Armco Metals 10Q 2011 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________ to __________________________

Commission file number: 001-34631

CHINA ARMCO METALS, INC.

(Exact name of registrant as specified in its charter)

Nevada	26-0491904
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

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 [X] No [ ]

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 [X] 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 [ ] Accelerated filer [ ]

Non-accelerated filer (Do not check if a smaller reporting company) [ ] Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X]

As of November 11, 2011, 15,242,533 shares of common stock, par value $0.001, are issued and outstanding.

TABLE OF CONTENTS

Page No.

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements.	F-1

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	1

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	16

Item 4.	Controls and Procedures.	16

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings.	18

Item 1A.	Risk Factors.	18

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	19

Item 3.	Defaults Upon Senior Securities.	19

Item 4.	(Removed and Reserved).	19

Item 5.	Other Information.	19

Item 6.	Exhibits.	19

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

This Report contains forward-looking statements. The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This Quarterly Report on Form 10-Q and other written and oral statements that we make from time to time contain such forward-looking statements that set out anticipated results based on management’s plans and assumptions regarding future events or performance. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will” and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance or results of current and anticipated sales efforts, expenses, the outcome of contingencies, such as legal proceedings, and financial results. A list of factors that could cause our actual results of operations and financial condition to differ materially is set forth below, and these factors are discussed in greater detail under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010:

●	We operate in cyclical industries and we experience volatile demand for our products.
●	Our ability to operate our scrap metal recycling facility efficiently and profitably.
●	Our ability to obtain sufficient capital to fund a potential expansion of our scrap metal recycling facility.
●	Our ability to establish adequate management, legal and financial controls in the United States and the PRC.

●	The availability to us of supplies of metal ore and scrap metal upon favorable terms.
●	The availability of electricity to operate our scrap metal 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.
●	The lack various legal protections in certain agreements to which we are a party which are customarily contained in similar contracts prepared in the United States and which are material to our operations.

●	Our dependence on our key management personnel.
●	Our potential inability to meet the 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 limitation on our ability to receive and use our revenues effectively as a result of restrictions on currency exchange in the PRC.

●	The impact on future inflation in China on economic activity in China.
●	Our ability to enforce our rights due to policies regarding the regulation of foreign investments in the PRC.
●	The restrictions imposed under 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 any business combinations 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.

●	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.

INDEX OF CERTAIN DEFINED TERMS USED IN THIS REPORT

When used in this report the terms:

–

“Armco” or “Armco & Metawise” refers to Armco Metals International Limited, 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.

	–	“Armco Shanghai” refers to Armco Metals (Shanghai) Holdings. Ltd., a wholly-owned foreign enterprise and limited liability company established under the laws of the People’s Republic of China.

	–	“China Armco Metals,” “we,” “us” or “our” refers to China Armco Metals, Inc., a Nevada corporation, and its subsidiaries.

–

“Exchange Act” refers to Securities Exchange Act of 1934, as amended.

–

“Henan Armco” refers to Henan Armco & Metawise Trading Co., Ltd., a limited liability company established under the laws of the People’s Republic of China.

–

“Lianyungang Armco” refers to Armco (Lianyungang) Holdings, Ltd., a wholly-owned foreign enterprise and limited liability company established under the laws of the People’s Republic of China.

–

“SEC” refers to the United States Securities and Exchange Commission;

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements.

China Armco Metals, Inc. and Subsidiaries

September 30, 2011 and 2010

Index to Consolidated Financial Statements

Contents	Page(s)

Consolidated Balance Sheets at September 30, 2011 (Unaudited) and December 31, 2010	F-2

Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended September 30, 2011 and 2010 (Unaudited)	F-3

Consolidated Statements of Operations and Comprehensive Income (Loss) for the Nine Months Ended September 30, 2011 and 2010 (Unaudited)	F-4

Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2011 (Unaudited)	F-5

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010 (Unaudited)	F-7

Notes to the Consolidated Financial Statements (Unaudited)	F-8

F-1

CHINA ARMCO METALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS





	September 30, 2011			December 31, 2010
	(Unaudited)

ASSETS
CURRENT ASSETS:
Cash	$	1,149,281		$	3,097,917
Pledged deposits		4,868,919			12,643,671
Marketable securities		2,090,702			2,890,380
Bank acceptance notes receivable		62,547			-
Accounts receivable		546,547			19,115,019
Inventories		14,165,312			10,439,831
Advance on purchases		17,482,079			6,509,846
Prepaid corporate income taxes-Armet		464,862			-
Prepayments and other current assets		1,578,027			4,729,935

Total Current Assets		42,408,276			59,426,599

PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment		37,166,495			34,633,639
Accumulated depreciation		(2,807,047	)		(761,515	)

PROPERTY, PLANT AND EQUIPMENT, net		34,359,448			33,872,124

LAND USE RIGHT
Land use right		2,417,485			2,338,289
Accumulated amortization		(195,999	)		(153,965	)

LAND USE RIGHT, net		2,221,486			2,184,324

Total Assets	$	78,989,210		$	95,483,047

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Loans payable	$	9,914,750		$	24,765,820
Banker's acceptance notes payable		1,563,673			4,174,355
Current maturities of capital lease obligation		761,350			727,756
Current maturities of long-term debt		3,909,182			4,537,342
Accounts payable		2,400,808			3,435,528
Advances received from Chairman and CEO		626,990			799,394
Customer deposits		11,283,565			1,345,304
Corporate income tax payable-HK		158,998			1,091,038
Accrued expenses and other current liabilities		5,536,070			6,316,568

Total Current Liabilities		36,155,386			47,193,105

CAPITAL LEASE OBLIGATION, net of current maturities		1,015,503			1,540,915

LONG-TERM DEBT, net of current maturities		-			3,781,119

DERIVATIVE LIABILITY		1,335			138,143

Total Liabilities		37,172,224			52,653,282

COMMITMENTS AND CONTINGENCIES

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, 15,045,656 and 14,840,948 shares issued and outstanding, respectively		15,046			14,841
Additional paid-in capital		29,568,913			28,966,596
Retained earnings		10,876,925			12,711,039
Accumulated other comprehensive income (loss):
Change in unrealized loss on marketable securities		(1,594,654	)		(506,278	)
Foreign currency translation gain		2,950,756			1,643,567

Total Stockholders' Equity		41,816,986			42,829,765

Total Liabilities and Stockholders' Equity	$	78,989,210		$	95,483,047

See accompanying notes to the consolidated financial statements.

F-2

CHINA ARMCO METALS, INC. AND SUBSIDIARIES
Consolidated ONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)



	For the Three Months
	Ended				Ended
		September 30, 2011				September 30, 2010
	(Unaudited)				(Unaudited)

NET REVENUES		$	16,098,439			$	18,682,407

COST OF GOODS SOLD			15,288,243				17,768,877

GROSS PROFIT			810,196				913,530

OPERATING EXPENSES:
Selling expenses			312,685				154,168
Professional fees			118,348				182,803
General and administrative expenses			777,201				693,672
Operating cost of Armet idle manufacturing facility			525,476				-

Total operating expenses			1,733,710				1,030,643

LOSS FROM OPERATIONS			(923,514	)			(117,113	)

OTHER (INCOME) EXPENSE:
Interest income			(57,039	)			-
Interest expense			400,775				75,563
Gain from foreign currency rate change on marketable securities			(288,698	)
Foreign currency transaction loss			93,871				-
Change in fair value of derivative liability			(8,688	)			13,215
Loan guarantee expense			13,667				93,749
Other (income) expense			(26,749	)			84,523

Total other (income) expense			127,139				267,050

LOSS BEFORE INCOME TAXES			(1,050,653	)			(384,163	)

INCOME TAX PROVISION			48,408				15,531

NET LOSS			(1,099,061	)			(399,694	)

OTHER COMPREHENSIVE INCOME (LOSS):
Change in unrealized loss of marketable securities			514,858				-
Foreign currency translation gain (loss)			420,577				687,549

COMPREHENSIVE INCOME (LOSS)		$	(163,626	)		$	287,855

NET LOSS PER COMMON SHARE - BASIC AND DILUTED:

# Net loss per common share - basic and diluted		$	(0.07	)		$	(0.03	)

Weighted Average Common Shares Outstanding - basic and diluted			15,373,535				15,266,783

See accompanying notes to the consolidated financial statements.

F-3

CHINA ARMCO METALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)



	For the Nine Months
	Ended			Ended
	September 30, 2011			September 30, 2010
	(Unaudited)			(Unaudited)

NET REVENUES	$	96,751,229		$	44,258,579

COST OF GOODS SOLD		91,422,865			42,589,285

GROSS PROFIT		5,328,364			1,669,294

OPERATING EXPENSES:
Selling expenses		854,733			876,265
Professional fees		747,153			522,725
General and administrative expenses		2,545,577			1,555,744
Operating cost of Armet idle manufacturing facility		1,425,262			-

Total operating expenses		5,572,725			2,954,734

LOSS FROM OPERATIONS		(244,361	)		(1,285,440	)

OTHER (INCOME) EXPENSE:
Interest income		(86,423	)		(2,284	)
Interest expense		1,364,203			157,106
Gain from foreign currency rate change on marketable securities		(288,698	)
Foreign currency transaction loss		1,002			-
Gain from vendor price adjustment		-			(963,259	)
Change in fair value of derivative liability		(136,808	)		(92,912	)
Loan guarantee expense		148,666			125,332
Other (income) expense		296,532			(62,724	)

Total other (income) expense		1,298,474			(838,741	)

LOSS BEFORE INCOME TAXES		(1,542,835	)		(446,699	)

INCOME TAX PROVISION		291,279			147,403

NET LOSS		(1,834,114	)		(594,102	)

OTHER COMPREHENSIVE INCOME (LOSS):
Change in unrealized loss of marketable securities		(1,088,376	)		-
Foreign currency translation gain (loss)		1,307,189			790,597

COMPREHENSIVE INCOME (LOSS)	$	(1,615,301	)	$	196,495

NET LOSS PER COMMON SHARE - BASIC AND DILUTED:

# Net loss per common share - basic and diluted	$	(0.12	)	$	(0.04	)

Weighted Average Common Shares Outstanding - basic and diluted		15,348,828			13,309,075

See accompanying notes to the consolidated financial statements.

F-4

CHINA ARMCO METALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

For the Year Ended December 31, 2010 and for the Interim Period Ended September 30, 2011

(Unaudited)

Common Stock, $0.001 Par Value

Accumulated Other Comprehensive Income (Loss)

Number of Shares

Amount

Additional Paid-in Capital

Retained Earnings

Change in Unrealized Loss on Marketable Securities

Foreign Currency Translation Gain

Total Stockholders' Equity

Balance, December 31, 2009	10,310,699	$	10,310	$	1,880,466		$	14,936,915	$	-	$	297,681	$	17,125,372

Issuance of common stock upon exercise of warrants to purchase 1,324,346 common shares at $5.00 per share for the three-month period ending March 31, 2010	1,324,346		1,325		6,620,405									6,621,730

Issuance of 78,217 common shares upon cashless exercise of warrants to purchase 167,740 common shares at $5.00 per share for the three-month period ending March 31, 2010	78,217		78		(78	)								-

Extinguishment of derivative liability associated with the exercise of warrants to purchase common stock for the three-month period ending March 31, 2010					1,875,106									1,875,106

Reclassification of derivative liability to additional paid-in capital associated with the waiver of anti-dilution provision of warrants to purchase 1,031,715 common shares					1,292,227									1,292,227

Issuance of common stock upon exercise of warrants to purchase 13,806 common shares at $5.00 per share for the three-month period ending June 30, 2010	13,806		14		69,016									69,030

Reclassification of derivative liability to additional paid-in capital associated with the exercise of warrants to purchase 13,806 common shares					21,229									21,229

Sale of common stock and warrant at $6.50 per unit on April 20, 2010	1,538,464		1,538		9,111,436									9,112,974

Issuance of common stock upon exercise of options to purchase 1,400,000 common shares at $5.00 per share for the three-month period ending June 30, 2010	1,400,000		1,400		6,998,600									7,000,000

F-5

CHINA ARMCO METALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

For the Year Ended December 31, 2010 and for the Interim Period Ended September 30, 2011

(Unaudited)

Common Stock, $0.001 Par Value

Accumulated Other Comprehensive Income (Loss)

Number of Shares

Amount

Additional Paid-in Capital

Retained Earnings

Change in Unrealized Loss on Marketable Securities

Foreign Currency Translation Gain

Total Stockholders' Equity


Issuance of common stock to China Direct Industries, Inc. for consulting services	80,000	80	392,720							392,800

Issuance of common stock to Bespoke for consulting services	22,500	23	78,502							78,525

Loan guarantee services received and shares vested from common shares issued to Chaoyang Steel on June 11, 2010 for 5 year loan guarantee services expiring June 30, 2016	66,666	67	244,930							244,997

Issuance of restricted stock to Director pursuant to 2009 Stock Incentive Plan for future services valued at $3.28 per share granted on September 16, 2010	6,250	6	19,494							19,500

Issuance of restricted stock to Director pursuant to 2009 Stock Incen tive Plan for future services valued at $3.28 per share granted on September 16, 2010			(19,500	)						(19,500	)

Amortization of deferred compensation			244,043							244,043

Issuance of stock options to an employee pursuant to 2009 Stock Incentive Plan for services on October 6, 2010			138,000							138,000

Comprehensive income (loss)
Net loss					(2,225,876	)				(2,225,876	)
Change in unrealized loss on marketable securities							(506,278	)		(506,278	)
Foreign currency translation gain									1,345,886	1,345,886

Total comprehensive income (loss)										(1,386,268	)

Balance, December 31, 2010	14,840,948	14,841	28,966,596		12,711,039		(506,278	)	1,643,567	42,829,765

F-6

CHINA ARMCO METALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

For the Year Ended December 31, 2010 and for the Interim Period Ended September 30, 2011

(Unaudited)

Common Stock, $0.001 Par Value

Accumulated Other Comprehensive Income (Loss)

Number of Shares

Amount

Additional Paid-in Capital

Retained Earnings

Change in Unrealized Loss on Marketable Securities

Foreign Currency Translation Gain

Total Stockholders' Equity

Loan guarantee services received and shares vested from common shares issued to Chaoyang Steel on June 11, 2010 for 5 year loan guarantee services expiring June 30, 2016	33,333		33		89,633											89,666

Issuance of common stock to an employee pursuant to 2009 Stock Incentive Plan for services valued at $3.38 per share granted on October 6, 2010	55,378		55		187,125											187,180

Issuance of common stock to HCI for consulting services for first quarter 2011	10,800		11		29,040											29,051

Issuance of common shares to an employee for future services	10,000		10		27,390											27,400

Issuance of common shares to an employee for future services			-		(27,400	)										(27,400	)

Amortization of deferred employee services					199,176											199,176

Loan guarantee services received and shares vested from common shares issued to Chaoyang Steel on June 11, 2010 for 5 year loan guarantee services expiring June 30, 2016	33,333		34		45,299											45,333

Issuance of common stock to HCI for consulting services for second quarter 2011	10,800		11		14,677											14,688

Loan guarantee services received and shares vested from common shares issued to Chaoyang Steel on June 11, 2010 for 5 year loan guarantee services expiring June 30, 2016	33,333		33		13,634											13,667

Issuance of common shares for conversion of accrued expenses-Director cash compensation	17,731		18		23,742											23,760

Comprehensive income (loss)
Net Loss								(1,834,114	)							(1,834,114	)
Change in unrealized loss on marketable securities											(1,088,376	)				(1,088,376	)
Foreign currency translation gain														1,307,189		1,307,189

Total comprehensive income (loss)																(1,615,301	)

Balance, September 30, 2011	15,045,656	$	15,046	$	29,568,913		$	10,876,925		$	(1,594,654	)	$	2,950,756	$	41,816,986

See accompanying notes to the consolidated financial statements.

F-7

CHINA ARMCO METALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Nine Months			For the Nine Months
	Ended			Ended
	September 30, 2011			September 30, 2010
	(Unaudited)			(Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,834,114	)	$	(594,102	)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation expense		2,022,523			215,021
Amortization expense		36,819			35,154
Change in fair value of derivative liability		(136,808	)		(92,912	)
Gain on foreign currency exchange rate change on investment		(288,698	)
Stock based compensation		391,582			666,850
Changes in operating assets and liabilities:
Bank acceptance notes receivable		(62,547	)		-
Accounts receivable		18,749,355			7,783,326
Inventories		(3,380,020	)		(8,739,169	)
Advance on purchases		(10,751,746	)		2,218,802
Prepaid value added taxes		-			(1,105,337	)
Prepayments and other current assets		2,831,681			(1,618,928	)
Accounts payable		(1,131,872	)		9,790,481
Customer deposits		4,976,595			(238,856	)
Taxes payable		(932,028	)		(2,159,178	)
Accrued expenses and other current liabilities		4,156,323			768,370

NET CASH PROVIDED BY OPERATING ACTIVITIES		14,647,045			6,929,522

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from release of pledged deposits		44,816,917			4,966,481
Payment made towards pledged deposits		(36,628,416	)		(7,253,611	)
Investment in Apollo Mineral		-			(3,396,658	)
Purchases of property and equipment		(1,385,735	)		(12,905,775	)

NET CASH USED IN INVESTING ACTIVITIES		6,802,766			(18,589,563	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans payable		59,785,871			18,347,925
Repayment of loans payable		(74,972,981	)		(27,299,502	)
Banker's acceptance notes payable		(2,752,064	)		-
Repayment of capital lease obligation		(568,656	)		-
Proceeds from long-term debt		-			1,492,961
Repayment of long-term debt		(4,691,018	)		(2,239,441	)
Advances from (repayment to) Chairman and CEO		(172,404	)		1,494,741
Sales of common stock and warrants, net of offering costs					22,303,733

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		(23,371,252	)		14,100,417

EFFECT OF EXCHANGE RATE CHANGES ON CASH		(27,195	)		369,646

NET CHANGE IN CASH		(1,948,636	)		2,810,022

Cash at beginning of period		3,097,917			743,810

Cash at end of period	$	1,149,281		$	3,553,832

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Interest paid	$	1,364,203		$	157,106
Income taxes paid	$	1,223,999		$	41,726

NON CASH FINANCING AND INVESTING ACTIVITIES:
Accrued director cash compensation paid in common shares in lieu of cash	$	23,760		$	-
Accrued employee compensation paid in common shares in lieu of cash	$	187,180		$	-

See accompanying notes to the consolidated financial statements.

