Armco Metals 10Q 2008 Q3 Quarterly report

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, 2008

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: 333-145712

CHINA ARMCO METALS, INC

(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 No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer (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 No þ

Indicated the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 10,092,649 shares of common stock are issued and outstanding as of November 13, 2008.

TABLE OF CONTENTS

		Page No.
PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements.	2
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	26
Item 4	Controls and Procedures.	26

PART II - OTHER INFORMATION
Item 1.	Legal Proceedings.	26
Item 1A.	Risk Factors.	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	26
Item 3.	Defaults Upon Senior Securities.	26
Item 4.	Submission of Matters to a Vote of Security Holders.	26
Item 5.	Other Information.	26
Item 6.	Exhibits.	26

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.

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PART 1 - FINANCIAL INFORMATION

Item 1.

Financial Statements.

CHINA ARMCO METALS, INC. AND SUBSIDIARIES

September 30, 2008 and 2007

INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Contents	Page(s)

Consolidated Balance Sheets at September 30, 2008 (Unaudited) and December 31, 2007	3

Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months and Nine Months Ended September 30, 2008 and 2007 (Unaudited)	4

Consolidated Statement of Stockholder’s Equity for the Nine Months Ended September 30, 2008 (Unaudited)	5

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007 (Unaudited)	6

Notes to the Consolidated Financial Statements (Unaudited)	7

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CHINA ARMCO METALS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	September 30, 2008		December 31, 2007
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash		3,459,077		232,286
Pledged deposits		803,000		564,150
Accounts receivable		15,434,049		2,586,529
Inventories		2,479,150		2,434,908
Advance on purchases		7,677,983		1,846,113
Prepayments and other current assets		604,402		-

Total Current Assets		30,457,661		7,663,986

PROPERTY AND EQUIPMENT, net		298,124		131,596

LAND USE RIGHT, net		2,231,067		2,108,983

Total Assets		32,986,852		9,904,565

LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Forward foreign currency exchange contracts		-		308,744
Forward foreign currency exchange swap liabilities		-		12,079
Loan payable		7,589,314		-
Accounts payable		2,775,858		290,740
Advances from stockholders		21,500		921,444
Customer deposits		4,291,490		2,228,720
Taxes payable		664,505		8
Accrued expenses and other current liabilities		1,558,163		1,058,697

Total Current Liabilities		16,900,830		4,820,432

STOCKHOLDER'S 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,
10,092,649 and 5,300,000 shares issued and outstanding, respectively		10,093		5,300
Additional paid-in capital		6,924,594		367,726
Retained earnings		8,577,441		4,634,449
Accumulated other comprehensive income:
Foreign currency translation gain		573,894		76,658

Total Stockholder's Equity		16,086,022		5,084,133

Total Liabilities and Stockholder's Equity		32,986,852		9,904,565

See accompanying notes to unaudited consolidated financial statements

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CHINA ARMCO METALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	For the Three Months			For the Three Months			For the Nine Months			For the Nine Months
	Ended			Ended			Ended			Ended
	September 30, 2008			September 30, 2007			September 30, 2008			September 30, 2007

NET REVENUES		20,384,974			27,329,425			43,174,787			36,345,975

COST OF GOODS SOLD		17,937,965			29,224,075			38,621,088			37,542,207

GROSS PROFIT		2,447,009			(1,894,650	)		4,553,699			(1,196,232	)

OPERATING EXPENSES:
Selling expenses		61,387			7,944			92,900			154,050
General and administrative expenses		282,729			62,817			624,170			197,086

Total operating expenses		344,116			70,761			717,070			351,136

INCOME (LOSS) FROM OPERATIONS		2,102,893			(1,965,411	)		3,836,629			(1,547,368	)

OTHER (INCOME) EXPENSE:
Interest income		(6,128	)		-			(6,128	)		-
Interest expense		22,167			6,457			119,503			6,457
Gain from contracts termination		(31,750	)		-			(1,265,501	)		-
Loss on forward foreign currency contracts		-			3,593			19,739			3,593
Other (income) expense		353,054			9,185			230,342			126,068

Total other (income) expense		337,343			19,235			(902,045	)		136,118

INCOME (LOSS) BEFORE INCOME TAXES		1,765,550			(1,984,646	)		4,738,674			(1,683,486	)

INCOME TAXES		409,717			-			795,682			-

NET INCOME (LOSS)		1,355,833			(1,984,646	)		3,942,992			(1,683,486	)

OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation gain (loss)		183,363			25,307			497,236			(23,459	)

COMPREHENSIVE INCOME (LOSS)		1,539,196			(1,959,339	)		4,440,228			(1,706,945	)

NET INCOME (LOSS) PER COMMON SHARE
BASIC AND DILUTED:		0.15			(0.26	)		0.48			(0.22	)

Weighted Common Shares Outstanding
basic and diluted		9,227,792			7,606,000			8,150,576			7,606,000

See accompanying notes to unaudited consolidated financial statements

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CHINA ARMCO METALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY

For the Nine Month Period Ended September 30, 2008

(UNAUDITED)

											Accumulated
											Other
											Comprehensive
											Income
											Foreign
	Common Stock, $0.001 Par Value				Additional			Retained			Currency		Total
	Number of				Paid-in			Earnings			Translation		Stockholder's
	Shares		Amount		Capital			(Deficit)			Gain		Equity

Balance, December 31, 2006		5,300,000	$	5,300	$	367,726		$	702,658		$	9,632	$	1,085,316

Contribution to capital														-

Comprehensive income
Net income									5,391,179					5,391,179
Foreign currency translation gain												67,026		67,026

