inc. and Subsidiaries
 Notes to
the Consolidated Financial Statements  (Unaudited)
 September
30, 2009 and 2008 –Continued
  NOTE
11 – SUBSEQUENT EVENTS
 
 The
Company has evaluated all events that occurred after the balance sheet date but
before financial statements were available through November 13, 2009 to be
issued to determine if they must be reported.  The Management of the
Company determined that there were certain reportable subsequent events to be
disclosed as follows:
 
 Effective
October 26, 2009, the Board of Directors of the Company approved the appointment
of Mr. Tao Pang, Heping Ma and William Thomson as directors of the
Company.  In addition, the Company established an Audit
Committee, Compensation Committee and Nominating and Governance Committee and
each of the directors was appointed to serve on these
committees.   The charters for each of these committees are
attached as Exhibits 99.1, 99.2 and 99.3, respectively, to a Form 8-K filed on
October 28, 2009. The Board has determined that all members of the audit
committee are independent directors under the applicable rules and regulations
of the Securities Exchange Act of 1934 (the “Exchange Act”) and each of them is
able to read and understand fundamental financial statements. The Board has
determined that William E. Thomson qualifies as an “audit committee financial
expert” as defined in the Exchange Act and will act as the Chairman of the Audit
Committee.
 
 On
October 26, 2009, the Board of Directors of the Company adopted the 2009 Stock
Incentive Plan (the “Plan”). The Board of Directors also authorized 1,200,000
shares of the Company’s common stock to be reserved for issuance pursuant to the
terms of the Plan upon the grant of restricted stock awards, deferred stock
grants, stock appreciation rights, stock awards and/or the exercise of options
granted under the Plan.
 
 On
October 26, 2009, the Company awarded 200,000 shares of its restricted common
stock, par value $.001 per share, pursuant to thePlan to Kexuan Yao, the Company’s Chief
Executive Officer and 6,250 shares of its restricted common stock to Mr. William
Thomson in conjunction with his appointment to the Company's Board of Directors
on October 26, 2009.  The shares awarded to Mr. Yao vest 66,667 shares
on December 15, 2010, 66,667 shares on December 15, 2011 and 66,666 shares on
December 15, 2012. The shares awarded to Mr. Thomson will vest 25% on March 31,
2010, 25% on June 30, 2010, 25% on September 30, 2010 and 25% on December 31,
2010.  The restricted stock vests only if the recipient is still
employed by the Company on the vesting date (with limited exceptions), and the
shares are eligible for the payment of dividends, if the Board of Directors were
to declare dividends on the Company’s common stock. The grant of restricted
stock to Mr. Thomson is made in addition to his annual cash retainer of
$20,000.
 
  - 20
-
 
 Item
      2.
              Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations.
 
 The
following discussion should be read in conjunction with the information
contained in our unaudited consolidated financial statements and the notes
thereto appearing elsewhere herein and in conjunction with the Management’s
Discussion and Analysis set forth in our Annual Report on Form 10-K for the year
ended December 31, 2008.
 
 We are on
a calendar year; as such the three month period ending September 30, is referred
to as our “third quarter”. The past year ended December 31, 2008 is referred to
as “2008”, the current year ending December 31, 2009 is referred to as “2009”,
and the coming year ending December 31, 2010 is referred to as
“2010”.
 
 OVERVIEW
OF OUR PERFORMANCE AND OPERATIONS
 
 OVERVIEW
OF OUR PERFORMANCE AND OPERATIONS
 
 Our
Business
 
 We
import, sell and distribute to the metal refinery industry in China a variety of
metal ore which includes iron, chrome, nickel, copper and manganese ore as well
as non-ferrous metals, scrap metal and coal. We obtain these raw materials from
global suppliers in Brazil, India, South America, Oman, Turkey, Libya, Nigeria,
Indonesia, and the Philippines and distribute them. China is the largest
developing country in the world, and the demand for steel has been growing
steadily over the past decade as the country continues to experience an
industrial revolution. Management estimates domestic steel production should
continue to witness significant growth as China continues to grow.
 
 We are in
the final stages of constructing a scrap metal recycling facility in the Banqiao
Industrial Zone of Lianyungang Economic Development Zone in the Jiangsu province
of the PRC. Upon completion of our planned metal recycling facility, we will
seek to recycle automobiles, machinery, building materials, dismantled ships and
various other scrap metals and will sell and distribute recycled scrap metal to
the metal refinery industry in the PRC utilizing our existing network of metal
ore customers. We expect to commence recycling operations in the first quarter
of 2010.
 
 We
believe scrap metal recycling will become a strong growth driver worldwide as
natural resources continue to be depleted and larger amounts of unprocessed
scrap metal becomes available as a result of increases in consumer demand for
products made from steel that eventually are recycled. We have invested a total
of approximately $14.5 million for construction and equipment purchases for the
first phase of our scrap metal recycling facility. These capital expenditures
were derived from a portion of the net proceeds from our 2008 offering
(approximately $6.0 million) and borrowings of approximately $7.3 million. It
does not appear that we will need to secure additional investment capital and/or
bank and vendor financing to complete the first phase of our scrap metal
recycling facility.
 