F-8

China Armco Metals, Inc. and Subsidiaries

September 30, 2011 and 2010

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 ($9,100). 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 Metals International Limited (formerly “Armco HK (H.K) Limited” or “Armco HK”) and Subsidiaries. The Company engages in, through its wholly owned subsidiaries in China, and Armco HK, import, export and distribution of ferrous and non-ferrous ores and metals, and processing and distribution of scrap steel.

Merger of Armco Metal International Limited and Subsidiaries (“Armco HK”)

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 HK and Feng Gao, who owned 100% of the issued and outstanding shares of Armco HK. In connection with the acquisition, the Company purchased from the Armco HK Shareholder 100% of the issued and outstanding shares of Armco HK’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 expiring on September 30, 2008 and 2,000,000 shares at $5.00 per share expiring on September 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 HK, for financial statement reporting purposes, the merger between the Company and Armco HK has been treated as a reverse acquisition with Armco HK deemed the accounting acquirer and the Company deemed the accounting acquiree under the purchase method of accounting in accordance with section 805-10-55 of the FASB Accounting Standards Codification. The reverse merger is deemed a capital transaction and the net assets of Armco HK (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 HK which are recorded at historical cost. The equity of the Company is the historical equity of Armco HK retroactively restated to reflect the number of shares issued by the Company in the transaction.

Armco & Metawise (H.K) Limited 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”). On March 22, 2011, Armco & Metawise (H.K) Limited amended its Memorandum and Articles of Association, and changed its name to Armco Metal International Limited (“Armco HK”). Armco HK engages in the import, export and distribution of ferrous and non-ferrous ore and metals.

On January 9, 2007, Armco HK formed Armet (Lianyungang) Renewable Resources Co, Ltd. (“Armet”), a wholly-owned foreign enterprise (“WOFE”) subsidiary in the City of Lianyungang, Jiangsu Province, PRC. On December 1, 2008, Armco HK transferred its 100% equity interest in Armet to China Armco Metals, Inc. Armet engages in the processing and distribution of scrap metal.

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 with Armet, Companies under Common Control

On December 28, 2007, Armco HK entered into a Share Transfer Agreement with Armet, whereby Amrco HK transferred to Armet all of its equity interest in Henan, a company under common control of Armco HK. 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 as of the first date of the first period presented.

F-9

Formation of Armco (Lianyungang) Holdings, Inc.

On June 4, 2009, the Company formed Armco (Lianyungang) Holdings, Inc. (“Lianyungang Armco”), a WOFE subsidiary in the City of Lianyungang, Jiangsu Province, PRC. Lianyungang intends to engage in marketing and distribution of the recycled scrap steel.

Formation of Armco Metals (Shanghai) Holdings, Ltd.

On July 16, 2010, the Company formed Armco Metals (Shanghai) Holdings. Ltd. (“Armco Shanghai”) as a WOFE subsidiary in Shanghai, China. Armco Shanghai serves as the headquarters for the Company’s China operations and oversees the activities of the Company in financing and international trading.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation - unaudited interim financial information

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 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim financial statements furnished reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of the results for the full year. These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2010 and notes thereto contained in the Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2011.

Principles of consolidation

The consolidated financial statements include all accounts of Armco Metals, Armco HK, Armet, Henan Armco and Lianyungang Armco as of September 30, 2011 and 2010 and for the interim periods then ended; all accounts of Armco Shanghai as of September 30, 2011 and 2010, for the interim period ended September 30, 2011 and for the period from July 16, 2010 (inception) through September 30, 2010. All inter-company balances and transactions have been eliminated.

Reclassification

Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported losses.

Use of estimates and assumptions

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 reported amounts of revenues and expenses during the reporting period.

The Company’s significant estimates and assumptions include the fair value of financial instruments; allowance for doubtful accounts; normal production capacity, inventory valuation and obsolescence; the carrying value, recoverability and impairment, if any, of long-lived assets, including the values assigned to and the estimated useful lives of property, plant and equipment, and land use rights; interest rate; revenue recognized or recognizable; sales returns and allowances; valued added tax rate, income tax rate and related tax provision, and foreign currency exchange rate. Those significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to those estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.

Management bases its estimates on historical experience and on various 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.

Management regularly reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates.

F-10

Fair value of financial instruments

The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and has adopted paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:


Level 1	Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.

Level 2	Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.

Level 3	Pricing inputs that are generally observable inputs and not corroborated by market data.

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.

The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

The carrying amounts of the Company’s financial assets and liabilities, such as cash, pledged deposits, accounts receivable, advance on purchases, prepayments and other current assets, accounts payable, customer deposits, corporate income tax payable, accrued expenses and other current liabilities approximate their fair values because of the short maturity of these instruments.

The Company’s loans payable, banker’s acceptance notes payable, capital lease obligation, and long-term debt 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 September 30, 2011 and December 31, 2010.

The Company’s Level 3 financial liabilities consist of the derivative warrant issued in July 2008 for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. The Company valued the automatic conditional conversion, re-pricing/down-round, change of control; default and follow-on offering provisions using a lattice model, with the assistance of a valuation specialist, for which management understands the methodologies. These models incorporate transaction details such as Company stock price, contractual terms, maturity, risk free rates, as well as assumptions about future financings, volatility, and holder behavior as of the date of issuance and each balance sheet date.

Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.

It is not however, practical to determine the fair value of advances from stockholders due to their related party nature.

Fair value of financial assets and liabilities measured on a recurring basis

Level 1 financial assets – Marketable securities

The Company uses Level 1 of the fair value hierarchy to measure the fair value of the marketable securities and marks the available for sale marketable securities at fair value in the statement of financial position at each balance sheet date and reports the unrealized holding gains and losses for available-for-sale securities in other comprehensive income (loss) until realized.

Level 3 financial liabilities – Derivative warrant liabilities

The Company uses Level 3 of the fair value hierarchy to measure the fair value of the derivative liabilities and revalues its derivative warrant liability at every reporting period and recognizes gains or losses in the consolidated statements of operations and comprehensive income (loss) that are attributable to the change in the fair value of the derivative warrant liability.

F-11

Fair value of non-financial assets or liabilities measured on a recurring basis

The Company identifies potentially excess and slow-moving inventories by evaluating turn rates, inventory levels and other factors. Excess quantities are identified through evaluation of inventory aging, review of inventory turns and historical sales experiences. The Company provides lower of cost or market reserves for such identified excess and slow-moving inventories. The Company establishes a reserve for inventory shrinkage, if any, based on the historical results of physical inventory cycle counts.

Carrying value, recoverability and impairment of long-lived assets

The Company has adopted paragraph 360-10-35-17 of the FASB Accounting Standards Codification for its long-lived assets. The Company’s long-lived assets, which include property, plant and equipment and land use rights 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 considers the following to be some examples of important indicators that may trigger an impairment review: (i) significant under-performance or losses of assets relative to expected historical or projected future operating results; (ii) significant changes in the manner or use of assets or in the Company’s overall strategy with respect to the manner or use of the acquired assets or changes in the Company’s overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant decline in the Company’s stock price for a sustained period of time; and (vi) regulatory changes. The Company evaluates acquired assets for potential impairment indicators at least annually and more frequently upon the occurrence of such events.

The key assumptions used in management’s estimates of projected cash flow deal largely with forecasts of sales levels, gross margins, and operating costs of the manufacturing facilities. These forecasts are typically based on historical trends and take into account recent developments as well as management’s plans and intentions. Any difficulty in manufacturing or sourcing raw materials on a cost effective basis would significantly impact the projected future cash flows of the Company’s manufacturing facilities and potentially lead to an impairment charge for long-lived assets. Other factors, such as increased competition or a decrease in the desirability of the Company’s products, could lead to lower projected sales levels, which would adversely impact cash flows. A significant change in cash flows in the future could result in an impairment of long lived assets.

The impairment charges, if any, is included in operating expenses in the accompanying consolidated statements of income and comprehensive income (loss).

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 consist of amounts held in financial institutions for (i) outstanding letters of credit and (ii) open banker’s acceptance notes payable maturing between three (3) to nine (9) months from the date of issuance.

The Company uses letters of credit in connection with its purchases of ferrous and non-ferrous ores and metals, and scrap metal for processing and distribution. The issuing financial institutions of those letters of credit require the Company to deposit and pledge certain percentage of the maximum amount stipulated under those letters of the credit as collateral. The pledged deposits are either released to the Company in the event of vendors' non-performance or to be released to the Company as part of the payment toward the letters of credit when vendors delivers the goods under those letters of credit on or before maturity date.

The Company satisfies certain accounts payable, through banker’s acceptance notes issued by financial institutions to certain of the Company’s vendors. The issuing financial institutions of those banker’s acceptance notes require the Company to deposit and pledge certain percentage of the amount stipulated under those banker’s acceptance notes as collateral. The pledged deposits are released to the Company as part of the payment toward banker’s acceptance notes upon maturity.

The Management of the Company believes it is appropriate to classify such amounts as current assets as those letters of credit are of a short term nature, three (3) to nine (9) months in length from the date of issuance.

F-12

Marketable securities, available for sale

The Company accounts for marketable securities, available for sale, in accordance with sub-topic 320-10 of the FASB Accounting Standards Codification (“Sub-topic 320-10”).

Pursuant to Paragraph 320-10-35-1, investments in debt securities that are classified as available for sale and equity securities that have readily determinable fair values that are classified as available for sale shall be measured subsequently at fair value in the consolidated balance sheets at each balance sheet date. Unrealized holding gains and losses for available-for-sale securities (including those classified as current assets) shall be excluded from earnings and reported in other comprehensive income until realized except an available-for-sale security that is designated as being hedged in a fair value hedge, from which all or a portion of the unrealized holding gain and loss of shall be recognized in earnings during the period of the hedge, pursuant to paragraphs 815-25-35-1 through 35-4.

The Company follows Paragraphs 320-10-35-18 through 33 and assess whether an investment is impaired in each reporting period. An investment is impaired if the fair value of the investment is less than its cost. Impairment indicators include, but are not limited to the following: a. a significant deterioration in the earnings performance, credit rating, asset quality, or business prospects of the investee; b. a significant adverse change in the regulatory, economic, or technological environment of the investee; c. a significant adverse change in the general market condition of either the geographic area or the industry in which the investee operates; d. a bona fide offer to purchase (whether solicited or unsolicited), an offer by the investee to sell, or a completed auction process for the same or similar security for an amount less than the cost of the investment; e. factors that raise significant concerns about the investee's ability to continue as a going concern, such as negative cash flows from operations, working capital deficiencies, or noncompliance with statutory capital requirements or debt covenants. If the fair value of an investment is less than its cost basis at the balance sheet date of the reporting period for which impairment is assessed, the impairment is either temporary or other than temporary. Pursuant to Paragraph 320-10-45-8A, in periods in which an entity determines that a security’s decline in fair value below its cost basis is other than temporary, the entity shall recognize and present the total other-than-temporary impairment in the statement of earnings with an offset for the amount of the total other-than-temporary impairment that is recognized in other comprehensive income, in accordance with paragraph 320-10-35-34D, if any. Pursuant to Paragraph 320-10-45-9A, An entity shall separately present, in the financial statement in which the components of accumulated other comprehensive income are reported, amounts recognized therein related to held-to-maturity and available-for-sale debt securities for which a portion of an other-than-temporary impairment has been recognized in earnings.

Accounts receivable and allowance for doubtful accounts

Accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts. The Company follows paragraph 310-10-50-9 of the FASB Accounting Standards Codification to estimate the allowance for doubtful accounts. The Company performs on-going credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current credit worthiness, as determined by the review of their current credit information; and determines the allowance for doubtful accounts based on historical write-off experience, customer specific facts and economic conditions.

Outstanding account balances are reviewed individually for collectability. 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. Bad debt expense is included in general and administrative expenses, if any. Pursuant to paragraph 310-10-50-2 of the FASB Accounting Standards Codification 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 has adopted paragraph 310-10-50-6 of the FASB Accounting Standards Codification and determine when receivables are past due or delinquent based on how recently payments have been received.

The Company does not have any off-balance-sheet credit exposure to its customers.

Advance on purchases

Advance on purchases primarily represent amounts paid to vendors for future delivery of products ranging from three (3) months to nine (9) months, all of which were fully or partially refundable depending upon the terms and conditions of the purchase agreements.

Inventories

The Company values inventories, consisting of raw materials, packaging material and finished goods, at the lower of cost or market. Cost is determined on the first-in and first-out (“FIFO”) method for raw materials and packaging materials and the weighted average cost method for finished goods. Cost of finished goods comprises direct labor, direct materials, direct production cost and an allocated portion of production overhead. The Company reduces inventories for the diminution of value, resulting from product obsolescence, damage or other issues affecting marketability, equal to the difference between the cost of the inventory and its estimated market value. Factors utilized in the determination of estimated market value include (i) current sales data and historical return rates, (ii) estimates of future demand, (iii) competitive pricing pressures, (iv) new product introductions, (v) product expiration dates, and (vi) component and packaging obsolescence.

F-13

The Company follows paragraph 330-10-30-3 of the FASB Accounting Standards Codification for the allocation of production costs and charges to inventories. The Company allocates fixed production overhead to inventories based on the normal capacity of the production facilities expected to be achieved over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. Judgment is required to determine when a production level is abnormally low (that is, outside the range of expected variation in production). Factors that might be anticipated to cause an abnormally low production level include significantly reduced demand, labor and materials shortages, and unplanned facility or equipment down time. The actual level of production may be used if it approximates normal capacity. In periods of abnormally high production, the amount of fixed overhead allocated to each unit of production is decreased so that inventories are not measured above cost. The amount of fixed overhead allocated to each unit of production is not increased as a consequence of abnormally low production or idle plant and unallocated overheads of underutilized or idle capacity of the production facilities are recognized as period costs in the period in which they are incurred rather than as a portion of the inventory cost.

The Company evaluates its current level of inventories considering historical sales and other factors and, based on this evaluation, classify inventory markdowns in the income statement as a component of cost of goods sold pursuant to Paragraph 420-10-S99 of the FASB Accounting Standards Codification to adjust inventories to net realizable value. These markdowns are estimates, which could vary significantly from actual requirements if future economic conditions, customer demand or competition differ from expectations. Other significant estimates include the allocation of variable and fixed production overheads. While variable production overheads are allocated to each unit of production on the basis of actual use of production facilities, the allocation of fixed production overhead to the costs of conversion is based on the normal capacity of the Company’s production facilities, and recognizes abnormal idle facility expenses as current period charges. Certain costs, including categories of indirect materials, indirect labor and other indirect manufacturing costs which are included in the overhead pools are estimated. The management of the Company determines its normal capacity based upon the amount of operating hours of the manufacturing machinery and equipment in a reporting period.

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 a 32 acre 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.

Banker’s acceptance notes payable

The Company satisfies certain accounts payable, through the issuance of banker’s acceptance notes issued by financial institutions to certain of the Company’s vendors. These notes are usually of a short term nature, three (3) to nine (9) months in length. They are non-interest bearing, are due upon maturity, and are paid by the Company’s banks directly to the vendors upon presentation on the date of maturity and the Company is obliged to repay the note in full to the financial institutions. In the event of insufficient funds to repay these notes, the Company's bank will convert them to loans on demand with interest at a predetermined rate per annum payable monthly.

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.

Leases

Lease agreements are evaluated to determine whether they are capital leases or operating leases in accordance with paragraph 840-10-25-1 of the FASB Accounting Standards Codification (“Paragraph 840-10-25-1”). When substantially all of the risks and benefits of property ownership have been transferred to the Company, as determined by the test criteria in Paragraph 840-10-25-1, the lease then qualifies as a capital lease. Capital lease assets are depreciated on a straight line method, over the capital lease assets estimated useful lives consistent with the Company’s normal depreciation policy for tangible fixed assets. Interest charges are expensed over the period of the lease in relation to the carrying value of the capital lease obligation.

F-14

Rent expense for operating leases, which may include free rent or fixed escalation amounts in addition to minimum lease payments, is recognized on a straight-line basis over the duration of each lease term.

Derivative instruments and hedging activities

The Company accounts for derivative instruments and hedging activities in accordance with paragraph 810-10-05-4 of the FASB Accounting Standards Codification (“Paragraph 810-10-05-4”). Paragraph 810-10-05-4 requires companies to recognize all derivative instruments as either assets or liabilities in the balance sheet at fair value. The accounting for changes in the fair value of a derivative instrument depends upon: (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.

From time to time, the Company employs foreign currency forward contracts to convert unforeseeable foreign currency exchange rates to fixed foreign currency exchange rates. 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.

The Company did not employ foreign currency forward contracts to convert unforeseeable foreign currency exchange rates to fixed foreign currency exchange rates for the interim period ended September 30, 2011 or 2010.

Derivative warrant liability

The Company evaluates its convertible debt, options, warrants or other contracts, if any, to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with paragraph 810-10-05-4 and paragraph 815-40-25 of the FASB Accounting Standards Codification. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as either an asset or a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the Statement of Operations and Comprehensive Income (loss) as other income or expense. Upon conversion, exercise or cancellation of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation and then that the related fair value is reclassified to equity.

In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.

The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.

On January 1, 2009, the Company adopted Section 815-40-15 of the FASB Accounting Standards Codification (“Section 815-40-15”) to determine whether an instrument (or an embedded feature) is indexed to the Company’s own stock. Section 815-40-15 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. The adoption of Section 815-40-15 has affected the accounting for (i) certain freestanding warrants that contain exercise price adjustment features and (ii) convertible bonds issued by foreign subsidiaries with a strike price denominated in a foreign currency.

The Company initially classified the warrants to purchase 2,728,913 shares of its common stock issued in connection with its July 2008 offering of common stock as additional paid-in capital upon issuance of the warrants. Upon the adoption of Section 815-40-15 on January 1, 2009, these warrants are no longer deemed to be indexed to the Company’s own stock and were reclassified from equity to a derivative liability with a fair value of $3,251,949 effective as of January 1, 2009. The reclassification entry included a cumulative adjustment to retained earnings of $1,845,455 and a reduction of additional paid-in capital of $5,097,404, the amount originally classified as additional paid-in capital upon issuance of the warrants on July 31, 2008.

F-15

On January 30, 2009, the Company issued 5,000 shares of its common stock for cash at $5.00 per share and received a cash payment of $25,000 in connection with the exercise of the warrant to purchase 5,000 shares with an exercise price of $5.00 per share by one investor and warrant holder.

