cnam_10q-033113.htm

March 31, 2013 and 2012

Index to the Consolidated Financial Statements

Contents	Page(s)

Consolidated Balance Sheets at March 31, 2013 (Unaudited) and December 31, 2012	F-2

Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2013 and 2012 (Unaudited)	F-3

Consolidated Statement of Stockholders’ Equity for the Period Ended March 31, 2013 (Unaudited)	F-4

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012 (Unaudited)	F-5

Notes to the Consolidated Financial Statements (Unaudited)	F-6

F-1

CHINA ARMCO METALS, INC.

CONSOLIDATED BALANCE SHEETS

	March 31, 2013			December 31, 2012
	(Unaudited)

ASSETS
CURRENT ASSETS:
Cash	$	1,327,506		$	1,367,171
Pledged deposits		8,767,003			4,590,829
Marketable securities		1,219,140			1,213,641
Bank acceptance notes receivable		1,123,667			7,926
Accounts receivable, net		8,147,497			15,699,390
Inventories		18,810,715			13,378,445
Advance on purchases		3,381,326			2,238,652
Prepayments and other current assets		1,502,408			453,299

Total Current Assets		44,279,262			38,949,353

PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment		43,651,046			43,319,218
Accumulated depreciation		(7,023,448	)		(6,284,162	)

PROPERTY, PLANT AND EQUIPMENT, net		36,627,598			37,035,056

LAND USE RIGHTS
Land use rights		6,509,360			6,473,761
Accumulated amortization		(321,522	)		(260,897	)

LAND USE RIGHTS, net		6,187,838			6,212,864

Total Assets	$	87,094,698		$	82,197,273

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Loans payable	$	12,179,406		$	19,109,930
Banker's acceptance notes payable and letters of credit		14,346,281			8,624,734
Current maturities of capital lease obligation		3,076,534			2,615,296
Accounts payable		4,708,366			1,141,583
Advances received from Chairman and CEO		121,922			-
Customer deposits		3,319,213			1,577,194
Corporate income tax payable		401,572			407,621
Derivative warrant liability		314,571			306,708
Value added tax and other taxes payable		1,239,007			2,504,677
Accrued expenses and other current liabilities		3,158,528			2,355,903

Total Current Liabilities		42,865,400			38,643,646

LONG-TERM LIABILITIES
Capital lease obligation, net of current maturities		1,336,113			1,749,955
Long-term debt - CEO		1,004,128			-

Total Long-Term Liabilities		2,340,241			1,749,955

Total Liabilities		45,205,641			40,393,601

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, 24,470,743 and 20,139,698 shares issued and outstanding, respectively		24,471			20,320
Additional paid-in capital		32,947,104			31,542,083
Retained earnings		5,666,931			6,756,699
Accumulated other comprehensive income (loss):
Change in unrealized gain on marketable securities		5,499			-
Foreign currency translation gain		3,245,052			3,484,570

Total Stockholders' Equity		41,889,057			41,803,672

Total Liabilities and Stockholders' Equity	$	87,094,698		$	82,197,273

See accompanying notes to the consolidated financial statements.

F-2

CHINA ARMCO METALS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

	For the Three Months Ended March 31, 2013				For the Three Months Ended March 31, 2012
	(Unaudited)				(Unaudited)

NET REVENUES		$	14,343,077		$	49,284,191

COST OF GOODS SOLD			13,698,412			47,824,094

GROSS MARGIN			644,665			1,460,097

OPERATING EXPENSES:
Selling expenses			29,226			130,523
Professional fees			196,497			114,595
General and administrative expenses			1,046,694			945,583
Operating cost of idle manufacturing facility			423,221			497,224

Total operating expenses			1,695,638			1,687,925

LOSS FROM OPERATIONS			(1,050,973	)		(227,828	)

OTHER (INCOME) EXPENSE:
Interest income			(2,725	)		(1,052	)
Interest expense			729,372			786,512
Foreign currency transaction (gain) loss - marketable securities			-			35,553
Impairment other than temporary - marketable securities			-			386,941
Change in fair value of derivative liability			(615,946	)		549
Loan guarantee expense			12,500			16,667
Other (income) expense			(75,896	)		119,807

Total other (income) expense			47,305			1,344,977

LOSS BEFORE INCOME TAXES PROVISION			(1,098,278	)		(1,572,805	)

INCOME TAX PROVISION			(8,510	)		87,403

NET LOSS			(1,089,768	)		(1,660,208	)

OTHER COMPREHENSIVE INCOME (LOSS):
Change in unrealized income (loss) of marketable securities			5,499			797
Foreign currency translation gain (loss)			(239,518	)		237,466

COMPREHENSIVE LOSS		$	(1,323,787	)	$	(1,421,945	)

NET LOSS PER COMMON SHARE - BASIC AND DILUTED:

Net loss per common share - basic and diluted		$	(0.05	)	$	(0.10	)

Weighted Average Common Shares Outstanding - basic and diluted			23,304,334			16,668,006

See accompanying notes to the consolidated financial statements.

F-3

CHINA ARMCO METALS, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

For the Period Ended March 31, 2013

(Unaudited)

	Common Stock, Par Value $0.001												Accumulated Other Comprehensive Income (Loss)
	Number of Shares			Amount			Additional Paid-in Capital			Retained Earnings			Unrealized Loss on Marketable Securities			Foreign Currency Translation Gain (Loss)			Total Stockholders' Equity

Balance, December 31, 2011		15,421,008			15,421			29,733,619			9,366,035			(797	)		3,221,038			42,335,316

Issuance of restricted stock to a Director for future services valued at $0.28 per share granted on December 20, 2011		50,000			50			13,950												14,000

Issuance of restricted stock to a Director for future services valued at $0.28 per share granted on December 20, 2011								(14,000	)											(14,000	)

Loan guarantee services received and quarterly 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			16,634												16,667

Issuance of restricted stock to a Director pursuant to the 2009 Stock Incentive Plan for future services valued at $0.2851 per share granted on December 19, 2011		6,250			6			1,776												1,782

Issuance of restricted stock to a Director pursuant to the 2009 Stock Incentive Plan for future services valued at $0.2851 per share granted on December 19, 2011								(1,782	)											(1,782	)

Issuance of common stock to employees pursuant to the 2009 Stock Incentive Plan for services valued at $0.57 per share granted on February 6, 2012		57,743			58			33,260												33,318

Issuance of restricted stock to CEO pursuant to an employment agreement for future services valued at $0.499 per share granted on February 8, 2012		1,500,000			1,500			747,000												748,500

Issuance of restricted stock to CEO pursuant to the 2009 Stock Incentive Plan for future services valued at $0.499 per share granted on February 8, 2012								(748,500	)											(748,500	)

Loan guarantee services received and quarterly 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			14,263												14,297

Issuance of common shares for legal services to All Bright for service so one year starting from Apirl 1, 2012		75,000			75			32,093												32,168

Cancellation of restricted stock to a Director for future services valued at $0.28 per share granted on December 20, 2011 on May 4, 2012		(50,000	)		(50	)		(13,950	)											(14,000	)

Cancellation of restricted stock to a Director for future services valued at $0.28 per share granted on December 20, 2011 on May 4, 2012								14,000												14,000

Issuance of restricted stock to a Director for future services valued at $0.69 per share granted on May 4, 2012		50,000			50			34,450												34,500
																				-
Issuance of restricted stock to a Director for future services valued at $0.69 per share granted on May 4, 2012								(34,500	)											(34,500	)

Loan guarantee services received and quarterly 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			12,616												12,650

Issuance of common shares for legal services to All Bright for service of one year starting from Apirl 1, 2012		75,000			75			28,388												28,463

Facilities leasing services received and quarterly shares vested from common shares Issued to Hebang on June 24, 2012 for 2 years facilities leasing expiring June 23, 2014		125,000			125			47,313												47,438

Issuance of common stock to employees pursuant to the 2009 Stock Incentive Plan for the first half year of 2012; services valued at $0.33 per share on the grant date on July 30, 2012		561,640			561			184,780												185,341

Issuance of common stock to employees pursuant to the 2009 Stock Incentive Plan for the 3rd quarter of 2012; services valued at $0.33 per share on the grant date on July 30, 2012		400,000			400			131,600												132,000

Issuance of common stock to employees pursuant to the 2009 Stock Incentive Plan for the 4th quarter of 2012; services valued at $0.35 per share on the grant date on November 12, 2012		980,991			981			342,366												343,347

Issuance of common stock to CEO in conversion of his advance to Company to shares		717,067			717			353,036												353,753

Loan guarantee services received and quarterly 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			16,096												16,130

Issuance of common shares for legal services to All Bright for service of one year starting from Apirl 1, 2012		75,000			75			36,218												36,293

Facilities leasing services received and quarterly shares vested from common shares Issued to Hebang on June 24, 2012 for 2 years facilities leasing expiring June 23, 2014		125,000			125			60,363												60,488

Issuance of common shares for consulting services to Broad Max Holding for service of one year starting from December 1, 2012		16,667			16			8,049												8,065

Amortization of deferred employee services								492,946												492,946

Comprehensive income (loss)
Net Loss											(2,609,336	)								(2,609,336	)
Change in unrealized loss on marketable securities														797						797
Foreign currency translation gain																	263,532			263,532

Total comprehensive income (loss)																				(2,345,007	)

Balance, December 31, 2012		20,319,698			20,320			31,542,083			6,756,699			-			3,484,570			41,803,672

Issuance of common shares at $0.50 per share for cash		3,242,712			3,243			1,618,113												1,621,356

Reclassification of the fair value of warrants to purchase 1,031,715 common shares at January 11, 2013 from additional paid-in capital to derivative liability to reflect the re-instatement of the derivative feature								(623,809	)											(623,809	)

Loan guarantee services received and quarterly 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			12,467												12,500

Issuance of common shares for legal services to All Bright for service of one year starting from Apirl 1, 2012		75,000			75			28,050												28,125

Facilities leasing services received and quarterly shares vested from common shares Issued to Hebang on June 24, 2012 for 2 years facilities leasing termindated on 3/31/2013		750,000			750			280,500												281,250

Issuance of common shares for consulting services to Broad Max Holding for service of one year starting from December 1, 2012		50,000			50			18,700												18,750

Amortization of deferred employee services								71,000												71,000

Comprehensive income (loss)
Net Loss											(1,089,768	)								(1,089,768	)
Change in unrealized loss on marketable securities														5,499						5,499
Foreign currency translation gain																	(239,518	)		(239,518	)

Total comprehensive income (loss)																				(1,323,787	)

Balance, March 31, 2013		24,470,743		$	24,471		$	32,947,104		$	5,666,931		$	5,499		$	3,245,052		$	41,889,057

See accompanying notes to the consolidated financial statements.