 Our
Performance
 
 For the third quarter and nine months of 2009, our net revenues increased
approximately 21% and approximately 34%, respectively, over the comparable
periods in 2008. Our gross profit margin as a percentage of revenues,
however, decreased for the third quarter and nine months of 2009 to
approximately 4% and approximately 10%, respectively compared to approximately
12% and approximately 11% during the third quarter and nine months of 2008,
respectively.  Our performance during the third quarter and nine
months of 2009 reveals the variable nature of our gross profit margins in our
trading business; during the current year, our gross profit margin as a
percentage of revenues began at approximately 10% for the first quarter of 2009,
then increased to 18% for the second quarter of 2009, and then decreased to 4%
for the third quarter of 2009. These fluctuations are attributable to variations
in market prices of the ore and metals we sell.  Our net income
decreased a $2.2 million and $1.3 million for the third quarter and nine months
of 2009, respectively. This decrease is partially due to a $1.1 million income
tax accrual calculated in the third quarter of 2009.  Our total assets
increased approximately 187% in comparison to December 31, 2008, which was
mainly due to the short-term increase of inventory resulting from the cut-off of
the quarter end and the construction of our scrap metal recycling
facility. 
 In
addition to our long term borrowings of approximately $7.3 million for our scrap
metal recycling facility, we borrowed from banks in China on a short term
basis approximately $13 million during the third quarter of 2009 to finance
the purchase of inventory on which we have executed contracts to resell at the
time of purchase.  These borrowings are secured by the inventory we
purchase and the contracts for their sale and are repaid upon receipt of payment
from our customers.  In addition, our accounts receivable increased
approximately $6.5 million mainly due to extension of credit terms given to our
customers.  Inventories and accounts payable both increased
approximately $31.1 million at September 30, 2009 from December 31, 2008 due to
timing differences between our receipt of product, shipment to our customers,
and payment to our vendors.   - 21
-
 Our
Outlook
 
 Our
performance for the three and nine months of 2009 showed increased sales
but a lower gross margin in comparison to our second quarter of 2009 as our
strong second quarter gross margin was mainly due to a one time sales
transaction during that period. We have witnessed a rebound in our revenue which
we believe is a sign of the beginning of a global economic
recovery.  We note consistent sales increases quarter-over-quarter in
the current year.  Due to efforts to improve our performance and
operate more efficiently, we now see our Company in the position to capitalize
on trading opportunities as a global economic recovery emerges.
 
 In
November 2008, the Chinese government announced a $586 billion domestic economic
stimulus program aimed at bolstering domestic economic activity.  The
two-year program includes tax rebates, spending in housing, infrastructure,
agriculture, health care and social welfare, and a tax deduction for capital
spending by companies. We can attribute a portion of our increased sales to this
stimulus program. The Chinese government has been very supportive and a series
of economically beneficial policies have recently been
implemented.  Based on these newly implemented policies we are
beginning to see some signs of economic recovery. However, in the short-term, it
remains to be seen whether domestic consumption can compensate for slower export
growth on the products made from the ore and metal we sell, and the impact this
will have on our revenues through the balance of this year.  The
metals markets  has witnessed a significant rebound in pricing during
the second quarter of 2009 followed by a leveling off during the third quarter
of 2009. In both market situations, we have experienced an increase in trading
volumes and the trading business has been more active through the second and
third quarters of 2009.
 
 Presentation
of Financial Statements
 
 The
presentation of the statements of operations included in Part 1, Item 1 in this
Form 10-Q have been modified to allow for the reporting of deductions from net
income to arrive at income (loss) applicable to common
stockholders.  Items reflected in our comprehensive income for the
periods reported are now included in our financial notes to the unaudited
financial statements included in this Form 10-Q.
 
 RESULTS
OF OPERATIONS
 
 The table
below summarizes the consolidated operating results for the three and nine
months ended September 30, 2009 and 2008.  The percentages represent
each line item as a percentage of revenues.
 
 For
      the Three Months Ended
                September
      30,
              
              
              For
      the Nine Months Ended
                September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Net
      revenues
              
              $
              27,312,276
              
              
              
              
              $
              20,384,974
              
              
              
              
              $
              55,207,948
              
              
              
              
              $
              43,174,787Cost
      of goods sold
              
              
              26,279,225
              
              96
              %
              
              
              17,937,965
              
              88
              %
              
              
              49,542,143
              
              90
              %
              
              
              38,621,088
              
              89
              %Gross
      profit
              
              
              1,033,051
              
              4
              %
              
              
              2,447,009
              
              12
              %
              
              
              5,665,805
              
              10
              %
              
              
              4,553,699
              
              11
              %Total
      operating expenses
              
              
              452,771
              
              2
              %
              
              
              344,116
              
              2
              %
              
              
              1,457,768
              
              3
              %
              
              
              717,070
              
              2
              %Operating  income
              
              
              580,280
              
              2
              %
              
              
              2,102,893
              
              10
              %
              
              
              4,208,037
              
              8
              %
              
              
              3,836,629
              
              9
              %
 
 Net
Revenues
 
 Revenues
for the three and nine months ended September 30, 2009 increased
approximately 34% and approximately 28% over the comparable periods in 2008,
respectively.  These increases are attributable to an increase in
sales to existing customers as demand for the metal ore we sell in China has
rebounded in response to Chinese government incentives and as signs of recovery
from the global economic slowdown has allowed our customers to begin to ramp-up
operations to pre-economic slowdown levels.
 
