UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2013

or

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

For the transition period from __________________ to __________________________

Commission File Number: 001-34631

ARMCO METALS HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Nevada	26-0491904
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)
One Waters Park Drive, Suite 98, San Mateo, CA	94403
(Address of principal executive offices)	(Zip Code)

(650) 212-7620

(Registrant's telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

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

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

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

As of August 9, 2013, 23,890,538 shares of common stock of the registrant, par value $0.001, were outstanding.

 1

TABLE OF CONTENTS

		Page No.
	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements.	F-1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	4
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	22
Item 4.	Controls and Procedures.	22

	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings.	24
Item 1A.	Risk Factors.	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	24
Item 3.	Defaults Upon Senior Securities.	24
Item 4.	Mine Safety Disclosures.	24
Item 5.	Other Information.	24
Item 6.	Exhibits.	25

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

Throughout this report, or in other reports or registration statements filed from time to time with the Securities and Exchange Commission under the Securities Exchange Act of 1934, or under the Securities Act of 1933, as well as in documents we incorporate by reference or in press releases or oral statements made by our officers or representatives, we may make statements that express our opinions, expectations, or projections regarding future events or future results, in contrast with statements that reflect historical facts. These predictive statements, which we generally precede or accompany by such typical conditional words as “anticipate,” “intend,” “believe,” “estimate,” “plan,” “seek,” “project” or “expect,” or by the words “may,” “will,” or “should,” are intended to operate as “forward-looking statements” of the kind permitted by the Private Securities Litigation Reform Act of 1995, incorporated in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. That legislation protects such predictive statements by creating a “safe harbor” from liability in the event that a particular prediction does not turn out as anticipated.

While we always intend to express our best judgment when we make statements about what we believe will occur in the future, and although we base these statements on assumptions that we believe to be reasonable when made, these forward-looking statements are not a guarantee of performance, and you should not place undue reliance on such statements. Forward-looking statements are subject to many uncertainties and other variable circumstances, many of which are outside of our control, that could cause our actual results and experience to differ materially from those we thought would occur.

The following listing represents some, but not necessarily all, of the factors that may cause actual results to differ from those we may have anticipated or predicted:

● We operate in cyclical industries and we experience volatile demand for our products.

● Our ability to operate our scrap metal recycling facility efficiently and profitably.

● Our ability to obtain sufficient capital to fund a potential expansion of our scrap metal recycling facility.

● Our ability to establish adequate management, legal and financial controls in the United States and China.

● The availability to us of supplies of metal ore and scrap metal upon favorable terms.

● The availability of electricity to operate our scrap metal recycling facility.

● Fluctuations in raw material prices may affect our operating results as we may not be able to pass on cost increases to customers.

● The lack of various legal protections, which may be customarily contained in similar contracts among parties in the United States and are material to our operations, in certain agreements to which we are a party.

2 

● Our dependence on our key management personnel.

● Our potential inability to meet the filing requirements imposed by the securities laws in the United States.

● Our ineffective internal control over financial reporting

● The effect of changes resulting from the political and economic policies of the Chinese government on our assets and operations located in China.

● The limitation on our ability to receive and use our revenues effectively as a result of restrictions on currency exchange in China.

● The impact of future inflation in China on economic activities in China.

● Our ability to enforce our rights due to policies regarding the regulation of foreign investments in China.

● The restrictions imposed under regulations relating to offshore investment activities by Chinese residents, causing us increased administrative burdens and regulatory uncertainties, may limit or adversely affect our ability to complete any business combinations with our subsidiaries based in China.

● Our ability to comply with the United States Foreign Corrupt Practices Act which could subject us to penalties and other adverse consequences.

● The provisions of our articles of incorporation and by-laws that may delay or prevent a takeover may sometimes work against the best interests of our shareholders.

● Our controlling stockholders may take actions that conflict with the interests of our shareholders.

For a more detailed discussion of these and other factors that may affect our business, see the discussion in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012, and the discussion in Management’s Discussion and Analysis of Financial Condition and Results of Operations included herein. We caution that the factors described herein and other factors could cause our actual results of operations and financial condition to differ materially from those expressed in any forward-looking statements we make and that investors should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time, and it is not possible for us to predict all of such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

OTHER PERTINENT INFORMATION

Unless otherwise set forth to the contrary, when used in this report the terms the “Company,” “we,” “us,” “ours,” and similar terms refers to Armco Metals Holdings, Inc. (formerly known as China Armco Metals, Inc.), a Nevada corporation, and our subsidiaries, the term “MT” refers to metric tons, and the term “Recycling Facility” refers to our metal recycling facility located in the Banqiao Industrial Zone, part of Lianyungang Economic Development Zone in the Jiangsu province of China.

The information which appears on our web site at www.armcometals.com is not part of this report.

3 

Armco Metals Holdings, Inc.

June 30, 2013 and 2012

Index to the Consolidated Financial Statements

Contents	Page(s)
Consolidated Balance Sheets at June 30, 2013 (Unaudited) and December 31, 2012	F-2
Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months and Six Months Ended June 30, 2013 and 2012 (Unaudited)	F-3
Consolidated Statement of Stockholders’ Equity for the Period Ended June 30, 2013 (Unaudited)	F-4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012 (Unaudited)	F-5
Notes to the Consolidated Financial Statements (Unaudited)	F-6

F-1 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

ARMCO METALS HOLDINGS, INC

(FORMERLY CHINA ARMCO METALS, INC.)