F-4

CHINA ARMCO METALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Three Months Ended March 31, 2013		For the Three Months Ended March 31, 2012
	(Unaudited)		(Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,089,768)	$	(1,660,208)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Depreciation expense		706,402		704,941
Amortization expense		59,190		12,422
Change in fair value of derivative liability		(615,946)		549
(Gain) loss from foreign currency exchange rate change on marketable securities		-		35,553
Impairment other than temporary - marketable securities		-		386,941
Stock based compensation		411,625		155,382
Changes in operating assets and liabilities:
Bank acceptance notes receivable		(1,115,698)		(158,265)
Accounts receivable		7,635,827		(27,480,173)
Inventories		(5,354,655)		22,233,344
Advance on purchases		(1,130,362)		(3,138,063)
Prepayments and other current assets		(1,113,145)		362,154
Accounts payable		3,468,335		(15,217,453)
Customer deposits		1,733,345		(3,386,988)
Taxes payable		(1,285,492)		277,761
Advance for Stock Subscription		-		820,715
Accrued expenses and other current liabilities		980,317		-

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		3,289,975		(26,051,388)

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from release of pledged deposits		3,756,871		8,413,409
Payment made towards pledged deposits		(7,907,848)		(9,534,359)
Purchase of property, plant and equipment		(97,858)		(1,297,120)

NET CASH USED IN INVESTING ACTIVITIES		(4,248,835)		(2,418,070)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans payable		9,503,386		43,404,164
Repayment of loans payable		(16,504,984)		(16,372,992)
Banker's acceptance notes payable		5,674,121		1,899,185
Repayment of capital lease obligation		(71,329)		(528,916)
Advances from (repayment to) Chairman and CEO		187,929		19,016
Proceeds from Related Party Loan		1,004,128		-
Proceeds from sales of common stock		1,621,356		-

NET CASH PROVIDED BY FINANCING ACTIVITIES		1,414,607		28,420,457

EFFECT OF EXCHANGE RATE CHANGES ON CASH		(495,412)		(11,727)

NET CHANGE IN CASH		(39,665)		(60,728)

Cash at beginning of the period		1,367,171		1,042,591

Cash at end of the period	$	1,327,506	$	981,863

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Interest paid	$	729,372	$	786,512
Income tax paid	$	1,777	$	-

NON CASH FINANCING AND INVESTING ACTIVITIES:
Accrued compensation paid in common shares in lieu of cash	$	-	$	15,591

See accompanying notes to the consolidated financial statements.

F-5

China Armco Metals, Inc.

March 31, 2013 and 2012

Notes to the Consolidated Financial Statements

(Unaudited)

Note 1 – Organization and Operations

China Armco Metals, Inc. (formerly Cox Distributing, Inc.)

Cox Distributing was founded as an unincorporated business in January 1984 and was incorporated as Cox Distributing, Inc. (“Cox Distributing”), a C corporation under the laws of 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). Cox Distributing engaged in the distribution of organic fertilizer products used to improve soil and growing conditions for the potato farmers of eastern Idaho (“Legacy Business”).

On June 27, 2008, Cox Distributing 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 & Metawise (H.K) Limited” or “Armco HK”) and Subsidiaries to better identify the Company with the business conducted, through its wholly owned subsidiaries in China, import, export and distribution of ferrous and non-ferrous ores and metals, and processing and distribution of scrap steel.

Cox Distributing conducted nominal organic fertilizer distribution business post the acquisition of Armco HK. On December 30, 2008, the Company entered into an Agreement of Assumption and Release and Bill of Sale (“Spin-Out Agreement”) with its former Chairman and Chief Executive Officer, Stephen E. Cox, with respect to its Legacy Business of fertilizer distribution business. Pursuant to the terms of the Spin-Out Agreement, Mr. Cox assumed all of the assets and liabilities of the Legacy Business and surrendered 6,200 shares of the Company’s common stock he owned for cancellation. As a result of the consummation of the Spin-Out Agreement, the Company discontinued its Legacy Business of distribution of organic fertilizer products.

Armco Metals International Limited (formerly Armco & Metawise (H.K) Limited) and Subsidiaries

Armco Metals International Limited (formerly Armco & Metawise (H.K) Limited)

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”). Armco HK engages in the import, export and distribution of ferrous and non-ferrous ore and metals.

On March 22, 2011, Armco & Metawise (H.K) Limited amended its Memorandum and Articles of Association, and changed its name to Armco Metals International Limited (“Armco HK”).

Formation of Henan Armco and Metawise Trading Co., Ltd.

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.

Formation of Armco (Lianyungang) Renewable Metals, Inc.

On January 9, 2007, Armco HK formed Armco (Lianyungang) Renewable Metals, Inc. (“Renewable Metals”), a wholly-owned foreign enterprise (“WOFE”) subsidiary in the City of Lianyungang, Jiangsu Province, PRC. Renewable Metals engages in the processing and distribution of scrap metal.

On December 1, 2008, Armco HK transferred its 100% equity interest in Renewable Metals to Armco Metals.

Merger of Henan with Renewable Metals, Companies under Common Control

On December 28, 2007, Armco HK entered into a Share Transfer Agreement with Renewable Metals, whereby Armco HK transferred to Renewable Metals 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 Renewable Metals 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-6

Acquisition of Armco Metal International Limited and Subsidiaries (“Armco HK”) Recognized as a Reverse Acquisition

On June 27, 2008, the Company entered into and consummated a share purchase agreement (the “Share Purchase Agreement”) with Armco HK and Feng Gao, who owned 100% of the issued and outstanding shares of Armco HK. In connection with the consummation of the Share Purchase Agreement, (i) Stephen Cox surrendered 7,694,000 common shares, representing his controlling interest in the Company for cancellation and resigned as an officer and director; (ii) 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; (iii) issued to Ms. Gao (a) a stock option entitling Ms. Gao to purchase 5,300,000 shares of the Company’s common stock, par value $.001 per share (the “Common Stock”) with an exercise price of $1.30 per share expiring on December 31, 2008 and (b) a stock option entitling Ms. Gao to purchase 2,000,000 shares of the Company’s common stock with an exercise price of $5.00 per share expiring two (2) years from the date of issuance on June 27, 2010 (the “Gao Options”). 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 controlling financial interest of the former stockholder 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 acquisition method of accounting in accordance with section 805-10-55 of the FASB Accounting Standards Codification. The reverse acquisition 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 acquisition. The acquisition process utilizes the capital structure of the Company and the assets and liabilities of Armco HK which are recorded at their 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.

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 Armco 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, 2012 and notes thereto contained in the Company’s Annual Report on Form 10-K filed with the SEC on March 29, 2013.

Principles of Consolidation

The Company applies the guidance of Topic 810 “Consolidation” of the FASB Accounting Standards Codification to determine whether and how to consolidate another entity. Pursuant to ASC Paragraph 810-10-15-10 all majority-owned subsidiaries—all entities in which a parent has a controlling financial interest—shall be consolidated except (1) when control does not rest with the parent, the majority owner; (2) if the parent is a broker-dealer within the scope of Topic 940 and control is likely to be temporary; (3) consolidation by an investment company within the scope of Topic 946 of a non-investment-company investee. Pursuant to ASC Paragraph 810-10-15-8 the usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity is a condition pointing toward consolidation. The power to control may also exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders, or by court decree. The Company consolidates all less-than-majority-owned subsidiaries, if any, in which the parent’s power to control exists.

F-7

The Company's consolidated subsidiaries and/or entities are as follows:

Name of consolidated subsidiary or entity	State or other jurisdiction of incorporation or organization	Date of incorporation or formation (date of acquisition, if applicable)	Attributable interest

Armco Metal International Limited (“Armco HK”)	Hong Kong SAR	July 13, 2001	100%

Henan Armco and Metawise Trading Co., Ltd. (“Henan Armco”)	PRC	June 6, 2002	100%

Armco (Lianyungang) Renewable Metals, Inc. (“Renewable Metals”)	PRC	January 9, 2007	100%

Armco (Lianyungang) Holdings, Inc. (“Lianyungang Armco”)	PRC	June 4, 2009	100%

Armco Metals (Shanghai) Holdings. Ltd. (“Armco Shanghai”)	PRC	July 16, 2010	100%

The consolidated financial statements include all accounts of the Company and the consolidated subsidiaries and/or entities as of December 31reporting period ending date(s) and for the reporting period(s) then ended.

All inter-company balances and transactions have been eliminated.

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; expected term of share options and similar instruments, expected volatility of the entity’s shares and the method used to estimate it, expected annual rate of quarterly dividends, and risk free rate(s); income tax rate and related income tax provision; reporting currency, functional currency of the PRC subsidiaries 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 in relation to the financial statements taken as a whole 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 evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly.

Actual results could differ from those estimates.

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.

F-8

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 March 31, 2012 and December 31, 2012.

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 significant stockholder and lease arrangement with the significant stockholder, if any, 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 provided the unrealized holding gains and losses is temporary. 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, and it is determined that the impairment is other than temporary, then an impairment loss is recognized in earnings equal to the entire difference between the investment’s cost and its fair value at the balance sheet date of the reporting period.

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.

Fair Value of Non-Financial Assets or Liabilities Measured on a Recurring Basis

The Company’s non-financial assets include inventories. 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.

F-9

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. When 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) and 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.

Marketable Debt and Equity Securities, Available for Sale

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

F-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 815-25-35-4.

The Company follows Paragraphs 320-10-35-17 through 34E 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 320-10-35-34, if it is determined that the impairment is other than temporary, then an impairment loss shall be recognized in earnings equal to the entire difference between the investment’s cost and its fair value at the balance sheet date of the reporting period for which the assessment is made. The measurement of the impairment shall not include partial recoveries after the balance sheet date. The fair value of the investment would then become the new basis of the investment and shall not be adjusted for subsequent recoveries in fair value. For presentation purpose, 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 320-10-45-8A; and 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 pursuant to Paragraph 320-10-45-9A. Pursuant to Paragraphs 320-10-35-36 and 37 the entire change in the fair value of foreign-currency-denominated available-for-sale debt securities shall be reported in other comprehensive income and An entity holding a foreign-currency-denominated available-for-sale debt security is required to consider, among other things, changes in market interest rates and foreign exchange rates since acquisition in determining whether an other-than-temporary impairment has occurred.

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.

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.

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.

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

Inventory Valuation

The Company values inventories, consisting of raw materials, consumables, packaging material, finished goods, and purchased merchandise for resale, 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-11

Normal Capacity and Period Costs of Underutilized or Idle Capacity of the Production Facilities

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.

Inventory Obsolescence and Markdowns

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.

Construction in progress represents direct costs of construction or the acquisition cost of long-lived assets. Under U.S. GAAP, all costs associated with construction of long-lived assets should be reflected as long-term as part of construction-in-progress. Capitalization of these costs ceases and the construction in progress is transferred to property, plant and equipment when substantially all of the activities necessary to prepare the long-lived assets for their intended use are completed. No depreciation is provided until the construction of the long-lived assets is complete and ready for their intended use.

Land Use Rights

Land use rights represent the cost to obtain the right to use certain parcels of land in the City of Lianyungang, Jiangsu Province, PRC. Land use rights are carried at cost and amortized on a straight-line basis over the lives of the rights 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.

F-12

Customer Deposits

Customer deposits primarily represent amounts received from customers for future delivery of products, which are 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.

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 March 31, 2013 or 2012.

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 Section 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 consolidated 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.

F-13

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.

The Company marks to market the fair value of the remaining embedded derivative warrants at each balance sheet date and records the change in the fair value of the remaining embedded derivative warrants as other income or expense in the consolidated statements of operations and comprehensive income (loss).

The Company utilizes the Lattice model that values the liability of the derivative warrants based on a probability weighted discounted cash flow model with the assistance of the third party valuation firm. The reason the Company picks the Lattice model is that in many cases there may be multiple embedded features or the features of the bifurcated derivatives may be so complex that a Black-Scholes valuation does not consider all of the terms of the instrument. Therefore, the fair value may not be appropriately captured by simple models. In other words, simple models such as Black-Scholes may not be appropriate in many situations given complex features and terms of conversion option (e.g., combined embedded derivatives). The Lattice model is based on future projections of the various potential outcomes. The features that were analyzed and incorporated into the model included the exercise and full reset features. 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 Lattice 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 the underlying factors which led to potential scenarios. Probabilities were assigned to each scenario 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 warrants.

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.

F-14

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.

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

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 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.

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 Renminbi, 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-15

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. If the Company is a newly formed corporation or shares of the Company are thinly traded the use of share prices established in the Company’s most recent private placement memorandum (“PPM”), or weekly or monthly price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.

