Armco Metals 10Q 2009 Q1 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 March 31, 2009

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 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 [ ]No [ ]

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. 10,097,449 shares of common stock are issued and outstanding as of May 15, 2009.

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.	24
Item 4	Controls and Procedures.	24

PART II - OTHER INFORMATION
Item 1.	Legal Proceedings.	25
Item 1A.	Risk Factors.	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	25
Item 3.	Defaults Upon Senior Securities.	25
Item 4.	Submission of Matters to a Vote of Security Holders.	25
Item 5.	Other Information.	25
Item 6.	Exhibits.	25

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.

PART 1 - FINANCIAL INFORMATION

Item 1.

Financial Statements.

China Armco Metals, Inc. and Subsidiaries

March 31, 2009 and 2008

Index to Consolidated Financial Statements

Contents	Page(s)

Consolidated Balance Sheets at March 31, 2009 (Unaudited) and December 31, 2008	3
Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2009 and 2008 (Unaudited)	4
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2009 and 2008 (Unaudited)	5
Notes to the Consolidated Financial Statements (Unaudited)	6 to 17

CHINA ARMCO METALS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	March 31, 2009		December 31, 2008
ASSETS	(unaudited)
CURRENT ASSETS:
Cash	$	1,314,624	$	3,253,533
Pledged deposits		2,943,372		-
Accounts receivable, net		14,790,318		16,722,307
Inventories		1,820,018		197,402
Advance on purchases		3,318,919		3,680,872
Prepayments and other current assets		520,814		379,452

Total Current Assets		24,708,065		24,233,566

PROPERTY, PLANT AND EQUIPMENT, net		3,417,019		2,377,816

LAND USE RIGHTS, net		2,161,800		2,208,902

Total Assets	$	30,286,884	$	28,820,284

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Loans payable		-		2,914,345
Accounts payable		11,953,646		6,694,534
Advances from stockholder		45,673		236,595
Customer deposits		2,083,705		2,613,653
Taxes payable		775,247		1,039,312
Accrued expenses and other current liabilities		13,476		32,899

Total Current Liabilities		14,871,747		13,531,338

STOCKHOLDERS' 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,
10,092,449 and 5,300,000 shares issued and outstanding, respectively		10,097		10,092
Additional paid-in capital		6,967,583		6,942,588
Retained earnings		8,094,700		7,967,064
Accumulated other comprehensive income:
Foreign currency translation gain		342,757		369,202

Total Stockholders' Equity		15,415,137		15,288,946

Total Liabilities and Stockholders' Equity	$	30,286,884	$	28,820,284

See accompanying notes to unaudited consolidated financial statements

CHINA ARMCO METALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	For the three months Ended			For the three months Ended
	March 31, 2009			March 31, 2008

NET REVENUES	$	5,357,858		$	9,775,337

COST OF GOODS SOLD		4,847,235			8,545,719

GROSS PROFIT		510,623			1,229,618

OPERATING EXPENSES:
Selling expenses		27,293			10,614
General and administrative expenses		306,641			216,908

Total operating expenses		333,934			227,522

INCOME FROM CONTINUING OPERATIONS		176,689			1,002,096

OTHER (INCOME) EXPENSE:
Interest expense		18,036			-
Loss on forward foreign currency contracts		-			12,930
Other (income) expense		30,227			(7,100	)

Total other (income) expense		48,263			5,830

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		128,426			996,266

INCOME TAXES		790			258,653

NET INCOME APPLICABLE TO SHAREHOLDERS	$	127,636		$	737,613

OTHER COMPREHENSIVE INCOME:
Foreign currency translation gain		(26,445	)		180,190

COMPREHENSIVE INCOME	$	101,191		$	917,803

NET INCOME PER COMMON SHARE - BASIC AND DILUTED:

Total net income per common share	$	0.01		$	0.14

Weighted Common Shares Outstanding - basic and diluted		10,095,616			5,300,000

See accompanying notes to unaudited consolidated financial statements

CHINA ARMCO METALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For the three months Ended			For the three months Ended
	March 31, 2009			March 31, 2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	127,636		$	737,613
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation expenses		18,033			-
Amortization expenses		39,648			21,214
Loss from disposal of property and equipment		-			243
Changes in operating assets and liabilities:
Accounts receivable		1,907,901			(6,038,250	)
Inventories		(1,623,282	)		(452,686	)
Advance on purchases		352,071			(1,060,482	)
Prepayments and other current assets		82,565			(44,584	)
Forward foreign exchange contracts		-			12,930
Accounts payable		5,274,564			5,698,390
Customer deposits		(521,128	)		786,574
Taxes payable		(263,217	)		258,689
Accrued expenses and other current liabilities		(244,474	)		317,283

NET CASH PROVIDED BY OPERATING ACTIVITIES		5,150,317			236,934

CASH FLOWS FROM INVESTING ACTIVITIES:
Payment made towards pledged deposits		(2,943,372	)		(167,959	)
Purchases of property and equipment		(1,065,260	)		(4,252	)

NET CASH USED IN INVESTING ACTIVITIES		(4,008,632	)		(172,211	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of loans payable		(2,914,345	)		-
Payments to related parties		(196,973	)		(893,620	)
Proceeds from exercise of warrants		25,000			-

NET CASH USED IN FINANCING ACTIVITIES		(3,086,318	)		(893,620	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH		5,693			741,738

NET CHANGE IN CASH		(1,938,940	)		(87,159	)

Cash at beginning of year		3,253,563			232,286

Cash at end of year		1,314,623			145,127

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Interest paid		18,036			3,449
Taxes paid		790			-

See accompanying notes to unaudited consolidated financial statements

China Armco Metals, Inc. and Subsidiaries

March 31, 2009 and 2008

Notes to the Consolidated Financial Statements

(Unaudited)

NOTE 1 – ORGANIZATION AND OPERATIONS

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. (“Armco Metals” or the “Company”) upon the acquisition of Armco & Metawise (H.K) Limited and Subsidiaries. The Company believes that the new name will better identify the Company with the business conducted by its wholly owned subsidiaries in China, Armco & Metawise (H.K) Limited and Subsidiaries, namely, the import, export and distribution of ferrous and non-ferrous ores and metals, and the recycling of scrap steel. On December 30, 2008, the Company discontinued its business of distribution of organic fertilizer products.

Merger of Armco & Metawise (H.K) Limited and Subsidiaries (“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 (the “Armco Shareholder”). In connection with the acquisition, the Company purchased from the Armco Shareholder 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 (the “Common Stock”) 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 (the “Gao Option”). 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. The shares issued represented approximately 69.7% of the issued and outstanding Common Stock immediately after the consummation of the Share Purchase and exercise of the option to purchase 5,300,000 shares of the Company’s common stock at $1.30 per share. 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 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 are 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 & 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 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 (“WOFE”) 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”) was incorporated on June 6, 2002 in the City of Zhengzhou, Henan Province, PRC. Henan engages in the import, export and distribution of ferrous and non-ferrous ores and metals.

Merger of Henan Armco and Metawise Trading Co., Ltd. (“Henan”) 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, a company under common control with Armco. The acquisition of Henan has been recorded on the purchase method of accounting at historical amounts as Armet and Henan were under common control since June 2002. The consolidated financial statements have been presented as if the acquisition of Henan had occurred on January 1, 2007.

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 interim consolidated financial statements should be read in conjunction with the 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 and Henan as of March 31, 2009 and 2008 and for the three months then ended. Armco Metals is included as of March 31, 2009 and for the three months ended March 31, 2009. All inter-company balances and transactions have been eliminated.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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

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 March 31, 2009 or 2008.

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 follows 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. 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 March 31, 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 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.

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 (“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

The Company follows 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, advance on purchases, prepayments and other current assets, accounts payable, customer deposits, corporate income tax payable, value added tax and other taxes payable, accrued expenses and other current liabilities, approximate their fair values because of the short maturity of these instruments. The Company’s loans payable approximate the fair value of such instruments based upon management’s best estimate of interest rates that would be available to the Company for similar financial arrangements at December 31, 2008, which were fully repaid during the interim period ended March 31, 2009.