CONSOLIDATED BALANCE SHEETS

	June 30, 2013			December 31, 2012
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash	$	1,156,813		$	1,367,171
Pledged deposits		10,209,744			4,590,829
Marketable securities		802,035			1,213,641
Bank acceptance notes receivable		1,140,647			7,926
Accounts receivable, net		9,375,065			15,699,390
Inventories		21,359,682			13,378,445
Advance on purchases		2,325,010			2,238,652
Prepayments and other current assets		1,155,975			453,299
Total Current Assets		47,524,971			38,949,353
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment		44,365,365			43,319,218
Accumulated depreciation		(7,840,159	)		(6,284,162	)
PROPERTY, PLANT AND EQUIPMENT, net		36,525,206			37,035,056
LAND USE RIGHTS
Land use rights		6,607,726			6,473,761
Accumulated amortization		(356,848	)		(260,897	)
LAND USE RIGHTS, net		6,250,878			6,212,864
Total Assets	$	90,301,055		$	82,197,273
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Loans payable	$	15,783,650		$	19,109,930
Banker's acceptance notes payable and letters of credit		16,179,397			8,624,734
Current maturities of capital lease obligation		3,018,616			2,615,296
Accounts payable		5,066,255			1,141,583
Advances received from Chairman and CEO		1,440,677			-
Customer deposits		285,886			1,577,194
Corporate income tax payable		374,459			407,621
Derivative warrant liability		10,179			306,708
Value added tax and other taxes payable		1,298,091			2,504,677
Accrued expenses and other current liabilities		1,046,541			2,355,903
Total Current Liabilities		44,503,751			38,643,646
LONG-TERM LIABILITIES
Capital lease obligation, net of current maturities		1,121,395			1,749,955
Long-term debt - CEO		1,019,302			-
Total Long-Term Liabilities		2,140,697			1,749,955
Total Liabilities		46,644,448			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, 24,593,659 and 20,319,698 shares issued and outstanding, respectively		24,594			20,320
Additional paid-in capital		33,037,171			31,542,083
Retained earnings		6,614,985			6,756,699
Accumulated other comprehensive income (loss):
Change in unrealized gain on marketable securities		(411,606	)		-
Foreign currency translation gain		4,391,463			3,484,570
Total Stockholders' Equity		43,656,607			41,803,672
Total Liabilities and Stockholders' Equity	$	90,301,055		$	82,197,273

 See accompanying notes to the consolidated financial statements.

F-2

ARMCO METALS HOLDINGS, INC

(FORMERLY CHINA ARMCO METALS, INC.)

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

	For the Six Months Ended June 30, 2013			For theThree Months Ended June 30, 2013			For the Six Months Ended June 30, 2012			For the Three Months Ended June 30, 2012
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
NET REVENUES	$	42,027,253		$	27,684,176		$	53,578,925		$	4,294,734
COST OF GOODS SOLD
Cost of goods sold		38,549,274			24,850,862			51,393,910			3,569,816
Lower of cost or market adjustment		481,925			481,925			-			-
Total cost of goods sold		39,031,199			25,332,787			51,393,910			3,569,816
GROSS PROFIT		2,996,054			2,351,389			2,185,015			724,918
OPERATING EXPENSES:
Selling expenses		89,686			60,460			269,352			138,829
Professional fees		316,985			120,488			105,934			89,222
General and administrative expenses		1,722,671			675,977			2,184,456			1,140,990
Operating cost of idle manufacturing facility		815,639			392,418			1,061,821			564,597
Total operating expenses		2,944,981			1,249,343			3,621,563			1,933,638
INCOME(LOSS) FROM OPERATIONS		51,073			1,102,046			(1,436,548	)		(1,208,720	)
OTHER (INCOME) EXPENSE:
Interest income		(46,861	)		(44,136	)		(44,173	)		(43,121	)
Interest expense		1,111,683			382,311			1,211,302			424,790
Foreign currency transaction (gain) loss - marketable securities		-			-			61,995			26,442
Impairment other than temporary - marketable securities		-			-			386,941			-
Change in fair value of derivative liability		(920,338	)		(304,392	)		129			(420	)
Loan guarantee expense		22,833			10,333			30,964			14,297
Other (income) expense		(36,218	)		39,678			130,848			11,041
Total other (income) expense		131,099			83,794			1,778,006			433,029
INCOME (LOSS) BEFORE INCOME TAXES PROVISION		(80,026)			1,018,252			(3,214,554	)		(1,641,749	)
INCOME TAX PROVISION		61,688			70,198			151,042			63,639
INCOME (LOSS) FROM CONTINUING OPERATIONS		(141,714	)		948,054			(3,365,596	)		(1,705,388	)
NET INCOME ( LOSS)		(141,714	)		948,054			(3,365,596	)		(1,705,388	)
OTHER COMPREHENSIVE INCOME (LOSS):
Change in unrealized income (loss) of marketable securities		(411,606	)		(417,105	)		797			-
Foreign currency translation gain (loss)		906,893			1,146,411			254,736			17,270
COMPREHENSIVE INCOME (LOSS)	$	353,573		$	1,677,360		$	(3,110,063	)	$	(1,688,118	)
NET  INCOME (LOSS) PER COMMON SHARE - BASIC AND DILUTED:
Net Income (loss) per common share - basic and diluted	$	(0.01	)	$	0.04		$	(0.19	)	$	(0.09	)
Weighted Average Common Shares Outstanding - basic and diluted		23,974,603			23,974,603			17,561,985			18,455,833

See accompanying notes to the consolidated financial statements.                                