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

Expected term of share options and similar instruments: The expected life of options and similar instruments represents the period of time the option and/or warrant are expected to be outstanding. Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards Codification the expected term of share options and similar instruments represents the period of time the options and similar instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and employees’ expected exercise and post-vesting employment termination behavior into the fair value (or calculated value) of the instruments. Pursuant to paragraph 718-10-S99-1, it may be appropriate to use the simplified method, i.e., expected term = ((vesting term + original contractual term) / 2), if (i) A company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time its equity shares have been publicly traded; (ii) A company significantly changes the terms of its share option grants or the types of employees that receive share option grants such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term; or (iii) A company has or expects to have significant structural changes in its business such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term. The Company uses the simplified method to calculate expected term of share options and similar instruments as the company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.

Expected volatility of the entity’s shares and the method used to estimate it. Pursuant to ASC Paragraph 718-10-50-2(f)(2)(ii) a thinly-traded or nonpublic entity that uses the calculated value method shall disclose the reasons why it is not practicable for the Company to estimate the expected volatility of its share price, the appropriate industry sector index that it has selected, the reasons for selecting that particular index, and how it has calculated historical volatility using that index. The Company uses the average historical volatility of the comparable companies over the expected contractual life of the share options or similar instruments as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.

Expected annual rate of quarterly dividends. An entity that uses a method that employs different dividend rates during the contractual term shall disclose the range of expected dividends used and the weighted-average expected dividends. 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 expected term of the share options and similar instruments.

Risk-free rate(s). An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used. 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 expected term of the share options and similar instruments.

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 Sub-topic 505-50 of the FASB Accounting Standards Codification (“Sub-topic 505-50”).

Pursuant to ASC 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. If the Company is a newly formed corporation or shares of the Company are thinly traded the use of share prices established in the Company’s most recent private placement memorandum (“PPM”), or weekly or monthly price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.

F-16

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

Expected term of share options and similar instruments: Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards Codification the expected term of share options and similar instruments represents the period of time the options and similar instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and holder’s expected exercise behavior into the fair value (or calculated value) of the instruments. The Company uses historical data to estimate holder’s expected exercise behavior. If the Company is a newly formed corporation or shares of the Company are thinly traded the contractual term of the share options and similar instruments is used as the expected term of share options and similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.

Pursuant to ASC paragraph 505-50-25-7, if fully vested, non-forfeitable equity instruments are issued at the date the grantor and grantee enter into an agreement for goods or services (no specific performance is required by the grantee to retain those equity instruments), then, because of the elimination of any obligation on the part of the counterparty to earn the equity instruments, a measurement date has been reached. A grantor shall recognize the equity instruments when they are issued (in most cases, when the agreement is entered into). Whether the corresponding cost is an immediate expense or a prepaid asset (or whether the debit should be characterized as contra-equity under the requirements of paragraph 505-50-45-1) depends on the specific facts and circumstances. Pursuant to ASC paragraph 505-50-45-1, a grantor may conclude that an asset (other than a note or a receivable) has been received in return for fully vested, non-forfeitable equity instruments that are issued at the date the grantor and grantee enter into an agreement for goods or services (and no specific performance is required by the grantee in order to retain those equity instruments). Such an asset shall not be displayed as contra-equity by the grantor of the equity instruments. The transferability (or lack thereof) of the equity instruments shall not affect the balance sheet display of the asset. This guidance is limited to transactions in which equity instruments are transferred to other than employees in exchange for goods or services. Section 505-50-30 provides guidance on the determination of the measurement date for transactions that are within the scope of this Subtopic.

Pursuant to Paragraphs 505-50-25-8 and 505-50-25-9, an entity may grant fully vested, non-forfeitable equity instruments that are exercisable by the grantee only after a specified period of time if the terms of the agreement provide for earlier exercisability if the grantee achieves specified performance conditions. Any measured cost of the transaction shall be recognized in the same period(s) and in the same manner as if the entity had paid cash for the goods or services or used cash rebates as a sales discount instead of paying with, or using, the equity instruments. A recognized asset, expense, or sales discount shall not be reversed if a share option and similar instrument that the counterparty has the right to exercise expires unexercised.

Pursuant to ASC 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.

Investment Credit - Government

Certain Chinese local governments provide non-refundable investment credits to encourage enterprises to invest in local communities. Investment credits from local governments are credited to other income – investment credit – government, upon receipt.

F-17

Income Tax Provision

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

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

The 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.

Uncertain Tax Positions

The Company did not take any uncertain tax positions and had no adjustments to its income tax liabilities or benefits pursuant to the provisions of Section 740-10-25 for the interim period ended March 31, 2013 or 2012.

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.

F-18

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.

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:

	March 31, 2013		December 31, 2012		March 31, 2012		December 31, 2011

Balance sheets		6.2741		6.3086		6.3185		6.3585

Statements of operations and comprehensive income (loss)		6.2814		6.3116		6.3089		6.4640

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 (loss), 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 contingent share arrangements, 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 as they were anti-dilutive:

	Potentially Outstanding Dilutive Common Shares
	For the Interim Period Ended March 31, 2013		For the Interim Period Ended March 31, 2012

Stock Option Shares

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		40,000

Sub-total: Stock option shares		40,000		40,000

Warrant Shares

Warrants issued on August 1, 2008 remaining outstanding and unexercised in connection with the Company’s August 1, 2008 equity financing at $0.50 per share expiring five (5) years from date of original issuance, as amended		12,180,210		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: Warrant shares		13,795,597		2,833,408

Total potentially outstanding dilutive common shares		13,835,597		2,873,408

F-19

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

FASB Accounting Standards Update No. 2011-08

In September 2011, the FASB issued the FASB Accounting Standards Update No. 2011-08 “Intangibles—Goodwill and Other: Testing Goodwill for Impairment” (“ASU 2011-08”). This Update is to simplify how public and nonpublic entities test goodwill for impairment. The amendments permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. Under the amendments in this Update, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount.

The guidance is effective for interim and annual periods beginning on or after December 15, 2011. Early adoption is permitted.

FASB Accounting Standards Update No. 2011-11

In December 2011, the FASB issued the FASB Accounting Standards Update No. 2011-11 “Balance Sheet: Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). This Update requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of IFRS.

The amended guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods.

FASB Accounting Standards Update No. 2012-02

In July 2012, the FASB issued the FASB Accounting Standards Update No. 2012-02 “Intangibles—Goodwill and Other (Topic 350) Testing Indefinite-Lived Intangible Assets for Impairment” (“ASU 2012-02”).

F-20

This Update is intended to reduce the cost and complexity of testing indefinite-lived intangible assets other than goodwill for impairment. This guidance builds upon the guidance in ASU 2011-08, entitled Testing Goodwill for Impairment. ASU 2011-08 was issued on September 15, 2011, and feedback from stakeholders during the exposure period related to the goodwill impairment testing guidance was that the guidance also would be helpful in impairment testing for intangible assets other than goodwill.

The revised standard allows an entity the option to first assess qualitatively whether it is more likely than not (that is, a likelihood of more than 50 percent) that an indefinite-lived intangible asset is impaired, thus necessitating that it perform the quantitative impairment test. An entity is not required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative impairment test unless the entity determines that it is more likely than not that the asset is impaired.

This Update is effective for annual and interim impairment tests performed in fiscal years beginning after September 15, 2012. Earlier implementation is permitted.

Other Recently Issued, but Not Yet Effective Accounting Pronouncements

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.

Note 3 – Pledged Deposits

Pledged deposits consisted of the following:

	March 31, 2013		December 31, 2012

Armco HK

Letters of credit	$	-	$	8,442

Sub-total – Armco HK		-		8,442

Renewable Metals

Bank acceptance notes payable (i)		4,465,503		475,541

Letters of credit (ii)		3,347,094		2,445,676

Deposit for capital lease obligation (iii)		478,156		475,541

Sub-total – Renewable Metals		8,290,753		3,396,758

Henan Armco

Letters of credit (iv)		476,250		1,185,629

Sub-total – Henan Armco		476,250		1,185,629

	$	8,767,003	$	4,590,829

(i)

$4,465,503 is to be released to the Company when the related banker’s acceptance notes payable mature ranging from June 6, 2013 through September 7, 2013.

(ii)

$3,347,094 is to be released to the Company for payment toward fulfilled letters of credit when those letters of credit mature in August 2013.

(iii)

$478,156 is to be released to the Company as part of the payment towards capital lease installment payment when the capital lease agreement matures on December 15, 2014.

(iv)

$463,046 was released to the Company as part of the payment toward fulfilled letters of credit t when those letters of credit matured and the remaining balance is to be released when letters of credit mature on June 27, 2013.

F-21

Note 4 – Marketable Equity 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 has 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.,

Apollo Minerals also issued to the Company, five (5) year options to purchase an additional 5 million shares of common stock at AUD0.25 (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 at the lower of its original cost, Private Place of Memorandum ("PPM") or market using Australia quoted market prices on Apollo Minerals stock, whichever is more reliably measurable.

At December 31, 2012, the estimated fair value of the investment in Apollo Minerals was approximately ($2.18) million less than its original cost based on most recent PPM price of AUD0.04 per common share; whereby Apollo Minerals sold 89,550,000 common shares for AUD3,600,000 on May 8, 2012. Even though the Company intends to hold these shares, the management of the Company concluded that the decline in the fair value was other than temporary and recorded the unrealized loss of marketable securities to (i) impairment – other than temporary of ($0.38) million in other income (loss) and (ii) foreign currency transaction loss in other income (loss) in the accompanying consolidated statements of operations and comprehensive income (loss) for the year ended December 31, 2012.

As of March 31, 2013, the Company’s available for sale marketable securities were marked to market to its fair value of $1,219,140 and reported a $5,499 change in unrealized loss on marketable securities as other comprehensive income (loss) in its Stockholders’ Equity.

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.

			Fair Value Measurement Using Level 1 Inputs
	Original cost		Impairment – Other Than Temporary			Accumulated Foreign Currency Transaction Gain (Loss)			Other Comprehensive Income (Loss) - Change in Unrealized Loss			Fair Value

Balance, December 31, 2011	$	3,396,658	$	(1,980,000	)	$	220,881		$	(797	)	$	1,636,742

Purchases, issuances and settlements

Total gains or losses (realized/unrealized) included in:

Net Loss: Impairment – other than temporary				(386,941	)								(386,941	)

Net Loss: Gain (loss) on foreign currency rate change							(36,957	)		-			(36,957	)

Other comprehensive income (loss): Changes in unrealized loss							-			797			797

Balance, December 31, 2012		3,396,658		(2,366,941	)		183,924			(-	)		1,213,641

Purchases, issuances and settlements

Total gains or losses (realized/unrealized) included in:

Net Loss: Impairment – other than temporary				-									-

Net Loss: Gain (loss) on foreign currency rate change							-			-			-

Other comprehensive income (loss): Changes in unrealized loss							-			5,499-			5,499-

Balance, March 31, 2013	$	3,396,658	$	(2,366,941	)	$	183,924		$	5,499		$	1,219,140

F-22

Note 5 – Accounts Receivable

Accounts receivable consisted of the following:

	March 31, 2013			December 31, 2012

Accounts receivable	$	8,190,647	*	$	15,742,540

Allowance for doubtful accounts		(43,150	)		(43,150	)

	$	8,147,497		$	15,699,390

The Company collected $ 7,867,294 through May 10, 2013, and the remaining balance of the accounts receivable is within the normal credit terms granted to the customers and expected to be collected when due.