During the three months ended March 31, 2010, warrants to purchase 1,324,346 shares of the Company’s common stock were exercised for cash at $5.00 per share and warrants to purchase 167,740 shares of the Company’s common stock were exercised on a cashless basis, for which the Company issued 1,324,346 and 78,217 shares of its common stock to the warrant holders and reclassified $1,665,011 and $210,095 of the derivative liability to additional paid-in capital, respectively. In addition, during the three months ended March 31, 2010, certain holders of warrants to purchase 1,031,715 shares of its common stock reached agreements with the Company, effective as of January 1, 2010, whereby the Company waived its right to offer or sell additional shares of its common stock below $5.00 per share in the future and the warrant holders waived their anti-dilution or commonly known as a most favored nation clause, for which the Company reclassified $1,292,227 of the derivative liability to additional paid-in capital.

During April 2010, four (4) warrant holders exercised their warrants to purchase 13,806 shares of Company common stock at $5.00 per share resulting in cash proceeds of $69,030 to the Company, for which the Company issued 13,806 shares of its common stock to the warrant holders and reclassified $21,229 of the derivative liability to additional paid-in capital.

The Company valued the fair value of the remaining derivative warrant liability at $1,335 at September 30, 2011 and recognized a gain of $136,808 on change in the fair value of the derivative warrants to purchase 186,306 shares of Company common stock for the interim period then ended.

Related parties

The Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.

Pursuant to Section 850-10-20 the related parties include a. affiliates of the Company; b. entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted for by the equity method by the investing entity; c. trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; d. principal owners of the Company; e. management of the Company; f. other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and g. other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.

The financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall include: a. the nature of the relationship(s) involved ; b. a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c. the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and d. amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.

Commitment and contingencies

The Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.

F-16

Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Management does not believe, based upon information available at this time, that these matters will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. However, there is no assurance that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations or cash flows.

Revenue recognition

(i) Import, export and distribution of ferrous and non-ferrous ore, metals and processed scrap metal: The Company derives its revenues from sales contracts with customers with revenues being generated upon the shipment of merchandise. Persuasive evidence of an arrangement is demonstrated via sales invoice or contract; product delivery is evidenced by warehouse shipping log as well as a signed bill of lading from the vessel 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 signed purchase order or contract 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: Form time to time, the Company provides import and export agent services to certain of its customers. Revenue from import and export agent services is recognized as the services are provided. The import and export agent services are considered provided when the goods to be imported or exported by the customer are delivered to the designated port specified by the service contract. The Company follows paragraph 605-45-45-15 to paragraph 605-45-45-18 of the FASB Accounting Standards Codification for revenue recognition to report revenue net for its import and export agent services since (1) the Company’s supplier is the primary obligor in the arrangement, (2) the amount the Company earns is fixed, and (3) the Company’s supplier has credit risk.

Net sales of products represent the invoiced value of goods, net of value added taxes (“VAT”). The Company is subject to VAT which is levied on the majority of the Company’s products at the rate of 13% on the invoiced value of sales prior to December 31, 2008 and 17% on the invoiced value of sales as of January 1, 2009 and forward. 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.

Shipping and handling costs

The Company accounts for shipping and handling fees in accordance with paragraph 605-45-45-19 of the FASB Accounting Standards Codification. While amounts charged to customers for shipping products are included in revenues, the related costs are classified in cost of goods sold as incurred.

Foreign currency transactions

The Company applies the guidelines as set out in Section 830-20-35 of the FASB Accounting Standards Codification (“Section 830-20-35”) for foreign currency transactions. Pursuant to Section 830-20-35 of the FASB Accounting Standards Codification, foreign currency transactions are transactions denominated in currencies other than U.S. Dollar, the Company’s reporting currency or Chinese Yuan or Reminbi, the Company’s Chinese operating subsidiaries' functional currency. Foreign currency transactions may produce receivables or payables that are fixed in terms of the amount of foreign currency that will be received or paid. A change in exchange rates between the functional currency and the currency in which a transaction is denominated increases or decreases the expected amount of functional currency cash flows upon settlement of the transaction. That increase or decrease in expected functional currency cash flows is a foreign currency transaction gain or loss that generally shall be included in determining net income for the period in which the exchange rate changes. Likewise, a transaction gain or loss (measured from the transaction date or the most recent intervening balance sheet date, whichever is later) realized upon settlement of a foreign currency transaction generally shall be included in determining net income for the period in which the transaction is settled. The exceptions to this requirement for inclusion in net income of transaction gains and losses pertain to certain intercompany transactions and to transactions that are designated as, and effective as, economic hedges of net investments and foreign currency commitments. Pursuant to Section 830-20-25 of the FASB Accounting Standards Codification, the following shall apply to all foreign currency transactions of an enterprise and its investees: (a) at the date the transaction is recognized, each asset, liability, revenue, expense, gain, or loss arising from the transaction shall be measured and recorded in the functional currency of the recording entity by use of the exchange rate in effect at that date as defined in section 830-10-20 of the FASB Accounting Standards Codification; and (b) at each balance sheet date, recorded balances that are denominated in currencies other than the functional currency or reporting currency of the recording entity shall be adjusted to reflect the current exchange rate.

F-17

Stock-based compensation for obtaining employee services

The Company accounts for its stock based compensation in which the Company obtains employee services in share-based payment transactions under the recognition and measurement principles of the fair value recognition provisions of section 718-10-30 of the FASB Accounting Standards Codification. Pursuant to paragraph 718-10-30-6 of the FASB Accounting Standards Codification, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur.

The fair value of each option award is estimated on the date of grant using a Black-Scholes option-pricing valuation model. The ranges of assumptions for inputs are as follows:

●	The Company uses historical data to estimate employee termination behavior. The expected life of options granted is derived from paragraph 718-10-S99-1 of the FASB Accounting Standards Codification and represents the period of time the options are expected to be outstanding.

●	The expected volatility is based on a combination of the historical volatility of the comparable companies’ stock over the contractual life of the options.

●	The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the contractual life of the option.

●	The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the contractual life of the option.

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.

Equity instruments issued to parties other than employees for acquiring goods or services

The Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance of section 505-50-30 of the FASB Accounting Standards Codification (“Section 505-50-30”).

Pursuant to Section 505-50-30, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur.

Pursuant to Paragraph 505-50-30-S99-1, if the Company receives a right to receive future services in exchange for unvested, forfeitable equity instruments, those equity instruments are treated as unissued for accounting purposes until the future services are received (that is, the instruments are not considered issued until they vest). Consequently, there would be no recognition at the measurement date and no entry should be recorded.

Income taxes

The Company accounts for income taxes under Section 740-10-30 of the FASB Accounting Standards Codification, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the Consolidated Statements of Income and Comprehensive Income in the period that includes the enactment date.

F-18

The Company adopted section 740-10-25 of the FASB Accounting Standards Codification (“Section 740-10-25”). Section 740-10-25 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under Section 740-10-25, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty (50) percent likelihood of being realized upon ultimate settlement. Section 740-10-25 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.

The estimated future tax effects of temporary differences between the tax basis of assets and liabilities are reported in the accompanying consolidated balance sheets, as well as tax credit carry-backs and carry-forwards. The Company periodically reviews the recoverability of deferred tax assets recorded on its consolidated balance sheets and provides valuation allowances as management deems necessary.

Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.

The Company had no material adjustments to its liabilities for unrecognized income tax benefits according to the provisions of Section 740-10-25.

Foreign currency translation

The Company follows Section 830-10-45 of the FASB Accounting Standards Codification (“Section 830-10-45”) for foreign currency translation to translate the financial statements of the foreign subsidiary from the functional currency, generally the local currency, into U.S. Dollars. Section 830-10-45 sets out the guidance relating to how a reporting entity determines the functional currency of a foreign entity (including of a foreign entity in a highly inflationary economy), re-measures the books of record (if necessary), and characterizes transaction gains and losses. Pursuant to Section 830-10-45, the assets, liabilities, and operations of a foreign entity shall be measured using the functional currency of that entity. An entity’s functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment, or local currency, in which an entity primarily generates and expends cash.

The functional currency of each foreign subsidiary is determined based on management’s judgment and involves consideration of all relevant economic facts and circumstances affecting the subsidiary. Generally, the currency in which the subsidiary transacts a majority of its transactions, including billings, financing, payroll and other expenditures, would be considered the functional currency, but any dependency upon the parent and the nature of the subsidiary’s operations must also be considered. If a subsidiary’s functional currency is deemed to be the local currency, then any gain or loss associated with the translation of that subsidiary’s financial statements is included in accumulated other comprehensive income. However, if the functional currency is deemed to be the U.S. Dollar, then any gain or loss associated with the re-measurement of these financial statements from the local currency to the functional currency would be included in the consolidated statements of income and comprehensive income (loss). If the Company disposes of foreign subsidiaries, then any cumulative translation gains or losses would be recorded into the consolidated statements of income and comprehensive income (loss). If the Company determines that there has been a change in the functional currency of a subsidiary to the U.S. Dollar, any translation gains or losses arising after the date of change would be included within the statement of income and comprehensive income (loss).

Based on an assessment of the factors discussed above, the management of the Company determined the relevant subsidiaries’ local currencies to be their respective functional currencies.

The financial records of the Company's Chinese operating subsidiaries 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 U.S. 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 U.S. dollar against the RMB taking into account demand and supply of RMB, as well as domestic and foreign economic and financial conditions.

F-19

Unless otherwise noted, the rate presented below per U.S. $1.00 was the midpoint of the interbank rate as quoted by OANDA Corporation (www.oanda.com) contained in its consolidated financial statements. Management believes that the difference between RMB vs. U.S. dollar exchange rate quoted by the PBOC and RMB vs. U.S. dollar exchange rate reported by OANDA Corporation 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 U.S. dollars has been made at the following exchange rates for the respective periods:

	September 30, 2011	December 31, 2010		September 30, 2010		December 31, 2009

Balance sheet	6.3952		6.6118		6.6981		6.8372

Statement of operations and comprehensive income (loss)	6.4972		6.7788		6.8164		6.8409

Net gains and losses resulting from foreign exchange transactions, if any, are included in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss).

Comprehensive income (loss)

The Company has applied section 220-10-45 of the FASB Accounting Standards Codification. This statement establishes rules for the reporting of comprehensive income and its components. Comprehensive income (loss), for the Company, consists of net income, change in unrealized loss of marketable securities and foreign currency translation adjustments and is presented in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) and Stockholders’ Equity.

Net income (loss) per common share

Net income (loss) per common share is computed pursuant to section 260-10-45 of the FASB Accounting Standards Codification. 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 the 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 the period to reflect the potential dilution that could occur from common shares issuable through stock options and warrants.

The following table shows the potentially outstanding dilutive common shares excluded from the diluted net income (loss) per common share calculation for the interim period ended September 30, 2011 and 2010 as they were anti-dilutive:

	Potentially outstanding dilutive common shares
	For the Interim Period Ended September 30, 2011		For the Interim Period Ended September 30, 2010

Warrants issued on August 1, 2008 in connection with the Company’s August 1, 2008 equity financing inclusive of non-derivative warrants to purchase 1,031,715 shares and derivative warrants to purchase 186,306 shares at $5.00 per share expiring five (5) years from date of issuance		1,218,021		1,218,021

Warrants issued on April 20, 2010 in connection with the Company’s April 20, 2010 equity financing inclusive of warrants to purchase 1,538,464 shares to the investors and warrants to purchase 76,923 shares to the placement agent at $7.50 per share expiring five (5) years from date of issuance		1,615,387		1,615,387

Sub-total - Warrants		2,833,408		2,833,408

Options issued on October 5, 2010 to an employee to purchase 40,000 common shares exercisable at $5.00 per share expiring five (5) years from the date of issuance		40,000		-

Sub-total - Options		40,000		-


Total potentially outstanding dilutive common shares		2,873,408		2,833,408

F-20

Cash flows reporting

The Company adopted paragraph 230-10-45-24 of the FASB Accounting Standards Codification for cash flows reporting, classifies cash receipts and payments according to whether they stem from operating, investing, or financing activities and provides definitions of each category, and uses the indirect or reconciliation method (“Indirect method”) as defined by paragraph 230-10-45-25 of the FASB Accounting Standards Codification to report net cash flow from operating activities by adjusting net income to reconcile it to net cash flow from operating activities by removing the effects of (a) all deferrals of past operating cash receipts and payments and all accruals of expected future operating cash receipts and payments and (b) all items that are included in net income that do not affect operating cash receipts and payments. The Company reports the reporting currency equivalent of foreign currency cash flows, using the current exchange rate at the time of the cash flows and the effect of exchange rate changes on cash held in foreign currencies is reported as a separate item in the reconciliation of beginning and ending balances of cash and cash equivalents and separately provides information about investing and financing activities not resulting in cash receipts or payments in the period pursuant to paragraph 830-230-45-1 of the FASB Accounting Standards Codification.

Subsequent events

The Company follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent events. The Company will evaluate subsequent events through the date when the financial statements are issued. Pursuant to ASU 2010-09 of the FASB Accounting Standards Codification, the Company as an SEC filer considers its financial statements issued when they are widely distributed to users, such as through filing them on EDGAR.

Recently issued accounting pronouncements

In May 2011, the FASB issued the FASB Accounting Standards Update No. 2011-04 “Fair Value Measurement” (“ASU 2011-04”). This amendment and guidance are the result of the work by the FASB and the IASB to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards (IFRSs).

This update does not modify the requirements for when fair value measurements apply; rather, they generally represent clarifications on how to measure and disclose fair value under ASC 820, Fair Value Measurement, including the following revisions:

●

An entity that holds a group of financial assets and financial liabilities whose market risk (that is, interest rate risk, currency risk, or other price risk) and credit risk are managed on the basis of the entity’s net risk exposure may apply an exception to the fair value requirements in ASC 820 if certain criteria are met. The exception allows such financial instruments to be measured on the basis of the reporting entity’s net, rather than gross, exposure to those risks.

●

In the absence of a Level 1 input, a reporting entity should apply premiums or discounts when market participants would do so when pricing the asset or liability consistent with the unit of account.

●

Additional disclosures about fair value measurements.

The amendments in this Update are to be applied prospectively and are effective for public entity during interim and annual periods beginning after December 15, 2011.

In June 2011, the FASB issued the FASB Accounting Standards Update No. 2011-05 “Comprehensive Income (“ASU 2011-05”), which was the result of a joint project with the IASB and amends the guidance in ASC 220, Comprehensive Income, by eliminating the option to present components of other comprehensive income (OCI) in the statement of stockholders’ equity. Instead, the new guidance now gives entities the option to present all non-owner changes in stockholders’ equity either as a single continuous statement of comprehensive income or as two separate but consecutive statements. Regardless of whether an entity chooses to present comprehensive income in a single continuous statement or in two separate but consecutive statements, the amendments require entities to present all reclassification adjustments from OCI to net income on the face of the statement of comprehensive income.

F-21

The amendments in this Update should be applied retrospectively and are effective for public entity for fiscal years, and interim periods within those years, beginning after December 15, 2011.

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

	September 30, 2011		December 31, 2010
Armco HK
Letters of credit (i)	$	184,315	$	427,553

Sub-total – Armco HK		184,315		427,553


Armet
Bank acceptance notes payable (ii)		1,563,673		1,906,684

Deposit for collateral short term loans (iii)		2,501,876		7,135,727

Sub-total – Armet		4,065,549		9,041,411


Henan Armco
Letters of credit (iv)		619,055		3,174,707

Sub-total – Henan Armco		619,055		3,174,707

	$	4,868,919	$	12,643,671

(i)

$104,610 was released to Armco HK as part of the payment toward fulfilled letters of credit in October 2011 and the remaining balance of $79,705 is to be released to the Company as part of the payment toward outstanding letters of credit when those letters of credit mature, ranging from November 15, 2011 through December 30, 2011.

(ii)

$1,563,673 released to the Company when the related banker’s acceptance note payable matured and paid on November 3, 2011.

(iii)

$2,501,876 is to be released to the Company for future payment of short term loans.

(iv)

$20,195 was released to the Company as part of the payment toward fulfilled letters of credit in October 2011 and the remaining balance of $598,860 is to be released to the Company as part of the payment toward outstanding letters of credit when those letters of credit mature, ranging from November 15, 2011 through January 25, 2012.

NOTE 4 – MARKETABLE SECURITIES, AVAILABLE FOR SALE

On June 8, 2010, China Armco Metals, Inc. (the “Company”) entered into a Subscription Agreement (the “Subscription Agreement”) with Apollo Minerals Limited (“Apollo Minerals”), an Australian iron ore exploration company listed on the Australian Securities Exchange (ASX: AON). Under the terms of the Subscription Agreement, the Company agreed to acquire up to a 19.9% stake in Apollo for US $3,396,658 in cash. On July 19, 2010 Apollo Minerals issued 29,250,000 shares of its common stock to the Company. Pursuant to the Subscription Agreement, the Company received a seat on Apollo Minerals’ Board of Directors in July 2010. The board representation continues as long as the Company maintains a minimum 12% stake in Apollo Minerals.

The Company will have the right to name one member to Apollo Mineral’s board of directors for as long as it maintains at least a 12% stake in Apollo Minerals. Apollo Minerals intends to use the cash infusion to advance its exploration activities, to carry out processing option studies and to evaluate opportunities to access local infrastructure and other project opportunities.

F-22

Apollo Minerals also issued to the Company, five (5) year options to purchase an additional 5 million shares of common stock at $0.25 (approximately $0.20) per share, half of which will vest on the first anniversary of the initial issuance with the balance vesting on the second anniversary of the initial issuance. The options may only be exercised in order for the Company to maintain its 19.9% stake should Apollo Minerals issue additional common shares in the future.

The Company values marketable securities using Australia quoted market prices on Apollo Mineral stock. At September 30, 2011, the estimated fair value of the investment in Apollo Minerals was approximately $1.6 million less than its original costs. The Company intends to hold these shares and the management of the Company concluded that the decline in the fair value was temporary and recorded the unrealized loss of marketable securities to other comprehensive income (loss) in the accompanying consolidated balance sheets and a gain from foreign currency transaction gain (loss) in other income in the accompanying consolidated statements of operations and comprehensive income (loss).