Total comprehensive income														5,458,205

Dividends									(1,459,388	)				(1,459,388	)

Balance, December 31, 2007		5,300,000		5,300		367,726			4,634,449			76,658		5,084,133

Reverse acquisition adjustment		2,306,000		2,306		(61,326	)							(59,020	)
						��
Issuance of common stock for cash from
July 25, 2008 through August 8, 2008,		2,486,649		2,487		1,520,790								1,523,277
net of offering costs

Issuance of warrants in connection with July
and August, 2008 common stock issuance						5,097,404								5,097,404

Comprehensive income
Net income									3,942,992					3,942,992
Foreign currency translation gain												497,236		497,236

Total comprehensive income														4,440,228


Balance, September 30, 2008		10,092,649	$	10,093	$	6,924,594		$	8,577,441		$	573,894	$	16,086,022

See accompanying notes to unaudited consolidated financial statements

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CHINA ARMCO METALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For the Nine Months			For the Nine Months
	Ended			Ended
	September 30, 2008			September 30, 2007

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	3,942,993		$	(1,683,486	)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation expenses		1,342			26,730
Amortization expense		61,548			-
Loss from disposal of property and equipment		5,459			12,464
Changes in operating assets and liabilities:
Accounts receivable		(12,847,520	)		(1,468,602	)
Inventories		136,747			(4,370,761	)
Advance on purchases		(5,694,647	)		91,112
Prepayments and other current assets		(744,785	)		51,989
Forward foreign exchange contracts swap		19,739			3,593
Accounts payable		2,466,568			5,827,446
Customer deposits		1,897,107			1,755,686
Taxes payable		784,719			(75,327	)
Accrued expenses and other current liabilities		442,254			3,844,139

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		(9,528,476	)		4,014,983

CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received from reverse acquisition		11,506			-
Proceeds from release of pledged deposits		606,083			-
Payment made towards pledged deposits		(803,000	)		(404,912	)
Purchases of property and equipment		(168,743	)		(123,345	)

NET CASH USED IN INVESTING ACTIVITIES		(354,154	)		(528,257	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from forward foreign exchange contracts		-			312,337
Payment of forward foreign exchange contracts		(344,670	)		-
Proceeds from loans payable		7,547,814			-
Amounts received from (paid to) related parties		(921,236	)		317,289
Sale of common stock and warrants, net of offering costs		6,623,168			-

NET CASH PROVIDED BY FINANCING ACTIVITIES		12,905,076			629,626

EFFECT OF EXCHANGE RATE CHANGES ON CASH		204,345			3,712

NET CHANGE IN CASH		3,226,791			4,120,064

Cash at beginning of year		232,286			137,798

Cash at end of year	$	3,459,077		$	4,257,862

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Interest paid	$	119,503		$	6,457
Taxes paid	$	-		$	-

See accompanying notes to unaudited consolidated financial statements

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NOTE 1 – ORGANIZATION AND OPERATIONS

China Armco Metals, Inc. (formerly Cox Distributing, Inc.) (“Armco Metals” or the ”Company”) was founded as an unincorporated business in January 1984 and was incorporated as 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 Company’s founder in exchange for the existing business of Cox Distributing. No value was given to the shares 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.

Merger of Armco & Metawise (H.K) Limited and Subsidiaries

On June 27, 2008, we 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 (the “Armco Shareholder”). In connection with the Share Purchase Agreement and the Share Purchase we purchased 100% of the issued and outstanding shares of Armco’s capital stock from the Armco Shareholder in exchange for $6,890,000 by delivery of a purchase money promissory note. In addition, we granted Ms. Gao an option to purchase a total of 5,300,000 shares of the Company’s common stock, par value $.001 per share (the “Common Stock”) at $1.30 per share expiring on September 30, 2008 and an option to purchase 2,000,000 shares of Common Stock at $5.00 per share expiring on June 30, 2010 (the “Gao Option”). On August 12, 2008, Ms. Gao exercised her option to purchase 5,300,000 shares of Common Stock in exchange for the $6,890,000 purchase money promissory note owed to Ms. Gao as the Armco Shareholder. Upon exercise, the shares issued represented approximately 69.7% of the issued and outstanding Common Stock immediately after the consummation of the Share Purchase. The acquisition of Armco has been treated as a reverse acquisition with Armco deemed the acquirer and the Company deemed the acquiree under the purchase method of accounting in accordance with Statement of Financial Accounting Standards No. 141 “Business Combinations” (“SFAS No. 141”). 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 utilizes the capital structure of the Company and the assets and liabilities of Armco which have been recorded at their 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 acquisition.

Armco & Metawise (H.K) Limited (“Armco”) was incorporated on July 13, 2001 under the laws of the Hong Kong Special Administrative Region (“HK SAR”) of the People’s Republic of China (“PRC”). Armco engages in the import, export and distribution of ferrous and non-ferrous ore and metals, and the recycling of scrap steel.

On January 9, 2007, Armco formed a wholly owned subsidiary, Armet (LianYunGang) Renewable Resources Co, Ltd. (“Armet”), a wholly owned foreign enterprise (“WOFE”) in the 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 PRC and is a wholly owned subsidiary of Armco. Henan Armco engages in the import, export and distribution of ferrous and non-ferrous ore and metals.

Merger of Henan Armco and Metawise Trading Co., Ltd. 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 the Company. 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 unaudited consolidated financial statements have been presented as if the acquisition of Henan Armco had occurred on January 1, 2006.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The accompanying unaudited 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”) related 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 consolidated 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 interim consolidated financial statements should be read in conjunction with the financial statements of the Company for the year ended December 31, 2007 and notes thereto contained in the Company’s Annual Report on Form 10-K filed with the SEC on March 28, 2008 and the consolidated financial statements of Armco for the year ended December 31, 2007 and notes thereto contained in the Company’s Current Report on Form 8-K as filed with the SEC on July 1, 2008.