Revenue recognition

The Company follows 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”) 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, export and 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 board (“FOB”) warehouse 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 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. The Company follows 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 the Company (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.

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.

Stock-based compensation

The Company accounted for its stock based compensation under the recognition and measurement principles of the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 (revised 2004) “Share-Based Payment” (“SFAS No. 123R”) and the Financial Accounting Standards Board Emerging Issues Task Force Issue No. 96-18 “Accounting For Equity Instruments That Are Issued To Other Than Employees For Acquiring, Or In Conjunction With Selling Goods Or Services” (“EITF No. 96-18”) using the modified prospective method. 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 third-party 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 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”). 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.

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:

·	The Company uses 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.

Shipping and handling costs

The Company accounts 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

The Company follows 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 Income 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.

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 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 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.

Unless otherwise noted, the rate presented below per U.S. $1.00 was the interbank rate as quoted by OANDA Corporation (www.oanda.com) for the period from January 1, 2009 through March 31, 2009 and the noon buying rate for RMB in New York City as reported by the Federal Reserve Bank of New York on the date of its balance sheets contained in this consolidated financial statements. The management believes that the difference between RMB vs. US$ 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:

March 31, 2009
Balance sheet		RMB 6.8456 to $1.00
Statement of income and comprehensive income		RMB 6.8466 to $1.00

December 31, 2008
Balance sheet		RMB 6.8225 to $1.00


March 31, 2008
Balance sheet		RMB 7.232 to $1.00
Statement of income and comprehensive income		RMB 7.582 to $1.00

December 31, 2007
Balance sheet		RMB 7.2946 to $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 $(26,445) and $180,190 and the effect of exchange rate changes on cash flows were $5,693and $741,738 for the interim period ended March 31, 2009 and 2008, respectively.

Comprehensive income

The Company has adopted Statement of Financial Accounting Standards No. 130 “Reporting Comprehensive Income” (“SFAS No. 130”). 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

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 Statement of Financial Accounting Standards No. 128 “Earnings Per Share” (“SFAS No. 128”). 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, which excludes 2,000,000 shares of common stock issuable under the stock options and 2,723,913 shares of common stock issuable under the warrants in connection with the Company’s August 1, 2008 equity financing for the three months ended March 31, 2009 as their effect would be anti-dilutive. There were no potentially dilutive shares outstanding for the three months ended March 31, 2008.

Cash flows reporting

The Company adopted Statement of Financial Accounting Standards No. 95 “Statement of Cash Flows” (“SFAS No. 95”) 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 SFAS No. 95 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 SFAS No. 95.

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 fiscal 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 May 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard No. 162 “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). The purpose of this standard is to provide a consistent framework for determining what accounting principles should be used when preparing U.S. GAAP financial statements. SFAS 162 categorizes accounting pronouncements in a descending order of authority. In the instance of potentially conflicting accounting principles, the standard in the highest category must be used. This statement will be effective 60 days after the SEC approves the Public Company Accounting and Oversight Board’s related amendments. The Company believes that SFAS 162 will have no impact on their existing accounting methods.

On December 30, 2008, FASB issued FASB Staff Position (“FSP”) No. FAS 132(R)-1, “ Employers’ Disclosures About Postretirement Benefit Plan Assets ”, which amends Statement of Financial Accounting Standards No. 132(R), “ Employers’ Disclosures About Pensions and Other Postretirement Benefits” (“SFAS No. 132(R)”) to require more detailed disclosures about plan assets, including investment strategies, major categories of plan assets, concentrations of risk within plan assets, and valuation techniques used to measure the fair value of plan assets consistent with fair value hierarchy model described in SFAS No. 157, “ Fair Value Measurements ”. The Company does not anticipate that the adoption of this statement will have any effect on its financial condition and results of operations since it does not have any postretirement plans.

In April 2009, FASB issued FASB Staff Position (“FSP”) Financial Accounting Standard (“FAS”) 157-4 “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”. Based on the guidance, if an entity determines that the level of activity for an asset or liability has significantly decreased and that a transaction is not orderly, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transaction or quoted prices may be necessary to estimate fair value in accordance with Statement of Financial Accounting Standards (SFAS) No. 157 “Fair Value Measurements”. This FSP is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The Company does not anticipate that the adoption of this statement will have any effect on its financial condition and results of operations.