F-3

ARMCO METALS HOLDINGS, INC

(FORMERLY CHINA ARMCO METALS, INC.)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

For the Period Ended June 30, 2013

(Unaudited)

	Common Stock, Par Value $0.001												Accumulated Other Comprehensive Income (Loss)
	Number of Shares			Amount			Additional Paid-in Capital			Retained Earnings			Change in Unrealized Loss on Marketable Securities			Foreign Currency Translation Gain (Loss)		Total Stockholders' Equity
Balance, December 31, 2010		14,840,948		$	14,841		$	28,966,596		$	12,711,039		$	(506,278	)	$	1,643,567	$	42,829,765
Loan guarantee services received and shares vested from common shares issued to Chaoyang Steel on June 11, 2010 for 5 year loan guarantee services expiring June 30, 2016		33,333			33			89,633											89,666
Issuance of common stock to employees pursuant to 2009 Stock Incentive Plan for services valued at $3.38 per share granted on October 6, 2010		55,378			55			187,125											187,180
Issuance of common stock to HCI for public relation services for first quarter 2011		10,800			11			29,040											29,051
Issuance of common shares to an employee for future services		10,000			10			27,390											27,400
Issuance of common shares to an employee for future services					-			(27,400	)										(27,400	)
Loan guarantee services received and shares vested from common shares issued to Chaoyang Steel on June 11, 2010 for 5 year loan guarantee services expiring June 30, 2016		33,333			34			45,299											45,333
Issuance of common stock to HCI for public relation services for second quarter 2011		10,800			10			14,678											14,688
Loan guarantee services received and shares vested from common shares issued to Chaoyang Steel on June 11, 2010 for 5 year loan guarantee services expiring June 30, 2016		33,333			33			13,634											13,667
Issuance of common shares for conversion of accrued expenses-Director cash compensation		17,371			18			23,742											23,760
Issuance of common stock to HCI for public relation services for 3rd quarter 2011		10,800			10			4,418											4,428
Loan guarantee services received and shares vested from common shares issued to Chaoyang Steel on June 11, 2010 for 5 year loan guarantee services expiring June 30, 2016		33,333			34			9,366											9,400
Issuance of common stock to HCI for public relation services for 4th quarter 2011		7,200			7			2,146											2,153
Issuance of common stock to employees pursuant to 2009 Stock Incentive Plan for services valued at $0.27 per share granted on December 15, 2011		264,379			264			71,119											71,383
Issuance of common stock to Directors for 2011 services pursuant to 2009 Stock Incentive Plan for services valued at $0.27 per share granted on December 15, 2011		60,000			60			16,140											16,200
Amortization of deferred employee services								260,693											260,693
Comprehensive income (loss)
Net Loss											(3,345,004	)							(3,345,004	)
Change in unrealized loss on marketable securities														505,481					505,481
Foreign currency translation gain																	1,577,471		1,577,471
Total comprehensive income (loss)																			(1,262,052	)
Appropriation to statutory reserves																			-
Appropriation to employee welfare funds																			-
Dividends paid																			-
Dividends declared																			-
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 restricted stock to a Director pursuant to the 2009 Stock Incentive Plan for future services valuedat $0.28 per share granted on December 20, 2011																			-
Issuance of restricted stock to a Director pursuant to the 2009 Stock Incentive Plan for future services valued at $0.28 per share granted on December 20, 2011																			-
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 April 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
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			10,300											10,333
Issuance of common shares for consulting services to Broad Max Holding for service of one year starting from December 1, 2012		33,333			34			10,299											10,333
Issuance of restricted stock to a Director for future services valued at $0.389 per share granted on May 3, 2013		50,000			50			19,400											19,450
Issuance of restricted stock to a Director for future services valued at $0.389 per share granted on May 3, 2013								(19,450	)										(19,450	)
Issuance of restricted stock to a Director pursuant to the 2009 Stock Incentive Plan for future services valued at $0.3301 per share granted on May 2, 2013		6,250			6			2,057											2,063
Issuance of restricted stock to a Director pursuant to the 2009 Stock Incentive Plan for future services valued at $0.3301 per share granted on May 2, 2013								(2,063	)										(2,063	)
Amortization of deferred employee services								140,524											140,524
Comprehensive income (loss)
Net Loss											(141,714	)							(141,714)
Change in unrealized loss on marketable securities														(411,606	)				(411,606	)
Foreign currency translation gain																	906,893		906,893
Total comprehensive income (loss)																			353,573
Balance, June 30, 2013		24,593,659		$	24,594		$	33,037,171		$	6,614,985		$	(411,606	)	$	4,391,463	$	43,656,607

 See accompanying notes to the consolidated financial statements.    