 Cost
of Goods Sold
 
 Cost of
goods sold as a percentage of revenues during the three and nine
months ended September 30, 2009 were approximately 96% and 90%,
respectively, compared to 88% and 89% for the comparable periods in 2008. These
increases were mainly due to a sales price reduction we agreed to in light of
the market price of chromium at the time of delivery to a customer in the third
quarter of 2009.  Overall, our gross profit margin decreased to
approximately 4% and approximately 10% for the three and nine months ended
September 30, 2009 as compared to approximately 12% and approximately 11% for
the same periods in 2008.
  - 22
-
  Total
Operating Expenses
 
 Operating
expenses for the three and nine months ended September 30, 2009 increased
approximately 32% and approximately 103% over the comparable periods of 2008,
respectively.  Operating expenses as a percentage of revenues were 2%
and 3% for the three and nine months ended September 30, 2009, respectively,
compared to 2% for the comparable periods of 2008. The increase in our operating
expense is due to an increase in both selling expenses and general and
administrative expenses.  Selling expense increased by approximately
$78,000 and $459,000 over the prior three and nine months, respectively mainly
due to higher selling expenses associated with a larger sales staff and higher
salaries needed to retain talent, and  higher  inspection
and warehousing fees on larger quantities of goods we were required to warehouse
pending delivery to customers. Our general and administrative cost increased by
approximately $31,000 and $281,000 over the prior three and nine month period,
respectively mainly due to higher salaries and an increase in professional fees
for regulatory compliance associated with our SEC reporting obligations. While
we will seek to contain our operating expenses to the extent possible without
negatively impacting our business, we expect these costs to stay within 2-3% of
revenues through the end of 2009.
 
 Total
Other Expense
 
 Total
other expense decreased approximately $32,000 for the three months ended
September 30, 2009 and increased $1.3 million for the nine months ended
September 30, 2009.  Total other income and expense includes interest
expense, interest income, bank charges, government subsidy income, and penalties
and fines.  Interest expense increased approximately $41,000 and
$35,000 for the three and nine months ended September 30, 2009, respectively.
This increase is due to higher interest expense associated with the $20.3
million debt obligations we have incurred in connection with our trading and
recycling facility construction.   This increase in expense was
partially offset by an increase in government subsidy income of approximately
$11,000 and $52,000 for the three and nine months ended September 30, 2009,
respectively.  This subsidy income is related to Chinese government
stimulus initiatives beginning in 2009.   For the nine months
of 2009, the change to other expense from other income for the comparative
period in 2008 is mainly due to a one-time gain of $1.2 million related to a
contract termination we recognized during the three months ended June 30, 2008,
this gain was not repeated in 2009.  We expect other expense to
continue to be about 1% of revenues through the end of 2009.
 
 Income
Tax Expense
 
 Income
tax expense for the three and nine months ended September 30, 2009
increased by $730,626 and $344,735 respectively compared to the comparable
periods of 2008, respectively. This increase is due to an income tax accrual we
made based on an analysis of the applicability of a potential 16.5% income tax
on the operations of our Hong Kong subsidiary during the nine months
of 2009.  Our income tax accrual and the related expense is an
estimate and will be reevaluated at the end of 2009.
 
 Net
Income (Loss)
 
 For the
three months ended September 30, 2009 our net loss was ($859,959) and for the
nine months ended September 30, 2009 our net income was
$2,637,736.  These amounts represented a decrease of approximately
163% and 33%, respectively, over the comparable periods in 2008 and were mainly
due to a $1.1 million income tax expense in the third quarter of 2009 and a
lower gross profit margin.
 
 Comprehensive
Income
 
 For the
three and nine months ended September 30, 2009 our comprehensive (loss) income
amounted to ($819,090) and $2,620,205, respectively.  Comprehensive
income consists of our net (loss) income and foreign currency translation gain
(loss).  The functional currency of two of our
subsidiaries operating in the PRC is the Chinese dollar or RMB. The financial
statements of our subsidiaries are translated to U.S. dollars using period end
rates of exchange for assets and liabilities, and average rates of exchange (for
the period) for revenues, costs, and expenses. Net gains and losses resulting
from foreign exchange transactions are included in the consolidated statements
of operations.  As a result of these translations, we reported a
foreign currency translation gain of $40,869 for the third quarter of 2009 and a
gain of $183,363 for the third quarter of 2008, and for the nine months of 2009
a loss of $17,532 and a gain of $497,263 for the nine months of 2008. These
non-cash gains and losses had the effect of increasing our reported
comprehensive income for the third quarter of 2009 and decreasing our
reported comprehensive income for the nine months of 2009.
  - 23
-
  LIQUIDITY
AND CAPITAL RESOURCES
 
 Liquidity
is the ability of a company to generate funds to support its current and future
operations, satisfy its obligations and otherwise operate on an ongoing basis.
At September 30, 2009 and December 31, 2008 we had cash and cash equivalents of
$4,715,817 and $3,253,533, respectively.  At September 30, 2009 our
working capital was approximately $12.8 million as compared to approximately
$10.7 million at December 31, 2008. We have historically met our liquidity
requirements utilizing internally generated cash derived from our operations,
raising capital by selling our common stock and warrants and debt
financing.
 