The table below provides a summary of the changes in the fair value of marketable securities, available for sale measured at fair value on a recurring basis using Level 1 of the fair value hierarchy to measure the fair value during the interim period ended September 30, 2011:

	Fair Value Measurement Using Level 1 Inputs
	Original cost			Accumulated Foreign Currency Transaction Gain (Loss)				Other Comp. Loss - Change in Unrealized Loss			Fair Market Value

Balance, December 31, 2009		$	-		$	-			-			$	-
Purchases, issuances and settlements			3,396,658			-			-				3,396,658

Total gains or losses (realized/unrealized) included in:
Net Loss: Gain (loss) on foreign currency rate change						-			-				-
Other comprehensive income (loss): Changes in unrealized loss						-			(506,278	)			(506,278	)
Balance, December 31, 2010			3,396,658			-			(506,278	)			2,890,380
Purchases, issuances and settlements			-			-			-				-

Total gains or losses (realized/unrealized) included in:
Net Loss: Gain (loss) on foreign currency rate change						288,698			-				288,698
Other comprehensive income (loss): Changes in unrealized loss						-			(1,088,376	)			(1,088,376	)
Balance, September 30, 2011		$	3,396,658		$	(288,698	)	$	(1,594,654	)		$	2,090,702

NOTE 5 – ACCOUNTS RECEIVABLE

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

	September 30, 2011			December 31, 2010

Accounts receivable	$	546,547		$	19,115,019

Allowance for doubtful accounts		(-	)		(-	)

	$	546,547		$	19,115,019

F-23

NOTE 6 – INVENTORIES

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

	September 30, 2011			December 31, 2010

Raw materials	$	6,515,599	*	$	1,925,159	*

Finished goods		7,649,713	*		4,719,339	*

Purchased merchandise for resale		-			3,795,333

	$	14,165,312		$	10,439,831

* Armet’s raw materials and finished goods are collateralized for loans from the Bank of Communications Lianyungang Branch.

Raw materials consisted of scrap metals to be processed and finished goods are comprised of all of the processed scrap metal at Armet. Due to the short duration time for the processing of its scrap metal, there was no material work-in-process inventory at September 30, 2011 or December 31, 2010. Armet’s raw materials at September 30, 2011 represented approximately one month production usage.

Purchased merchandise for sale is comprised of all of the metal ores to be resold through the distribution business at Armco HK and Henan, all of which were sold and delivered to the customers. There was no balance of purchased merchandise for sale as of September 30, 2011.

NOTE 7 – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, stated at cost, less accumulated depreciation at September 30, 2011 and December 31, 2010 consisted of the following:

	Estimated Useful Life (Years)	September 30, 2011			December 31, 2010

Buildings and leasehold improvements (i)	20	$	22,252,400		$	21,426,672
Construction in progress			-			32,682
Machinery and equipment	7		13,472,953			11,954,005
Vehicles	5		1,187,899			1,034,961
Office equipment	5-8		253,243			185,319

			37,166,495			34,633,339

Less accumulated depreciation (ii)			(2,807,047	)		(761,515	)

		$	34,359,448		$	33,872,124

(i) Capitalized interest

For the interim periods ended September 30, 2011 and 2010, the Company capitalized $0 and $257,020 of interest to fixed assets, respectively.

(ii) Depreciation and amortization expense

Depreciation and amortization expense for the interim periods ended September 30, 2011 and 2010 was $1,922,076, and $219,121, respectively.

F-24

NOTE 8 – LAND USE RIGHT

Land use right, stated at cost, less accumulated amortization at September30, 2011 and December 31, 2010, consisted of the following:

	September 30, 2011			December 31, 2010

Land use right	$	2,417,485		$	2,338,289

Accumulated amortization		(195,999	)		(153,965	)

	$	2,221,486		$	2,184,324

Amortization expense

Amortization expense for the interim periods ended September 30, 2011 and 2010 was $36,241 and $34,544 respectively.

NOTE 9 – LOANS PAYABLE

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

	September 30, 2011	December 31, 2010

Armco HK

Loan payable to RZB Austria Finance (Hong Kong) Limited, collateralized by certain of the Company’s inventory, guaranteed by the Company’s Chairman and Chief Executive Officer, with interest at the bank’s cost of funds plus 200 basis points, per annum, payable monthly, with principal due and paid on January 26, 2011.	-	2,145,246

Loan payable to RZB Austria Finance (Hong Kong) Limited, collateralized by certain of the Company’s inventory, guaranteed by the Company’s Chairman and Chief Executive Officer, with interest at the bank’s cost of funds plus 200 basis points (2.87%) per annum, with principal and interest due and paid in full on October 25, 2011.	410,678	-

Loan payable to RZB Austria Finance (Hong Kong) Limited, collateralized by certain of the Company’s inventory, guaranteed by the Company’s Chairman and Chief Executive Officer, with interest at the bank’s cost of funds plus 200 basis points (2.94%) per annum, with principal and interest due and paid in full on November 11, 2011.	1,211,038	-

Loan payable to ING Bank, Hong Kong Branch, in the form of letters of credits, secured by (i) pledged deposits equal to 5% of the letters of credits, (ii) guarantee from China Armco Metals, Inc., (iii) guarantee by the Company’s Chairman and Chief Executive Officer, and (iv) assignment of specific receivables, with interest at the bank’s cost of funds plus 250 basis points, per annum, payable monthly with principal due and paid on January 3, 2011.	-	11,198,830

Loan payable to ING Bank, Hong Kong Branch, in the form of letters of credits, secured by (i) pledged deposits equal to 5% of the letters of credits, (ii) guarantee from China Armco Metals, Inc., (iii) guarantee by the Company’s Chairman and Chief Executive Officer, and (iv) assignment of specific receivables, with interest at the bank’s cost of funds plus 250 basis points (3.63%) per annum, payable monthly with principal due December 7, 2011.	702,250	-

Unsecured loan payable to Fremery Holdings, Ltd., with interest at 15% per annum, with principal and interest due March 26, 2011 and paid in full by March 23, 2011.	-	1,500,000

Sub-total - Armco HK	2,323,966	14,844,076

Armet

F-25

Loan payable to Bank of Communications, Lianyungang Branch, under trade credit facilities, collateralized by Armet inventories and guaranteed by the Company’s Chairman and Chief Executive Officer, with interest at 120% of the bank’s benchmark rate, payable monthly, with principal due from January 5, 2012 through March 28, 2012.		6,629,972		9,074,685

Loan payable to Bank of China, Lianyungang Branch, under trade credit facilities, guaranteed by the Company’s Chairman and Chief Executive Officer, with interest at 5.838%, per annum, payable monthly, with principal due and paid in full on October 28, 2011.		781,836		756,224

Sub-total – Armet		7,411,808		9,830,909

Henan Armco

Loan payable to Guangdong Development Bank Zhengzhou Branch, with interest at 4.5%, per annum, payable monthly, with principal due and paid March 21, 2011		-		90,835

Loan payable to Guangdong Development Bank Zhengzhou Branch, with interest at 5.8%, per annum, payable monthly, with principal due January 18, 2012		178,976		-

Sub-total – Henan Armco		178,976		90,835

	$	9,914,750	$	24,765,820

NOTE 10 – BANKER’S ACCEPTANCE NOTES PAYABLE

Banker’s acceptance notes payable at September 30, 2011 and December 31, 2010, consisted of the following:

	September 30, 2011		December 31, 2010

Armet

Banker’s acceptance notes payable matured and paid in full on November 3, 2011	$	1,563,673	$	4,174,355

	$	1,563,673	$	4,174,355

NOTE 11 – RELATED PARTY TRANSACTIONS

Advances from stockholder

From time to time, the Chairman, CEO and significant stockholder of the Company advance funds to the Company for working capital purpose. Those advances are unsecured, non-interest bearing and due on demand.

Advances from stockholder at September 30, 2011 and December 31, 2010 consisted of the following:

	September 30, 2011		December 31, 2010

Advances from chairman, chief executive officer and stockholder	$	626,990	$	799,394

	$	626,990	$	799,394

Operating lease from Chairman, CEO and Stockholder

On January 1, 2006, Henan entered into a non-cancellable operating lease for its 176.37 square meter commercial office space in the City of Zhengzhou, Henan Province, PRC from the Chairman, Chief Executive Officer and significant stockholder of the Company for RMB10,000 per month, which expired on December 31, 2008 and has been extended through December 31, 2011. Total lease payments for the interim periods ended September 30, 2011 and 2010 amounted to RMB90,000 (equivalent to $13,852 and $13,203). Future minimum lease payments required under the non-cancelable operating lease are RMB30,000 per year (equivalent to $4,691) for 2011.

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NOTE 12 – CAPITAL LEASE OBLIGATION

Capital lease obligation at September 30, 2011 and December 31, 2010 consisted of the following:

	September 30, 2011			December 31, 2010

Armet

Capital lease obligation to a financing company for a term of three (3) years, collateralized by all of Armet’s machinery and equipment, with interest at 11.8% per annum, with principal and interest due and payable in monthly installment of RMB497,897 (approximately $75,304) on the 23rd of each month.	$	1,776,853		$	2,268,671

Less current maturities		(761,350	)		(727,756	)

CAPITAL LEASE OBLIGATION, net of current maturities	$	1,015,503		$	1,540,915

The future minimum payments under this capital lease obligation at September 30, 2011 were as follows:

Year ending December 31:

2011 (remainder of the year)	$	234,851

2012		939,403

2013		861,119

Total capital lease obligation payments		2,035,732

Less amounts representing interest		(258,519	)

Present value of total future capital lease obligation payments		1,776,853

Less current maturities of capital lease obligation		(761,350	)

Capital lease obligation, net of current maturities	$	1,015,503

NOTE 13 – LONG-TERM DEBT

Long-term debt at September 30, 2011 and December 31, 2010 consisted of the following:

	September 30, 2011			December 31, 2010

Armet

Long-term debt due to Bank of China, Lianyungang Branch, collateralized by all of Armet��s building and land use right, with interest at 5.40% per annum payable monthly, with the remaining principal of RMB25,000,000 ($3,909,182) due August 25, 2012.	$	3,909,182		$	8,318,461

Less current maturities		(3,909,182	)		(4,537,342	)

LONG-TERM DEBT, net of current maturities	$	-		$	3,781,119

F-27

NOTE 14 – DERIVATIVE INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

(i) Warrants issued in 2008

Description of warrants and fair value on date of grant

In connection with the four (4) rounds of private placements from July 25, 2008 through August 8, 2008 (the “2008 Unit Offering”), the Company issued (i) warrants to purchase 2,486,649 common shares of the Company to the investors and (ii) warrants t purchase 242,264 common shares of the Company to the brokers, or 2,728,913 common shares in aggregate (“2008 Warrants”) with an exercise price of $5.00 per share expiring on August 31, 2013, all of which have been earned upon issuance. The fair value of 2008 warrants, estimated on the date of grant, was $5,097,404, which was originally recorded as additional paid-in capital and the remaining balance of the net proceeds of $1,523,277 has been assigned to common stock, 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 risk-free interest rate is based on a yield curve of U.S treasury interest rates on the date of valuation based on the contractual life of the warrant remaining. Expected dividend yield is based on our dividend history and anticipated dividend policy. Expected volatility is based on historical volatility for our common stock. The Company currently has no reason to believe future volatility over the expected remaining life of these warrants is likely to differ materially from historical volatility. The expected life is based on the remaining term of the warrants.

Derivative analysis

The exercise price of 2008 warrants and the number of shares issuable upon exercise is subject to reset adjustment in the event of stock splits, stock dividends, recapitalization, most favored nation clause and similar corporate events. Pursuant to the most favored nation provision of the 2008 Unit Offering, if the Company issues any common stock or securities other than the excepted issuances, to any person or entity at a purchase or exercise price per share less than the share purchase price of the 2008 Unit Offering without the consent of the subscriber holding purchased shares, warrants or warrant shares of the 2008 Unit Offering, then the subscriber shall have the right to apply the lowest such purchase price or exercise price of the offering or sale of such new securities to the purchase price of the purchased shares then held by the subscriber (and, if necessary, the Company will issue additional shares), the reset adjustments are also referred to as full reset adjustments.

Because these warrants have full reset adjustments tied to future issuances of equity securities by the Company, they are subject to derivative liability treatment under Section 815-40-15 of the FASB Accounting Standard Codification (“Section 815-40-15”) (formerly FASB Emerging Issues Task Force (“EITF”) 07-5). Section 815-40-15 became effective for the Company on January 1, 2009 and as of that date the Warrants issued in the 2008 Unit Offering have been measured at fair value using a lattice model at each reporting period with gains and losses from the change in fair value of derivative liabilities recognized on the consolidated statement of income and comprehensive income.

Valuation of derivative liability

(a)

Valuation methodology

The Company’s 2008 warrants do not trade in an active securities market, as such, the Company developed a lattice model that values the derivative liability of the warrants based on a probability weighted discounted cash flow model. This model is based on future projections of the various potential outcomes. The features that were analyzed and incorporated into the model included the exercise feature and the full ratchet reset.

Based on these features, there are two primary events that can occur; the Holder exercises the Warrants or the Warrants are held to expiration. The model analyzed the underlying economic factors that influenced which of these events would occur, when they were likely to occur, and the specific terms that would be in effect at the time (i.e. stock price, exercise price, volatility, etc.). Projections were then made on these underlying factors which led to a set of potential scenarios. As the result of the large Warrant overhang we accounted for the dilution affects, volatility and market cap to adjust the projections.

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Probabilities were assigned to each of these scenarios based on management projections. This led to a cash flow projection and a probability associated with that cash flow. A discounted weighted average cash flow over the various scenarios was completed to determine the value of the derivative warrant liability.

(b)

Valuation assumptions

The Company’s 2008 derivative warrants were valued with the following assumptions:

● The underlying stock price was used as the fair value of the common stock on period end date;

● The stock price would fluctuate with the CNAM projected volatility. The projected volatility curve for each valuation period was based on the historical volatility of 14 comparable companies in the metal/industrial metals industries;

● The Holder would exercise the warrant at maturity if the stock price was above the exercise price;

● Reset events projected to occur are based on no future projected capital needs;

● The Holder would exercise the warrant as they become exercisable at target prices of $7.50 for the 2008 Offering, and lowering such target as the warrants approached maturity;

● The probability weighted cash flows are discounted using the risk free interest rates.

The fair value of the 2008 derivative warrants were computed using the following assumptions at September 30, 2011 and December 31, 2010:

	September 30, 2011		December 31, 2010

Expected option life (year)	1.75			2.50

Expected volatility	97	%		159	%

Risk-free interest rate	0.25	%		1.02	%

Dividend yield	0.00	%		0.00	%

(c)

Fair value of derivative warrants

The table below provides a summary of the changes in the fair value, including net transfers in and/or out, of derivative warrants measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the interim period ended September 30, 2011:

	Fair Value Measurement Using Level 3 Inputs
	Derivative warrants Assets (Liability)				Total

Balance, December 31, 2010		$	(138,143	)		$	(138,143	)
Total gains or losses (realized/unrealized) included in:
Net income (loss)			136,808				136,808
Other comprehensive income (loss)			-				-
Purchases, issuances and settlements			-				-
Transfers in and/or out of Level 3			-				-
Balance, September 30, 2011		$	(1,335	)		$	(1,335	)

F-29

Extinguishment of derivative warrant liability

During the three months ended March 31, 2010, certain holders of 2008 warrants to purchase 1,031,715 shares of the Company’s common stock reached agreements with the Company effective as of January 1, 2010, whereby the Company waived its right to offer or sell additional shares of its common stock below $5.00 per share in the future and the 2008 warrant holders waived their anti-dilution or commonly known as most favored nation clause and no longer required derivative treatment, for which the Company reclassified $1,292,227 of the derivative warrant liability to additional paid-in capital.

Exercise of warrants

On January 30, 2009, the Company issued 5,000 shares of its common stock for cash at $5.00 per share and received a cash payment of $25,000 in connection with the exercise of the 2008 warrants for 5,000 shares with an exercise price of $5.00 per share by one (1) investor and 2008 warrants holder.

During the first quarter of 2010, the Company issued 1,324,346 shares of its common stock for cash at $5.00 per share and received cash of $6,621,730 in connection with the exercise of the warrants to purchase 1,324,346 shares with an exercise price of $5.00 per share to 50, 2008 warrant holders. In addition, the Company issued 78,217 shares of its common stock in connection with the exercise of the 2008 warrants to purchase 167,740 shares with an exercise price of $5.00 per share on a cashless basis to 13, 2008 warrant holders.

During April 2010, four (4) 2008 warrant holders exercised their warrants to purchase 13,806 shares of the Company’s common stock at an exercise price of $5.00 per share resulting in cash proceeds of $69,030 to the Company.

Warrants outstanding

As of September 30, 2011 warrants to purchase 1,218,021 shares of Company common stock remain outstanding.

The table below summarizes the Company’s derivative warrant activity through September 30, 2011:

	2008 Warrant Activities									APIC			(Gain) Loss
	Derivative Shares			Non-derivative Shares	Total Warrant Shares		Fair Value of Derivative Warrants			Reclassification of Derivative Liability			Change in Fair Value of Derivative Liability

Derivative warrant at December 31, 2009		2,728,913		-	2,728,913		$	(3,417,974	)	$	-		$	166,025

Exercise of warrants		(5,000	)	-	(5,000	)		6,263			(6,263	)		-

Exercise of warrants		(1,324,346	)	-	(1,324,346	)		1,658,748			(1,658,748	)		-

Exercise of warrants – Cashless		(167,740	)	-	(167,740	)		210,095			(210,095	)		-

Total warrant exercised		(1,497,086	)	-	(1,497,086	)		1,875,106			(1,875,106	)		-

Extinguishment of warrant liability resulting from waiver of anti-dilution		(1,031,715	)	1,031,715	-			1,292,227			(1,292,227	)		-

Derivative warrants remaining		200,112		-	-			(250,641	)		-			-

Mark to market		-		-				(321,752	)		-			321,752

F-30

Derivative warrant at March 31, 2010	200,112		1,031,715	1,231,827		(572,393	)	-		321,752

Exercise of warrants in April 20, 2010	(13,806	)	-	(13,806	)	21,229		(21,229	)	-

Derivative warrants remaining	186,306		-	186,306		(551,164	)	-		-

Mark to market	-		-			427,875		-		(427,875	)

Derivative warrant at June 30, 2010	186,306		1,031,715	1,218,021		(123,289	)	-		(106,123	)

Mark to market	-		-			(13,211	)	-		13,211

Derivative warrant at September 30, 2010	186,306		1,031,715	1,218,021		(136,500	)	-		(92,912	)

Mark to market	-		-			(1643	)	-		1643

Derivative warrant at December 31, 2010	186,306		1,031,715	1,218,021		(138,143	)	-		(91,269	)

Mark to market	-		-			51,223		-		(51,223	)

Derivative warrant at March 31, 2011	186,306		1,031,715	1,218,021		(86,920	)	-		(51,223	)

Mark to market						76,897				(76,897	)

Derivative warrant at June 30, 2011	186,306		1,031,715	1,218,021		(10,023	)			(128,120	)

Mark to market						8,688				(8,688)

Derivative warrant at September 30, 2011	186,306		1,031,715	1,218,021		(1,335	)			(136,808	)

(ii) Warrants issued in April 2010

Description of warrants

In connection with the sale of 1,538,464 shares of its common stock at $6.50 per share or $10,000,016 in gross proceeds to nine (9) accredited and institutional investors on April 20, 2010, the Company issued warrants to purchase an additional 1,538,464 shares of its common stock with an exercise price of $7.50 per share (“2010 Warrants”) expiring five (5) years from date of grant exercisable commencing 181 days following the date of issuance. At the closing of the private offering, the Company paid Rodman & Renshaw, LLC, a FINRA member firm that served as placement agent for the Company in the offering, (i) a fee of $500,000 as compensation for their services and (ii) a warrant to purchase 76,923 shares of the Company’s common stock with an exercise price of $7.50 per share expiring five (5) years from date of grant exercisable commencing 181 days following the date of issuance, as well as a $15,000 non-accountable expense allowance to one of the nine (9) investors in the offering.