F-4

 

ARMCO METALS HOLDINGS, INC

(FORMERLY CHINA ARMCO METALS, INC.)

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Six Months			For the Six Months
	Ended			Ended
	June 30, 2013			June 30, 2012
	(Unaudited)			(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(141,714)		$	(3,365,596	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Depreciation expense		1,432,247			1,417,754
Amortization expense		90,552			24,861
Change in fair value of derivative liability		(920,338	)		129
(Gain) loss from foreign currency exchange rate change on marketable securities		-			61,995
Impairment other than temporary - marketable securities		-			386,941
Stock based compensation		501,815			506,926
Changes in operating assets and liabilities:		-
Bank acceptance notes receivable		(1,132,558	)		-
Accounts receivable		6,640,189			(29,284	)
Inventories		(7,689,157	)		19,814,593
Advance on purchases		(40,034	)		(814,011	)
Prepayments and other current assets		(761,181	)		-
Bank acceptance notes payable		-			580,859
Accounts payable		3,883,794			(17,569,656	)
Customer deposits		(1,323,944	)		(5,152,574	)
Taxes payable		(1,291,579	)		297,140
Advance for Stock Subscription		(80,000	)		-
Accrued expenses and other current liabilities		(1,246,756	)		(1,112,164	)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		(2,078,664	)		(4,952,087	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from release of pledged deposits		5,517,104			12,163,902
Payment made towards pledged deposits		(11,041,193	)		(13,665,517	)
(Purchase) disposal of property, plant and equipment		(165,656	)		(1,343,721	)
NET CASH USED IN INVESTING ACTIVITIES		(5,689,745	)		(2,845,336	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans payable		20,909,692			51,324,318
Repayment of loans payable		(24,503,446	)		(45,456,352	)
Banker's acceptance notes payable		7,376,187			3,167,414
Repayment of capital lease obligation		(315,572	)		(1,073,817	)
Advances from (repayment to) Chairman and CEO		2,153,815			(306,762	)
Proceeds from Related Party Loan		1,019,302			-
Proceeds from sales of common stock		1,621,356			-
NET CASH PROVIDED BY FINANCING ACTIVITIES		8,261,334			7,654,801
EFFECT OF EXCHANGE RATE CHANGES ON CASH		(703,283	)		(20,794	)
NET CHANGE IN CASH		(210,358	)		(163,417	)
Cash at beginning of the period		1,367,171			1,042,591
Cash at end of the period	$	1,156,813		$	879,174
		-
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Interest paid	$	1,211,724		$	1,256,282
Income tax paid	$	7,157		$	-
NON CASH FINANCING AND INVESTING ACTIVITIES:
Accrued director cash compensation paid in common shares in lieu of cash	$	-		$	-
Accrued compensation paid in common shares in lieu of cash	$	-		$	-
Advance payments used towards construction in progress and land use rights	$	-		$	-
Common shares issued for conversion of advances from Chairmand and CEO	$	-		$	-

See accompanying notes to the consolidated financial statements. 

F-5

Armco Metals Holdings, Inc.

(Formerly China Armco Metals, Inc.)

June 30, 2013 and 2012

Notes to the Consolidated Financial Statements

(Unaudited)

Note 1 – Organization and Operations

Armco Metals Holdings, Inc. (formerly China Armco Metals, Inc. and 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).

On June 27, 2008, Cox Distributing amended its Articles of Incorporation, and changed its name to China Armco Metals, Inc. (“Armco Metals” ) 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.

On July 3, 2013, the Company changed its name from “China Armco Metals, Inc.” to “Armco Metals Holdings, Inc.”(“Armco Metals Holdings” or the “Company”).

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:

F-8

Level 1	Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level 2	Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
Level 3	Pricing inputs that are generally observable inputs and not corroborated by market data.

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

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

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

The Company’s loans payable, banker’s acceptance notes payable, capital lease obligation, and long-term debt approximate the fair value of such instruments based upon management’s best estimate of interest rates that would be available to the Company for similar financial arrangements at June 30, 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.

F-9

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.

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.

F-10

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”).

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.

F-11

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.

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.

Leasehold improvements

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

Construction in progress represents direct costs of construction or the acquisition cost of long-lived assets. UnderU.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.

F-12

Banker’s Acceptance Notes Payable

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

Customer Deposits

Customer deposits primarily represent amounts received from customers for future delivery of products, 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 June 30, 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.

F-13

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

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

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.

F-14

Commitment and Contingencies

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

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

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”).

F-16

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.

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.

● 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.

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.

F-17

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.

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 June 30, 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).

F-18

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

The financial records of the Company's Chinese operating subsidiaries are maintained in their local currency, the Renminbi (“RMB”), which is the functional currency. Assets and liabilities are translated from the local currency into the reporting currency, U.S. dollars, at the exchange rate prevailing at the balance sheet date. Revenues and expenses are translated at weighted average exchange rates for the period to approximate translation at the exchange rates prevailing at the dates those elements are recognized in the consolidated financial statements. Foreign currency translation gain (loss) resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining accumulated other comprehensive income in the consolidated statement of stockholders’ equity.