 On
September 3, 2009, we entered into a RMB 70 million (equivalent to $8,931,306 at
September 30, 2009) line of credit facility (“Line of Credit”) with the Bank of
China.  The proceeds from the Line of Credit are designated for
property, plant and equipment expenditures related to our scrap metal recycling
facility and is secured by these assets in addition to our land use right on
which this facility is being constructed.  The Line of Credit expires
on September 3, 2012.  As of September 30, 2009, we drew RMB 50
million (equivalent to U.S. $7,312,507) of the Line of Credit with RMB 20
million (equivalent to U.S. $1,618,799 at September 30, 2009) remaining
available to us.
 
 On
September 13, 2009, we borrowed $7,637,615 from Raiffeisen Zentralbank
Österreich AG in China to finance the purchase of inventory that was subject to
a contract for resale to one of our customers at the time of the loan. The loan
accrues interest at rate of 3.30% per annum payable monthly, with the principal
due February 3, 2010.  The loan was secured by the inventory which was
purchased with the proceeds of the loan and the contract for its sale and
personally guaranteed by Kexuan Yao, our Chief Executive Officer and
Chairman.  This loan was repaid on November 13, 2009 upon receipt of
payment from our customer in connection with the completion of the sale of the
inventory.
 
 In
addition, on September 26, 2009, we borrowed $5,338,076 from Guangdong
Development Bank in China to finance the purchase of additional inventory that
was subject to a contract for resale to one of our customers at the time of the
loan. The loan accrues interest at rate of 6.30% per annum payable monthly, with
the principal due January 26, 2010.  The loan was secured by the
inventory which was purchased with the proceeds of the loan and the contract for
its sale. We completed delivery of the goods in connection with this transaction
and expect to repay this loan when we receive payment from our customer which is
due prior to the date the loan matures.
 
 As of September 30, 2009, we have invested a total of approximately $14.5
million for construction and equipment purchases for the first phase of our
scrap metal recycling facility with approximately $1.8 million being invested by
us in the third quarter of 2009. These capital expenditures were derived from
our cash flow, a portion of the net proceeds from our 2008 offering
(approximately $6.0) and the proceeds from our Line of Credit ($7.3
million).  It does not appear that we will need to secure additional
investment capital and/or bank and vendor financing to complete the first phase
of our scrap metal recycling facility. While we expect to expand the production
capacity of our planned recycling facility after completion of the first phase
of construction, we have not set a timeframe
for this expansion.  Also, we have not determined how we plan to
finance future expansion of our recycling facility and unless we can obtain
additional financing, we will be unable to complete construction of additional
phases of our scrap steel recycling facility. There is no assurance, however,
that we will be successful in obtaining the additional financing that we require
for additional phases or that such financing may not be on terms deemed to be
desirable to our management. Furthermore, in the event we are successful, there
is no assurance that such investment will result in enhanced operating
performance and any inability on our part to secure additional financing over
the next 12 months, if needed, could have a material adverse effect on our
growth plans.
 
 A
majority of our cash reserves, $4,016,176 or approximately 95% at September
30, 2009, is held in the form of RMB held in bank accounts at financial
institutions located in the PRC. Cash held in banks in the PRC is not insured.
The value of cash on deposit in China at September 30, 2009 has been translated
based on the exchange rate as of September 30, 2009.  In 1996, the
Chinese government introduced regulations which relaxed restrictions on the
conversion of the RMB; however restrictions still remain, including but not
limited to restrictions on foreign invested entities.  Foreign
invested entities may only buy, sell or remit foreign currencies after providing
valid commercial documents at only those banks authorized to conduct foreign
exchanges.  Furthermore, the conversion of RMB for capital account
items, including direct investments and loans, is subject to PRC government
approval.  Chinese entities are required to establish and maintain
separate foreign exchange accounts for capital account items.  We
cannot be certain Chinese regulatory authorities will not impose more stringent
restrictions on the convertibility of the RMB, especially with respect to
foreign exchange transactions.  Accordingly, cash on deposit
in banks in the PRC is not readily deployable by us for purposes outside of
China.
 
 Our
current assets at September 30, 2009 increased 189% from December 31, 2008; this
reflects increases in current asset items including inventories of $31.1
million, accounts receivable of $6.5 million, prepayments and other current
assets of $3.8 million, and deposits on future construction of $2.8 million.
These increases were partially offset by a decrease in advances on purchases of
$1.8 million.
 
 Our
current liabilities increased 324% at September 30, 2009 from December 31, 2008;
this reflects an increase in accounts payable of $31.1 million, loans payable of
$10.1 million and accrued expenses and other liabilities of $2.5 million which
were partially offset by decreases in customer deposits of $0.5
million.
 