In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board (“APB”) 28-1 “Interim Disclosures about Fair Value of Financial Instruments”. The FSP amends SFAS No. 107 “Disclosures about Fair Value of Financial Instruments” to require an entity to provide disclosures about fair value of financial instruments in interim financial information. This FSP is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The Company does not anticipate that the adoption of this statement will have any effect on its financial condition and results of operations.

In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets”. The FSP states that in developing assumptions about renewal or extension options used to determine the useful life of an intangible asset, an entity needs to consider its own historical experience adjusted for entity-specific factors. In the absence of that experience, an entity shall consider the assumptions that market participants would use about renewal or extension options. This FSP is to be applied to intangible assets acquired after January 1, 2009. The adoption of this FSP did not have an impact on the financial statements.

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.

NOTE 3 – PLEDGED DEPOSITS

Pledged deposits at March 31, 2009 and December 31, 2008 consisted of the following:

	March 31, 2009		December 31, 2008
Letter of credit	$	2,943,372	$	-	(1)

	$	2,943,372	$	-

(1)

On January 13, 2009 China CITIC Bank Zhengzhou Branch issued a letter of credit (“Letter of Credit”) in the amount of $2,952,600 expiring April 15, 2009 on behalf of the Company to a vendor of Henan in connection with purchase of Manganese ore. Henan made the pledged deposit with China CITIC Bank as collateral to the Letter of Credit, which has been released to pay vendor upon receipt of goods in April 2009.

NOTE 4 – INVENTORIES

Inventories at March 31, 2009 and December 31, 2008 consisted of the following:

	March 31, 2009		December 31, 2008
Goods purchased	$	1,820,018	$	197,402

	$	1,820,018	$	197,402

NOTE 5 – RELATED PARTY TRANSACTIONS

Advances from stockholder

Advances from stockholder at March 31, 2009 and December 31, 2008 consisted of the following:

	March 31, 2009		December 31, 2008
Advances from chairman, chief executive officer and stockholder	$	45,673	$	236,595

	$	45,673	$	236,595

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

NOTE 6 – STOCKHOLDERS’ EQUITY

2008 Offering

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 in a private placement. 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 (the “Warrants“).

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 fess 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.

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).

Stock options

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 & Metawise (H.K) Limited (“Armco”) and Feng Gao, who owned 100% of the outstanding shares of Armco (the “Armco Shareholder”). Under the Share Purchase Agreement, the Company purchased from Ms. Gao, the sole shareholder of Armco (the “Armco Shareholder”), 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 (the “Share Purchase”). 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 (the “Common Stock”) 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 (the “Gao Option”). 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 three months ended March 31, 2009, the Company did not record any stock-based compensation for shares vested. For the three months ended March 31, 2008, the Company did not issue any stock options.

The table below summarizes the Company’s stock option activity for the interim period ended March 31, 2009:

	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, December 31, 2008		2,000,000	$	5.00	$	5.00		*	$	-

Granted		-		-		-				-
Canceled		-		-		-				-
Exercised		-		-		-				-
Expired		-		-		-				-
Balance, March 31, 2009		2,000,000	$	5.00	$	5.00		*	$	-


Vested and exercisable, March 31, 2009		2,000,000	$	5.00	$	5.00		*	$	-
Unvested, March 31, 2009		-	$	5.00	$	5.00		*	$	-

* - Less than $1.00

The following table summarizes information concerning outstanding and exercisable stock options as of March 31, 2009:

	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		1.50	$	5.00		2,000,000		1.50	$	5.00

$5.00		2,000,000		1.50	$	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)		5.00
Expected 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 in connection with the exercise of the warrant for 5,000 shares with an exercise price of $5.00 per share.