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The unaudited consolidated financial statements include all the accounts of Armco and Henan Armco as of September 30, 2008 and 2007 and for the interim periods then ended. Armet is included as of September 30, 2008 and for the interim period ended September 30, 2008 and the period from January 9, 2007 (inception) through September 30, 2007. Armco Metals is included as of September 30, 2008 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. Actual results could differ from those estimates.

Cash equivalents

We consider 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 (1) amounts held for outstanding letters of credit maturing in future periods and (2) deposits held for outstanding forward foreign currency hedging contracts maturing in future 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 our best estimate of the amount of probable credit losses in existing accounts receivable. We determine 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. We do not have any off-balance-sheet credit exposure to its customers.

Inventories

We value inventories, consisting of purchased products, at the lower of cost or market. Cost is determined on the First-in and First-out method of accounting. We review 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. We determined there was no inventory obsolescence as of September 30, 2008 or 2007.

Property and equipment

Property 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 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 ten (10) years. Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in operations. Leasehold improvements, if any, are amortized on a straight-line basis over the lease period or the estimated useful life, whichever is shorter. Upon becoming fully amortized, the related cost and accumulated amortization are removed from the accounts.

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Land use right

Land use right represents the cost to obtain the right to use land in the 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

We follow Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”) for its long-lived assets. Our 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.

We assess 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, 2008 or 2007.

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 agreement.

Derivatives

We account for derivatives in accordance with Statement of Financial Accounting Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”) and the related interpretations. SFAS No. 133, as amended, 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.

We employ foreign currency forward contracts to convert unforeseeable foreign currency exchange rate to fixed foreign currency exchange rate. We do 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. hawse have 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 (“Fair Value Hedges”). 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.

Fair value of financial instruments

We follow Statement of Financial Accounting Standards No. 107 “Disclosures about Fair Value of Financial Instruments” (“SFAS No. 107”) for its financial instruments. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amounts of financial assets and liabilities, such as cash, accounts receivable, prepayments and other current assets, accounts payable, accrued expenses and other current liabilities, approximate their fair values because of the short maturity of these instruments.

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Revenue recognition

We follow the guidance of the United States Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) No. 101 “Revenue Recognition” (“SAB No. 101”), as amended by SAB No. 104 (“SAB No. 104”) and SAB Topic 13 for revenue recognition. We record revenue when persuasive evidence of an arrangement exists, service has been rendered, the sales price to the customer is fixed or determinable, and 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, export and distribution of ferrous and non-ferrous ores and metals: We derive revenues from sales contracts with customers with revenues being recognized 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 board (“FOB”) warehouse terms; the sales price to the customer is fixed upon acceptance of the purchase order and there are no separate sales rebates, discounts, or volume incentives. We do not make anyprovisions for returns because, historically, there have been very few sales returns and adjustments that have impacted the ultimate collection of revenues.

(ii) Import and export agent 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. We follow the Financial Accounting Standards Board Emerging Issues Task Force Issue No. 99-19 “Reporting Revenue Gross as a Principal versus Net as an Agent” for revenue recognition to report revenue net for its import and export agent services since we (1) takes title to the products with full payment for the goods and related cost from the customer, (2) has no risks and rewards of ownership, such as the risk of loss for collection, delivery, or returns, and (3) acts as an agent or broker (including performing services, in substance, as an agent or broker) with compensation on a commission or fee basis on any of its outsourcing projects.

Stock-based compensation

We adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 (revised 2004) “Share-Based Payment” (“SFAS No. 123R”) using the modified prospective method. The fair value of each option grant estimated on the date of grant uses the Black-Scholes option-pricing model with the following weighted-average assumptions:


	June 27, 2008

Expected option life (year)		2.00
Expected 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 SEC Staff Accounting Bulletin No. 107 (“SAB 107”). Our 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.

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 above for 2008 are as follows:

·	We use historical data to estimate employee termination behavior. The expected life of options granted is derived from SAB 107 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.

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Shipping and handling costs

We account for shipping and handling fees in accordance with the Financial Accounting Standards Board Emerging Issues Task Force Issue No. 00-10 “Accounting for Shipping and Handling Fees and Costs” (“EITF Issue No. 00-10”). While amounts charged to customers for shipping products are included in revenues, the related costs are classified in cost of goods sold as incurred.

Income taxes

We follow Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes” (“SFAS No. 109”), 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 Operations and Comprehensive Income in the period that includes the enactment date.

Foreign currency translation

Transactions and balances originally denominated in U.S. dollars are presented at their original amounts. Transactions and balances in other currencies are converted into U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52 “Foreign Currency Translation” (“SFAS No. 52”) and are included in determining net income or loss.

Our financial records 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 combined and consolidated financial statements. Foreign currency translation 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 combined and 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, which are determined largely by supply and demand. Translation of amounts from RMB into United States dollars has been made at the following exchange rates for the respective periods:

September 30, 2008
Balance sheet		RMB 6.7899 to $1.00
Statement of income and comprehensive income		RMB 6.9829 to $1.00

September 30, 2007
Balance sheet		RMB 7.4928 to $1.00
Statement of income and comprehensive income		RMB 7.7134 to $1.00

December 31, 2006
Balance sheet		RMB 7.8041 to $1.00

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 U.S. 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.