Warrants valuation and related assumptions

The 2010 warrants were valued with the following assumptions:

● The underlying NYSEAmex stock price $6.95 was used as the fair value of the common stock on April 20, 2010;

● The Holder would exercise the warrant at maturity if the stock price was above the exercise price;

F-31

● Reset events projected to occur are based on no future projected capital needs;

● The Holder would exercise the warrants as they become exercisable at target prices of $11.25 for the 2010 Offering, and lowering such target as the warrants approaches maturity;

● The probability weighted cash flows are discounted using the risk free interest rates.

The fair value of the 2010 warrants, estimated on the date of issuance, was $2,483,938.

Derivative analysis

The warrants issued as part of the April 20, 2010 private placement were analyzed to determine the appropriate treatment under ASC 815-40. The warrants meet the provisions of EITF 07-5 (ASC 815-40) to be considered indexed to the Company’s own stock. In addition, the warrants meet all the criteria in EITF 00-19 (ASC 815-40) to be accounted for as equity.

Warrants outstanding

As of September 30, 2011 warrants to purchase 1,615,387 shares of its common stock remain outstanding.

(iii) Warrant activities

The table below summarizes the Company’s non-derivative warrant activities through September 30, 2011:

	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, 2009	2,723,913		$	5.00	$	5.00	$	-	$	-

Granted	1,615,387			7.50		7.50		2,483,938		-
Canceled for cashless exercise	(89,523	)		- -		-		-		-

Exercised (Cashless)	(78,217	)		-		-		-		-
Exercised	(1,338,152	)		5.00		5.00		-		-
Expired	-			-		-		-		-
Balance, December 31, 2010	2,833,408		$	5.00 - 7.50	$	6.43	$	-	$	-

Granted	-			-		-		-		-
Canceled for cashless exercise	(-	)		- -		-		-		-

Exercised (Cashless)	(-	)		-		-		-		-
Exercised	(-	)		-		-		-		-
Expired	-			-		-		-		-
Balance, September 30, 2011	2,833,408		$	5.00 - 7.50	$	6.43	$	-	$	-

Earned and exercisable, September 30, 2011	2,833,408		$	5.00 - 7.50	$	6.43	$	-	$	-

Unvested, September 30, 2011	-		$	-	$	-	$	-	$	-

F-32

The following table summarizes information concerning outstanding and exercisable warrants as of September 30, 2011:

		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		1,218,021	1.84	$	5.00	1,218,021	1.84	$	5.00

$	7.50		1,615,387	3.56	$	7.50	1,615,387	3.56	$	7.50

$	5.00 - $7.50		2,833,408	2.82	$	6.43	2,833,408	2.82	$	6.43

NOTE 15 – STOCKHOLDERS’ EQUITY

Sale of common stock

On April 20, 2010, the Company entered into a Securities Purchase Agreement with nine (9) accredited and institutional investors for the sale of 1,538,464 shares of its common stock at an offering price of $6.50 per share resulting in gross proceeds to the Company of $10,000,016. At closing the Company issued the investors warrants to purchase an additional 1,538,464 shares of its common stock at an exercise price of $7.50 per share expiring five (5) years from the date of grant. The warrants are exercisable commencing 181 days after the date of issuance. The private offering, which was made under an exemption from the registration requirements of the Securities Act of 1933 in reliance on exemptions provided by Section 4(2) of that act and Rule 506 of Regulation D. At closing, the Company paid Rodman & Renshaw, LLC, a FINRA member firm that served as placement agent for the Company in the offering, (i) a fee of $500,000 as compensation for its services and (ii) a warrant to purchase 76,923 shares of the Company’s common stock at an exercise price of $7.50 per share expiring five (5) years from the date of issuance which are exercisable commencing 181 days after the date of issuance, as well as a $15,000 non-accountable expense allowance to one (1) of the investors in the offering. The Company intends to use the net proceeds from this offering for its working capital.

Issuance of common stock for services

On May 7, 2009, the Company issued 7,000 shares of its common stock to Hayden Communications as consideration for canceling an agreement to provide IR services. These shares were valued at $1.50 per share for total consideration of $10,500 (the estimated fair value on the date of grant).

On February 5, 2010, the Company issued 80,000 shares of its common stock to China Direct Investments, Inc. as consideration for management and accounting consulting services for the period beginning January 1, 2010 through December 31, 2010. There is no performance commitment at the date of the agreement therefore the company will use the date(s) at which performance is complete as the measurement date(s). The services are earned and forfeitable on a ratable basis throughout each quarter during the year. The 20,000 shares each earned for each quarter in 2010 were valued at $9.39, $2.90, $3.47 and $3.88 per share, or $187,800, $58,000, $69,400 and $77,600 in aggregate, which was recorded as consulting fees for the relevant quarter. In aggregate, $392,800 was recorded as consulting fee for the year ended December 31, 2010.

On April 30 and July 9, 2010, the Company issued 12,500 shares and 10,000 shares, or 22,500 shares in aggregate to Bespoke Growth Partners, Inc. as consulting fees for investor relations services rendered, valued at $3.49 per share for $78,525.

On June 11, 2010 the Company entered into a Guaranty Cooperation Agreement with Henan Chaoyang Steel Co., Ltd. (“Henan Chaoyang”), a Chinese limited liability company that was 85% owned by the Company’s then member of the Board of Director, Mr. Heping Ma. Under the terms of the guaranty, Henan Chaoyang agreed to provide loan guarantees to Armet existing and pending bank lines of credit of up to 300 million RMB in aggregate (approximately $45,400,000) for five (5) years expiring June 30, 2016. On September 16, 2010 Mr. Ma resigned from the Company’s Board of Directors. As consideration for the guaranty, the Company issued a designee of Henan Chaoyang 500,000 shares of its common stock, which are earned and forfeitable on a ratable basis during the term of the agreement.

33,333 shares each earned for quarters ended September 30, 2010 and December 31, 2010 were valued at $3.47 and $3.88 per share, or $115,666 and $129,332 in aggregate, which was recorded as loan guarantee expense and included in the consolidated statements of operations and comprehensive income (loss) for the relevant periods. In aggregate, $244,998 was recorded as loan guarantee expense for the year ended December 31, 2010.

33,333 common shares each earned for quarter ended March 31, 2011, June 30, 2011 and September 30, 2011 were valued at $2.61, $1.36 and $0.41 per share, or $86,996, $45,333 and $135,667 in aggregate, which was recorded as loan guarantee expense and included in the consolidated statements of operations and comprehensive income (loss) for the relevant periods.

On November 19, 2010, the Company entered into an investor relations consulting agreement with HCI International Inc. expiring December 31, 2011. Either party may terminate the agreement any time during the term of the contract. Pursuant to the agreement the Company is required to pay the investor relation firm 3,600 shares of the Company’s restricted stock per month payable at the first of each month for the 12 month service period, or 43,200 shares in aggregate for 2011 investor relations services. 10,800 shares per quarter were valued at $1.36 per share, or $14,688 in aggregate and $2.69 per share, or $29,051 in aggregate and recorded as investor relations expense for the quarterly period ended March 31, 2011 and June 30, 2011, respectively. The Company did not issue any shares to HCI for quarter ending September 30, 2011.

F-33

Stock options

The fair value of the stock options issued in June 2008 under Share Purchase Agreement using the Black-Scholes Option Pricing Model was $0 at the date of grant. For the interim periods ended March 31, 2010 and 2009, the Company did not grant any stock options.

On April 12, 2010, Mr. Kexuan Yao purchased the stock option to purchase 2,000,000 shares of the Company’s common stock at $5.00 per share on June 27, 2008 originally granted to and owned by Ms. Feng Gao pursuant to a share purchase agreement to consummate the reverse merger capital transaction with Armco HK. In addition, on April 12, 2010 and June 25, 2010, Mr. Yao exercised part of the option and purchased 1,000,000 and 400,000 shares of the Company’s common stock at $5.00 per share resulting in net proceeds of $4,500,000, forgiveness of debt of $500,000 and $2,000,000 to the Company, respectively. The balance of the stock option to purchase the remaining 600,000 common shares expired at June 27, 2010.

Stock incentive plan as amended

On October 26, 2009, the Board of Directors of the Company adopted the 2009 Stock Incentive Plan, whereby the Board of Directors authorized 1,200,000 shares of the Company’s common stock to be reserved for issuance (the “2009 Stock Incentive Plan”). The purpose of the 2009 Stock Incentive Plan is to advance the interests of the Company’s company by providing an incentive to attract, retain and motivate highly qualified and competent persons who are important to us and upon whose efforts and judgment the success of the company is largely dependent. Grants to be made under the Plan will be limited to the Company’s employees, including employees of the Company’s subsidiaries, the Company’s directors and consultants to the Company. The recipient of any grant under the Plan, and the amount and terms of a specific grant, will be determined by the board of directors. Should any option granted or stock awarded under the Plan expire or become un-exercisable for any reason without having been exercised in full or fail to vest, the shares subject to the portion of the option not so exercised or lapsed will become available for subsequent stock or option grants.

On May 19, 2011, the Company’s Board of Directors adopted and approved the Amended and Restated 2009 Stock Incentive Plan, subject to stockholder approval at the Annual Meeting. At the 2011 Annual Meeting of Stockholders (the “Annual Meeting”) of the Company held on July 9, 2011, the Company’s stockholders approved an amendment and restatement of the Company’s 2009 Stock Incentive Plan (the “Amended and Restated 2009 Stock Incentive Plan”). The primary purpose for the Amended and Restated 2009 Stock Incentive Plan was to increase the number of shares of the Company’s common stock available for issuance thereunder by 1,000,000 shares to 2.200,000 shares of the Company’s common stock.

On October 26, 2009, the Company awarded 200,000 shares of its restricted common stock, par value $.001 per share, pursuant to the 2009 Stock Incentive Plan, to Mr. Kexuan Yao, the Company’s Chief Executive Officer. The shares awarded to Mr. Yao will vest 66,667 shares on December 15, 2010, 66,667 shares on December 15, 2011 and 66,666 shares on December 15, 2012. These shares were valued at $3.28 per share or $656,000 on the date of grant and were amortized over the vesting period. In aggregate, $54,667 was recorded as stock based compensation for the interim period ended March 31, 2011 each.

On October 26, 2009, the Company agreed to pay Mr. William Thomson the sum of $20,000 and awarded 6,250 shares of the Company’s restricted common stock to Mr. William Thomson in conjunction with his appointment to the Company's board of directors. The shares awarded to Mr. Thomson will vest 25% on March 31, 2010, 25% on June 30, 2010, 25% on September 30, 2010 and 25% on December 31, 2010. The restricted stock vests only if Mr. Thomson is still a director of the Company on the vesting date (with limited exceptions), and the shares are eligible for the payment of dividends, if the Board of Directors was to declare dividends on the Company’s common stock. These shares were valued at $3.28 per share or $20,500 on the date of grant and were amortized over the vesting period. In aggregate, all of the $20,500 was earned and recorded as stock based compensation for the year ended December 31, 2010. The Company and Mr. William Thomson are in the process of entry into the new director service agreement for 2011.

F-34

On September 16, 2010, the Company agreed to pay Mr. Jinping Chan the sum of $20,000 and awarded 6,250 shares of the Company’s restricted common stock to Mr. Chan in conjunction with his appointment to the Company's board of directors. The shares awarded to Mr. Chan will vest 50% on March 10, 2011 and 50% on September 10, 2011. The restricted stock vests only if Mr. Chan is still a director of the Company on the vesting date (with limited exceptions), and the shares are eligible for the payment of dividends, if the Board of Directors was to declare dividends on the Company’s common stock. These shares were valued at $3.12 per share or $19,500 on the date of grant and were amortized over the vesting period. In aggregate, $4,875 was recorded as stock based compensation for the three months ended March 31, 2011.

On October 5, 2010, the Company awarded a stock option to purchase 40,000 shares of the Company’s common stock exercisable at $5.00 per share expiring five (5) years from the date of grant to an employee in conjunction with his employment agreement as the Company's Director of Administration, vested upon grant. The fair value of option granted, estimated on the date of grant, was $138,000, using the Black-Scholes option-pricing model with the following weighted-average assumptions:

Expected option life (year)							5.00

Expected volatility							187%

Risk-free interest rate							1.21%

Dividend yield							0.00%

The Company recorded the entire amount of $138,000 as stock based compensation expense on the date of grant.

On January 25, 2011, the Company issued 55,378 shares of its common shares to certain of its employees for their 2010 services of approximately $187,180 in lieu of cash, which was recorded as compensation expenses in 2010 and credited the same to the accrued expenses at December 31, 2010.

On March 29, 2011, the Company awarded 10,000 shares of the Company’s common stock to an employee for his 2011 employment service vesting on July 1, 2011. These shares were valued at $2.74 per share or $27,400 on the date of grant and are being amortized over the service period of one year in 2011. $20,550 was recorded as stock based compensation expense for the interim period ended September 30, 2011.

The table below summarizes the Company’s Amended and Restated 2009 Stock Incentive Plan activities as of September 30, 2011:

	Number of Shares or Options		Fair Value at Date of Grant

Balance, December 31, 2009		206,250	$	676,500

Granted – shares		6,250		19,500
Canceled – shares		-		-
Granted – options		40,000		138,000
Canceled – options		-		-
Balance, December 31, 2010		252,500		834,000

Granted – shares		65,378		214,580
Canceled – shares		-		-
Granted – options		-		-
Canceled – options		-		-
Balance, September 30, 2011		317,878	$	1,048,580

Vested, September 30, 2011		232,047		768,399

Unvested, September 30, 2011		85,831	$	280,181

F-35

As of September 30, 2011, there were 1,882,122 shares of common stock remaining available for issuance under the Amended and Restated 2009 Stock Inceptive Plan.

NOTE 16 – OPERATING COST OF IDLE MANUFACTURING FACILITY

Armet’s manufacturing facility is idle from time to time depending upon market conditions. Total operating costs of the idle manufacturing facility, including salary and wages, payroll tax and benefits, materials, depreciation and other operating costs of maintaining the manufacturing facility, were $1,425,262 for the interim period ended September 30, 2011. There were no operating costs of the idle manufacturing facility for the interim period ended September 30, 2010 as Armet did not complete the construction of its manufacturing facility and commence operations until the end of September 2010.

NOTE 17 – COMMITMENTS AND CONTINGENCIES

Uncommitted trade credit facilities

The Company entered into uncommitted trade credit facilities with certain financial institutions. Substantially all of the uncommitted trade credit facilities were guaranteed by Mr. Yao, the Company’s chairman, Chief Executive Officer and principal stockholder. The uncommitted trade credit facilities at September 30, 2011 were as follows:

	Date of Expiration		Total Facilities		Facilities Used		Facilities Available

Armco HK

DBS (Hong Kong) Limited (i)(*)		August 26, 2011	$	20,000,000	$	680,000	$	19,320,000

ING Bank, N.V. Hong Kong Branch (ii)		July 28, 2012		30,000,000		1,489,000		28,511,000-

RZB (Beijing) Branch (iii)(*)		October 31, 2011		15,000,000		798,000		14,202,000

Sub-total - Armco HK				65,000,000		2,967,000		62,003,000

Henan Armco

Guangdong Development Bank Zhengzhou Branch (iv)		June 17, 2012		10,945,709		681,460		10,264,249

China CITIC Bank Zhengzhou Branch (v)		April 26, 2012		7,818,364		0.00		7,818,364

China Minsheng Bank Zhengzhou Branch (vi)(*)		October 13, 2011		3,127,346		2,558,5000		568,846

Sub-total – Henan Armco				21,891,489		3,236,960		18,651,459

Armet

Bank of China Lianyungang Branch (vii)		September 3, 2012		10,945,709		3,909,182		7,036,527

Bank of China Lianyungang Branch (viii)(*)		October 29, 2011		3,127,346		781,836		2,345,509

Bank of Communications Lianyungang Branch (ix)		June 30, 2013		11,258,444		6,629,972		4,628,471

Sub-total – Armet				25,331,499		11,320,990		14,010,507

			$	112,222,918	$	17,527,950	$	94,694,966

F-36

(i) On August 6, 2010, Armco HK entered into a Banking Facilities Agreement with DBS Bank (Hong Kong) Limited of $20,000,000 for issuance of commercial letters of credit in connection with the Company’s purchase of metal ore. The Company pays interest at LIBOR or DBS Bank’s cost of funds plus 2.50% per annum on issued letters of credit in addition to an export bill collection commission equal to 1/8% of the first $50,000 and 1/16% of the balance and an opening commission of 1/4% on the first $50,000 and 1/16% of the balance for each issuance. Amounts advanced under this facility are repaid from the proceeds of the sale of metal ore. The lender may terminate the facility at anytime at its sole discretion. The facility is secured by the charge on cash deposit of the borrower, the borrower’s restricted pledged deposit in the minimum amount of 3% of the letter of credit amount, the Company’s letter of comfort and the guarantee of Mr. Kexuan Yao.