The table below summarizes the Company’s warrant activity for the three months ended March 31, 2009:

	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, 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, March 31, 2009		2,723,913		$	5.00	$	5.00	$	5,083,639		$	-


Earned and exercisable, March 31, 2009		2,723,913		$	5.00	$	5.00	$	5,083,639		$	-
Unvested, March 31, 2009		-		$	5.00	$	5.00	$	-		$	-

The following table summarizes information concerning outstanding and exercisable warrants as of March 31, 2009:

	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		2,723,913		5.00	$	5.00		2,723,913		5.00	$	5.00

$5.00		2,723,913		5.00	$	5.00		2,723,913		5.00	$	5.00

NOTE 7 – CONCENTRATIONS AND CREDIT RISK

Customers and Credit Concentrations

Customer concentrations for the interim period ended March 31, 2009 and 2008 and credit concentrations at March 31, 2009 and December 31, 2008 are as follows:

	Net Sales for the Interim Period Ended					Accounts receivable at
	March 31, 2009		March 31, 2008			March 31, 2009			December 31, 2008
Customer #206010 Lian YunGang Jiaxin	-	%		-	%		49.2	%		50.9	%
Customer #122004 Zhejiang Properties	-	%		-	%		19.3	%		-	%
Customer #122007 QingDao HuaQing	-	%		-	%		27.0	%		23.8	%
Customer #122002 Zhejiang WuChan	49.6	%		-	%		-	%		-	%
Customer #206036 Hanzhong Yinlong	48.9	%		-	%		-	%		-	%
Customer #122015 ZheJiang GuXiong	-	%		-	%		-	%		21.9	%
Customer #206030 TianJin ZhiYi	-	%		96.9	%		-	%		-	%
	98.5	%		96.9	%		95.5	%		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.

Vendor Concentrations

Vendor purchase concentrations for the three month period ended March 31, 2009 and 2008 and accounts payable concentration at March 31, 2009 and December 31, 2008 and are as follows:

	Net Purchases for the Interim Period Ended					Accounts Payable at
	March 31, 2009		March 31, 2008			March 31, 2009			December 31, 2008
Vendor #126010 ZhongJi NingBo	-	%		-	%		32.0	%		-	%
Vendor #204002 Yingfuguowaikuan	47.5	%		-	%		24.1	%		-	%
Vendor #204006 BestonHoldings	-	%		-	%		17.3	%		32.2	%
Vendor #204028 De Vi	43.9	%		-	%		22.3	%		-	%
Vendor #204019 Sipex	-	%		85.0	%		-	%		-	%
	91.4	%		85.0	%		95.7	%		32.2	%

Credit Risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents. As of March 31, 2009, substantially 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 RMB, the functional currency due to the fact the majority of the Company’s purchasing activities are transacted in foreign currencies. The Company had no foreign currency hedges in place at March 31, 2009 to reduce such exposure. The Company’s previous forward foreign currency exchange contracts expired on August 2, 2008 and the Company’s realized losses on these foreign currency hedges for the three months ended March 31, 2008 was $25,009.

NOTE 8 - 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 5-10% 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 March 31, 2009, the Company had no Statutory Surplus Reserve and the Statutory Common Welfare Fund established and segregated in retained earnings.

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 months period ending March 31, is our first quarter. The year ended December 31, 2008 is referred to as “2008” and the coming year ending December 31, 2009 is referred to as “2009”.

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 metal, and manganese ore.

We are in the process 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 utilizing our existing network of metal ore customers in the PRC. We expect to commence recycling operations in the fourth 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 2008 worldwide crude steel production amounted to 1,330 million metric ton ("mmt"). This is a decrease of 1.2% compared to 2007. 2008 is the second consecutive year that world steel production has been over 1,300 mmt. China’s crude steel production in 2008 reached 502 mmt, an increase of 2.6% from 2007. Production volume in China has more than doubled within five years, from 222 mmt in 2002. China’s share of world steel production continued to grow in 2008 producing 38% of world total crude steel.

We believe recycling operations will become strong growth drivers worldwide as natural resources continue to be depleted and the amount of unprocessed scrap metal becomes available as a result of increases in consumer demand for products made from steel that eventually are recycled. We intend to invest substantially all of the $6.6 million in net proceeds we raised in our private offering of our common stock and warrants we closed in August 2008 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.