 Pledged
deposits increased approximately $507,000 at September 30, 2009 from December
31, 2008.  The Company makes these pledged deposits with financial
institutions as collateral to Letters of Credit; the amounts will be released to
pay vendors upon acceptance of goods.
 
 Our
accounts receivable, net of allowance for doubtful accounts, increased
approximately $6.5 million mainly due to extension of credit terms given to our
customers.  All of our accounts receivables are aged less than 90
days.
 
 -
24 -
 
 Due from
related parties increased approximately $1.5 million at September 30, 2009 from
December 31, 2008.  This amount was advanced to Prime Armet Group,
Inc., a company controlled by Kexuan Yao, our Chairman and Chief Executive
Officer, which  acted as a third party payor in order to facilitate a
foreign exchange payment for equipment to be delivered to and incorporated into
our recycling facility. Upon delivery of the equipment, this due from related
party will be reclassified to property, plant, and equipment.
 
 Inventories
increased approximately $31.1 million at September 30, 2009 from December 31,
2008 mainly due to timing differences between our receipt of product and
shipment to our customers.  We hold inventory for short periods of
time, normally less than one month, in situations where our customer has not
accepted the shipment or delays in shipment occur.  Along with this
increase in inventory, accounts payable also increased $31.1 million from
December 31, 2008 mainly due to similar timing differences as we normally pay
for any goods held as inventory after we receive payment from our customer upon
delivery.
  Advances
on purchases decreased approximately 50% at September 30, 2009 from December 31,
2008, and consisted of prepayments to vendors for merchandise and deposits on
pending purchases. These advances on purchases are customary in our
business and helps us secure inventory below prevailing market prices, thereby
providing us with a better opportunity to increase our gross profit
margins.
 
 Our
prepayment and other current assets increased approximately $3.9 million at
September 30, 2009 from December 31, 2008.  These were due to
prepayments and deposits for start-up costs and deposits related to our
recycling operation in Lianyungang in preparation for operations to begin at the
recycling facility in the first quarter of 2010.  The prepayments
include a $1.5 million guarantee deposit to the recycling equipment vendor, $1.0
million in prepaid expenses related to the recycling facility, and $800,000 in
prepaid expenses related to the trading business.  This in an increase
from prepaid expenses related to the recycling facility of $150,000 and prepaid
expenses related to the trading business of $230,000 at December 31,
2009.  Additionally, deposits on future construction increased $4.3
million for prepaid construction costs also related to our recycling
operation.
 
 Loans payable increased approximately $10.1 at September 30, 2009 from December
31, 2008 as a result of approximately $13.0 million in short-term borrowings in
the third quarter of 2009 to finance inventory purchases partially offset by
repayments.  The short-term borrowings in the third quarter of 2009
carry interest rates ranging from 3.3% to 7.85%.
 Advance
from stockholder decreased approximately $188,000 at September 30. 2009 from
December 31, 2008.  Our Chairman and CEO, Mr. Kexuan Yao has advanced
us funds for working capital purposes.  We repaid approximately
$60,000 during the third quarter of 2009 and $188,000 during the nine months
ended September 30, 2009.
 
 Customer
deposits decreased 87% at September 30, 2009 from December 31,
2008.  This decrease is due to timing of customer orders and amounts
that we require for deposits.  We recognize customer deposits as
revenue when the goods have been delivered and risk of loss has transferred to
the customer either at the port of origin or port of destination based on the
shipping terms we agree to with our customer.
 
 Accrued
expenses and other current liabilities increased to approximately $2.5 million
at September 30, 2009 from December 31, 2008.  This line item consists
of accrued expenses and other payables related to shipping
fees.  These expenses are due to timing differences of shipments and
payments of our payables as compared to 2008.
 
 Long-term
debt increased approximately $7.3 million at September 30, 2009 from December
31, 2008 due to a bank loan, the proceeds of which were used for purchases of
property, plant and equipment related to the construction of our scrap metal
recycling facility. The term of the loan is for a period of three years bearing
interest at the rate of 5.4% per annum and is secured by our fixed assets and
land use right.
 
 Statement
of Cash Flows
  As of
September 30, 2009, our cash increased approximately $1.5 million to $4.7
million. This increase consisted of $3.1 million used in operating activities,
$12.7 million used in investing activities, and $17.6 million provided by
financing activities. Our cash increase of approximately $3.2 million at
September 30, 2008 consisted of $9.5 million used in operating activities,
$354,000 used in investing activities, and $12.9 million provided by financing
activities.
 