(ii) On July 29, 2011, Armco HK obtained a $30,000,000 line of credit from ING Bank Hong Kong Branch for issuance of letters of credit to finance the purchase of metal ore along with a sub-limit facility for freight advance of $3,000,000. The letters of credit require the Company to pledge cash equal to 5% of the letter of credit, subject to increase by the lender in the event of price fluctuations and market demand while the letter of credit remains open. The Company pays interest at the lender’s cost of funds plus 250 basis points per annum on issued letters of credit in addition to an export bill collection commission equal to 1/4% of the first $50,000 and 1/16% of the balance for each issuance. Amounts advanced under this line of credit are repaid from the proceeds of the sale of metal ore. The lender may terminate the facility at anytime at its sole discretion. The facility is secured by the Company’s restricted cash deposit in the minimum amount of 5% of the letter of credit amount, the Company’s guarantee, the guarantee of Mr. Kexuan Yao and a security interest in the contract for the purchase of the ore for which the letter of credit has been issued and the contract for the sale of the ore. (iii) On July 23, 2010, Armco HK entered into Amendment No. 1 to the March 25, 2010 uncommitted Trade Finance Facility with RZB Austria Finance (Hong Kong) Limited. The amendment provides for the issuance of $15,000,000 of commercial letters of credit in connection with the purchase of metal ore, an increase of $5,000,000 over the amounts provided for in the March 25, 2010 facility. The Company pays interest at 200 basis points per annum plus the lender’s cost of funds per annum on issued letters of credit in addition to fees upon issuance of the letter of credit of 1/16% for issuance commissions, negotiation commissions, commission-in-lieu and collection commissions. Amounts advanced under this facility are repaid from the proceeds of the sale of metal ore. The lender may, however, terminate the facility at anytime or at its sole discretion upon the occurrence of any event which causes a material market disruption in respect of unusual movement in the level of funding costs to the lender or the unusual loss of liquidity in the funding market. The lender has the sole discretion to decide whether or not such event has occurred. The facility is secured by restricted cash deposits held by the lender, the personal guarantee of Mr. Kexuan Yao, the Company’s guarantee, and a security interest in the contract for the purchase of the ore for which the letter of credit has been issued and the contract for the sale of the ore.

(iv) On June 18, 2011, Henan Armco obtained a RMB 70,000,000 (approximately $10,800,000) line of credit from Guangdong Development Bank Zhengzhou Branch for issuance of letters of credit to finance the purchase of metal ore. The Company pays interest at 120% of the applicable base rate for lending published by the People’s Bank of China (“PBC”) at the time the loan is made on issued letters of credit. The facility is secured by the guarantee provided by Mr. Kexuan Yao and Armet jointly and the pledge of movable assets provided by the borrower. Amounts advanced under this line of credit are repaid from the proceeds of the sale of metal ore. The term of the facility is one year.

(v) On April 27, 2011, Henan Armco obtained a RMB 50,000,000 (approximately $7,700,000) line of credit from China CITIC Bank, Zhengzhou Branch, for issuance of letters of credit to finance the purchase of metal ore and scrap metal expiring one (1) year from the date of issuance. The letters of credit require the Company to pledge cash deposits equal to 20% of the letter of credit for letters of credit at sight, or 30% for term letters of credit. Term letters of credit are limited to no more than 90 days. The interest rates are variable depending on the lender’s cost of funds at the time when the letter of credit is issued. The facility is guaranteed by Armet and Mr. Kexuan Yao, the Company’s Chairman and Chief Executive Officer.

(vi) On October 13, 2010, Henan Armco obtained a RMB 20,000,000 (approximately $3,000,000) line of credit from China Minsheng Bank, Zhengzhou Branch, for issuance of letters of credit to finance the purchase of metal ore and scrap metal expiring one (1) year from the date of issuance. The facility is guaranteed by Armet and Mr. Kexuan Yao, the Company’s Chairman and Chief Executive Officer.

(vii) On September 4, 2009, Armet entered into a line of credit facility (“Line of Credit”) in the amount of RMB 70,000,000 (approximately $10.7 million) from Bank of China, Lianyungang Branch expiring September 3, 2012, which can be drawn in the form of long-term debt or a bank acceptance payable. The facility is to finance the construction of Armet’s metal recycling facility. Armet pays interest at 105% of the applicable base rate for lending published by the People’s Bank of China (“PBOC”) at the time the loan is drawn down, as adjusted annually. The line of credit facility is collateralized by Armet’s building, equipment and land use right and the guarantees provided by Mr. Kexuan Yao, Mr. Yi Chu, Henan Armco and Henan Chaoyang, respectively.

(viii) On October 29, 2010, Armet entered into a line of facility in the amount of RMB20, 000,000 (approximately $3.0 million) from Bank of China, Lianyungang Branch for the purchase of raw materials. The term of the facility is 12 months with interest at 5.838% per annum. The facility is secured by the guarantees provided by Mr. Kexuan Yao, Mr. Yi Chu, Henan Armco and Henan Chaoyang, respectively.

F-37

(ix) On July 1, 2011, Armet obtained a RMB 72,000,000 (approximately $11.1 million) line of credit from Bank of Communications, Lianyungang Branch expiring two (2) years from the date of issuance, for issuance of letters of credit in connection with the purchase of scrap metal. The letters of credit require Armet to pledge cash deposit equal to 20% of the letter of credit for letters of credit at sight, or 30% for other domestic letters of credit and for extended domestic letters of credit, the collateral of inventory equal to 166% of the letter of credit. The facility is secured by Armet inventories and guarantee provided by Mr. Kexuan Yao, the Company’s Chairman and Chief Executive Officer.

(*) The lines of credit has expired and the Company is in the process of renewing them with the financial institutions with the same terms and conditions.

Loan guarantee

On June 11, 2010 the Company entered into a Guaranty Cooperation Agreement with Henan Chaoyang to provide additional liquidity to meet anticipated capital requirements of the recently launched Armet scrap metal recycling facility and the expansion of its metal ore trading business in the coming years. Under the terms of this guaranty, Henan Chaoyang agreed to provide up to RMB 300 million (approximately $46,400,000) loan guarantees to the Company’s subsidiary, Armet, for five (5) years for the following approved bank loans and credit lines and pending application of bank loans and line of credits:

●

Bank of China Lianyungang Branch’s project loan in the amount of RMB 90 million (approximately $13.4 million) which was guaranteed in 2009,

●

Bank of Communications Lianyungang Branch loan in the amount of RMB 50 million (approximately $7.5 million) which was approved on June 10, 2010 and is in the process of closing,

●

Bank of Jiangsu loan in the amount of RMB 30 million (approximately $4.5 million) which is pending lender approval, and

●

Bank of China’s additional loan for working capital of RMB 130 million (approximately $19.4 million) which is pending lender approval.

Under the terms of the Guaranty Cooperation Agreement, the Company has the right to apply to other banks for credit lines at the same or lesser amounts if the pending applications are not approved, but the Company needs the consent of Henan Chaoyang to apply to other banks for credit lines.

As consideration for the guaranty, the Company issued to Xianjun Ma, a designee of Henan Chaoyang, 500,000 shares of its common stock. The shares are earned ratably over the term of the agreement, and the unearned shares are forfeitable in the event of nonperformance by the guarantor.

Mr. Heping Ma, a former member of the Company’s Board of Directors, is the founder, Chairman and owns 85% equity interest of Henan Chaoyang. On September 16, 2010, Mr. Ma resigned from the Company’s Board of Directors. This transaction was approved by the members of Board of Directors of the Company who were independent in the matter in accordance with the Company’s Related Persons Transaction Policy.

Operating leases

(i) Operating lease for San Mateo office

On December 17, 2010, China Armco entered into a non-cancelable operating lease for office space that will expire on December 31, 2013. Future minimum payments required under this non-cancelable operating lease were as follows:

Year ending December 31:

2011	$	10,934

2012		43,734

2013		43,734

	$	98,402

F-38

(ii) Operating lease for Armco Shanghai office

On July 16, 2010, Armco Shanghai entered into a non-cancelable operating lease for office space that will expire on July 15, 2012. Future minimum payments required under this non-cancelable operating lease were as follows:

Year ending December 31:

2011	$	23,237

2012		50,348

	$	73,585

(iii) Operating lease of property, plant and equipment and facilities

On June 24, 2011, Armet entered into a non-cancelable operating lease agreement with an independent third party for property, plant, equipment and facilities expiring one (1) year from date of signing. Armet is required to pay RMB 30 (equivalent to $4.64) per metric ton of scrap metal processed at this facility over the term of the lease. The fee will be paid annually and necessary adjustment will be made at the end of term.

For the period from June 24, 2011 (date of signing) through September 30, 2011, no scrap metal had been processed at this facility due to current market conditions.

NOTE 18 – CONCENTRATIONS AND CREDIT RISK

Customers and credit concentrations

Customer concentrations for the interim periods ended September 30, 2011 and 2010 and credit concentrations at September 30, 2011 and December 31, 2010 are as follows:

	Net Sales for the Interim Period Ended				Accounts Receivable at
	September 30, 2011		September 30, 2010		September 30, 2011			December 31, 2010

Customer #206010 Lianyungang Jiaxin	-	%	18.6	%		-	%	15.5	%

Customer #22030500 Henan Ruite	-	%	12.8	%		-	%	-	%

Customer #122024 Jianshu Provincial	-	%	10.1	%		-	%	11.5	%

Customer #122021 Shagang South-Asia	-	%	-	%		-	%	59.8	%

Customer #101007 Jiangsu LiHuai	-	%	-	%		-	%	12.0	%

Customer # 1122026 China SDIC International Co., LTD	-	%	-	%		76.8	%	-	%

Customer #1122024 Derby Materials	23.0	%	-	%		-	%	-	%

Customer #1122014 Citic Metal	-	%	-	%		9.5	%	-	%

Customer #302023 Shangdong Yongjia	11.4	%	-	%		-	%	-	%

Customer #1131003 Yixing Jingri	-	%	16.7	%		-	%	-	%

Customer #101009 NingBo HangGang	16.8	%	-	%		-	%	-	%

Customer #102010 ZhongJian International	11.20	%	-	%		-	%	-	%
							%
	62.4	%	58.2	%		86.3	%	98.8	%

F-39

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 interim periods ended September 30, 2011 and 2010 and accounts payable concentration at September 30, 2011 and December 31, 2010 are as follows:

	Net Purchases for the Interim Period Ended					Accounts Payable at
	September 30, 2011		September 30 , 2010			September 30 , 2011			September 30, 2010

Vendor #302006 Anhuihuatai	-	%		16.0	%		-	%		-	%

Vendor #2202031 Akmetal Dis Ticarret	-	%		-	%		13.5	%			%

Vendor #010032 LianYunGang TongKe Trade	8.4	%			%		62.5	%			%

Vendor #010030 LinYi LiYuan	-	%		-	%		10.2	%		-	%

Vendor #204014 Mineracao	21.3	%		-	%		-	%		-	%

Vendor #202015 Liangyungang Dihe	-	%		-	%		-	%		36.4	%

Vendor #301009 XinJiang BaGang	11.6	%		-	%		-	%		-	%

Vendor #204033 Oversea Enterprise Pte, Ltd.	7.7	%		18.5	%		-	%			%

Vendor #2121032 Jiangshu Bright	-	%		15.1	%		-	%		51.7	%

Vendor #2202019 Smart Trading LLP	7.0	%		-	%		-	%		-	%

	56.0	%		60.6	%		86.2	%		88.1	%

Credit risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents.

As of September 30, 2011, 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 for the interim period ended September 30, 2011 or 2010 to reduce such exposure.

Interest risk

Substantially all of the Company’s operations are carried out in the PRC. The tight monetary policy currently instituted by the PRC government and increases in interest rate would have a material adverse effect on the Company’s results of operations and financial condition.

F-40

NOTE 19 - 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, monetary policies, 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 September 30, 2011, the Company had no Statutory Surplus Reserve and the Statutory Common Welfare Fund established and segregated in retained earnings.

NOTE 20 – SUBSEQUENT EVENTS

The Company has evaluated all events that occurred after the balance sheet date through the date when the financial statements were issued. The Management of the Company determined that there were no reportable subsequent events to be disclosed.

F-41

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, as amended, for the year ended December 31, 2010 (the “Form 10-K”).

We are on a calendar year; as such the three month period ended September 30, 2011 is referred to as our “third quarter” and the nine month period ended September 30, 2011 is referred to as the “first nine months of fiscal 2011”, and the prospective three month period ended December 31, 2011 is referred to as the "fourth quarter of 2011". The past year ended December 31, 2010 is referred to as “2010,” the current year ending December 31, 2011 is referred to as “2011,” and the coming year ending December 31, 2012 is referred to as “2012.”

The unaudited interim consolidated financial statements furnished in this Report reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of the results for the full year. These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2010 and notes thereto contained in our Annual Report on Form 10-K filed with the SEC on March 31, 2011.

OVERVIEW OF OUR PERFORMANCE AND OPERATIONS

Our Business and Recent Developments

We import, sell and distribute to the metal refinery industry in the People’s Republic of China (the “PRC” or “China”) a variety of metal ore, including iron, chrome, nickel, copper and manganese ore, as well as non-ferrous metals and coal. We obtain these raw materials from global suppliers in Brazil, India, Oman, Turkey, Nigeria, Indonesia, and the Philippines and distribute them in the PRC. We also recycle scrap metal used by steel mills in the production of recycled steel.

Domestic Steel Production in the PRC further slowed down in the third quarter of 2011 compared to the second quarter of 2011. China has been experiencing a slowdown in its real estate and manufacturing sectors due to tightening measures by the government. Weakening growth in steel industry in the PRC has dampened prices around the world. Steelmakers are doing a few things to regulate production in anticipation of further fall in prices and their margins coming under increasing pressure because of the domino effect of European Union’s sovereign debt crisis, pursuit of tight monetary policy by major economies like China and India at the cost of growth and a global steel supply glut. As a consequence, it has resulted to an excessive supply of iron ore and heavily iron ore inventory stored in China ports. Prices of iron ore and steel in China market slumped dramatically in the late of third quarter and continue to fall. Some China steelmakers are advancing maintenance schedules to keep production down for the time being. Consequently, both our metal ore trading and scrap metal recycling business experienced difficulties in the third quarter due to the economic environment and gloomy outlook. Our net revenue from both two sections for the third quarter of 2011decreased as compared to the third quarter of 2010 and the second quarter of 2011. Despite the decrease in net revenue in third quarter, our overall revenue for the first nine months of 2011 improved as compared to same period of 2010 due to the increase in revenue from the first six months of 2011 compared to same period of 2010.

We continue to refine our business model in response to unpredictable fluctuations in market prices. We seek to secure longer term supply contracts in response to known opportunities rather than sell goods purchased in the spot market. Where possible, we structure transaction-specific terms with our customers in order to better manage risk and ensure an acceptable profit margin. While this process may limit certain trading opportunities, we believe that it will enhance our competitive position when the metal ore market prices recover. Additionally, in the first nine months of fiscal 2011 we added six new metal ore trading customers in the Jiangsu province of the PRC. These customers, along with our growing base of customers throughout China, will help us meet our goal of obtaining a strong position in the metal ore trading and recycled scrap metals market. In the third quarter, in response to the market change and decrease in demand from our customers, we control our purchase at the level of execution of existing contracts to manage the price and market risks. We are also considering other methods such as hedging, to manage market and price risks in the future.

We formally commenced the operation of our scrap metal recycling facility in the Banqiao Industrial Zone of Lianyungang Economic Development Zone in the Jiangsu province of the PRC (the “Facility”) late in the third quarter of 2010. As a result, no comparisons can be made with respect to prior comparable periods for the year ended December 31, 2010. The Facility recycles automobiles, machinery, building materials, dismantled ships and various other scrap metals. We sell and distribute the recycled scrap metal to the metal refinery industry in the PRC utilizing our existing network of metal ore customers while continuing to seek new customers.

During the third quarter of 2011, our net revenue in the scrap metal recycling business decreased to $8.35 million from $22.13 million in the second quarter. Our production decreased to 13,500 metric tons (“MT”) from 36,322 MT in the second quarter. During the third quarter our scrap metal customers temporarily reduced or postponed pre-order significantly due to market condition and gloomy outlook for steel demand in China. In respond to the sharp price change of scrap metals and uncertainty of market, we reacted with initiatives to lower our procurement and pre-selling sales to control market risk accordingly. Consequently, for the third quarter of 2011, our scrap metal recycling business sold approximately 16,592 MT of scrap metals, generating approximately $8.35 million of revenue and $0.7 million of gross profit.

We continue to believe that our recycling business will become a strong growth driver for our company as natural resources continue to be depleted and larger amounts of unprocessed scrap metal become available as a result of increases in consumer demand for products made from steel that eventually are recycled. We also believe the profit margin of our recycling business will gradually stabilize and could further increase as we gain more experience in operating our Facility, marketing our products and establishing our reputation and presence in the recycled scrap metal industry. We have conducted a series of cost testing and variance analysis to improve our cost control and implement precise management in our recycling operation.

We have developed a strategy to expand our sources of raw material acquisition and to establish a supply chain network to increase and stabilize the availability of raw materials for our recycling operation. In furtherance of this strategy, in June 2011 we signed a lease agreement to manage, operate and control a scrap recycling facility in the area. This facility is capable of recycling scrap metals and will increase our control over the local supply of recycled and raw materials and has supplied over 2,000 MT scrap metals since October 2011. Additionally, in the third quarter we controlled two more local scrap recyclers by lease and five more similar scrap recyclers in the area have been under negotiation with us. Each such small scrap recycling facility is expected to be able to acquire and process scrap metals 1,000 MT monthly. We also expanded our purchase from overseas market and have acquired approximately 10,000 MT unprocessed scrap metals overseas. We will continue to build our overseas supply channels.

We invested a total of approximately $39.6 million in the aggregate to acquire land use rights and to construct and purchase equipment for the Facility. These capital expenditures were funded from a portion of the net proceeds we received from sales of securities and debt and vendor financing. During the third quarter of 2011, we continued to build on our achievements from the prior year in our continuing efforts to secure financing for our business. We maintain nine bank facilities, which provide for the issuance of commercial lines of credit for letters of credit in the aggregate amount of $112 million with an availability of approximately $95 million at September 30, 2011. These bank facilities improve our ability to finance our continued business expansion.

Our Performance

Our net revenues decreased approximately 13.8% in the third quarter of 2011compared to the same period in 2010 while our gross profit margin increased slightly to 5.03% from 4.89% over the same periods in 2010. Our operating expenses increased by $0.7 million in the third quarter compared to the same period in 2010 mainly due to newly increased operating cost of our idle recycling manufacturing facility. Our net loss in the third quarter was $1.1 million, compared with $0.4 million in the third quarter of 2010; the increased loss was resulted from lower revenues and higher operating expenses incurred during the quarter.