RMB is not a fully convertible currency. All foreign exchange transactions involving RMB must take place either through the People’s Bank of China (the “PBOC”) or other institutions authorized to buy and sell foreign exchange. The exchange rate adopted for the foreign exchange transactions are the rates of exchange quoted by the PBOC. Commencing July 21, 2005, China adopted a managed floating exchange rate regime based on market demand and supply with reference to a basket of currencies. The exchange rate of the US dollar against the RMB was adjusted from approximately RMB 8.28 per U.S. dollar to approximately RMB 8.11 per U.S. dollar on July 21, 2005. Since then, the PBOC administers and regulates the exchange rate of the U.S. dollar against the RMB taking into account demand and supply of RMB, as well as domestic and foreign economic and financial conditions.

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:

	June 30, 2013		December 31, 2012		June 30, 2012		December 31, 2011
Balance sheets		6.1807		6.3086		6.3143		6.3585
Statements of operations and comprehensive income (loss)		6.2437		6.3116		6.3141		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:

F-19

	Potentially Outstanding Dilutive Common Shares
	For the Interim Period Ended June 30, 2013		For the Interim Period Ended June 30, 2012
Stock Option Shares
An option 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 on January 11, 2013		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

Cash Flows Reporting

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

Subsequent Events

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

Recently Issued Accounting Pronouncements

In January 2013, the FASB issued ASU No. 2013-01, "Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities". This ASU clarifies that the scope of ASU No. 2011-11, "Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities." applies only to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in FASB Accounting Standards Codification or subject to a master netting arrangement or similar agreement. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013.

In February 2013, the FASB issued ASU No. 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income." The ASUadds new disclosure requirements for items reclassified out of accumulated other comprehensive income by component and their corresponding effect on net income. The ASU is effective for public entities for fiscal years beginning after December 15, 2013.

In February 2013, the Financial Accounting Standards Board, or FASB, issued ASU No. 2013-04, "Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for which the Total Amount of the Obligation Is Fixed at the Reporting Date." This ASU addresses the recognition, measurement, and disclosure of certain obligations resulting from joint and several arrangements including debt arrangements, other contractual obligations, and settled litigation and judicial rulings. The ASU is effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2013.

F-20

In March 2013, the FASB issued ASU No. 2013-05, "Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity." This ASU addresses the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. The guidance outlines the events when cumulative translation adjustments should be released into net income and is intended by FASB to eliminate some disparity in current accounting practice. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013.

In March 2013, the FASB issued ASU 2013-07, “Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting.” The amendments require an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. Liquidation is imminent when the likelihood is remote that the entity will return from liquidation and either (a) a plan for liquidation is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the plan will be blocked by other parties or (b) a plan for liquidation is being imposed by other forces (for example, involuntary bankruptcy). If a plan for liquidation was specified in the entity’s governing documents from the entity’s inception (for example, limited-life entities), the entity should apply the liquidation basis of accounting only if the approved plan for liquidation differs from the plan for liquidation that was specified at the entity’s inception. The amendments require financial statements prepared using the liquidation basis of accounting to present relevant information about an entity’s expected resources in liquidation by measuring and presenting assets at the amount of the expected cash proceeds from liquidation. The entity should include in its presentation of assets any items it had not previously recognized under U.S. GAAP but that it expects to either sell in liquidation or use in settling liabilities (for example, trademarks). The amendments are effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein. Entities should apply the requirements prospectively from the day that liquidation becomes imminent. Early adoption is permitted.

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

Note 3 – Pledged Deposits

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

Pledged deposits consisted of the following:

		June 30, 2013		December 31, 2012
Armco HK
Letters of credit	$	7,666	$	8,442
Sub-total – Armco HK		7,666		8,442
Renewable Metals
Bank acceptance notes payable (i)		5,343,866		475,541
Letters of credit (ii)		3,397,674		2,445,676
Deposit for capital lease obligation (iii)		485,382		475,541
Sub-total – Renewable Metals		9,226,922		3,396,758
Henan Armco
Letters of credit (iv)		624,872		1,185,629
Sub-total – Henan Armco		624,872		1,185,629
Armco Shanghai
Letter of Credit (v)		350,284		-
Sub-total – Armco Shanghai		350,284		-
	$	10,209,744	$	4,590,829

F-21

(i) $5,343,866 is to be released to the Company when the related banker’s acceptance notes payable mature ranging from August 28, 2013 through December 17, 2013.

(ii) $ 3,397,674 is to be released to the Company for payment toward fulfilled letters of credit when those letters of credit mature in August 2013.

(iii)	$485,382 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)	$9,426 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 August 15, 2013.

(v) $350,284 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 August 9, 2013.

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 consolidated statements of operations and comprehensive income (loss) for the year ended December 31, 2012.

As of June 30, 2013, the Company’s available for sale marketable securities were marked to market to its fair value of $802,035 and reported a $411,606 change in unrealized loss on marketable securities as other comprehensive income (loss) in its Stockholders’ Equity.