 Cash
(Used in) Provided by Operating Activities
 
 For the
nine months ended September 30, 2009 cash used in operations of $3.1 million was
mainly comprised of outflows related to an increase in inventories of $31.2
million, a increase in accounts receivable of $6.5 million, and an increase in
prepayments of $3.9 million.  These outflows were partially offset by
cash provided by our net income of $2.6 million, and cash provided by an
increase in accounts payable of $31.0 million, increase in accruals of $2.5, and
decrease in advance on purchases of $1.8 million
 
 For the
nine months ended September 30, 2008 cash used in operations of $9.5 million
included an increase in accounts receivables of $12.8 million due primarily to
longer payment terms extended to clients during the three months ended September
30, 2008, prepayments and other current assets of $744,785, and an increase in
advances on purchases of $5.7 million. These outflows were partially offset by
an increase in accounts payables of approximately $2.5 million, deposits from
customers of $1.9 million, taxes payable of approximately $785,000, accrued
expenses and other current liabilities of approximately $442,000, and net income
of $3.9 million.
  - 25
-
  Cash
Used in Investing Activities
 
 For the
nine months ended September 30, 2009 cash used in investing activities of $12.7
million was due to purchases of property and equipment associated with our
recycling facility construction project during the period of $7.9 million,
deposits for future construction of $2.8 million, increase in advances to
related parties of $1.5 million and payments made towards pledged deposits of
$506,621.
 
 For the
nine months ended September 30, 2008 cash used in investing activities of
$354,154 was mainly due to net payments toward pledged deposits of $196,917 and
purchases of property and equipments of $168,743.
 
 Cash
Provided by Financing Activities
 
 For the
nine months ended September 30, 2009 cash provided in financing activities of
$17.6 million, consisted of proceeds from short-term loans of $10.1 million,
used to finance the purchase of inventories, proceeds from long-term debt of
$7.3 million, for property, plant and equipment purchases related to our scrap
metal recycling facility, and proceeds from the exercise of warrants of $435,500
partially offset by repayments of short-term loan payable of $2.9 million, and
payments to related parties of $187,626.
 
 For the
nine months ended September 30, 2008 cash provided by financing activities of
$12.9 million was due to proceeds from loans payable of $7.5 million and
proceeds from the sale of common stock of $6.6 million partially offset by
amounts repaid to related parties of $921,236 and payment of forward foreign
exchange contracts of $344,670.
 
 Off
Balance Sheet Arrangements
 
 Under SEC
regulations, we are required to disclose our off-balance sheet arrangements that
have or are reasonably likely to have a current or future effect on our
financial condition, such as changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources that are material to investors. An off-balance sheet arrangement means
a transaction, agreement or contractual arrangement to which any entity that is
not consolidated with us is a party, under which we have:
 
 ·
              Any
      obligation under certain guarantee contracts;·
              Any
      retained or contingent interest in assets transferred to an unconsolidated
      entity or similar arrangement that serves as credit, liquidity or market
      risk support to that entity for such assets;·
              Any
      obligation under a contract that would be accounted for as a derivative
      instrument, except that it is both indexed to our stock and classified in
      stockholder’s equity in our statement of financial position;
      and·
              Any
      obligation arising out of a material variable interest held by us in an
      unconsolidated entity that provides financing, liquidity, market risk or
      credit risk support to us, or engages in leasing, hedging or research and
      development services with us.
  We do not
have any off-balance sheet arrangements that we are required to disclose
pursuant to these regulations. In the ordinary course of business, we enter into
operating lease commitments, purchase commitments and other contractual
obligations. These transactions are recognized in our financial statements in
accordance with generally accepted accounting principles in the United
States.
 
 Critical
Accounting Policies
 
 The
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with U.S. GAAP. The preparation of these consolidated financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates based on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions.
 
 A summary
of significant accounting policies is included in Note 2 to the unaudited
consolidated financial statements included in this quarterly report. Management
believes that the application of these policies on a consistent basis enables us
to provide useful and reliable financial information about our Company's
operating results and financial condition.
  - 26
-
  Recently
Issued Accounting Pronouncements
 
 In June
2009, the FASB approved the "FASB Accounting Standards Codification" (the
"Codification") as the single source of authoritative nongovernmental U.S. GAAP
to be launched on July 1, 2009. The Codification does not change current U.S.
GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by
providing all the authoritative literature related to a particular topic in one
place. All existing accounting standard documents will be superseded and all
other accounting literature not included in the Codification will be considered
non-authoritative. The Codification is effective for interim and annual periods
ending after September 15, 2009. The Company does not expect the adoption to
have a material impact on its consolidated financial position, results of
operations or cash flows.
  In
December 2007 the FASB issued Accounting Standard, or AS, Topic 805,Business Combinations, or AS
805, which established principles and requirements for the acquirer of a
business to recognize and measure in its financial statements the identifiable
assets (including in-process research and development and defensive assets)
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree. AS 805 is effective for financial statements issued for fiscal years
beginning after December 15, 2008. Prior to the adoption of AS 805,
in-process research and development costs were immediately expensed and
acquisition costs were capitalized. Under AS 805 all acquisition costs are
expensed as incurred. The standard also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of financial statements to evaluate the
nature and financial effects of the business combination. In April 2009 the
FASB updated AS 805 to amend the provisions for the initial recognition and
measurement, subsequent measurement and accounting, and disclosures for assets
and liabilities arising from contingencies in business combinations. This update
also eliminates the distinction between contractual and non-contractual
contingencies. We expect AS 805 will have an impact on our consolidated
financial statements, but the nature and magnitude of the specific effects will
depend upon the nature, terms and size of the acquisitions we consummate after
the January 1, 2009 effective date.
 