Our net revenues increased by 119% in the first nine months of 2011compared with the same period in 2010 while our gross profit margin increased to 6% from 4% over the same periods. The increase in revenues in the first nine month was due to significantly increased sales from our scrap metals recycling and metal ore trading business during the first six months compared to same period of 2010 which was partially offset by decrease in revenues in the third quarter. Our operating expenses during the first nine months of 2011 increased by $2.6 million compared to the same period in 2010, mainly due to newly increased expenses of operating cost of our idle recycling manufacturing facility and professional fees. Our net loss for the first nine months of 2011 was $1.8 million, compared to net loss of $0.6 million from the same period of a year ago. The 2011 results reflect the increased revenue and gross margin and substantially higher operating expenses as discussed later in this section.

Our Outlook

Our performance during the third quarter of 2011 showed decreased sales with a slightly higher gross margin in comparison to the same period in 2010. We believe our new recycling operation has the potential to substantially improve our overall performance in 2012 if we can better manage our raw material supply, improve our cost control and obtain sufficient liquidity. Additionally, we believe our efforts to obtain consistent supply sources through our entry into an operating lease with a local recycling facility and our efforts in Brazil will help us attain better gross margins in metals trading in the coming years.

Metal Ore Trading. The price of metal ores and steel slumped and rapidly and sharply in September and have been kept in the serious downtrend since then. The Chinese government’s measures to prevent the real estate sector from overheating and to implement a tight monetary policy have directly impact in the steel industry. It is expected that in short-term it is difficult for China market to change the downtrend. On the other hand, metal ore prices are likely to be positively affected by demand from the construction and infrastructure sectors. For example, the Chinese government’s investment programme in social housing is a key, non-seasonal driver of metal demand. The Government’s goal is to build ten million low-cost housing units this year with the bulk of the actual construction biased towards 2012. While the price and demand trends are somewhat negative as we move into the last quarter of the year, we believe the strong demand from the construction and infrastructure sectors will limit the metal ore price downside.

Scrap Metal Recycling. We believe our scrap metal recycling operation can provide increased revenue and profitability in 2012 and coming years. In the third quarter our scrap metals recycling business lost momentum in the second quarter of 2011 and slowed down due to the sharp price change and uncertainty of market which our scrap metal customers temporarily reduced or postponed pre-order significantly and we also lowered our procurement and pre-selling sales to control market risk accordingly. However , on the other hand, it is favorable to maintain sustained and sound development for China scrap metal recycling industry and our scrap recycling business as the scrap metal price further go down to a relatively lower level and become more stable in China market. We have seen the market opportunity and started to stockpile raw materials to ramp up our recycling production. We have concentrated and made efforts on streamline our production and operation by developing standard and more efficient production process, improving cost control and implementing precise management. Further, we have also been improving on our supply chain. We anticipate that our recycling operation will be the largest driver of revenue for the foreseeable future. We intend to devote a significant amount of our resources towards this operation and we will continue to pursue our strategy to create a network of raw material suppliers and expand our market share as opportunities arise.

Overall we believe our business is well positioned to grow in the coming years, but will require sufficient liquidity to support that growth.

RESULTS OF OPERATIONS

The table below summarizes the consolidated operating results for the three and nine months ended September 30, 2011 and 2010.

		For the Three Months Ended September 30,									For the Nine Months Ended September 30,
		2011				2010					2011				2010

Revenues	$	16,098,439			$	18,682,407				$	96,751,229			$	44,258,579
Cost of revenues		15,288,243	95.0	%		17,768,877		95.1	%		91,422,865	94.5	%		42,589,285		96	%
Gross profit		810,196	5.0	%		913,530		4.9	%		5,328,364	5.5	%		1,669,294		3	%

Total operating expenses		1,733,710	10.8	%		1,030,643		5.5	%		5,572,725	5.8	%		2,954,734		6.7	%
Operating (loss) income		(923,514)	(5.7)	%		(117,113	)	(0.6)	%		(244,361)	(0.3)	%		(1,285,440	)	(2.9)	%

Net Revenues

Net revenues for the third quarter of 2011 decreased by approximately 13.8% over the same period in 2010, primarily as a result of a decrease in sales of manganese ore ($5.3 million) and scrap steel ($1.5 million), partially offset by $4.7million increase in sales of Chromium and sales of iron ore $1.8 million.

Net revenues for the first nine months of 2011 increased by approximately 119% over the same period in2010, as sales of scrap steel increased by $23 million, sales of Chromium increased by $7.5 million, sales of iron ore increased by $27 million, and sales of Pellets increased by 11 million. These increases were partially offset by a $3.1 million decrease in sales of manganese. Revenue for the nine month period increased significantly compared to the same period of 2010 primarily due to increased sales in our scrap metal recycling business, which was not formally operating until the late of third quarter in 2010, and increased sales in our metal ore trading business in the first six months of 2011. The type of products we buy and sell are subject to change and are dependent upon availability and the demands of our customers.

Cost of Goods Sold

Cost of goods sold for the third quarter of 2011 was $15.3 million, a decrease of $2.5 million over the same period in 2010 and represents a gross profit margin of 5.03% compared to 4.89% in the third quarter of 2010. This gross profit margin increase was primarily due to higher margins on our sales of scrap metals which we did not commence formal operations at our recycling facility until the late third quarter of 2010.

For the first nine months of 2011, cost of goods sold was $91.4 million, an increase of $48.8 million from the same period in 2010, and represents a gross profit margin of 5.5% compared to 3.8% for the same period in 2010. This profit margin increase was primarily due to improvement in profit margins in sales of scrap metals, iron ore and magnesium ore compared to same period in 2010.

Total Operating Expenses

Operating expenses for the three and nine months ended September 30, 2011 were $1.7 million and $5.5 million, representing increases of $0.7 million and $2.6 million, compared to the three and nine months ended September 30, 2010, respectively.

For the three months ended September 30, 2011, the increase in operating expenses was primarily due to an increase in operating cost of our idle manufacturing facility of $0.53 million, an increase in selling expenses of $0.16 million, and an increase in profession fees of $0.12 million including legal fees, audit fees, investor relations, website design and SEC filing services. These increases were partially offset by general and administrative expenses of $0.1million.

For the nine months ended September 30, 2011, the increase in operating expenses was primarily due to an increase in general and administrative expenses of $0.46 million resulting from increased activities of production and operation at our China subsidiaries and an increase in management activities at our U.S. headquarters , an increase in operating costs of $1.4 million for our Armet idle manufacturing facility which was not formal operating until the late third of 2011 , and an increase in professional fees of $0.75 million due to the efforts to improve corporate governance, financial reporting and investor relations.

Other (Income) expense

Total other expense for the three and nine months ended September 30, 2011 were $0.13 million and $1.3 million, respectively. During the three and nine months ended September 30, 2010, we had other expenses of $0.27 million and other income $0.8 million, respectively.

For the three months ended September 30, 2011, interest expenses increased $0.3 million over the comparative period in 2010, mainly due to increases in use of borrowings in the third quarter, partially offset by $0.06 million increase in interest income. Our loan guarantee expense decreased $0.1 million compared to same period of 2010. During the third quarter, we accounted for a gain from FXR on market security of $0.3 million and other income of $0.11million. We also accounted for a $0.1 million expense in foreign currency transaction gain.

For the nine months ended September 30, 2011, total other expenses increased $2.1 million, compared to the same period in 2010, mainly due to an increase in interest expense of $1.2 million, a lack of a gain from vendor price adjustment of $0.96 million in the first quarter of 2010, and an increase in other expenses associated with the operation of China subsidiaries of $0.436 million.

Income tax (benefit) expense

Income tax (benefit) expenses for the three and nine months ended September 30, 2011 was $0.05 million and $0.29 million, respectively. In the comparative periods in 2010, income tax (benefit) expense was $0.02 million and $0.15 million, respectively. Our income tax (benefit) expense was derived mainly from operational results at our Hong Kong subsidiary applying an effective tax rate of 16.5%.

Net income (loss)

Our net loss in the third quarter of 2011 was $1.1 million, compared with a loss of $0.4 million in the third quarter of 2010. The increase in net loss is primarily due to the decrease in net revenue ($2.6million) and increases in operating expenses of $0.7 million, partially offset by a $0.1million decrease in total other expenses.

Our net loss for the first nine months of 2011 was $1.8 million, compared to net loss of $0.6 million from the same period of 2010 due to an increase of $2.6 million in total operating expenses and an increase of $2.1 million in total other expense, partially offset by increase of $52 million in net revenues and increase of $3.7 million in gross profit.

Comprehensive Income (Loss)

During the three and nine months ended September 30, 2011, our comprehensive loss amounted to $0.16 million and $1.6 million, respectively, compared to comprehensive income of $0.3 million and $0.2 million in the comparative periods in 2010. Comprehensive income (loss) consists of our net income and other comprehensive income, including change in unrealized loss of marketable securities and foreign currency translation gain (loss). The functional currency of four of our subsidiaries operating in the PRC is the Chinese Yuan or RMB. The financial statements of our subsidiaries are translated to U.S. dollars using the exchange rate prevailing as of the date of the balance sheet for assets and liabilities, and average exchange rates (for the period) for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations. As a result of these translations, we reported a foreign currency translation gain of $1.30 million the first nine months of 2011, comparable to a gain of $.79 million for the same period in 2010. We also had a $0.5 million gain and $1.1 million loss in change in unrealized loss of marketable securities for the three and nine months ended September 30, 2011, respectively. Collectively, these non-cash losses and gains had the effect of decreasing our reported comprehensive income in both periods.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is the ability of a company to generate adequate cash to meet its needs for cash.

At September 30, 2011 our working capital was $6.3 million, as compared to $12.2 million at December 31, 2010. Our cash balance at September 30, 2011 totaled $1.15 million, a decrease of $1.9 million as compared to $3.1 million at December 31, 2010.

As of September 30, 2011, we had invested a total of approximately $39.6 million for the acquisition of land use rights, construction and equipment purchases for the Facility. We expect to expand the production capacity at the Facility in the future and to build or acquire additional facilities in the future, depending on market conditions. We have not set a timeframe for this expansion.

Moreover, we have not yet determined how we plan to finance this future expansion if we determine to proceed with it. Unless we can obtain additional financing on terms we deem favorable to us, we will be unable to complete any such expansion or construct additional facilities in the future, and there can be no assurance that we will be successful in obtaining any such additional financing, or that such financing would be on terms deemed to be desirable or favorable to us. Furthermore, in the event we do obtain such financing, there can be no assurance that such expansion or additional facilities will result in enhanced operating performance or produce significant revenues and related profits in the future.

In addition, we will need to fund future capital expenditures for our existing operations, to service our debt and to purchase the raw materials required in our recycling operations. We have historically financed our cash needs primarily through the sales of our common stock and warrants, internally generated funds, debt financing and advances from our Chairman. We collect cash from our customers based on our sales to them and their respective payment terms.

We believe our working capital is sufficient for our operations for the next 12 months. We have bank facilities which provide for cash borrowings or the issuance of commercial letters of credit that we require in our metal ore trading business in the aggregate amount of $112.2 million, as more fully described below. Approximately $94.7 million was available under these facilities at September 30, 2011.

Substantially all of our cash reserves are held in the form of RMB in bank accounts at financial institutions located in the PRC. Cash held in banks in the PRC is not insured. As described under "Risk Factors" in our Annual Report on Form 10-K, the Chinese regulatory authorities impose a number of restrictions regarding RMB conversions and restrictions on foreign investments. Accordingly, our cash on deposit in banks in the PRC is not readily deployable by us for purposes outside of China.

On August 6, 2010, Armco HK entered into a Banking Facilities Agreement with DBS Bank (Hong Kong) Limited of $20,000,000 for issuance of commercial letters of credit in connection with the Company’s purchase of metal ore. The Company pays interest at LIBOR or DBS Bank’s cost of funds plus 2.50% per annum on issued letters of credit in addition to an export bill collection commission equal to 1/8% of the first $50,000 and 1/16% of the balance and an opening commission of 1/4% on the first $50,000 and 1/16% of the balance for each issuance. Amounts advanced under this facility are repaid from the proceeds of the sale of metal ore. The lender may terminate the facility at anytime at its sole discretion. The facility is secured by the charge on cash deposit of the borrower, the borrower’s restricted pledged deposit in the minimum amount of 3% of the letter of credit amount, the Company’s letter of comfort and the personal guarantee of Mr. Kexuan Yao, our Chairman and Chief Executive Officer. At September 30, 2011, the balance outstanding under this facility was $680,000.

On July 29, 2010, Armco HK obtained a $30,000,000 line of credit from ING Bank Hong Kong Branch for issuance of letters of credit to finance the purchase of metal ore along with a sub-limit facility for freight advance of $3,000,000. The letters of credit require the Company to pledge cash equal to 5% of the letter of credit, subject to increase by the lender in the event of price fluctuations and market demand while the letter of credit remains open. The Company pays interest at the lender’s cost of funds plus 250 basis points per annum on issued letters of credit in addition to an export bill collection commission equal to 1/4% of the first $50,000 and 1/16% of the balance for each issuance. Amounts advanced under this line of credit are repaid from the proceeds of the sale of metal ore. The lender may terminate the facility at anytime at its sole discretion. The facility is secured by the Company’s restricted cash deposit in the minimum amount of 5% of the letter of credit amount, the Company’s guarantee, the personal guarantee of Mr. Kexuan Yao and a security interest in the contract for the purchase of the ore for which the letter of credit has been issued and the contract for the sale of the ore. ING verbally approved the increase of trade credit facilities to $26,740,000 to facilitate one purchase on a temporary basis. At September 30, 2011, the balance outstanding under this facility was $1,489,000.

On July 23, 2010, Armco HK entered into Amendment No. 1 to the March 25, 2010 uncommitted Trade Finance Facility with RZB Austria Finance (Hong Kong) Limited. The amendment provides for the issuance of $15,000,000 of commercial letters of credit in connection with the purchase of metal ore, an increase of $5,000,000 over the amounts provided for in the March 25, 2010 facility. The Company pays interest at 200 basis points per annum plus the lender’s cost of funds per annum on issued letters of credit in addition to fees upon issuance of the letter of credit of 1/16% for issuance commissions, negotiation commissions, commission-in-lieu and collection commissions. Amounts advanced under this facility are repaid from the proceeds of the sale of metal ore. The lender may, however, terminate the facility at anytime or at its sole discretion upon the occurrence of any event which causes a material market disruption in respect of unusual movement in the level of funding costs to the lender or the unusual loss of liquidity in the funding market. The lender has the sole discretion to decide whether or not such event has occurred. The facility is secured by restricted cash deposits held by the lender, the personal guarantee of Mr. Kexuan Yao, the Company’s guarantee, and a security interest in the contract for the purchase of the ore for which the letter of credit has been issued and the contract for the sale of the ore. At September 30, 2011, the balance outstanding under this facility was $798,000.

On June 18, 2011, Henan Armco obtained a RMB 70,000,000 (approximately $10,800,000) line of credit from Guangdong Development Bank Zhengzhou Branch for issuance of letters of credit to finance the purchase of metal ore. The Company pays interest at 120% of the applicable base rate for lending published by the People’s Bank of China (“PBC”) at the time the loan is made on issued letters of credit. The facility is secured by the guarantee provided by Mr. Kexuan Yao and Armet jointly and the pledge of movable assets provided by the borrower. Amounts advanced under this line of credit are repaid from the proceeds of the sale of metal ore. The term of the facility is one year. At September 30, 2011, the balance outstanding under this facility was $681,460. Loan payable of $1,799,373 with principal under this facility was due and paid on July 27, 2011.

On April 27, 2011, Henan Armco obtained a RMB 50,000,000 (approximately $7,700,000) line of credit Yfrom China CITIC Bank, Zhengzhou Branch, for issuance of letters of credit to finance the purchase of metal ore and scrap metal expiring one year from the date of issuance. The letters of credit require the Company to pledge cash deposits between 20% and 30% of the drawn amounts. Term letters of credit are limited to no more than 90 days. The interest rates are variable depending on the LIBOR and the lender’s cost of funds at the time when a letter of credit is issued. The facility is guaranteed by Armet and Mr. Kexuan Yao. At September 30, 2011, the balance outstanding under this facility was $0.

On October 13, 2010, Henan Armco obtained a RMB 20,000,000 (approximately $3,094,299) line of credit from China Minsheng Bank, Zhengzhou Branch, for issuance of letters of credit to finance the purchase of metal ore and scrap metal expiring one year from the date of issuance. The facility is guaranteed by Armet and Mr. Kexuan Yao, the Company’s Chairman and Chief Executive Officer. At September 30, 2011, the balance outstanding under this facility was $2,558,500. Loan payable of $1,149,174 with principal and interest under this facility was due and paid on July 26, 2011.

On September 4, 2009, Armet entered into a line of credit facility (“Line of Credit”) in the amount of RMB 70,000,000 (approximately $10.8 million) from Bank of China, Lianyungang Branch expiring September 3, 2012, which can be drawn in the form of long-term debt or a bank acceptance payable. The facility is to finance the construction of Armet’s metal recycling facility. Armet pays interest at 105% of the applicable base rate for lending published by the People’s Bank of China at the time the loan is drawn down, as adjusted annually. Interest is paid quarterly. The line of credit facility is collateralized by Armet’s building, equipment and land use right and the guarantees provided by Mr. Kexuan Yao and his wife, Henan Armco and Henan Chaoyang, respectively. As of September 30, 2011, the balance outstanding under our Line of Credit was $3.9 million. The remaining principal payments of RMB 25 million (equivalent to U.S. $3.9 million) are due on August 25, 2012. RMB 30 million (equivalent to U.S. $4.6 million) was due and paid on August 25, 2011.

On October 29, 2010, Armet entered into a line of credit facility in the amount of RMB 20,000,000 (approximately $3,094,299) from Bank of China, Lianyungang Branch for the purchase of raw materials. The term of the facility is 12 months with interest at 5.838% per annum. The facility is secured by the guarantees provided by Mr. Kexuan Yao and his wife, Henan Armco and Henan Chaoyang, respectively. At September 30, 2011, the balance outstanding under this facility was approximately $781,836. Loan payable of $781,836 with principal and interest under this facility was due and paid on October 28, 2011.

On July 1, 2011, Armet obtained a RMB 72,000,000 (approximately $11.1 million) line of credit from Bank of Communications, Lianyungang Branch expiring two year from the date of issuance, for issuance of letters of credit in connection with the purchase of scrap metal. The letters of credit require Armet to pledge cash deposit equal to 20% of the letter of credit for letters of credit at sight, or 30% for other domestic letters of credit and for extended domestic letters of credit, the collateral of inventory equal to 166% of the letter of credit. The facility is secured by Armet inventories and the personal guaranty provided by Mr. Kexuan Yao, the Company’s Chairman and Chief Executive Officer. As of September 30, 2011, the balance outstanding under this facility was $6,629,972.