F-22

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							-			(411,606	)		(411,606	)
Balance, June 30, 2013	$	3,396,658	$	(2,366,941	)	$	183,924		$	(411,606	)	$	802,035

Note 5 – Accounts Receivable

Accounts receivable consisted of the following:

	June 30, 2013			December 31, 2012
Accounts receivable	$	9,375,065	*	$	15,742,540
Allowance for doubtful accounts		(-	)		(43,150	)
	$	9,375,065		$	15,699,390

* The Company collected all of accounts receivable balance through August 12, 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:

	June 30, 2013			December 31, 2012
Raw materials – scrap metal	$	6,103,542	*	$	5,371,867
Finished goods – processed scrap metal		13,503,819	*		2,517,948
Purchased merchandise for resale		1,752,321			5,488,630
	$	21,359,682		$	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 June 30, 2013 or December 31, 2012.

F-23

Slow-Moving or Obsolescence Markdowns

The Company recorded no inventory obsolescence adjustments for the interim period ended June 30, 2013 or 2012.

Lower of Cost or Market Adjustments

There was $486,837 and nil of lower of cost or market adjustments for the interim period ended June 30, 2013 or 2012.

Note 7 – Property, Plant and Equipment

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

	Estimated Useful Life (Years)			June 30, 2013			December 31, 2012
Buildings and leasehold improvements (i)	20			$	24,777,230		$	24,175,794
Construction in progress					4,654,709			4,560,340
Machinery and equipment	7				12,448,492			12,193,408
Vehicles	5				2,136,863			2,048,305
Office equipment	5	-	8		348,071			341,371
					44,365,365			43,319,218
Less accumulated depreciation (ii)					(7,840,159	)		(6,284,162	)
				$	36,525,206		$	37,035,056

(i)     Capitalized Interest

The Company did not capitalize any of interest to fixed assets for the interim period ended June 30, 2013 or 2012.

(ii)     Depreciation and Amortization Expense

Depreciation and amortization expense for the interim period ended June 30, 2013 and 2012 was $1,432,247 and $1,417,754, 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.

(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.

F-24

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 $2,640,478 at June 30, 2013 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.

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

	June 30, 2013			December 31, 2012
Renewable Metals
Land use right	$	2,501,384		$	2,450,671
Accumulated amortization		(291,694	)		(260,897	)
		2,209,690			2,189,774
Lianyungang Armco
Land use right		4,106,342			4,023,090
Accumulated amortization		(65,154	)		(-	)
		4,041,188			4,023,090
Total
Land use right		6,607,726			6,473,761
Accumulated amortization		(356,848	)		(260,897	)
	$	6,250,878		$	6,212,864

(i)     Amortization Expense

Amortization expense for the interim period ended June 30, 2013 and 2012 was $90,552 and $24,861, 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-25

Note 9 – Loans Payable

Loans payable consisted of the following:

	June 30, 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 payables 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 3.23% per annum, and are due from August 18, 2013 through August 26, 2013.		505,447		5,599,314
Sub-total - Armco HK		505,447		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%), $1,294,352 was repaid in August 2013, and the remaining balance is due December 5, 2013		3,235,879		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 7.39% per annum payable monthly, and are due from March 25, 2014 through May 21, 2014.		8,089,699		7,925,689
Sub-total – Renewable Metals		11,325,578		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; 67,115 was repaid in July 2013and the remaining balance is due from September 6, 2013 through October 25, 2013.		1,185,208		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		161,794		-
Loan Payable to Industrial and Commercial Bank of China, collateralized by certain of Henan’s inventory, with interest at 6.5% per annum, whole balance was repaid on July 18, 2013		1,447,338			-
Temporary Short Term Loan, with no interest-bearing, and is due upon demand.		808,970		-
Sub-total – Henan Armco		3,603,310		244,401
Armco Shanghai
Loan Payable to Merchants Bank of China, was repaid on August 9, 2013		349,315		-
Sub-total – Armco Shanghai		349,315		-
	$	15,783,650	$	19,109,930

F-26

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

Banker’s acceptance notes payable consisted of the following:

	June 30, 2013		December 31, 2012
Renewable Metals
Banker’s acceptance notes payable maturing from August 28, 2013 through December 17, 2013	$	7,442,523	$	3,867,736
Letters of credit maturing on from August 15, 2013 through August 18, 2013, $4,853,819 was repaid on July 28, 2013		8,736,874		4,755,413
Henan Armco
Banker’s acceptance notes payable maturing June 27, 2013		-		1,585
	$	16,179,397	$	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 June 30, 2013 and December 31, 2012, the advance balance was $1,440,677 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.

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 June 30, 2013 and 2012 amounted to RMB 60,000 (equivalent to $9,708 and $9,503).

Note 12 – Capital Lease Obligation

Capital lease obligation consisted of the following:

	June 30, 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.	$	467,431		$	819,659
Less current maturities		(467,431	)		(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 RMB3,609,102 on the 15th of each quarter.		3,672,580			3,545,592
Less current maturities		(2,551,185	)		(1,795,637	)
Capital lease obligation, net of current maturities		1,121,395			1,749,955
Total capital lease obligation		4,140,011			4,365,251
Less current maturities		(3,018,616	)		(2,615,296	)
TOTAL CAPITAL LEASE OBLIGATION, net of current maturities	$	1,121,395		$	1,749,955

F-27

The future minimum payments under this capital lease obligation at June 30, 2013 were as follows:

Year ending December 31:
2013 (remainder)		2,235,368
2014		2,335,724
Total capital lease obligation payments		4,571,092
Less amounts representing interest		(431,081	)
Present value of total future capital lease obligation payments	$	4,140,011
Less current maturities of capital lease obligation		(3,018,616	)
Capital lease obligation, net of current maturities	$	1,121,395

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.