Our Performance

For the three months ended March 31, 2009, we experienced a decrease in net revenues, income and an increase in assets. The decrease in net revenues and net income was mainly attributable to the worldwide economic slowdown and decrease in demand due to the slowdown in worldwide construction and outputs. The performance was offset by increased costs incurred in connection with the planning and construction of our scrap metal recycling facility which we expect to complete in the fourth quarter 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

Net Revenues

Net revenues for the first quarter of 2009 and 2008 were $5.4 million and $9.8 million, respectively. This represents a decrease in our net revenues of 45% compared to the first quarter of 2008. This decrease was mainly contributable to the global economic slowdown which adversely affected our net revenues.

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 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 first quarter of 2009 and 2008 were $4.8 million and $8.5 million, respectively. This decrease of 43% is directly related to the 45% decrease in our net revenues. Our cost of revenues as a percentage of revenues during the first quarter of 2009 and 2008 were 90% and 87%, respectively. These changes as a percentage of revenues are indicative of our product mix in the first quarter of 2009 as compared to the comparable period in 2008.

Total Operating Expenses

Operating expenses for the first quarter of 2009 and 2008 were $333,934 and $227,522, respectively. This represents an increase of 33% compared to the first quarter of 2008. 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 our U.S. offices. Armet Lianyungang, our wholly owned subsidiary, is constructing a scrap metal recycling facility in the Banqiao Industrial Zone of Lianyungang Economic Development Zone in Jiangsu province. Toward this end, we have expanded operational staff to support the recycling operations.

The table below summarizes the consolidated operating results for the three months ended March 31, 2009 and 2008.

(in 000’s)	For the three months ended March 31,
	2009				2008

Revenues	$	5,358	-		$	9,775	-
Cost of revenues		4,847	90	%		8,545	87	%
Gross profit		511	10	%		1,230	13	%

Total operating expenses		302	6	%		228	2	%
Operating (loss) income	$	209	4	%	$	1,002	10	%

Other Income (expense)

Total other expense for the first quarter of 2009 and 2008 was $48,263 and $5,830, respectively. During the three months ended March 31, 2009, we had interest expense of $18,036 and other expenses of $17,178 and $13,049 in our Armet and Henan Armco subsidiaries, respectively.

Income tax benefit (expense)

Income tax expense decreased to $790 in the first quarter of 2009 as compared to $258,653 in the first quarter of 2008 primarily as a result of the decrease 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 and no provision for income taxes has been made. Armco’s statutory tax rate is 17.5% and is subject to Hong Kong SAR income taxes as of January 1, 2008.

Net income (loss)

For the first quarter of 2009 and 2008 our net income totaled $127,636 and $737,613, respectively. The decrease in our net income is attributable to the reduced revenues as a result of the global economic slowdown mentioned herein.

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 March 31, 2009 and December 31, 2008 we had cash and cash equivalents of $1,314,624 and $3,253,533, respectively. At March 31, 2009 our working capital was $9.8 million as compared to $10.7 million at December 31, 2008. 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 first quarter of 2009. 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 March 31, 2009 and December 31, 2008.

	March 31		December 31,		Increase /
	2008		2008		(decrease)			%

Cash	$	1,314,624	$	3,253,533	$	(1,938,909	)		-60	%
Pledged deposits		2,943,372		-		2,943,372			100	%
Accounts receivable, net		14,790,318		16,722,307		(1,931,989	)		-12	%
Inventories, net		1,820,018		197,402		1,622,616			822	%
Advance on purchases		3,318,919		3,680,872		(361,953	)		-10	%
Prepayments and other current assets		520,814		379,452		141,362			37	%
Total current assets		24,708,065		24,233,566		474,499			2	%
Property and equipment, net		3,417,019		2,377,816		1,039,203			44	%
Land use rights, net		2,161,800		2,208,902		(47,102	)		-2	%
Total assets		30,286,884		28,820,284		1,466,600			5	%

Loans Payable		-		2,914,345		(2,914,345	)		-100	%
Accounts payable		11,953,646		6,694,534		5,259,112			79	%
Customer deposits		2,083,705		2,613,653		(529,948	)		-20	%
Taxes payable		775,247		1,039,312		(264,065	)		-25	%
Total current liabilities		14,871,747		13,531,338		1,340,409			10	%
Total liabilities	$	14,871,747	$	13,531,338	$	1,340,409			10	%

At March 31, 2009, our cash totaled $1,314,624 as compared to $3,253,533 at December 31, 2008.