Note 6 – Inventories

Inventories consisted of the following:

	March 31, 2013			December 31, 2012

Raw materials – scrap metal	$	5,407,434	*	$	5,371,867

Finished goods – processed scrap metal		10,285,903	*		2,517,948

Purchased merchandise for resale		3,117,378			5,488,630

	$	18,810,715		$	13,378,445

Renewable Metals raw materials and finished goods are collateralized for loans from the Bank of Communications Limited Lianyungang Branch. Raw materials consisted of scrap metals to be processed and finished goods were comprised of all of the processed scrap metal at Renewable Metals. Due to the short duration time for the processing of its scrap metal, there was no material work-in-process inventory at March 31, 2013 or December 31, 2012.

Slow-Moving or Obsolescence Markdowns

The Company recorded no inventory obsolescence adjustments for the interim period ended March 31, 2013 or 2012.

Lower of Cost or Market Adjustments

There was no lower of cost or market adjustments for the interim period ended March 31, 2013 or 2012.

F-23

Note 7 – Property, Plant and Equipment

Property, plant and equipment, stated at cost, less accumulated depreciation consisted of the following:

	Estimated Useful Life (Years)			March 31, 2013			December 31, 2012

Buildings and leasehold improvements (i)		20		$	24,404,728		$	24,175,794

Construction in progress					4,585,416			4,560,340

Machinery and equipment		7			12,262,318			12,193,408

Vehicles		5			2,055,432			2,048,305

Office equipment	5	-	8		343,152			341,371

					43,651,046			43,319,218

Less accumulated depreciation (ii)					(7,023,448	)		(6,284,162	)

				$	36,627,598		$	37,035,056

F-24

(i) Capitalized Interest

The Company did not capitalize any of interest to fixed assets for the interim period ended March 31, 2013 or 2012.

(ii) Depreciation and Amortization Expense

Depreciation and amortization expense for the interim period ended March 31, 2013 and 2012 was $706,402 and $704,941, respectively.

(iii)Collateralization of Property, Plant and Equipment

Both Renewable Metals and Lianyungang Armco’s property, plant and equipment representing substantially all of the Company’s property, plant and equipment are collateralized for loans from the Bank of China Lianyungang Branch.

(iv) Impairment

The Company completed the annual impairment test of property, plant and equipment and determined that there was no impairment as the fair value of property, plant and equipment, substantially exceeded their carrying values at December 31, 2012.

Note 8 – Land Use Rights

Renewable Metals

On September 28, 2007, Renewable Metals entered into an agreement with the Chinese government, whereby the Company paid RMB 14,384,002 to acquire the right to use 129,585.60 square meters of land for approximate 50 years. In November 2007, the Company expended additional RMB 1,076,300 in aggregate in land survey, transfer agent fees and land use right transfer tax in connection with the acquisition of the land use right and obtained the land use right certificate (Certificate No. 017158277) expiring December 30, 2058 on November 20, 2007. The purchase price and related acquisition costs are being amortized over the term of the right of approximately fifty (50) years.

Lianyungang Armco

On September 2, 2010, the Company entered into an agreement with the Chinese government, whereby the Company made a deposit of RMB 8,160,000 in aggregate towards the acquisition of the right to use 199,999 square meters of land for RMB 40,800,000. On April 13, 2011, the Company paid an additional RMB16,320,000 to acquire the temporary land use right to use 100,045 square meters of land and obtained the related certificate of the land use right (Certificate No. (L) LUR (2011) Y003218) expiring September 9, 2060 on October 25, 2011and on July 19, 2012 the Company acquire the formal land certificate of the land use right (Certificate No. (L) LUR (2012) LY 002394). The Company expended an additional RMB 900,067 in aggregate in land survey, transfer agent fees and land use right transfer tax in connection with the acquisition of the land use right. In addition, Lianyungang Armco expended an additional RMB 20, 674,830 to level the land as of December 31, 2011, which was recorded as construction in progress included in consolidated balance sheets. The purchase price and related acquisition costs shall be amortized over the term of the right of approximately fifty (50) years when the land is ready to use in the intended purpose.

The Company needs to pay an additional RMB16,320,000 (equivalent to $2,566,643 using U.S. Dollar to RMB at 6.3585 exchange rate) to acquire the land use right to use the remaining 100,045 square meters of land.

The short term plan for this parcel of land is for warehouse of raw materials and products when Renewable Metals’ space becomes scarce for future expansion and the long term plan for the land is to construct automobile dismantling production line or build a scrap metal trading market center, depending on the Company’s progress on obtaining necessary license and permits and market conditions.

F-25

Land use rights, stated at cost, less accumulated amortization, consisted of the following:

	March 31, 2013			December 31, 2012

Renewable Metals

Land use right	$	2,464,147		$	2,450,671

Accumulated amortization		(274,842	)		(260,897	)

		2,189,305			2,189,774

Lianyungang Armco

Land use right		4,045,213			4,023,090

Accumulated amortization		(46,680	)		(-	)

		3,998,533			4,023,090

Total

Land use right		6,509,360			6,473,761

Accumulated amortization		(321,522	)		(260,897	)

	$	6,187,838		$	6,212,864

(i) Amortization Expense

Amortization expense for the interim period ended March 31, 2013 and 2012 was $59,190 and $12,422, respectively.

(ii) Collateralization of Land Use Rights

Both Renewable Metals and Lianyungang Armco’s land use rights representing all of the Company’s land use rights are collateralized for loans from the Bank of China Lianyungang Branch.

(iii)Impairment

The Company completed the annual impairment test of land use rights and determined that there was no impairment as the fair value of land use rights, substantially exceeded their carrying values at December 31, 2012.

F-26

Note 9 – Loans Payable

Loans payable consisted of the following:

	March 31, 2013		December 31, 2012

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, with principal and interest due and $435,552 was repaid on January 7, 2013 and remaining balance was repaid on March 21, 2013.	$	-	$	585,113

Loan payable to DBS, collateralized by certain of the Company’s inventory, guaranteed by the Company’s Chairman and Chief Executive Officer, with interest at an average of 3.44% per annum, repaid in full on January 21, 2013		-		5,599,314

Sub-total - Armco HK		-		6,184,427

Renewable Metals

Loan payable to Bank of Communications, Lianyungang Branch, under trade credit facilities, collateralized by Renewable Metals inventories and guaranteed by the Company’s Chairman and Chief Executive Officer, with interest at 120% of the bank’s benchmark rate per annum (average 7.2%), $2,060,679 was repaid in January and February 2013, and the remaining balance is due from May 20, 2013 through August 4, 2013		3,984,635		4,755,413

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 7.872% per annum payable monthly, $1,593,854 was repaid on April 13, 2013, and the remaining balance is due from May 21, 2013 through March 25, 2014.		7,969,270		7,925,689

Sub-total – Renewable Metals		11,953,905		12,681,102

Henan Armco

Loan payable to Guangdong Development Bank Zhengzhou Branch, collateralized by certain of Henan’s inventory, with interest at 6.5% per annum, payable monthly; whole balance was repaid in January and February of 2013.		66,116		244,401

Loan Payable to Guanhutun Credit Union, collateralized by Henan’s building and leasehold improvement, with interest at 9.6% per annum, and is due on February 20, 2014		159,385		-

Sub-total – Henan Armco		225,501		244,401

	$	12,179,406	$	19,109,930

Note 10 – Banker’s Acceptance Notes Payable and Letters of Credit

Banker’s acceptance notes payable consisted of the following:

	March 31, 2013		December 31, 2012

Renewable Metals

Banker’s acceptance notes payable maturing from June 6, 2013 through September 7, 2013	$	5,737,875	$	3,867,736

Letters of credit maturing on August 18, 2013		8,606,812		4,755,413

Henan Armco

Banker’s acceptance notes payable maturing June 27, 2013		1,594		1,585

	$	14,346,281	$	8,624,734

Note 11 – Related Party Transactions

Advances from Stockholder

From time to time, the Chairman, CEO and significant stockholder of the Company advances funds to the Company for working capital purpose. Those advances are unsecured, non-interest bearing and due on demand. As of March 31, 2013 and December 31, 2012, the advance balance was $121,922 and $nil, respectively.

Promissory Note from Chief Executive Officer

On March 29, 2013, the Company executed a promissory note in the amount of CNY 6,300,000 payable to the Chairman, CEO and significant stockholder of the Company. The note, which is due one year from the date of issuance, accrues interest at 8% per annum. The proceeds are used for working capital purposes.

F-27

Operating Lease from Chairman, CEO and Stockholder

On January 1, 2006, Henan entered into a non-cancellable operating lease for its 176.37 square meters 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, 2013. Total lease payments for the interim period ended March 31, 2013 and 2012 amounted to RMB 30,000 (equivalent to $4,776 and $4,755). Future minimum lease payments required under the non-cancelable operating lease are RMB 90,000 (equivalent to $14,344) for the year of 2013.

Note 12 – Capital Lease Obligation

Capital lease obligation consisted of the following:

	March 31, 2013			December 31, 2012

Renewable Metals

(i) Capital lease obligation to a financing company for a term of three (3) years, collateralized by certain of Renewable Metals machinery and equipment, with interest at 11.8% per annum, with principal and interest due and payable in monthly installments of RMB 497,897 on the 23rd of each month.	$	752,837		$	819,659

Less current maturities		(752,837	)		(819,659	)

Capital lease obligation, net of current maturities		-			-

(ii) Capital lease obligation to a financing company for a term of three (3) years, collateralized by certain of Renewable Metals machinery and equipment, with interest at 11.0% per annum, with principal and interest due and payable in quarterly installments of RMB2,969,054 on the 15th of each quarter.		3,659,810			3,545,592

Less current maturities		(2,323,697	)		(1,795,637	)

Capital lease obligation, net of current maturities		1,336,113			1,749,955

Total capital lease obligation		4,412,647			4,365,251

Less current maturities		(3,076,534	)		(2,615,296	)

TOTAL CAPITAL LEASE OBLIGATION, net of current maturities	$	1,336,113		$	1,749,955

The future minimum payments under this capital lease obligation at March 31, 2013 were as follows:

Year ending December 31:

2013 (remainder)		2,975,647

2014		1,872,857

Total capital lease obligation payments		4,848,504

Less amounts representing interest		(435,857	)

Present value of total future capital lease obligation payments	$	4,412,647

Less current maturities of capital lease obligation		(3,076,534	)

Capital lease obligation, net of current maturities	$	1,336,113

Note 13 – Derivative Instruments and the Fair Value of Financial Instruments

(i) Warrants Issued in 2008 (“2008 Warrants)

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 to 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.

F-28

The Company estimated the fair value of 2008 warrants on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	July 25, 2008 through August 8, 2008

Expected life (year)		5.00

Expected volatility (*)		89.00	%

Risk-free interest rate		3.23	%

Expected annual rate of quarterly dividends		0.00	%

Expected volatility is based on historical volatility of the Company’s common stock. The Company currently has no reason to believe future volatility over the expected life of these warrants is likely to differ materially from its historical volatility. The risk-free interest rate is based on a yield curve of U.S. treasury interest rates on the date of grant based on the expected term of the warrant. Expected annual rate of quarterly dividends is based on the Company’s dividend history and anticipated dividend policy.

The relative 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.

Amendment No. 1 to the Subscription Agreement and Common Stock Purchase Warrant

In May, 2010 (the “Closing Date”), effective as of January 1, 2010, China Armco Metals, Inc. (the “Company”) entered into an amendment (the “First Amendment”) to that certain Subscription Agreement and Common Stock Purchase Warrant (the “Original Agreements”) dated July 2008. Pursuant to the Original Agreements, the Company offered (the “Offering”) and issued securities to 82 investors for an aggregate purchase price of $6,896,229.