Net gains and losses resulting from foreign exchange transactions, if any, are included in the Consolidated Statements of Operations and Comprehensive Income (Loss). The foreign currency translation gain (loss) at September 30, 2008 and 2007 was $401,861 and ($214,755) and effect of exchange rate changes on cash flows for interim periods then ended were $69,480 and $3,712, respectively.

-11-

Comprehensive income (loss)

We adopted Statement of Financial Accounting Standards No. 130 “Reporting Comprehensive Income” (“SFAS No. 130”). This statement establishes rules for the reporting of comprehensive income (loss) and its components. Comprehensive income (loss), consists of net income (loss) and foreign currency translation adjustments and is presented in the Consolidated Statements of Operations and Comprehensive Income (Loss) and Stockholders’ Equity.

Commitments and 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 (loss) per common share

Net income (loss) per common share is computed pursuant to Statement of Financial Accounting Standards No. 128 “Earnings Per Share” (“SFAS No. 128”). Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during each period. Diluted net income (loss) per common share is computed by dividing net income (loss) 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. Diluted net income (loss) per common share equals basic income (loss) per share for the nine months ended September 30, 2008 as the 2,000,000 shares of common stock issuable under the Gao Options and the 2,728,913 shares of common stock issuable under the common stock purchase warrants issued in connection with the 2008 Offering were anti-dilutive. There were no potentially dilutive shares outstanding for the interim period ended September 30, 2007.

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. 33-8934 on June 26, 2008. Commencing with its annual report for the year ending December 31, 2009, 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, in the following year, 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 December 2007, the FASB issued FASB Statement No. 141 (Revised 2007) “Business Combinations” (“SFAS No. 141(R)”), which requires the Company to record fair value estimates of contingent consideration and certain other potential liabilities during the original purchase price allocation, expense acquisition costs as incurred and does not permit certain restructuring activities previously allowed under Emerging Issues Task Force Issue No. 95-3 to be recorded as a component of purchase accounting. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, except for the presentation and disclosure requirements, which shall be applied retrospectively for all periods presented. The Company will adopt this standard at the beginning of the Company’s year ending December 31, 2008 for all prospective business acquisitions. The Company has not determined the effect that the adoption of SFAS No. 141(R) will have on the financial results of the Company.

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In December 2007, the FASB issued FASB Statement No. 160 “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51” (“SFAS No. 160”), which causes noncontrolling interests in subsidiaries to be included in the equity section of the balance sheet. SFAS No. 160 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, except for the presentation and disclosure requirements, which shall be applied retrospectively for all periods presented. The Company will adopt this standard at the beginning of the Company’s year ending December 31, 2008 for all prospective business acquisitions. The Company has not determined the effect that the adoption of SFAS No. 160 will have on the financial results of the Company.

In March 2008, the FASB issued FASB Statement No. 161 “Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133” (“SFAS No. 161”), which changes the disclosure requirements for derivative instruments and hedging activities. Pursuant to SFAS No.161, Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 with early application encouraged. SFAS No. 161 encourages but does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In years after initial adoption, this Statement requires comparative disclosures only for periods subsequent to initial adoption. The Company will adopt this standard at the beginning of the Company’s year ending December 31, 2008. The Company does not expect the adoption of SFAS No. 161 to have a material impact on the financial results of the Company.

On October 10, 2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. This FASB Staff Position (FSP) clarifies the application of FASB Statement No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. Statement 157 was issued in September 2006, and is effective for financial assets and financial liabilities for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We have adopted SFAS 157-3 and determined that it had no impact as of September 30, 2008, and we will continue to evaluate the impact, if any, of SFAS 157-3 on our financial statements.

The Company 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.

NOTE 3 – INVENTORIES

Inventories at September 30, 2008 and December 31, 2007 consisted of the following:


	September 30, 2008		December 31, 2007
Goods purchased	$	2,479,150	$	2,434,908


	$	2,479,150	$	2,434,908

NOTE 4 – FINANCIAL INSTRUMENTS

We utilized forward foreign currency exchange contracts resulting in a fixed foreign currency exchange rate of $1.00 to RMB 7.3750. These forward foreign currency exchange contracts expired on August 2, 2008. Losses on these foreign currency exchange contracts for the nine months ended September 30, 2008 and 2007 amounted to $19,739 and $3,593, respectively.

The forward foreign currency exchange contracts and related swap liabilities at September 30, 2008 and December 31, 2007 consisted of the following:


	September 30, 2008		December 31, 2007
Forward foreign currency exchange contracts	$	-	$	308,744
Forward foreign currency exchange swap liabilities		-		12,079

	$	-	$	320,823

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NOTE 5 – LOAN PAYABLE

Loan payable at September 30, 2008 and December 31, 2007, consisted of the following:


	September 30, 2008		December 31, 2007
Loan payable to Raiffeisen Zentralbank, guaranteed by Kexuan Yao, our CEO and Chairman, with interest at 4.85% per annum payable monthly, with principal due November 30, 2008.	$	7,589,314	$	-

NOTE 6 – RELATED PARTY TRANSACTIONS

Advances from stockholders

Advances from stockholders at September 30, 2008 and December 31, 2007, consisted of the following:

	September 30, 2008			December 31, 2007
Advances from chairman, and chief executive officer	$	-		$	(921,444	)
Advances from former chief executive officer		(21,500	)

	$	(21,500	)	$	(921,444	)

The advances bear no interest and have no formal repayment terms.

Operating lease from a related party

On August 1, 2008, the Company entered into an operating sublease for its commercial office space in California from Prime Armet Group, Inc., an entity wholly owned and controlled by the Company’s chairman and chief executive officer. The lease expires on October 1, 2009 and provides for future minimum lease payments of $2,643 per month.