 Management
does not believe that any other recently issued, but not yet effective
accounting pronouncements, if adopted, would have a material effect on the
accompanying consolidated financial statements.
 
 Cautionary
Note Regarding Forward-Looking Information and Factors That May Affect Future
Results
 
 This
report contains forward-looking statements. The Securities and Exchange
Commission encourages companies to disclose forward-looking information so that
investors can better understand a company’s future prospects and make informed
investment decisions. This Quarterly Report on Form 10-Q and other written and
oral statements that we make from time to time contain such forward-looking
statements that set out anticipated results based on management’s plans and
assumptions regarding future events or performance. We have tried, wherever
possible, to identify such statements by using words such as “anticipate,”
“estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will” and similar
expressions in connection with any discussion of future operating or financial
performance. In particular, these include statements relating to future actions,
future performance or results of current and anticipated sales efforts,
expenses, the outcome of contingencies, such as legal proceedings, and financial
results. A list of factors that could cause our actual results of operations and
financial condition to differ materially is set forth below, and these factors
are discussed in greater detail under Item 1A. “Risk Factors” in our Annual
Report on Form 10-K for the year ended December 31, 2008:
 
 ·
              Continued
      global economic weakness is expected to reduce demand for our
      products.·
              Our
      ability to obtain sufficient capital to fund our planned expansion and
      construction of a scrap steel recycling facility.·
              Fluctuations
      in raw material prices may affect our operating results as we may not be
      able to pass on cost increases to customers.·
              Our
      ability to service debt obligations.·
              Our
      ability to manage growth in operations to maximize our potential growth
      and achieve our expected revenues.·
              Our
      organic growth strategy, if unsuccessful, may result in a negative impact
      on our growth, financial condition, results of operations and cash
      flow.·
              Our
      ability to successfully complete construction of our proposed scrap steel
      recycling facility, or, even if constructed, our ability to operate the
      proposed recycling facility profitably.·
              Our
      ability to successfully implement our acquisition growth strategy and meet
      growth and revenue expectations.·
              The
      lack various legal protections in certain agreements to which we are a
      party and which are material to our operations which are customarily
      contained in similar contracts prepared in the United
    States.·
              Our
      dependence on our key management personnel.·
              Our
      inability to meet the accelerated filing and internal control reporting
      requirements imposed by the SEC.·
              The
      effect of changes resulting from the political and economic policies of
      the Chinese government on our assets and operations located in the
      PRC.·
              The
      influence of the Chinese government over the manner in which our Chinese
      subsidiaries must conduct our business activities, including the impact of
      governmental regulations associated with the Beijing Olympic
      games.·
              The
      impact on future inflation in China on economic activity in
      China.
 
  - 27
-
  
 ·
              The
      impact of any recurrence of severe acute respiratory syndrome, or SAR’s,
      or another widespread public health problem.·
              The
      limitation on our ability to receive and use our revenues effectively as a
      result of restrictions on currency exchange in China.·
              Our
      ability to enforce our rights due to policies regarding the regulation of
      foreign investments in China.·
              The
      restrictions imposed under recent regulations relating to offshore
      investment activities by Chinese residents and the increased
      administrative burden we face and the creation of regulatory uncertainties
      that may limit or adversely affect our ability to complete the business
      combination with our PRC based subsidiaries.·
              Our
      ability to comply with the United States Foreign Corrupt Practices Act
      which could subject us to penalties and other adverse
      consequences.·
              Our
      ability to establish adequate management, legal and financial controls in
      the PRC.·
              The
      provisions of our articles of incorporation and bylaws which may delay or
      prevent a takeover which may not be in the best interests of our
      shareholders.·
              Our
      controlling stockholders may take actions that conflict with your
      interests.
 
 We
caution that the factors described herein and other factors could cause our
actual results of operations and financial condition to differ materially from
those expressed in any forward-looking statements we make and that investors
should not place undue reliance on any such forward-looking statements. Further,
any forward-looking statement speaks only as of the date on which such statement
is made, and we undertake no obligation to update any forward-looking statement
to reflect events or circumstances after the date on which such statement is
made or to reflect the occurrence of anticipated or unanticipated events or
circumstances. New factors emerge from time to time, and it is not possible for
us to predict all of such factors. Further, we cannot assess the impact of each
such factor on our results of operations or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
 
 Item
      3.
              Quantitative
      and Qualitative Disclosures About Market
Risk.
 
 Not
applicable for a smaller reporting company.
 
 Item
      4T.
              Controls
      and Procedures.
 
 Evaluation
of Disclosure Controls and Procedures
 
 We
maintain “disclosure controls and procedures” as such term is defined in Rule
13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange
Act”).  In designing and evaluating our disclosure controls and
procedures, our management recognized that disclosure controls and procedures,
no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of disclosure controls and procedures
are met.  Additionally, in designing disclosure controls and
procedures, our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and
procedures.  The design of any disclosure controls and procedures also
is based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions.  Pursuant to Rule
13a-15(b) under the Exchange Act, we carried out an evaluation, with the
participation of our management, including our Chief Executive Officer (“CEO”)
and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure
controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act)
as of the end of the period covered by this report. Based upon that evaluation,
our CEO and CFO concluded that our disclosure controls and procedures are
effective to ensure 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, and that such information is accumulated and
communicated to our management, including our CEO and CFO, as appropriate, to
allow timely decisions regarding required disclosure.
 