A majority of our cash reserves, $1,273,798 or approximately 96% at March 31, 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 March 31, 2009 has been translated based on the exchange rate as of March 31, 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 March 31, 2009 increased $474,499, or approximately 2%, from December 31, 2008; this reflects increases in current asset items including cash, inventories, prepayments and other current assets. These increases were partially offset by a decrease in accounts receivable and advance on purchases. Our total and current liabilities increased by approximately $1.3 million, or 10%, at March 31, 2009 from December 31, 2008; this reflects an increase in accounts payable which was partially offset by a decrease in loans payable, customer deposits, and taxes payable.

Our accounts receivable decreased to $14.8 million compared to $16.7 million as of our prior year end. This represents a decrease of approximately 12% which was mainly due to efficient collection efforts.

Inventories increased $1.6 million, or approximately 2% at March 31, 2009 from the prior year end. This occurred due to timing differences between our receipt of product and shipment to our customers.

Our prepayment and other current assets increased $141,362 as of March 31, 2009 over our prior year end.

Advances on purchases decreased $361,953, or approximately 10%, and consisted of prepayments to vendors for merchandise, security and deposits.

Our accounts payable increased $5.3 million or approximately 79% over the prior year end. This increase was partially offset by the decrease in customer deposits and taxes payable of approximately 20% and 25%, respectively. Additionally, we had no loans payable as of March 31, 2009 as compared to the balance of $2,914,345 as of December 31, 2008.

2008 Offering

Between July and August 2009 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. 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 first quarter of 2009, our cash totaled $1,314,624 and consisted of $5,150,317 provided by operating activities, $4,008,632 used in investing activities, and $3,086,318 used in financing activities.

For the first quarter of 2008, our cash totaled $145,127 and consisted of $236,934 provided by operating activities, $172,211 used in investing activities, and $893,620 used in financing activities.

Cash (Used in) Provided by Operating Activities

For the first quarter of 2009 cash provided by operations of $5.2 million comprised of our net income of $127,636, adjustments to net income for depreciation and amortization of $57,681, a decrease in accounts receivable of $1,907,901, and an increase in accounts payable of $5.3 million. These were partially offset by inventory purchases of $1.6 million, a decrease in customer deposits of $521,128, and an increase in accrued expenses and current liabilities of $244,474.

For the first quarter of 2009 cash provided by operations of $236,934 was comprised of our net income of $737,613, adjustments to net income for depreciation and amortization of $21,214, an increase in accounts payable of $5.7 million, an increase in customer deposits of $786,574, and an increase in accrued expenses and current liabilities of $317,283. These were partially offset by an increase in accounts receivable of $6.0 million, and a decrease in advance on purchases of $1.1 million.

Cash used in Investing Activities

For the first quarter of 2009 cash used in investing activities of $4.0 million, and was due to purchases of property and equipments and construction projects during the period of $1,065,260, and payments made towards pledged deposits of $2,943,372.

For the first quarter of 2008 cash used in investing activities of $172,211 was due to payments toward pledged deposits of $167,959 and purchases of property and equipments of $4,252.

Cash provided by Financing Activities

For the first quarter of 2009 cash used in financing activities of $3.1 million, which was mainly due to repayments of loan payable of $2.9 million and payments to related parties of $196,973, these were partially offset by proceeds from the exercise of warrants of $25,000.

For the first quarter of 2008 cash used in financing activities of $893,620 was due to payments to related parties.

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.

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, 2008 and Item 1.01 “Risk Factors” of our Current Report on Form 8-K filed on July 1, 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 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).

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-K for the year ended December 31, 2008. 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.

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

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: May 20, 2009	By:	/s/ Kexuan Yao
		Kexuan Yao
		CEO and Chairman
		(Principal Executive Officer)



Date: May 20, 2009	By:	/s/ Fengtao Wen
		Fengtao Wen
		Chief Financial Officer
		(principal accounting officer)

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Armco Metals (AMCO) Inactive 10-Q2009 Q1 Quarterly report

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