NOTE 7 – STOCKHOLDERS’ EQUITY

Sale of common stock

2008 Offering

Between July and August 2008 we sold $7,419,729 (net proceeds of $6,585,468) worth of securities to 92 accredited investors through the sale of 24.73 units (the “2008 Offering”). Each unit sold in the 2008 Offering consists of 100,000 shares of Common Stock, $.001 par value per share at a per share purchase price of $3.00, and five year warrants to purchase 100,000 shares of Common Stock with an exercise price of $5.00 per share (the “Warrants“). In connection with the 2008 Offering, we issued 2,486,649 shares of Common Stock, and we granted 2,728,913 Warrants including 242,264 Warrants granted to broker-dealers, all of which has been earned upon issuance. The fair value of these Warrants, estimated on the date of grant, was $5,092,970 at the date of issuance. The accredited investors entered into a subscription agreement with the Company; the material terms of which are set forth in the exhibits filed with our Form 8-K filed on August 1, 2008.

Stock options

In connection with the Share Purchase Agreement we issued Ms. Gao an option to purchase 5,300,000 shares of the Company’s common stock, par value $.001 per share (the “Common Stock”) at $1.30 per share, which was exercised in August 2008, and an option to purchase 2,000,000 shares of Common Stock at $5.00 per share which expires on September 30, 2010 (the “Gao Option”). 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.

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The fair value of the stock options issued in June 2008 under Share Purchase Agreement using the Black-Scholes Option Pricing Model was nil at the date of grant. For the interim period ended September 30, 2008, we did not record any stock-based compensation as we did not issue any stock based compensation. We did not issue any options or other stock based compensation during the three month period ended September 30, 2007,

The table below summarizes our stock option activity for the interim period ended September 30, 2008:

	Number of Option Shares		Exercise Price Range Per Share			Weighted Average Exercise Price			Fair Value at Date of Grant		Aggregate Intrinsic Value

Balance, December 31, 2007		-		$	-		$	-		-		$	-
Granted		2,000,000			5.00			5.00		*			*
Canceled		-			-			-					-
Exercised		-			-			-					-
Expired		-			-			-					-
Balance, September 30, 2008		2,000,000		$	5.00		$	5.00		*		$	-
Vested and exercisable, September 30, 2008		2,000,000		$	5.00		$	5.00		*		$	-
Unvested, September 30, 2008		-		$	5.00		$	5.00		*		$	-

* - Less than $1

The following table summarizes information concerning outstanding and exercisable stock options as of September 30, 2008:

		Options Outstanding					Options Exercisable
Range 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	2.00	$	5.00	2,000,000	2.00	$	5.00

$	5.00		2,000,000	2.00	$	5.00	2,000,000	2.00	$	5.00

Warrants

In connection with the 2008 Offering, we issued 2,728,913 Warrants including 242,264 Warrants granted to broker-dealers, all of which has been earned upon issuance. The fair value of these Warrants, estimated on the date of grant, was $5,092,970 at the date of issuance, all of 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)	5.00
Expected volatility	89.00	%
Risk-free interest rate	3.23	%
Dividend yield	0.00	%

The remaining balance of the net proceeds from the Offering of $1,523,277 has been assigned to the Common Stock.

The table below summarizes our warrant activity for the interim period ended September 30, 2008:

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	Number of Warrant Shares		Exercise Price Range Per Share			Weighted Average Exercise Price			Fair Value at Date of Issuance		Aggregate Intrinsic Value

Balance, December 31, 2007		-		$	-		$	-	$	-		$	-
Granted		2,728,913			5.00			5.00		5,092,970			-
Canceled		-			-			-		-			-
Exercised		-			-			-		-			-
Expired		-			-			-		-			-
Balance, September 30, 2008		2,728,913		$	5.00		$	5.00	$	5,092,970		$	-
Earned and exercisable, September 30, 2008		2,728,913		$	5.00		$	5.00	$	5,092,970		$	-
Unvested, September 30, 2008		-		$	5.00		$	5.00	$	-		$	-

The following table summarizes information concerning outstanding and exercisable warrants as of September 30, 2008:

		Warrants Outstanding					Warrants Exercisable
Range 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		2,728,913	5.00	$	5.00	2,728,913	5.00	$	5.00

$	5.00		2,728,913	5.00	$	5.00	2,728,913	5.00	$	5.00

NOTE 8 – CONCENTRATION OF CREDIT RISK

Customers and Credit Concentrations

Two customers accounted for approximately 78.3% of total sales for the interim period ended September 30, 2008 and three customers accounted for approximately 87.0% of total sales for the interim period ended September 30, 2007, respectively.

Vendor Concentrations

Four vendors accounted for 88.1% of total purchases for the interim period ended September 30, 2008 and three vendors accounted for 96.2% of total purchases for the interim period ended September 30, 2007, respectively.

Credit Risk

Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of cash and cash equivalents. As of September 30, 2008, substantially all cash and cash equivalents were held by financial institutions located in the PRC, none of which are insured. However, we has not experienced losses on these accounts and management believes the Company is not exposed to significant risks on such accounts.

Foreign currency risk

We are exposed to fluctuations in foreign currencies for transactions denominated in currencies other than RMB as the majority of our purchasing activities are transacted in foreign currencies. We had no foreign currency hedges in place at September 30, 2008 to reduce such exposure. Previous forward foreign currency exchange contracts expired on August 2, 2008 and the realized loss on these foreign currency hedges as of September 30, 2008 was $19,739. The total realized loss on these foreign currency hedges amounted to $31,818 which includes a $12,079 loss recognized for the year ended December 31, 2007.