Pursuant to the First Amendment 34 investors (the “First Amendment Investors”) with warrants to purchase 1,031,715 shares of the Company’s common stock waived certain rights under, Section 6.6 Adjustment for Certain Transactions, of the Common Stock Purchase Warrant, and Section 12(b) Most Favored Nation Provision, of the Subscription Agreement, in exchange for certain covenants that so long as any Warrants are outstanding other than Excepted Issuances that it will not enter into an agreement to issue nor issue any shares of Common Stock or Common Stock Equivalents to any Third Party Purchasers at an effective price per shore of less than $5.00 without the prior written consent of the Investor, which consent may be withheld for any reason.

The waiver of the anti-dilution or commonly known as a most favored nation clause made those warrants no longer derivative instruments, accordingly the Company reclassified $1,292,227 of the derivative liability to additional paid-in capital.

Amendment No. 2 to the Subscription Agreement and Common Stock Purchase Warrant

On January 11, 2013 (the “Closing Date”), China Armco Metals, Inc. (the “Company”) entered into a second amendment (the “Second Amendment”) to that certain Subscription Agreement and Common Stock Purchase Warrant (the “Original Agreements”) dated July 2008, as amended by certain Amendment No. 1 to the Original Agreements dated May 2010 (“First Amendment”). Pursuant to the Original Agreements, the Company offered (the “Offering”) and issued securities to 82 investors for an aggregate purchase price of $6,896,229.

This Second Amendment amended (i) the First Amendment to eliminate the Future Financing Restrictions, (ii) the Warrant to reinstate Section 6.6, Adjustment for Certain Transaction, and (iii) the Subscription Agreement to reinstate Section 12(b), Most Favored Nation Provision.

The Second Amendment provides that it shall only be effective upon execution of this Second Amendment by each of the investors that executed the First Amendment. At January 8, 2013, three (3) days prior to the Closing Date, after an exhaustive search and numerous attempts to reach all holders that signed the first amendment, all the First Amendment Investors that executed the First Amendment signed the Second Amendment except two (2) investors from whom the Company has been unable to reach or receive responses. These two (2) investors invested a total amount of $400,000. On January 8, 2013, the Company transmitted emails to all of the First Amendment Investors to notify them of the foregoing circumstance and conveyed to them the Company’s intent to declare the Second Amendment effective despite the absence of executions by the two (2) remaining investors. A two-day objection period was afforded to all the First Amendment Investors (including the two (2) unsigned investors) in such emails. As of January 10, 2013, the Company has received no indication from any of the First Amendment Investors that object to effectiveness of the Second Amendment, and no indications from the two unsigned investors that they will not sign the Second Amendment. Accordingly, on the Closing Date the Company declared the Second Amendment effective with respect to all the signed investors.

F-29

Amendment to the Common Stock Purchase Warrant in Connection with January 28, 2013 Security Offering

On January 28, 2013, the Company completed a public registered direct offering of an aggregate of 3,242,712 shares of the Company’s Common Stock, at a purchase price of $0.50 per share (the “January 2013 Offering”).

Pursuant to Section 12 of the Subscription Agreement and Section 6 of the Warrant, as a result of the January 2013 Offering, the Investor is now entitled to adjustments to the terms of the Warrant consisting of the followings:

(a)

a lowered exercise price of $0.50 per share instead of $5.00 per share with respect to the unexercised and outstanding portion of the Warrant; and

(b)

increased number of Warrant Shares, which shall cause (i)(x) the total number of new Warrant Shares pursuant to the unexercised and outstanding portion of the Warrant following such adjustment, multiplied by (y) the adjusted Exercise Price per share, to equal the dollar amount of (ii)(x) the total number of old Warrant Shares pursuant to the unexercised and outstanding portion of the Warrant before adjustment, multiplied by (y) the total Exercise Price before adjustment, i.e. 10 times of the unexercised and outstanding portion of the Warrant prior to such adjustment.

The Company reclassified warrants to purchase 1,031,715 common shares from non-derivative to derivative and related fair value at January 11, 2013 from additional paid-in capital to derivative liability to reflect the re-instatement of the derivative feature of these 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”) Issue No. 07-5: Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock (“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.

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.

F-30

(b)

Valuation Assumptions

The Company’s 2008 derivative warrants were valued at each period ending date 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 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 warrants

·	Expected annual rate of quarterly dividends is based on the Company’s dividend history and anticipated dividend policy.

(c)

Fair Value of Derivative Warrants

The fair value of the 2008 derivative warrants were computed using the lattice model with the following assumptions:

	March 31, 2013			December 31, 2012

Expected life (year)		1.00			1.00

Expected volatility		69.00	%		75.00	%

Risk-free interest rate		0.22	%		0.19	%

Expected annual rate of quarterly dividends		0.00	%		0.00	%

The fair value of the embedded derivative warrants is marked-to-market at each balance sheet date and the change in the fair value of the embedded derivative warrants is recorded in the consolidated statements of operations and comprehensive income (loss) as other income or expense.

The table below provides a summary of the fair value of the remaining derivative warrant liability and the changes in the fair value of the remaining derivative warrants to purchase 12,180,210 shares of the Company’s common stock, including net transfers in and/or out, of derivative warrants measured at fair value on a recurring basis using significant unobservable inputs (Level 3).

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

Balance, December 31, 2011		$	(203	)	$	(203	)

Purchases, issuances and settlements			-			-

Transfers in and/or out of Level 3			-			-

Total gains or losses (realized/unrealized) included in:

Net income (loss)			(306,505	)		(360,505	)

Other comprehensive income (loss)			-			-

Balance, December 31, 2012			(306,708	)		(306,708	)

Purchases, issuances and settlements			(623,809	)		(623,809	)

Transfers in and/or out of Level 3			-			-

Total gains or losses (realized/unrealized) included in:

Net income (loss)			615,946			615,946

Other comprehensive income (loss)			-			-

Balance, March 31, 2013		$	(314,571	)	$	(314,571	)

F-31

Exercise and Extinguishment 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 three months ended March 31, 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 fifty (50) of the 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 thirteen (13) of the 2008 warrant holders. The Company reclassified $1,665,011 and $210,095 of the derivative liability to additional paid-in capital, respectively.

During April 2010, four (4) of the 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, for which the Company issued 13,806 shares of its common stock to the 2008 warrant holders and reclassified $21,229 of the derivative liability to additional paid-in capital.

2008 Warrants Outstanding

As of March 31, 2013 2008 warrants to purchase 12,180,210 shares of Company’s common stock remain outstanding.

The table below summarizes the Company’s 2008 derivative warrant activity

	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, 2012		186,306		1,031,715			1,218,021			(203	)				(137,940	)

Mark to market										(306,505	)				306,505

Derivative warrant at December 31, 2012		186,306		1,031,715			1,218,021			(306,708	)				306,505

Reclassification of warrants to purchase 1,031,715 common shares from additional paid-in capital to derivative liability at January 11, 2013 to reflect the re-instatement of the derivative feature		1,031,715		(1,031,715	)		(-	)		(623,809	)		623,809		(-	)

Increased number of warrant shares per Amendment No. 2 to the Subscription Agreement and Common Stock Purchase Warrant ("2008 Unit Offering Agreement") dated July 2008 and Amendment No. 1 to 2008 Unit Offering Agreement upon completion of January 2013 Offering.		10,962,189		-			10,962,189			(-	)				-

Mark to market										615,946					(615,946	)

Derivative warrant at March 31, 2013		12,180,210		-			12,180,210			(314,571	)				(615,946	)

F-32

(ii) Warrants Issued in April 2010 (“2010 Warrants)

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 on the date of grant with the following assumptions:

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

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; At April 20, 2010 one (1) through five (5) years were 76%, 134%, 155%, 167% and 182%, respectively.

·	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 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 risk-free interest rate is based on a yield curve of U.S treasury interest rates on the date of valuation based on the expected term of the warrants

·	Expected annual rate of quarterly dividends is based on the Company’s dividend history and anticipated dividend policy.

The Company estimated the fair value of 2010 warrants on the date of grant using the lattice model with the Black-Scholes option-pricing model with the following weighted-average assumptions:

	April 20, 2010

Expected life (year)		5.00

Expected volatility		182.00	%

Risk-free interest rate		2.56	%

Expected annual rate of quarterly dividends		0.00	%

The fair value of the 2010 warrants, estimated on the date of issuance, was $2,483,938, which was recorded as additional paid-in capital and the remaining balance of the net proceeds of $6,629,036, net of issuance cost, has been assigned to common stock.

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 Section 815-40-15 of the FASB Accounting Standard Codification (“Section 815-40-15”) (formerly FASB Emerging Issues Task Force (“EITF”) Issue No. 07-5: Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock (“EITF 07-5”)) to be considered indexed to the Company’s own stock. In addition, the warrants meet all the criteria in Section 815-40-55 of the FASB Accounting Standard Codification (“Section 815-40-55”) (formerly FASB EITF Issue No. 00-19: Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock (“EITF 00-19”)) to be accounted for as equity.

F-33

2010 Warrants Outstanding

As of March 31, 2013, 2010 warrants to purchase 1,615,387 shares of its common stock remain outstanding.

The table below summarizes the Company’s 2010 non-derivative warrant activities through March 31, 2013:

	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, 2011		1,615,387		$	7.50	$	7.5	$	-	$	-

Granted		-			-		-		-		-

Canceled for cashless exercise		(-	)		-		-		-		-

Exercised (Cashless)		(-	)		-		-		-		-

Exercised		(-	)		-		-		-		-

Expired		-			-		-		-		-

Balance, December 31, 2012		1,615,387		$	- 7.50	$	7.5	$	-	$	-

Granted		-			-		-		-		-

Canceled for cashless exercise		(-	)		-		-		-		-

Exercised (Cashless)		(-	)		-		-		-		-

Exercised		(-	)		-		-		-		-

Expired		-			-		-		-		-

Balance, March 31, 2013		1,615,387		$	7.50	$	7.5	$	-	$	-

Earned and exercisable, March 31, 2013		1,615,387		$	7.50	$	7.5	$	-	$	-

Unvested, March 31, 2013		-		$	-	$	-	$	-	$	-

The following table summarizes information concerning outstanding and exercisable 2010 warrants as of March 31, 2013:

			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

$0.50				12,180,210		0.33	$	0.50		12,180,210		0.33	$	0.50

$7.50				1,615,387		2.05	$	7.50		1,615,387		2.05	$	7.50

$0.50	-	$7.50		13,795,597		0.53	$	1.32		13,795,597		0.53	$	1.32

Note 14 – 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.

F-34

The uncommitted trade credit facilities at March 31, 2013 were as follows:

	Date of Expiration	Total Facilities		Facilities Used		Facilities Available

Armco HK

DBS (Hong Kong) Limited (i)	December 20, 2012	$	-	$	-	$	-

RZB (Beijing) Branch (ii)	February 28, 2014		15,000,000		-		15,000,000

Sub-total - Armco HK			15,000,000		-		15,000,000

Henan Armco

ICBC Bank (iii)	July 8, 2013		1,753,240		1,873,594		-

China CITIC Bank (iv)	June 18, 2013		6,375,4161		-		6,375,416

Guangdong Development Bank Zhengzhou Branch (v)	September 19, 2013		12,432,062		562,550		11,869,512

Sub-total – Henan Armco			20,560,718		2,436,144		18,244,928

Renewable Metals

Bank of China Lianyungang Branch (vi)	December 27, 2015		7,969,270		7,969,270		-

Shanghai Pudong Development Bank (vii)	June 19, 2013		2,390,781		2,390,781		-

Bank of Communications Lianyungang Branch (viii)	June 30, 2013		11,475,750		8,128,656		3,347,094

Sub-total – Renewable Metals			21,835,801		18,488,707		3,347,094

		$	57,396,519	$	20,924,851	$	36,592,022

(i)

On December 20, 2011, 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 any time 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. Armco HK is negotiating with DBS to extend the facility for another year.