 Changes
in Internal Control over Financial Reporting
 
 There
have been no changes in our internal control over financial reporting during our
last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
  - 28
-
  PART
II - OTHER INFORMATION
 
 Item
      1.
              Legal
      Proceedings.
 
 None.
 
 Item
      1A.
              Risk
      Factors
 
 Debt Repayment
 
 As of
September 30, 2009, we had approximately $7.3 million of long-term debt and
$13.0 million of short term debt. Our ability to meet our cash requirements,
including our debt service obligations, is dependent upon our future
performance, which will be subject to financial, business and other factors
affecting our operations, many of which are or may be beyond our control. We
cannot provide assurance that our business will generate sufficient cash flows
from operations to fund these cash requirements, including our debt service
obligations. If we are unable to meet our cash requirements from operations, we
would be required to obtain alternative financing. The degree to which we may be
leveraged as a result of the indebtedness we have incurred could materially and
adversely affect our ability to obtain financing for working capital,
acquisitions or other purposes, could make us more vulnerable to industry
downturns and competitive pressures or could limit our flexibility in planning
for, or reacting to, changes and opportunities in our industry, which may place
us at a competitive disadvantage. There can be no assurance that we would be
able to obtain alternative financing, that any such financing would be on
acceptable terms or that we would be permitted to do so under the terms of
existing financing arrangements. In the absence of such financing, our ability
to respond to changing business and economic conditions, make future
acquisitions, react to adverse operating results, meet our debt service
obligations or fund required capital expenditures could be materially and
adversely affected.
 
 Additional
risk factors describing the major risks to our business can be found under Item
1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December
31, 2008. Other than the risk factor discussed above, there has been no material
change in our risk factors from those previously discussed in the Annual Report
on Form 10-K.
 
 Item
      2.
              Unregistered
      Sales of Equity Securities and Use of
Proceeds.
 
 None
 
 Item
      3.
              Defaults
      Upon Senior Securities.
 
 None
 
 Item
      4.
              Submission
      of Matters to a Vote of Security
Holders.
 
 None
 
 Item
      5.
              Other
      Information.
 
 On
September 3, 2009, we entered into a RMB 70 million (equivalent to $8,931,306 at
September 30, 2009) line of credit facility (“Line of Credit”) with the Bank of
China which provides for an interest rate of 5.4% per annum payable monthly with
principal due September 7, 2012.  The proceeds from the Line of Credit
are designated for property, plant and equipment expenditures related to our
scrap metal recycling facility and is secured by these assets in addition to our
land use right on which this facility is being constructed.  The Line
of Credit expires on September 3, 2012.  As of September 30, 2009, we
drew RMB 50 million (equivalent to U.S. $7,312,507) of the Line of Credit with
RMB 20 million (equivalent to U.S. $1,618,799 at September 30, 2009) remaining
available to us.
 On
September 13, 2009, we borrowed $7,637,615 from Raiffeisen Zentralbank
Österreich AG in China to finance the purchase of inventory that was subject to
a contract for resale to one of our customers at the time of the loan. The loan
accrues interest at rate of 3.30% per annum payable monthly, with the principal
due February 3, 2010.  The loan was secured by the inventory which was
purchased with the proceeds of the loan and the contract for its sale and
personally guaranteed by Kexuan Yao, our Chief Executive Officer and
Chairman.  This loan was repaid on November 13, 2009 upon receipt of
payment from our customer in connection with the completion of the sale of the
inventory.
 
 In
addition, on September 26, 2009, we borrowed $5,338,076 from Guangdong
Development Bank in China to finance the purchase of additional inventory that
was subject to a contract for resale to one of our customers at the time of the
loan. The loan accrues interest at rate of 6.30% per annum payable monthly, with
the principal due January 26, 2010.  The loan was secured by the
inventory which was purchased with the proceeds of the loan and the contract for
its sale. We completed delivery of the goods in connection with this transaction
and expect to repay this loan when we receive payment from our customer which is
due prior to the date the loan matures.
  - 29
-
  
 Item
      6.
              Exhibits
 
 No.
              Description31.1
              Rule
      13a-14(a)/ 15d-14(a) Certification of Chief Executive Officer
      *31.2
              Rule
      13a-14(a)/ 15d-14(a) Certification of Chief Financial Officer
      *32
              Section
      1350 Certification of Chief Executive Officer and the Chief Financial
      Officer *
 
 * Filed
herewith
 
 
  - 30
-
  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
      Armco Metals, Inc.Date:
      November 23, 2009
              By:
              /s/ Kexuan
      YaoKexuan
      YaoCEO
      and Chairman(Principal
      executive officer)
 
 
 
 Date:
      November 23, 2009
              By:
              /s/ Fengtao
      WenFengtao
      WenChief
      Financial Officer(Principal
      financial and accounting officer)