NOTE 9 - FOREIGN OPERATIONS

Operations

Substantially all of the Company’s operations 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. Our 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.

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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 5-10% 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, 2008, the Company had no Statutory Surplus Reserve and the Statutory Common Welfare Fund established and segregated in retained earnings.

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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 (1) our Annual Report on Form 10-K for the year ended December 31, 2007, and (2) our Quarterly Report on Form 10-Q for the quarter ended September 30, 2008.

We are on a calendar year; as such the nine month period ending September, is our third quarter. The year ended December 31, 2007 is referred to as “2007”, and the coming year ending December 31, 2008 is referred to as “2008”.

OVERVIEW OF OUR PERFORMANCE AND OPERATIONS

Our Business

We import, sell and distribute metal ores and non-ferrous metals to the metal refinery industry in China. We obtain raw materials from global suppliers in Brazil, India, South America, Oman, Turkey, Iran, Libya, Nigeria, Indonesia, and the Philippines. We distribute these raw materials to the metal refinery industry within China including but not limited to iron ore, coal, chrome ore, nickel ore, copper ore, scrap steel, and manganese ore. As well, we are a U.S. based distributor of organic fertilizer products used to improve soil and growing conditions for the potato farmers of eastern Idaho.

We are in the process of constructing a scrap steel 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 steel and will sell and distribute recycled scrap steel to the metal refinery industry utilizing our existing network of metal ore customers in the PRC. We expect to commence recycling operations in the third quarter of 2009.

Effective June 27, 2008, Armco entered into an agreement to be acquired by us. Following the close of the acquisition we changed our former corporate name Cox Distributing, Inc. to China Armco Metals, Inc.

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. The steel industry is an important basic industry of the national economy of China, and plays a vital role in the recent industrialization efforts of the country. As witnessed over the last decade, the production of steel has increased dramatically throughout the world, and particular in China. According to the www.worldsteel.org, in 2007 worldwide crude steel production amounted to 1,344 million metric tons while China accounted for approximately 489 million metric tons. In 2006, worldwide crude steel production amounted to 1,244 million metric tons with China accounting for 422 million metric tons. Globally, this increase represents an approximate 8% increase from 2006 to 2007. However steel production in China increased approximately 16% from 2006 to 2007.

We invested substantially all of the $6.6 million in net proceeds we raised in our 2008 Offering to fund the construction of our planned scrap metal recycling facility beginning in the third quarter of 2008. This planned investment is in addition to the approximately $3 million of investment capital we have expended on this project in 2007 and 2008.

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.

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RESULTS OF OPERATIONS

Net Revenues

Net revenues for the third quarter of 2008 were $20.4 million, a decrease of 25.4% compared to the third quarter of 2007, and for the nine months of 2008 were $43.2 million, an increase of 18.8% compared to the nine months of 2007. The global economic slowdown has adversely affected the rate of growth in our business. During the third quarter we witnessed some business interruptions due to the Beijing Olympics. From July through September, the Chinese government imposed restrictions limiting the transport of goods. Our operations were negatively impacted due to these restrictions.

In November 2008, however, 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 expect to see a benefit to the Chinese economy from this stimulus program. However in the short-term, it remains to be seen whether domestic consumption can compensate for slower export growth, and the impact this will have on our revenues through the balance of this year.

Cost of Revenues

Cost of revenues for the third quarter of 2008 were $17.9 million, a decrease of $11.3 million compared to the third quarter of 2007, and for the nine months of 2008 were $38.6 million, an increase of $1.1 million compared to the nine months of 2007. These changes as a percentage of revenues fluctuate based on the product mix traded as they vary in gross profit margins. A decrease of $2.9 million shipping expense during the nine month ended September 30, 2008 as nickel ore and chrome ore sales decreased approximately $10.6 million or 35.2%.

Total Operating Expenses

Operating expenses for the third quarter of 2008 were $344,116, an increase of 386% compared to the third quarter of 2007, and for the nine months of 2008 were $717,070, an increase of 104% compared to the nine months of 2007. Our operating expenses are comprised of selling expenses as well as general and administrative expenses. These increases are a result of increased levels of sales operations and additional costs related to our Armet Lianyungang subsidiary and Armco US offices. We intend to invest to fund the construction of a scrap steel recycling facility throughout 2008 and beyond. Armet Lianyungang, our wholly owned subsidiary, intends to construct a scrap metal recycling facility in the Banqiao Industrial Zone of Lianyungang Economic Development Zone in Jiangsu province. We have expanded operational staff to support our expanding operations.

The table below summarizes the consolidated operating results for the three and nine months ended September 30, 2008 and 2007.

	For the three months ended								For the nine months ended
	September 30, 2008				September 30, 2007				September 30, 2008				September 30, 2007
	$				$				$				$
	(in 000’s)		%		(in 000’s)		%		(in 000’s)		%		(in 000’s)		%
							-								-
Revenues		20,385	-			27,329				43,175	-			36,346	-
Cost of revenues		17,938	88.0	%		29,224	106.9	%		38,621	89.5	%		37,542	103.3	%
Gross profit		2,447	12.0	%		-1,895	-6.9	%		4,554	10.5	%		-1,196	-3.3	%
Total operating expenses		344	1.7	%		71	0.3	%		717	1.7	%		351	1.0	%
Operating (loss) income		2,103	10.3	%		-1,965	-7.2	%		3,837	8.9	%		-1,547	-4.3	%

Other Income (expense)

Total other income (expense) for the three and nine months ended September 30, 2008 was $(337,343) and $902,045, respectively. Other income was comprised mainly of: 1- a gain of $1.3 million in other income in relation to a litigation settlement from one of our customers due to a breach of contracts, 2- foreign currency forward contracts to convert unforeseeable foreign currency exchange rates to fixed foreign currency exchange rates and for the three and nine months ended September 30, 2008 we recognized a loss of $0 and $19,739, respectively on forward foreign currency contracts, and we recorded interest income of $6,128 during the third quarter of 2008 and other expense of 230,342 during the nine months ended September 30, 2008.