(ii)

On November 13, 2012, Armco HK entered into Amendment No. 3 to the March 25, 2009 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 any time 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.

(iii)

On December 18, 2012, Henan Armco obtained a RMB 11,000,000 (approximately $1.7 million) line of credit from China ICBC for issuance of letters of credit to finance the purchase of metal ore and scrap metal expiring July 8, 2013

(iv)

On June 18, 2012, Henan Armco obtained a RMB 40,000,000 (approximately $6.3 million) 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 facility is guaranteed by Renewable Metals and Mr. Kexuan Yao, the Company’s Chairman and Chief Executive Officer.

(v)

On September 19, 2012, Henan Armco obtained a RMB 78,000,000 (approximately $12.0 million) 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 Renewable Metals 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.

F-35

(vi)

On March 15, 2013, Renewable Metals entered into a line of credit facility in the amount of RMB50, 000,000 (approximately $7.9 million) from Bank of China, Lianyungang Branch for the purchase of raw materials. The facility is expiring December 27, 2015 with interest at 7.872% per annum. The facility is secured by Renewable metals properties, machinery and equipment and land use right, and guaranteed by Mr. Kexuan Yao, Ms. Yi Chu, and Henan Armco, respectively.

(vii)

On July 24, 2012, Renewable Metals entered into a line of credit facility in the amount of RMB 15,000,000 (approximately $2.4 million) from Shanghai Pudong Development Bank for the purchase of raw materials. The term of the facility is 12 months with interest at 120% of the applicable base rate for lending published by the People’s Bank of China (“PBOC”) at the time the loan is drawn down per annum. The facility is secured by Armco machinery’s land use right and guarantees provided Mr. Kexuan Yao, Ms. Yi Chu.

(viii)

On July 1, 2011, Renewable Metals obtained a RMB 72,000,000 (approximately $11.4 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 Renewable Metals 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 Renewable Metals inventories and guarantee provided by Mr. Kexuan Yao, the Company’s Chairman and Chief Executive Officer.

Employment with the Chairman and CEO

On February 8, 2012, the Company and the CEO, Mr. Yao, entered into an Employment Agreement (the “Employment Agreement”), to employ Mr. Yao as the Company’s Chairman of the Board of Directors, President, and Chief Executive Officer. The initial term of employment under the agreement is from January 1, 2012 (the “Effective Date”) until December 31, 2014, unless sooner terminated in accordance with the terms of the Employment Agreement. Pursuant to the Employment Agreement, Mr. Yao is entitled to, among others, the following compensation and benefits:

Base Salary. The Company shall pay the Executive a salary at a minimum rate of (i) $250,000 per annum for the period beginning on the Effective Date through December 31, 2012; (ii) $275,000 per annum for the period beginning on January 1, 2013 through December 31, 2013; and (iii) $300,000 per annum for the period beginning on January 1, 2014 through December 31, 2014 (the “Base Salary”). Base Salary shall be payable in accordance with the customary payroll practices of the Company applicable to senior executives.

Bonus. Each year during the Term, in addition to Base Salary, the Executive shall be entitled to an annual cash bonus in an amount equal to 50% of the Executive’s Base Salary for such year. Any such bonus shall be payable no later 2 ½ months following the year with respect to which the Base Salary is payable.

Restricted Shares. On the Effective Date, Executive shall receive 1,500,000 shares of the Company’s common stock (“Restricted Shares”) subject to the terms and conditions of the Amended and Restated China Armco Metals, Inc. 2009 Stock Incentive Plan (the "Incentive Plan"). The Restricted Shares shall vest according to Vesting Schedule attached the Employment Agreement as Exhibit A; provided, however, if the Executive is terminated pursuant to Section 5 of this Agreement, the Executive shall forfeit all the unvested Restricted Shares as of such termination.

Equity Incentive Compensation. The Executive shall be entitled to participate in any equity compensation plan of the Company in which he is eligible to participate, and may, without limitation, be granted in accordance with any such plan options to purchase shares of Company’s common stock, shares of restricted stock and other equity awards in the discretion of the Board or the Committee. Any equity incentive compensation shall be payable no later than 2 ½ months of the following tax year in which such compensation is granted

Eligibility to participate in the Company’s benefit plans that are generally provided for executive employees.

Operating Leases

(i) Operating Lease - 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.

F-36

Future minimum payments required under this non-cancelable operating lease were as follows:

Year ending December 31:

2013 (remainder)		34,578

	$	34,578

(ii) Operating Lease - Armco Shanghai Office

On July 16, 2012, Armco Shanghai entered into a non-cancelable operating lease for office space that will expire on July 31, 2014.

Future minimum payments required under this non-cancelable operating lease were as follows:

Year ending December 31:

2013 (remainder)		78,460

2014		61,025

	$	139,485

(iii) Operating Lease of Property, Plant and Equipment and Facilities

Initial Lease Signed on June 24, 2010

On June 24, 2011, Renewable Metals 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. Renewable Metals is required to pay RMB 30 per metric ton of scrap metal processed at this facility over the term of the lease, which were accrued and included in the inventory of finished goods – processed scrap metal and transferred to cost of goods sold upon shipment of processed scrap metal.

First Renewal on April 13, 2012

On April 13, 2012, Renewable Metals renewed the aforementioned non-cancelable operating lease agreement for property, plant, equipment and facilities for an additional two-year term commencing on June 25, 2012, in consideration for (i) the issuance of one (1) million shares of the Company’s common stock and (ii) the payment of RMB1,000,000 (approximately $159,000) in cash. Pursuant to the lease agreement, the Company issued one million shares to the third party on April 13, 2012. The cash amount is to be paid during the second year of the lease term

On March 31, 2013, Renewable Metals terminated the operating lease agreement

Note 15 – Stockholders’ Equity

Shares Authorized

Upon formation the aggregate number of shares which the Corporation shall have authority to issue is seventy five million (75,000,000) shares, consisting of two classes to be designated, respectively, “Common Stock” and “Preferred Stock,” with all of such shares having a par value of $.001 per share. The total number of shares of Preferred Stock that the Corporation shall have authority to issue is one million (1,000,000) shares. The total number of shares of Common Stock that the Corporation shall have authority to issue is seventy four million (74,000,000) shares.

Common Stock

Immediately prior to the consummation of the Share Purchase Agreement on July 27, 2008, the Company had 10,000,000 common shares issued and outstanding.

On July 27, 2008, upon the consummation of the Share Purchase Agreement, (i) Stephen Cox surrendered 7,694,000 common shares, representing his controlling interest in the Company for cancellation and resigned as an officer and director; (ii) the Company issued a promissory note of $6,890,000 (the “Share Purchase Note”) to purchase from Ms. Gao, the sole stockholder of Armco HK, the 100% of the issued and outstanding capital stock of Armco HK; and (iii) (a) a stock option entitling Ms. Gao to purchase 5,300,000 shares of its common stock, par value $.001 per share (the “Common Stock”) with an exercise price of $1.30 per share expiring on September 30, 2008 and (b) a stock option entitling Ms. Gao to purchase 2,000,000 shares of its common stock with an exercise price of $5.00 per share expiring two (2) years from the date of issuance on June 27, 2010, vested immediately (the “Gao Options”). The Company did not record the fair value of the Gao Options as the options were included as part of the reverse acquisition and recapitalization.

F-37

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.

On April 12, 2010, Mr. Kexuan Yao purchased the Gao option to purchase 2,000,000 shares of the Company’s common stock with an exercise price of $5.00 per share 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 on June 27, 2008. 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 on June 27, 2010.

Sale of Common Stock or Equity Unit Inclusive of Common Stock and Warrants

July and August 2008 Issuances

On July 25, 2008 and July 31, 2008, the Company closed the first and second rounds of a private placement by raising $6,896,229 from eighty-two (82) investors through the sale of 22.9 units of its securities at an offering price of $300,000 per unit in a private placement. Each unit sold in the offering consisted of 100,000 shares of the Company’s common stock, $.001 par value per share at a per share purchase price of $3.00, and five (5) year warrants to purchase 100,000 shares of common stock with an exercise price of $5.00 per share (the “Warrants“).

On August 8, 2008 the Company closed the third round of the offering by raising $523,500 from ten (10) investors through the sale of 1.745 units of its securities at an offering price of $300,000 per unit.

On August 11, 2008 the Company closed the fourth round of the offering by raising $40,200 from five (5) investors through the sale of 0.134 units of its securities at an offering price of $300,000 per unit.

The Company paid (i) FINRA member broker-dealers cash commissions of $162,660 and issued those firms five (5) year warrants to purchase a total of 99,650 shares of its common stock at $5.00 per share as compensation for services to the Company, (ii) due diligence fees to certain investors or their advisors in connection with the Offering aggregating $579,316 in cash and issued those firms five (5) year warrants to purchase a total of 142,614 shares of its common stock at $5.00 per share as compensation for services to the Company, and (iii) professional fees in the amount of $97,689 paid in cash in connection with the Offering. The recipients of these fees included China Direct Investments, Inc., a subsidiary of China Direct, Inc. and a principal stockholder of the company..

In aggregate, the Company raised $7,459,929 in the offering from ninety-seven (97) investors through the sale of 24.87 units and after payment of cash commissions, broker dealer fee, due diligence fees and other costs associated with the Offering, the Company received net proceeds of $6,620,681, all of which were used for construction of a scrap steel recycling facility in the City of Lianyungang, Jiangsu Province, China as previously disclosed by the Company and general corporate working capital purposes.

April 2010 Issuance

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 used the net proceeds from this offering for its working capital.

January 2013 Offering

On January 28, 2013 (the “Closing Date”), the Company completed a public offering of an aggregate of 3,242,712 shares of the Company’s common stock in a registered direct public offering (the “January 2013 Offering”) for approximately $1.6 million proceeds in cash. The shares offered in this January 2013 Offering were sold by the Company directly to the investors. No underwriter or agents was involved in connection with this Offering to solicit offers to purchase the shares.

F-38

On the Closing Date, the Company entered into Subscription Agreements (the “Subscription Agreements”) with certain investors (the “Investors”) in connection with the January 2013 Offering, pursuant to which the Company agreed to sell an aggregate of 3,242,712 shares of its common stock at a purchase price of $0.50 per share to the Investors for aggregate gross proceeds, before deducting the estimated offering expenses payable by the Company, of approximately $1,621,356.

The purchase and issuance of the securities in the Registered Direct Offering are completed on January 28, 2013.

The January 2013 Offering was effectuated as a takedown off the Company’s shelf registration statement on Form S-3, as amended (File No. 333-184354), which became effective on December 14, 2012 (the “Registration Statement”), pursuant to a prospectus supplement filed with the Securities and Exchange Commission (the “SEC”) on January 28, 2013.

Conversion of Advances from Chairman and CEO to Common Shares

On December 31, 2012, Mr. Kexuan Yao proposed to the Company to convert the amount of unpaid Principals of the Loans owed him, into shares of common stock of the Company, at a conversation price equal to the current market price at which the Company's common stock trades on NYSE MKT; and the Board of the Directors of the Company considered that it is in the best interest of the Company and its stockholders for the Company to authorize the conversion of the amount of unpaid Principals of the Loans, into shares of common stock of the Company, at a conversation price equal to the average of the three (3) closing bid prices during the three (3) trading days immediately prior the date hereof at which the Company's common stock trades on NYSE MKT. Upon authorization by the Board of Directors of the Company, Mr. Yao converted unpaid Principals of the Loans of $353,753 owed him, into common shares of the Company, at a conversation price of $0.4933 per share, the average of the three (3) closing bid prices during the three (3) trading days immediately prior the date hereof at which the Company's common stock trades on NYSE MKT, or 717,067 shares of the Company’s common stock.