The following table provides certain selected balance sheet comparisons as of September 30, 2011 and December 31, 2010.

	September 30, 2011		December 31, 2010		Increase (decrease)			%
Cash	$	1,149,281	$	3,097,917	$	(1,948,636	)		-62.9	%
Pledged deposits		4,868,919		12,643,671		(7,774,752	)		-61.5	%
Marketable securities		2,090,702		2,890,380		(799,678	)		-27.7	%
Bank acceptance notes receivable		62,547		0		62,547			n/a
Accounts receivable, net		546,547		19,115,019		(18,568,472	)		-97.1	%
Inventories		14,165,312		10,439,831		3,725,481			35.7	%
Advance on purchases		17,482,079		6,509,846		10,972,233			168.5	%
Prepaid corporate income taxes - Armet		464,862		0		464,862			n/a
Prepayments and other current assets		1,578,027		4,729,935		(3,151,908	)		-66.6	%
Total Current Assets		42,408,276		59,426,599		(17,018,323	)		-28.6	%

Loan payable		9,914,750		24,765,820		(14,851,070	)		-60.0	%
Banker's acceptance note payable		1,563,673		4,174,355		2,610,682			-62.5	%
Current maturities of capital lease obligation		761,350		727,756		33,594			4.6	%
Current maturities of long-term debt		3,909,182		4,537,342		(628,160)			13.8	%
Accounts payable		2,400,808		3,435,528		(1,034,720	)		-30.1	%
Advances from Chairman and CEO		626,990		799,394		(172,404	)		-21.6	%
Customer deposits		11,283,565		1,345,304		9,938,261			738.7	%
Corporate income tax payable-HK		158,998		1,091,038		(932,040	)		-85.4	%
Accrued expenses and other current liabilities		5,536,070		6,316,568		(780,498	)		-12.4	%
Total Current Liabilities		36,155,386		47,193,105		-11,037,719			-23.4	%

Our current assets at September 30, 2011 were $42 million, a decrease of $17 million, or 29%, from December 31, 2010. This overall decrease reflects a decrease of $18.6 million in accounts receivable, a decrease of $7.8 million in pledged deposits, a decrease of $3.2 million in prepayments and other current assets, , a decrease of $1.9 million in cash, and a decrease of $0.8 million in marketable securities, partially offset by an increase of $10.1 million in advance on purchases, $3.7 million in inventories, $0.5 million in prepaid corporate income taxes, and $0.01 million in bank acceptance notes receivable.

Our accounts receivable decreased $18.6 million at September 30, 2011 from December 31, 2010, mainly due to collections of sales made near the end of prior year and our pre-sale contract arrangement.

Our pledged deposits decreased $7.8 million at September 30, 2011 from December 31, 2010, primarily due to the transactions associated with the pledged deposits have been settled which the related pledged deposits either have been released to us or used for payments to vendors.

Our prepayments and other current assets decreased $3.2 million at September 30, 2011 compared to December 31, 2010 primarily due to receipt of raw materials we prepaid for our recycling operation at Armet.

Our cash decreased $1.9 million at September 30, 2011 compared to December 31, 2010 as more cash has been used for increased operation expenses and professional fees due to the efforts to improve corporate governance, financial reporting and investor relations.

Marketable securities decreased $0.8 million at September 30, 2011 compared to December 31, 2010 due to the temporary decrease in the market value of our investment securities.

Advance on purchases increased $10.1 million at September 30, 2011 compared to December 31, 2010, due to our commitments to build up our inventory for our scrap metal recycling business and an advance payment made on a land leveling project for a piece of real estate that will be available for our future expansion or for storage of materials and products.

Inventories increased $3.7 million at September 30, 2011 compared to December 31, 2010, primarily as a result of the higher inventory needed at Armet to increase scrap metals production and the temporary increase in our metal ores inventory for trading due to a slowdown in iron ore trading.

At September 30, 2011, our total current liabilities decreased $11.0 million, or 24%, from December 31, 2010, which reflected a decrease in loans payable, accounts payable, corporate income tax payable, accrued expenses and other current liabilities, current maturities of long-term debt and advances received from our Chairman and CEO, partially offset by an increase in customer deposits, banker's acceptance notes payable, and current maturities of capital lease obligation.

Loans payable under our letter of credit facilities decreased $14.9million at September 30, 2011 compared to December 31, 2010 due to the repayment of short-term borrowings in the second and third quarter of 2011. We used collections of accounts receivable to repay these short-term borrowings.

Accounts payable decreased $1.0 million at September 30, 2011 compared to December 31, 2010 primarily due to the repayment of outstanding balance owed to our suppliers during the second quarter.

Corporate income tax payable decreased $0.9 million at September 30, 2011 compared to December 31, 2010 mainly due to tax payment made during the first nine months of 2011.

Accrued expenses and other current liabilities decreased $0.8 million at September 30, 2011 compared to December 31, 2010 due to timing difference of shipments and payment of our payables. Accrued expenses consist of accrued expenses and other payables related to shipping fees.

Customer deposits increased $9.9 million at September 30, 2011 compared to December 31, 2010 due to timing of customer orders and amounts that we require for deposits. We recognize customer deposit as revenue when the goods have been delivered and the risk of loss has transferred to the customer either at the port of origin or port of destination based on the shipping terms we agree to with our customer. The increase in customer deposits also partially resulted from our implementation of pre-selling strategy to speed our fund turnover.

Banker's acceptance note payable decreased $2.6 million at September 30, 2011 compared to December 31, 2010 primarily due to an increase in short-term borrowing used in raw materials acquisition.

Statement of Cash Flows

For the first nine months of 2011, our net decrease in cash totaled $1.9 million, and was comprised of $14.6 million generated by operating activities and $6.8 million from investing activities, offset by $23.4 million used in financing activities.

For the first nine months 2010, our net increase in cash totaled $2.8 million, and was comprised of $6.9 million generated by operating activities and $14.1 million provided by financing activities, offset by $18.6 million cash used in investing activities.

Cash Flows from Operating Activities

For the first nine months of 2011 cash generated by operations of $14.6million was mainly comprised of a decrease in accounts receivable of $18.7 million, a decrease of prepayments and other current assets of $2.8 million, and an increase in customer deposits of $5.0 million. These cash inflows were partially offset by an increase in advance on purchases of $10.8 million, a decrease in accrued expenses and other current liabilities of $4.2 million, an increase in inventory of $3.4 million, a decrease in accounts payable of $1.1 million, and a decrease in taxes payable of $0.93million.

For the first nine months of 2010 cash generated by operations of $6.9 million was mainly comprised of a decrease in accounts receivable of $7.8 million, an increase in accounts payable of $39.8 million, and a decrease in advance on purchases of $2.2 million. These cash inflows were partially offset by an increase of prepayments and other current assets of $1.6 million, an increase in inventory of $8.7 million, a decrease in taxes payable of $2.2 million, a decrease in accrued expenses and other current liabilities of $0.8 million, and a decrease in customer deposits of $0.2 million.

Cash Flows from Investing Activities

For the nine months ended September 30, 2011net cash from in investing activities of $6.8 million was due to purchases of property and equipments of $1.4 million and payment made toward pledged deposits of $36.6 million, partially offset by proceeds received from the release of pledge deposits of $44.8 million

For the nine months ended September 30, 2010 cash used in investing activities of $18.6 million was due to purchases of property and equipments of $12.9 million, investment in marketable securities of $3.4 million, and payment made toward pledged deposits of $7.3 million, partially offset by proceeds received from the release of pledged deposits of $5.0 million.

Cash Flows from Financing Activities

For the nine months ended September 30, 2011 cash used in financing activities of $23.4 million was mainly due to the repayment of loans payable of $75.0 million, repayment of long-term debt of $4.69 million, repayment of banker's acceptance notes payable of $2.75 million, and repayment of capital lease obligation of $0.6 million, partially offset by proceeds from loans payable of $59.8 million.

For the nine months ended September 30, 2010 cash provided by financing activities of $14.1 million was mainly due to sale of common stock and warrants of $22.3 million, proceeds from loans payable of $18.3 million, proceeds from long term loans of $1.5 million and advances from our Chairman and CEO of $1.5 million, partially offset by repayment of loans payable of $27.3million, and repayment of long term debt of $2.2 million.

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 the generally accepted accounting principles in the United States.

Contractual Obligations and Commitments. At September 30, 2011, our long-term debt and financial obligations and commitments by due dates were as follows:

	Payments due by period
Contractual obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Banker's acceptance notes payable (1)		1,563,673		1,563,673
Long-Term Debt Obligations(2)		3,909,182		3,909,182						-
Short-Term Loans Payable (3)		9,914,750		9,914,750
Capital Lease Obligations (4)		1,776,853		761,350		1,015,503		-		-
Operating Lease Obligations (5)		171,987		117,319		54,668		-		-

Total		17,336,445		16,266,274		1,070,171				-

(1)		See Note 10 – Banker's acceptance notes payable in our unaudited interim consolidated financial statements included in this report.
(2)		See Note 13 – Long-Term Debt in our unaudited interim consolidated financial statements included in this report.
(3)		See Note 9 – Loans Payable in our unaudited interim consolidated financial statements included in this report.
(4)		See Note 12 – Capital lease obligation in our unaudited interim consolidated financial statements included in this report.
(5)		See Note 17 – Operating lease in our unaudited interim consolidated financial statements included in this report.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss further below.

Fair value of financial instruments

We follow paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and has adopted paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:

Level 1		Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.

Level 2		Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.

Level 3		Pricing inputs that are generally observable inputs and not corroborated by market data.

Fair value of financial assets and liabilities measured on a recurring basis

Level 1 financial assets – Marketable securities

Level 3 financial liabilities – Derivative warrant liabilities

Fair value of non-financial assets or liabilities measured on a recurring basis

Carrying value, recoverability and impairment of long-lived assets

The impairment charges, if any, is included in operating expenses in the accompanying consolidated statements of income and comprehensive income (loss).

Marketable securities, available for sale

The Company accounts for marketable securities, available for sale, in accordance with sub-topic 320-10 of the FASB Accounting Standards Codification (“Sub-topic 320-10”).

Derivative warrant liability

Revenue recognition

The Company applies paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition. The Company recognizes revenue when it is realized or realizable and earned. 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. The Company derives its revenues from sales contracts with customers with revenues being generated upon the shipment of metal ore pursuant to. Persuasive evidence of an arrangement is demonstrated via sales invoice or contract; product delivery is evidenced by warehouse shipping log as well as a signed bill of lading from the vessel 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 signed purchase order or contract 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.

Stock-based compensation for obtaining employee services

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 are as follows:

●

The Company uses historical data to estimate employee termination behavior. The expected life of options granted is derived from paragraph 718-10-S99-1 of the FASB Accounting Standards Codification and represents the period of time the options are expected to be outstanding.

●

The expected volatility is based on a combination of the historical volatility of the comparable companies’ stock over the contractual life of the options.

●

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the contractual life of the option.

●

The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the contractual life of the option.

Equity instruments issued to parties other than employees for acquiring goods or services

Use of estimates and assumptions

Recently Issued Accounting Pronouncements

There are no recently issued accounting standards that are expected to have a material effect on our financial condition, results of operations or cash flows.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

As a smaller reporting company, we are not required to provide the information required by this item.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported as specified in the SEC’s rules and forms and that such information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer, or CEO, and our Chief Financial Officer, or CFO, to allow timely decisions regarding required disclosure. Management, with the participation of our CEO and CFO, performed an evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2011. Based on that evaluation, we have identified material weaknesses in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)). These weaknesses include a lack of sufficiently qualified accounting and other finance personnel with appropriate U.S. GAAP knowledge and experience. Solely as a result of these material weaknesses, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were not effective as of September 30, 2011. The general experience of our accounting and finance personnel and the qualifications of our audit committee financial expert are described in more detail below.

General Experience of Company Accounting and Finance Personnel

The people who are primarily responsible for preparing and supervising the preparation of the Company’s financial statements and evaluating the effectiveness of internal controls, all of whom are our employees, have responsibilities and qualifications as set forth below:

The CFO, who has served in this role since 2008, and is responsible for overseeing all of our accounting, financial reporting and internal control functions. From 2005 through 2008, he served as the accounting manager of Armco & Metawise and Henan & Armco. From 1996 to 2005, our CFO worked in the accounting department of Zhengzhou Forging Co., Ltd. Our CFO obtained a bachelors degree in accounting from Zhengzhou University in 1996.

The Chief Accountant, who has served in this role since 2009, and obtained a bachelors degree in accounting from Henan Institute of Finance in 2005. The Chief Accountant supervises the accounting, financial reporting and internal control functions. Prior to joining our Company, the Chief Accountant spent eleven years as the financial manager of another PRC industrial company.

The Henan Armco Finance Manager is responsible for the accounting and internal control functions for Henan Armco. This individual served as an accountant for Henan Armco from 2003 to 2010 prior to being named the Finance Manager, and studied accounting at Henan Taxation Advanced Vocational College from 1999 to 2001. Prior to joining our Company, this individual was responsible for financial accounting and reporting at another Chinese industrial company from 2001 to 2003.

The Armet Finance Manager has been responsible for the accounting and internal control functions for our Armet subsidiary since 2007, and obtained an associates degree in accounting from Suzhou University in 1996.

The above-mentioned individuals supervise an additional seven accounting staff members who are responsible for recording our business and financial transactions in our accounting records and ensure that all disbursements are properly authorized, as well as performing other tasks normally associated with accounting and financial controls.

Experience of Audit Committee Financial Expert

As previously disclosed, William Thomson serves as our audit committee financial expert. Through Mr. Thomson’s experience as a chief financial officer, audit committee member in a number of public companies, auditor for Peat Marwick Mitchell & Co. and educational background, he has acquired an understanding of U.S. GAAP and internal control over financial reporting that we believe meets the standards of an “audit committee financial expert.”

Mr. Thomson received his Bachelor of Commerce from Dalhousie University in 1961 and received his Chartered Accountant designation from the Institute of Chartered Accountants of Nova Scotia in 1963. He was a supervising auditor at Peat Marwick Mitchell & Co. from 1961 to 1966. Mr. Thomson served as vice president of finance for Clairtone Sound Corp. Ltd. from 1968 to 1970. He served as chief financial officer of Gage Educational Publishing Ltd. from 1971 to 1973, of Upper Lakes Shipping Ltd. from 1973 to 1981, and of Bendinat Inc. (Spain) from 1985 to 1988.

Mr. Thomson currently serves on the boards of directors of Score Media, Inc., Asia Bio-Chem Group Co. and Chile mining Technologies, Inc., in addition to our company. He has served on a total of 13 boards of public companies, beginning in 1983. Of these 13 companies, Mr. Thomson has served on the audit committee for six and was the audit committee chair of each of these six companies. He is currently the audit committee chair of each of the four boards on which he serves.

Remediation Plan

As a result of management’s evaluation of our internal controls, we are considering the costs and benefits associated with remediating our control deficiencies. We are devoting significant resources to remediate, improve and document our disclosure controls and procedures, including our recent engagement of a CPA consultant who has U.S. GAAP knowledge to assist in the preparation of our financial statements. We are currently considering the following remediation options, or some combination thereof: (i) hiring additional personnel with sufficient U.S. GAAP experience and (ii) implementing ongoing training in U.S. GAAP requirements for our CFO and accounting and other finance personnel. Our Audit Committee and Board of Directors recently approved the hiring of a professional services firm that has expertise in accounting and U.S. GAAP matters with publicly-traded companies. No such firm has been engaged at this time, but we have identified several potential candidates and are in the process of evaluating them.

Changes in Internal Control

There were no changes in our internal control over financial reporting identified in connection with the evaluation of our controls performed during the quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors

AS A COMPANY ACTIVE IN THE U.S. SECURITIES MARKET AND WITH OPERATIONS BASED IN CHINA, WE MAY BE SUBJECT TO HEIGHTENED SCRUITINY BY THE U.S. SECURITIES AND EXCHANGE COMMISSION RELATING TO OUR SECURITIES LAW COMPLIANCE, OUR FINANCIAL REPORTING AND/OR OUR COMPLIANCE WITH THE FCPA.

In recent months, the Securities and Exchange Commission has investigated several Chinese companies that have entered the U.S. securities market through reverse mergers into publicly traded U.S. companies for, among other things, accounting irregularities in financial reporting and compliance with the FCPA. Given this heightened scrutiny of Chinese companies with a presence in the U.S. securities market that the Securities and Exchange Commission appears to have implemented, we may also be subject to such heightened scrutiny, including formal investigation by the U.S. Securities and Exchange Commission or other regulatory authority. While we have not received any notice that we are under investigation for our U.S. securities law compliance, financial reporting or FCPA compliance, there can be no assurance that we will not be under such investigation in the future. Any such investigation could divert substantial time and focus of our management team from operating our business, which could materially adversely affect our business, financial condition and results of operations. If any investigation results were to result in a finding that we are not in compliance with the U.S. securities laws or the FCPA, or that our financial reporting lacks sufficient internal controls, our business, financial condition and results of operations would likely be materially adversely affected, and we may also be subject to significant penalties, which could include the delisting of our common stock from the NYSE Amex Stock Exchange.

Additional risk factors describing the major risks to our business can be found under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010. Other than the risk factor included above, there has been no material change in our risk factors from those previously discussed in the Annual Report on Form 10-K.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. (Removed and Reserved).

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 Chief Financial Officer

32.1*

Section 1350 Certification of Chief Executive Officer and the Chief Financial Officer

101**

Financial statements from the quarterly report on Form 10-Q of China Armco, Inc. for the quarter ended June 30, 2011, filed on August 15, 2011, formatted in XBRL: (i) the Unaudited Condensed Consolidated Balance Sheets, (ii) the Unaudited Condensed Consolidated Statements of Income, (iii) the Unaudited Condensed Consolidated Statements of Cash Flows and (iv) the Notes to Unaudited Condensed Consolidated Financial Statements tagged as blocks of text.

* Filed herewith

**Furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise not subject to liability under these sections.

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, 2011	By:	/s/ Kexuan Yao
		Kexuan Yao
		Chief Executive Officer and Chairman
		(Principal executive officer)

Date: November 14, 2011	By:	/s/ Fengtao Wen
		Fengtao Wen
		Chief Financial Officer
		(Principal financial and accounting officer)

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Armco Metals (AMCO) Inactive 10-Q2011 Q3 Quarterly report

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