Income tax benefit (expense)

Income tax expense increased to $409,717 and $795,682 during the three and nine months ended September 30, 2008, respectively primarily as a result of the increase in taxable income generated on a consolidated basis during the period. Armco is exempt from Hong Kong income taxes since none of its income was from Hong Kong sources for the years ended December 31, 2007 and 2006 and no provision for income taxes has been made for the relevant periods. Armco’s statutory tax rate is 17.5% and is subject to Hong Kong SAR income taxes as of January 1, 2008 and forward.

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Net income (loss)

For the three and nine months ended September 30, 2008 our net income increased sharply to $1.4 million and $3.9 million from net (loss) of ($2.0) and ($1.7) in 2007, respectively. These increases are attributable to the analysis discussed above of our continued operations and the efforts of our management team to provide our customers that are in growing demand for our products in China, and the isolated event in other income.

Foreign currency translation gain

The functional currency of our operating entities operating in the PRC is the Chinese yuan or Renminbi (“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, which are a non-cash adjustment, we reported a foreign currency translation gain of $183,363 and $497,236 during the three and nine months ended September 30, 2008, respectively as compared to a gain (loss) of $25,307 and ($23,459) for the comparable periods in 2007. This non-cash gain had the effect of increasing our reported comprehensive income.

Comprehensive income

Comprehensive income for the three and nine months ended September 30, 2008 was $1.5 million and $4.4 million, respectively. Comprehensive income is comprised of the sum of our net income plus foreign currency translation gains.

LIQUIDITY AND CAPITAL RESOURCES OF ARMCO AND ITS SUBSIDIARIES

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, 2008 and December 31, 2007 we had cash and cash equivalents of $3,459,077, and $232,286, respectively. We have historically met our liquidity requirements utilizing internally generated cash derived from our operations.

We intend to invest substantially all of the $6.5 million of the net proceeds from our 2008 Offering to fund the construction of our planned scrap metal recycling facility beginning in the third quarter of 2008. We intend to use the balance of the net offering proceeds for working capital to expand our metal ore distribution business. Upon completion of the construction of the scrap metal recycling facility, we estimate to sell recycled scrap metal utilizing our existing network of customers. In addition to the net proceeds of our 2008 Offering we will need to secure additional investment capital and/or bank and vendor financing to provide sufficient funds to complete this project. There is no assurance, however, that we will be successful in obtaining the additional financing that we require or that such financing may not be on terms deemed to be desirable to our management. In the event we are successful, there is no assurance that such investment will result in enhanced operating performance. Unless we can obtain additional financing, we will be unable to complete construction of our planned scrap steel recycling project. Any inability on our part to secure additional financing during 2008, as needed, will have a material adverse effect on our growth plans.

The following table provides certain selected balance sheet comparisons as of September 30, 2008 and December 31, 2007.

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	June 30, 2008		December 31, 2007		Increase / (decrease)			%
	(Unaudited)

Cash	$	3,459,077	$	232,286		3,226,791			1389	%
Pledged deposits		803,000		564,150		238,850			42	%
Accounts receivable, net		15,434,049		2,586,529		12,847,520			497	%
Inventories, net		2,479,150		2,434,908		44,242			2	%
Advance on purchases		7,677,983		1,846,113		5,831,870			316	%
Prepayments and other current assets		604,402		0		604,402		nm
Total current assets		30,457,661		7,663,986		22,793,675			297	%
Property and equipment, net		298,124		131,596		166,528			127	%
Land use rights, net		2,231,067		2,108,983		122,084			6	%
Total assets		32,986,852		9,904,565		29,562,801			298	%

Forward foreign currency exchange contracts and swap liabilities		0		308,744		(308,744	)		-100	%
Forward foreign currency exchange swap liabilities		0		12,079		(12,079	)		-100	%
Short-term loans		7,589,314		0		7,589,314		nm
Accounts payable		2,775,858		290,740		2,485,118			855	%
Advances from stockholder		21,500		921,444		(899,944	)		-98	%
Customer deposits		4,291,490		2,228,720		2,062,770			93	%
Taxes payable		664,505		8		664,497		nm
Accrued expenses and other current liabilities		1,558,163		1,058,697		499,466			47	%
Total current liabilities		16,900,830		4,820,432		12,080,398			251	%
Total liabilities		16,900,830		4,820,432		12,080,398			251	%

nm – not meaningful

A Majority of our cash reserves, approximately $3,202,195 or 96.6% at September 30, 2008, is 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, 2008 has been translated based on the exchange rate as of September 30, 2008. 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, 2008 increased $22.8 million, or approximately 297%, from December 31, 2007; this reflects increases in current asset items including accounts receivables and advances on purchases. Our current liabilities increased by approximately $12.1 million, or approximately 251%, at September 30, 2008 from December 31, 2007; this reflects increases in short-term loans, accounts payable, customer deposits and taxes payable.

Our prepaid and other assets increased approximately $604,402 as of September 30, 2008 over our prior year end.

Advances on purchases consist of prepayments to vendors for merchandise, security and deposits. This increase is directly attributed to the increase in sales.