Issuance of Common Stock to Parties Other Than Employees for Acquiring Goods or Services

Loan Guarantee - Henan Chaoyang Steel Co., Ltd.

On June 11, 2010 the Company entered into a Guaranty Cooperation Agreement with Henan Chaoyang Steel Co., Ltd. (“Henan Chaoyang”) to provide additional liquidity to meet anticipated working capital requirements of Renewable Metals’ scrap metal recycling facility. Under the terms of the guaranty, Henan Chaoyang agreed to provide loan guarantees to Renewable Metals’ existing and pending bank lines of credit of up to 300 million RMB in the aggregate (approximately $45,400,000) for five (5) years expiring June 30, 2015. As consideration for the guaranty, the Company issued a designee of Henan Chaoyang 500,000 shares of its common stock. These 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 a founder, Chairman and owns an 85% equity interest of Henan Chaoyang Steel Co., Ltd. Co, a corporation incorporated under the laws of the PRC. This transaction was approved by the members of the Board of Directors of the Company who were independent in the matter in accordance with the Company’s Related Persons Transaction Policy. On September 16, 2010, Mr. Ma resigned from the Company’s Board of Directors.

Shares Earned during the Year Ending December 31, 2012

33,333 common shares earned for the quarter ended March 31, 2012 were valued at $0.50 per share, or $16,667, which was recorded as loan guarantee expense and included in the consolidated statements of operations and comprehensive income (loss) for the relevant periods.

33,333 common shares earned for the quarter ended June 30, 2012 were valued at $0.4289 per share, or $14,297, which was recorded as loan guarantee expense and included in the consolidated statements of operations and comprehensive income (loss) for the relevant periods.

33,333 common shares earned for the quarter ended September 30, 2012 were valued at $0.3795 per share, or $12,650, which was recorded as loan guarantee expense and included in the consolidated statements of operations and comprehensive income (loss) for the relevant periods.

33,333 common shares earned for the quarter ended December 31, 2012 were valued at $0.4839 per share, or $16,130, which was recorded as loan guarantee expense and included in the consolidated statements of operations and comprehensive income (loss) for the relevant periods.

Shares Earned during the Year Ending December 31, 2013

33,333 common shares earned for the quarter ended March 31, 2013 were valued at $0.375 per share, or $12,500, which was recorded as loan guarantee expense and included in the consolidated statements of operations and comprehensive income (loss) for the relevant periods.

F-39

Legal Services Agreement – All Bright Law Offices

On March 3, 2012, the Company entered into a Legal Services Agreement (“Legal Agreement”) with All Bright Law Office (“All Bright”), a PRC law firm located in Shanghai, China. Pursuant to the Legal Agreement, All Bright agreed to provide Chinese-law related legal counsel services from April 1, 2012 to March 31, 2013 in exchange for 300,000 shares of common stock of the Company. These shares are earned ratably over the term of the agreement and the unearned shares are forfeitable in the event of nonperformance by the All Bright.

Shares Earned during the Year Ending December 31, 2012

75,000 common shares earned for the quarter ended June 30, 2012 were valued at $0.4289 per share, or $32,168, which was recorded as legal expenses and included in the consolidated statement of operations and comprehensive income (loss).

75,000 common shares earned for the quarter ended September 30, 2012 were valued at $0.3795 per share, or $28,463, which was recorded as legal fees and included in the consolidated statement of operations and comprehensive income (loss).

75,000 common shares earned for the quarter ended December 31, 2012 were valued at $0.4839 per share, or $36,293, which was recorded as legal fees and included in the consolidated statement of operations and comprehensive income (loss).

Shares Earned during the Year Ending December 31, 2013

75,000 common shares earned for the quarter ended March 31, 2013 were valued at $0.375 per share, or $28,125, which was recorded as legal expenses and included in the consolidated statement of operations and comprehensive income (loss).

Consulting Services Agreement – Broad Max Holding

On December 1, 2012, the Company entered into a Consulting Services Agreement (“Consulting Agreement”) with Broad Max Holding (“Broad Max”), a HK firm located in Hong Kong, China. Pursuant to the Consulting Agreement, Broad Max agreed to provide consulting services from December 1, 2012 to May 31, 2013 in exchange for 100,000 shares of common stock of the Company. These shares are earned ratably over the term of the agreement and the unearned shares are forfeitable in the event of nonperformance by the Broad Max.

Shares Earned during the Year Ending December 31, 2012

16,667 common shares earned for the quarter ended December 31, 2012 were valued at $0.4839 per share, or $8,065, which was recorded as consulting fees and included in the consolidated statement of operations and comprehensive income (loss).

Shares Earned during the Year Ending December 31, 2013

50,000 common shares earned for the quarter ended March 31, 2013 were valued at $0.375 per share, or $18,750, which was recorded as consulting fees and included in the consolidated statement of operations and comprehensive income (loss).

Facility and Equipment Lease Agreement – Hebang Renewable Resources Co., Ltd.

On April 13, 2012, the Company entered into a Facility and Equipment Leasing Agreement (“Leasing Agreement”) with Lianyungang Hebang Renewable Resources Co., Ltd. (“Hebang”), a PRC company located in the City of Lianyungang, Jiangsu Province, China. Pursuant to the Leasing Agreement, Hebang agreed to lease its entire facility and all of its equipment for the Company’s exclusive use and operation for a two-year term commencing on June 25, 2012, in consideration for the issuance of one (1) million shares of common stock of the Company to Hebang and the payment of RMB one (1) million (approximately $159,000) in cash. Pursuant to the Leasing Agreement, the Company issued the Shares to a designee of Hebang on April 13, 2012 (the “Hebang Stock Issuance”). The cash amount is to be paid out to Hebang during the second year of the lease term. These shares are earned ratably over the term of the agreement and the unearned shares are forfeitable in the event of nonperformance by Hebang.

On March 31, 2013, Renewable Metals and Hebang terminated the Leasing Agreement ("Termination Agreement"). Under the terms and conditions of the Termination Agreement, Hebang agreed to forgive the cash amount to be paid under the amended Leasing Agreement and Renewable Metals agreed to let Hebang to keep the remaining unearned 625,000 common shares, which was valued at $0.375 per share or $234,375, which was recorded as facility leasing expenses and included in the consolidated statement of operations and comprehensive income (loss).

F-40

Shares Earned during the Year Ending December 31, 2012

125,000 common shares earned for the quarter ended September 30, 2012 were valued at $0.3795 per share, or $47,438, which was recorded as facility leasing expenses and included in the consolidated statement of operations and comprehensive income (loss).

125,000 common shares earned for the quarter ended December 31, 2012 were valued at $0.4839 per share, or $60,488, which was recorded as facility leasing expenses and included in the consolidated statement of operations and comprehensive income (loss).

Shares Earned during the Year Ending December 31, 2013

125,000 common shares earned for the quarter ended March 31, 2013 were valued at $0.375 per share, or $46,875, which was recorded as facility leasing expenses and included in the consolidated statement of operations and comprehensive income (loss).

On March 31, 2013, Renewable Metals and Hebang terminated the Leasing Agreement ("Termination Agreement"). Under the terms and conditions of the Termination Agreement, Hebang agreed to forgive the cash amount to be paid under the amended Leasing Agreement and Renewable Metals agreed to let Hebang to keep the remaining unearned 625,000 common shares, which was valued at $0.375 per share or $234,375, which was also recorded as facility leasing expenses and included in the consolidated statement of operations and comprehensive income (loss).

2009 Stock Incentive Plan as Amended

Adoption of 2009 Stock Incentive Plan

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 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 2009 Stock Incentive Plan are 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 2009 Stock Incentive Plan, and the amount and terms of a specific grant, are determined by the Board of Directors of the Company. Should any option granted or stock awarded under the 2009 Stock Incentive 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.

2011 Amendment to the 2009 Stock Incentive Plan

On May 19, 2011, the Company’s Board of Directors adopted and approved the Amended and Restated 2009 Stock Incentive Plan 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 among other material terms, subject to stockholder approval at the Annual Meeting. At the 2011 Annual Meeting of Stockholders (the “2011 Annual Meeting”) of the Company held on July 9, 2011, the Company’s stockholders approved the amendment and restatement of the Company’s 2009 Stock Incentive Plan (the “Amended and Restated 2009 Stock Incentive Plan”).

Common shares

The Amended and Restated Incentive Plan contains limitations on the number of shares available for issuance with respect to specified types of awards as specified in Section 6.2 Limitation on Shares of Stock Subject to Awards and Cash Awards. During any time when the Company has a class of equity securities registered under Section 12 of the Securities Exchange Act:

●

the maximum number of shares of the Company’s common stock subject to stock options or SARs that may be granted under the Amended and Restated Incentive Plan in a calendar year to any person eligible for an award will be 1,300,000 shares;

●

the maximum number of shares of the Company’s common stock that may be granted under the Amended and Restated Incentive Plan, other than pursuant to stock options or SARs, in a calendar year to any person eligible for an award will be 1,300,000 shares; and

●

the maximum amount that may be paid as a cash-settled performance-based award will be $1,000,000 for a performance period of 12 months or less and $5,000,000 for a performance period of greater than 12 months.

The maximum number of shares available for issuance pursuant to incentive stock options granted under the Amended and Restated Incentive Plan will be the same as the number of shares available for issuance under the Amended and Restated Incentive Plan.

F-41

Options

Under the Amended and Restated Incentive Plan, the board of directors, or the committee to which it grants authority under the Amended and Restated Incentive Plan, may grant both incentive stock options ("ISOs") intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), and options that are not qualified as incentive stock options ("NSOs"). ISOs may only be granted to persons who are employees of the Company or a subsidiary of the Company and the fair market value at the date of grant of the shares of stock with respect to which all ISO’s held by a particular grantee become exercisable for the first time during any calendar year does not exceed $100,000. ISOs and NSOs must be granted a an exercise price that is at least the fair market value of the common stock on the date of grant and the term of these options cannot exceed ten years from the date of grant. The exercise price of an ISO granted to a holder of more than 10% of the common stock of the Company must be at least 110% of the fair market value of the Common Stock on the date of grant, and the term of these options cannot exceed five years. All of the authorized shares of common stock under the Amended and Restated Incentive Plan are available for grant as ISOs.

Stock Appreciation Rights

Under the Amended and Restated Incentive Plan, the board of directors, or the committee to which it grants authority under the Amended and Restated Incentive Plan, may grant stock appreciation rights (“SARs”), that confer on the grantee a right to receive, upon exercise thereof, the excess of (a) the fair market value of one share of common stock of the Company on the date of exercise over (b) the grant price of the SAR (which shall be at least the grant date fair market value of a share of common stock of the Company) as determined by the board of directors or the committee to which it grants authority under the Amended and Restated Incentive Plan. The term of each SAR is ten years from the date of grant of the SAR.

Stock Awards

Under the stock component of the Amended and Restated Incentive Plan, the board of directors, or the committee to which it grants authority under the Amended and Restated Incentive Plan, may, in selected cases, grant to a plan participant a given number of shares of restricted stock, stock units or unrestricted stock. Restricted stock under the Amended and Restated Incentive Plan is common stock restricted as to sale pending fulfillment of such vesting schedule and requirements as the board of directors, or the committee to which it grants authority under the Amended and Restated Incentive Plan, shall determine. Prior to the lifting of the restrictions, the participant will nevertheless be entitled to receive dividends on, and to vote the shares of, the restricted stock. Stock units are a right to be delivered shares of common stock upon fulfillment of such vesting schedule and requirements as the board of directors, or the committee to which it grants authority under the Amended and Restated Incentive Plan, shall determine. Grantees of stock units will have no voting or dividend rights or other rights associated with stock ownership, although the board of directors, or the committee may award dividend equivalent rights on such units.