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.

F-28

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.

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

(a) 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.

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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.

(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:

	June 30, 2013			December 31, 2012
Expected life (year)		0.08			1.00
Expected volatility		57.00	%		75.00	%
Risk-free interest rate		0.02	%		0.19	%
Expected annual rate of quarterly dividends		0.00	%		0.00	%

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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)		920,338			920,338
Other comprehensive income (loss)		-			-
Balance, June 30, 2013	$	(10,179	)	$	(10,179	)

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 interim period ended June 30, 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 June 30, 2013 2008 warrants to purchase 12,180,210 shares of Company’s common stock remain outstanding.

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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										920,338					920,338	)
Derivative warrant at June 30, 2013		12,180,210		-			12,180,210			(10,179	)				(920,338	)

(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;

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● 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.

2010 Warrants Outstanding

As of June 30, 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 June 30, 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	$	7.50	$	-	$	-
Granted		-			-		-		-		-
Canceled for cashless exercise		(-	)		-		-		-		-
Exercised (Cashless)		(-	)		-		-		-		-
Exercised		(-	)		-		-		-		-
Expired		-			-		-		-		-
Balance, December 31, 2012		1,615,387		$	7.50	$	7.50	$	-	$	-
Granted		-			-		-		-		-
Canceled for cashless exercise		(-	)		-		-		-		-
Exercised (Cashless)		(-	)		-		-		-		-
Exercised		(-	)		-		-		-		-
Expired		-			-		-		-		-
Balance, June 30, 2013		1,615,387		$	7.50	$	7.50	$	-	$	-
Earned and exercisable, June 30, 2013		1,615,387		$	7.50	$	7.50	$	-	$	-
Unvested, June 30, 2013		-		$	-	$	-	$	-	$	-

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The following table summarizes information concerning outstanding and exercisable 2010 warrants as of June 30, 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		0.08	$	0.50		12,180,210		0.08	$	0.50
$	7.50				1,615,387		1.81	$	7.50		1,615,387		1.81	$	7.50
$	0.50	-	$7.50		13,795,597		0.28	$	1.32		13,795,597		0.28	$	1.32

Note 14 – Commitments and Contingencies

Litigation

The Company is a party to a lawsuit filed on March 29, 2013 by Albert Perron in the District Court for Clark Count, Nevada (Case No.: A-13-679151-C), which seeks a declaratory judgment, rescission, unspecified damages, equitable and injunctive relief, and attorney's fees. The complaint alleges that the directors of the Company breached their fiduciary duties to the Company by exceeding their authority under the Company's Amended and Restated 2009 Stock Incentive Plan, as further amended (the “Plan”), by issuing shares to Mr. Kexuan Yao that exceeded that allowed under the Plan.

On August 12, 2013, the Company and certain directors filed an answer to the complaint denying all the allegations of wrongdoing. The Company's position is that the shares at issue in this matter granted to Mr. Yao were authorized under the Plan. The Company and the directors intend to defend this matter vigorously.

Uncommitted Trade Credit Facilities

The Company entered into uncommitted trade credit facilities with certain financial institutions. Substantially all of the uncommitted trade credit facilities were guaranteed by Mr. Yao, the Company’s Chairman, Chief Executive Officer and principal stockholder.

The uncommitted trade credit facilities at June 30, 2013 were as follows:

	Date of Expiration	Total Facilities			Facilities Used		Facilities Available
Armco HK
RZB (Beijing) Branch (i)	February 28, 2014		15,000,000			-		15,000,000
Sub-total - Armco HK			15,000,000			-		15,000,000
Henan Armco
Bank of China (ii)	May 23, 2014		4,853,819			1,650,000		3,203,819
China CITIC Bank (iii)	May 31, 2014		6,471,759			-		6,471,759
Guangdong Development Bank Zhengzhou Branch (iv)	September 19, 2013		12,619,930			1,610,000		11,009,930
Sub-total – Henan Armco			23,945,508			3,260,000		20,685,508
Renewable Metals
Bank of China Lianyungang Branch (v)	December 27, 2015		8,089,699			8,089,699		-
Shanghai Pudong Development Bank (vi)	September 9, 2013		2,426,910			2,426,910		-
Bank of Communications Lianyungang Branch (vii)	August 15, 2013		11,649,166			6,795,347		4,853,819
Sub-total – Renewable Metals			22,165,775			17,311,956		4,853,819
		$	61,111,283		$	20,571,956	$	40,539,327
%				%

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(i) 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.

(ii) On June 8, 2013, Henan Armco obtained a RMB 30,000,000 (approximately $4.8 million) line of credit from Bank of China for issuance of letters of credit to finance the purchase of metal ore and scrap metal expiring May 23, 2014. The facility is secured by the guarantee provided by Renewable Metals 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.