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Inventories increased approximately 2% at September 30, 2008 from the prior year end. This occurred due to timing differences between our receipt of product and shipment to our customers.

Accrued expenses and other current liabilities increased approximately $499,466 as of September 30, 2008 over our prior year end.

Accounts receivable, advances on purchases, accounts payable, taxes payable and customer deposits increased significantly in 2008 as a direct result of the significant sales transaction of approximately $20 million occurring at the end of the third quarter in 2008. Accounts payable and accrued expenses represent payables associated with the general operation of our business. Customer deposits represent prepayments for products, which have not yet been shipped.

2008 Offering

Between July and August 2008 we sold $7,419,729 (net proceed of $6,585,468) worth of securities to 92 accredited investors through the sale of 24.73 units. Each unit sold in the 2008 Offering consists of 100,000 shares of Common Stock, $.001 par value per share at a per share purchase price of $3.00, and five year warrants to purchase 100,000 shares of Common Stock with an exercise price of $5.00 per share (the “Warrants“). The accredited investors entered into a subscription agreement with the Company; the material terms of which are set forth in the exhibits filed with our Form 8-K filed on August 1, 2008.

Statement of Cash Flows

For the nine months ended September 30, 2008, our cash totaled $3,459,077 and consisted of $9,528,476 used in operating activities, $354,154 used in investing activities, and $12,905,076 provided by financing activities.

For the nine months ended September 30, 2007, our cash totaled $4,257,862 and consisted of $4,014,983 provided by operating activities, $528,257 used in investing activities, and $629,626 provided by financing activities.

Cash (Used in) Provided by Operating Activities

For the nine months ended September 30, 2008 cash used in operations of $9,528,476 included an increase in accounts receivables of approximately $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 decreases in cash funds were partially offset by an increase in accounts payables of approximately $2.5 million, deposits from customers of $1.9 million, taxes payable of $784,719, accrued expenses and other current liabilities of approximately $442,254, and net income of $3.9 million.

For the nine months ended September 30, 2007 cash provided by operations of $4.0 million included a $5.8 million increase in accounts payable, $1.8 million of customer deposits, and an increase of $3.8 million from accrued expenses and other liabilities, which were offset by an increase in accounts receivable of approximately $1.5 million and an increase in inventories of approximately $4.4 million.

Cash used in Investing Activities

For the nine months ended September 30, 2008 cash used in investing activities of $354,154 was mainly due to proceeds from release of pledged deposits of $606,083 and cash received from reverse acquisition of $11,506, offset by purchases of property and equipments of $168,743 and payments toward pledged deposits of $803,000.

For the nine months ended September 30, 2007 cash used in investing activities of $528,257 was mainly due to payments toward pledged deposits of $404,912 and purchases of property and equipments of $123,345.

Cash provided by Financing Activities

For the nine months ended September 30, 2008 cash provided by financing activities of $12,905,076 was due to proceeds from loans of approximately $7,547,814, proceeds from a capital raise of approximately $6,623,168, offset by payments of $344,670 of forward foreign exchange contracts and $921,236 to decrease due to Mr. Kexan Yao, our Chief Executive Officer.

For the nine months ended September 30, 2007 cash provided by financing activities of $629,626 was due to proceeds from forward foreign exchange contracts of $312,337 and an increase due to Mr. Kexan Yao, our Chief Executive Officer, of $317,289.

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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 accounting principles generally accepted in the United States. 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.

Recently Issued Accounting Pronouncements

·	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.

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Cautionary Note Regarding Forward-Looking Information and Factors That May Affect Future Results

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. 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 6 “Management’s Discussion and Analysis or Plan of Operation - Risk Factors” of our Annual Report on Form 10-KSB for the year ended December 31, 2007 and Item 1.01 “Risk Factors” of our Current Report on Form 8-K filed on July 1, 2008:

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	·	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 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.
	·	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.

The Renminbi is not freely convertible into foreign currencies and no representation is made that the Renminbi or U.S. Dollar amounts referred to herein could have been or could be converted into U.S. Dollars or Renminbi, as the case may be, at the stated rate or at all. Unless otherwise noted, all currency figures in this filing are in U.S. dollars. References to "yuan" or "RMB" are to the Chinese yuan (also known as the renminbi).

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

Not applicable for a smaller reporting company.

Item 4.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“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.

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings.

None.

Item 1A.

Risk Factors

Risk factors describing the major risks to our business can be found under Item 6 “Management’s Discussion and Analysis or Plan of Operation - Risk Factors” in our Annual Report on Form 10-KSB for the year ended December 31, 2007 and Item 1.01 “Risk Factors” in our Current Report on Form 8-K filed on July 1, 2008. There has been no material change in our risk factors from those previously discussed in the Annual Report on Form 10-K or the Current Report on Form 8-K filed on July 1, 2008.

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.

None

Item 6.

Exhibits


No.	Description
31.1	Rule 13a-14(a)/ 15d-14(a) Certification of Chief Executive Officer *
31.2	Rule 13a-14(a)/ 15d-14(a) Certification of Principal Financial and Accounting Officer *
32	Section 1350 Certification of Chief Executive Officer and the Principal Financial and Accounting Officer *

* Filed herewith

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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 14, 2008	By:	/s/ Kexuan Yao
		Kexuan Yao
		CEO and Chairman
		(Principal Executive Officer)



Date: November 14, 2008	By:	/s/ Fengtao Wen
		Fengtao Wen
		Chief Financial Officer
		(principal accounting officer)

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Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Avg

Armco Metals (AMCO) Inactive 10-Q2008 Q3 Quarterly report

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