Shares Awarded during 2009

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, vesting 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, or $54,667 per quarter.

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 vesting 25% on March 31, 2010, 25% on June 30, 2010, 25% on September 30, 2010 and 25% on December 31, 2010. These shares were valued at $3.28 per share or $20,500 on the date of grant and were amortized over the vesting period, all of which was earned and recorded as stock based compensation for the year ended December 31, 2010.

Shares and Options Awarded during 2010

On September 16, 2010, the Company agreed to pay Mr. K.P. 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 vesting 50% on March 10, 2011 and 50% on September 10, 2011. These shares were valued at $3.12 per share or $19,500 on the date of grant and were amortized over the vesting period, or $4,875 per quarter.

F-42

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 Company estimated the fair value of option granted, estimated on the date of grant, using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	October 5, 2010

Expected life (year)		5.00

Expected volatility		187.00	%

Risk-free interest rate		1.21	%

Expected annual rate of quarterly dividends		0.00	%

Expected volatility is based on historical volatility for the Company’s common stock. The Company currently has no reason to believe future volatility over the expected life of the option is likely to differ materially from its historical volatility. 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 expected term of the share options or equity instruments. Expected dividend yield is based on our dividend history and anticipated dividend policy.

The fair value of share options or equity instruments granted, estimated on the date of grant, using the Black-Scholes option-pricing model, was $138,000. The Company recorded the entire amount as stock based compensation expense on the date of grant.

Shares Awarded during 2011

On January 25, 2011, the Company issued 55,378 shares of its common stock 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.

On December 15, 2011, the Company issued 10,000 and 50,000 shares of its common stock to two (2) of its outside directors for their 2011 services, respectively. These shares were valued at $0.27 per share, $2,700 and $13,500 or $16,200 in aggregate on the date of grant, which was recorded as stock based compensation.

On December 15, 2011, the Company issued 264,379 shares of its common stock to certain of its employees for their 2011 services of approximately $71,383, in lieu of cash, which was recorded as compensation expense in 2011.

On December 16, 2011, the Company agreed to pay Director Mr. Kam Ping Chan 6,250 shares of the Company’s restricted common stock in conjunction with his appointment to the Company's board of directors vesting 50% on June 30, 2012 and 50% on December 31, 2012, effectively January 1, 2012. 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 $0.2851 per share or $1,782 on the date of grant and are being amortized over the vesting period, or $446 per quarter in 2012.

On December 20, 2011, the Company issued 50,000 shares of its common stock to Mr. Tao Pang, one of its outside directors for his 2012 services, effectively January 1, 2012. These shares were valued at $0.28 per share, or $14,000 on the date of grant, which was deferred to 2012 to be recognized as stock based compensation. On May 4, 2012 those shares were cancelled upon Mr. Pang's resignation as a member of the board of directors. Mr. Pang was compensated in cash in lieu of common shares for such period served as a director.

2012 Amendment to the 2009 Stock Incentive Plan

At the 2012 Annual Meeting of Stockholders (the “2012 Annual Meeting”) of the Company held on July 13, 2012, the Company’s stockholders approved an amendment and restatement of the Company’s 2009 Stock Incentive Plan to increase the number of shares of the Company’s common stock available for issuance hereunder by 3,000,000 shares to 5,200,000 shares of the Company’s common stock.

Shares Awarded during 2012

On February 6, 2012, the Company issued 57,743 shares of its common stock to certain of its employees for their 2011 services of approximately $33,318, in lieu of cash, which was recorded as compensation expense and credited to common shares to be issued at December 31, 2011.

On February 8, 2012, the Company awarded 1,500,000 shares of its restricted common stock, par value $.001 per share, pursuant to the Amended and Restated 2009 Stock Incentive Plan, to Mr. Kexuan Yao, the Company’s Chief Executive Officer. The term of employment under the agreement is from January 1, 2012 (the “Effective Date”) until December 31, 2014, unless sooner terminated in accordance with the terms of the Employment Agreement.. These shares were valued at $0.499 per share or $748,500 on the date of grant and are amortized over the vesting period, or $62,375 per quarter.

F-43

On May 4, 2012, the Company agreed to pay Director Mr. Weiping Shen 50,000 shares of the Company’s restricted common stock in conjunction with his appointment to the Company's board of directors vesting 50% on September 30, 2012 and 50% on May 3, 2013. The restricted stock vests only if Mr. Shen 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 $0.69 per share or $34,500 on the date of grant and are being amortized over the vesting period, or $8,625 per quarter.

On July 30, 2012, the Company issued 561,640 shares of its common stock to certain of its employees for the first half year of their 2012 service of approximately $185,341, in lieu of cash, all of which was recorded as compensation expense for the quarter ended June 30, 2012.

On July 30, 2012, the Company granted 400,000 shares of its common stock to certain of its employees for the second half year of their 2012 service of approximately $132,000, in lieu of cash, which were recorded as compensation expense for the year ended December 31, 2012.

On November 12, 2012, the Company granted 980,991 shares of its common stock to certain of its employees for the second half year of their 2012 service of approximately $343,347, in lieu of cash, which were recorded as compensation expense for the quarter ended December 31, 2012.

Shares Awarded during 2013

The Company did not issue any shares of its common stock to its employees during the interim period ended March 31, 2013.

Summary of the Company’s Amended and Restated 2009 Stock Incentive Plan Activities

The table below summarizes the Company’s Amended and Restated 2009 Stock Incentive Plan activities:

	Number of Shares or Options			Fair Value at Date of Grant

Balance, December 31, 2011		698,507		$	1,151,945

Options - granted		-			-

Options - canceled		-			-

Shares - granted		3,550,374			1,447,006

Shares - canceled		(50,000	)		(14,000	)

Balance, December 31, 2012		4,198,881		$	2,614,951

Options - granted		-			-

Options - canceled		-			-

Shares - granted		-			-

Shares - canceled		(-	)		(-	)

Balance, March 31, 2013		4,198,881		$	2,614,951

Vested, March 31, 2013		3,319,714			2,175,451

Unvested, March 31, 2013		879,167		$	439,500

As of March 31, 2013, there were 1,001,119 shares of common stock remaining available for issuance under the Amended and Restated 2009 Stock Incentive Plan.

F-44

Note 16 – Concentrations and Credit Risk

Credit Risk Arising from Financial Instruments

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

As of March 31, 2013, 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.

Customers and Credit Concentrations

Customer concentrations and credit concentrations are as follows:

	Net Sales for the Three Months Ended						Accounts Receivable at
	March 31, 2013			March 31, 2012			March 31, 2013			December 31, 2012

Customer A	-		%		18.0	%		-	%		-	%

Customer B		-	%		16.3	%		-	%		-	%

Customer C		-	%		37.1	%		-	%		-	%

Customer D		54.6	%		-	%		93.1	%		-	%

Customer E		-	%		-	%		-	%		96.5	%

		54.6	%		71.4	%		93.1	%		96.5	%

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 and accounts payable concentration as follows:

	Net Purchases for the Three Months Ended						Accounts Payable at
	March 31, 2013			March 31 , 2012			March 31 , 2013			December 31, 2012

Vendor A		-	%		80.3	%		-	%		-	%

Vendor B		-	%		-	%		-	%		30.0	%

Vendor C		-	%		-	%		-	%		10.0	%

Vendor D		9.0	%		-	%		31.6	%		-	%

Vendor E		82.6	%		-	%		39.2	%		-	%

		91.6	%		80.3	%		70.8	%		40.0	%

Note 17 - Foreign Operations

Operations

Substantially all of the Company’s operations are carried out and all of its assets are located in the PRC, which may be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies since 1980, no assurance can be given that the PRC Government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC’s political, economic and social conditions; nor that the PRC government’s pursuit of economic reforms will be consistent or effective.

F-45

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.

Currency Convertibility Risk

Substantially all of the Company’s businesses are transacted in RMB, which is not freely convertible into foreign currencies. Under China’s Foreign Exchange Currency Regulation and Administration, the Company is permitted to exchange RMB for foreign currencies through banks authorized to conduct foreign exchange business. All foreign exchange transactions continue to take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other institutions requires submitting a payment application form together with invoices and signed contracts.

Foreign Currency Exchange Rate Risk

On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to U.S. Dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant volatility of the RMB against the U.S. Dollar.

Any significant revaluation of RMB may materially and adversely affect the cash flows, revenues, earnings and financial position reported in U.S. Dollar.

The Company had no foreign currency hedges in place to reduce such exposure for the interim period ended March 31, 2013 or 2012.

Dividends and Reserves

Under the laws of the PRC, net income after taxation can only be distributed as dividends after appropriation has been made for the following: (i) cumulative prior years’ losses, if any; (ii) allocations to the “Statutory Surplus Reserve” of at least 10% of net income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company’s registered capital; (iii) allocations of 5-10% of income after tax, as determined under PRC accounting rules and regulations, to the Company’s “Statutory Common Welfare Fund”, which is established for the purpose of providing employee facilities and other collective benefits to employees in PRC; and (iv) allocations to any discretionary surplus reserve, if approved by stockholders.

As of March 31, 2013, the Company had no Statutory Surplus Reserve and the Statutory Common Welfare Fund established and segregated in retained earnings.

Note 18 – 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.

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)

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

	PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements.	F-1

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	5

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	21

Item 4.	Controls and Procedures.	22

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings.	23

Item 1A.	Risk Factors.	23

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	23

Item 3.	Defaults Upon Senior Securities.	24

Item 4.	Mine Safety Disclosures.	24

Item 5.	Other Information.	24

Item 6.	Exhibits.	24

	For the Three Months Ended March 31,
	2013					2012					$ Change			% Change
Net revenues	$	14,343,077		100	%	$	49,284,191		100	%	$	(34,941,114	)		(71	) %
Cost of goods sold		13,698,412		95.5	%		47,824,094		97.0	%		(34,125,682	)		(71	) %
Gross profit		644,665		4.5	%		1,460,097		3.0	%		(815,432	)		(56	) %

Total operating expenses		1,695,638		11.8	%		1,687,925		3.4	%		7,713			0.5	%
Operating income (loss)		(1,050,973	)	(7.3	) %		(227,828	)	(0.5	) %		(823,145	)		361	%

●	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.

	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 and letters of credit (1)		14,346,281		14,346,281
Long-Term Debt Obligations(2)		1,004,128		0		1,004,128				-
Short-Term Loans Payable (3)		12,179,406		12,179,406
Capital Lease Obligations (4)		4,412,647		3,076,534		1,336,113		-		-
Operating Lease Obligations (5)		174,063		113,038		61,025		-		-
Total		32,116,525		29,715,259		2,401,266				-

	(1)	See Note 10 – Banker's acceptance notes payable and letters of credit in our unaudited consolidated financial statements included in this Report.
	(2)	See Note 11 – Long-Term Debt from our CEO in our unaudited consolidated financial statements included in this Report.
	(3)	See Note 9 – Loans Payable in our unaudited consolidated financial statements included in this Report.
	(4)	See Note 12 – Capital lease obligation in our unaudited consolidated financial statements included in this Report.
	(5)	See Note 14 – Operating lease in our unaudited consolidated financial statements included in this Report.

	China Armco Metals, Inc.

Date: May 15, 2013	By:	/s/ Kexuan Yao
		Kexuan Yao
		Chief Executive Officer
		(Duly Authorized Officer and Principal Executive Officer)

Date: May 15, 2013	By:	/s/ Fengtao Wen
		Fengtao Wen
		Chief Financial Officer
		(Duly Authorized Officer and Principal Financial Officer)