(iii) On June 18, 2012, Henan Armco obtained a RMB 40,000,000 (approximately $6.4 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.

(iv) On September 19, 2012, Henan Armco obtained a RMB 78,000,000 (approximately $12.6 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.

(v) 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 rights, and guaranteed by Mr. Kexuan Yao, Ms. Yi Chu, and Henan Armco, respectively.

(vi) 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.

(vii) On July 1, 2011, Renewable Metals obtained a RMB 72,000,000 (approximately $11.6 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:

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a. 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.

b. 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.

c. 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.

d. 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

e. 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.

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

Year ending December 31:
2013 (remainder)		23,052
	$	23,052

(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)		53,097
2014		61,947
	$	115,044

(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.

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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 June 30, 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.

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.

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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.

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.

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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.

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.

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.

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.

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.

33,333 common shares earned for the quarter ended June 30, 2013 were valued at $0.31 per share, or $10,333, which was recorded as loan guarantee expense.

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.

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.

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.

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.

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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.

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.

33,333 common shares earned for the quarter ended June 30, 2013 were valued at $0.31 per share, or $10,333, which was recorded as consulting fees.

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).

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.

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.

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.

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 and recorded as facility leasing expenses.

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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.

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.

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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 , 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.

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.

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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.

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.

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2013 Amendment to the 2009 Stock Incentive Plan

At the 2013 Annual Meeting of Stockholders (the “2013 Annual Meeting”) of the Company held on July 2, 2013, 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 8,200,000 shares of the Company’s common stock.

Shares Awarded during 2013

On May 2, 2013, 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, 2013 and 50% on December 31, 2013, effectively January 1, 2013.  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 $0.3301 per share or $2,063 on the date of grant and are being amortized over the vesting period, or $516 per quarter in 2013.

On May 3, 2013, 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, 2013 and 50% on May 3, 2014.  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 $0.389 per share or $19,450 on the date of grant and are being amortized over the vesting period, or $4,863 per quarter.

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			1,477,006
Shares - canceled		(50,000	)		(14,000	)
Balance, December 31, 2012		4,198,881		$	2,614,951
Options - granted		-			-
Options - canceled		-			-
Shares - granted		56,250			21,513
Shares - canceled		(-	)		(-	)
Balance, June 30, 2013		4,255,131		$	2,636,464
Vested, June 30, 2013		3,460,340			2,244,975
Unvested, June 30, 2013		794,791		$	391,489

As of June 30, 2013, there were 3,944,869 shares of common stock remaining available for issuance under the Amended and Restated 2009 Stock Incentive Plan.

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.

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As of June 30, 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 Interim Period Ended						Accounts Receivable at
	June 30, 2013			June 30, 2012			June 30, 2013			December 31, 2012
Customer A		-	%		16.3	%		-	%		-	%
Customer B		-	%		14.8	%		-	%		-	%
Customer C		-	%		33.7	%		-	%		-	%
Customer D		-	%		10.8	%		-	%		-	%
Customer E		13.8	%		-	%		37.0	%		-	%
Customer F		-	%		-	%		31.0	%		-	%
Customer G		-	%		-	%		18.4	%		-	%
Customer H		-	%		-	%		-	%		96.5	%
Customer I		35.6	%		-	%		-	%		-	%
		49.4	%		75.6	%		86.4	%		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 Interim Period Ended						Accounts Payable at
	June 30, 2013			June 30, 2012			June 30, 2013			December 31, 2012
Vendor A		-	%		51.0	%		-	%		-	%
Vendor B		-	%		-	%		-	%		30.0	%
Vendor C		-	%		-	%		-	%		10.0	%
Vendor D		75.3	%		-	%		-	%		-	%
Vendor E		-	%		-	%		47.8	%		-	%
Vendor F		-	%		-	%		11.2	%		-	%
		75.3	%		51.0	%		59.0	%		40.0	%

F-45

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.

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 June 30, 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 June 30, 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.

F-46

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

The following discussion should be read in conjunction with the information contained in our unaudited consolidated financial statements and the notes thereto appearing elsewhere herein. The unaudited interim consolidated financial statements furnished in this report reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of the results for the full year. These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2012 and notes thereto and the Management’s Discussion and Analysis set forth in our Annual Report on Form 10-K for the year ended December 31, 2012, as amended, (the “Form 10-K”). The year ended December 31, 2012 is referred to as “2012,” the year ended December 31, 2011 is referred to as “2011,” and the coming year which will end December 31, 2013 is referred to as “2013.” 

OVERVIEW OF OUR PERFORMANCE AND OPERATIONS

Our Business and Recent Developments

We import, sell and distribute to the metal refinery industry in the People’s Republic of China a variety of metal ore, including iron, chrome, nickel, copper and manganese ore as well as non-ferrous metals and coal. We obtain raw materials from suppliers in Brazil, India, South America, Oman, Turkey, Nigeria, Indonesia, and Philippines. We also recycle scrap metal at our Recycling Facility and sell the recycled products to steel mills in China for their use in the production of recycled steel.

In the second quarter of 2013, domestic steel industry in China lost momentum from the first quarter due to the continuing oversupply accompanying with the slowdown of the economy.  China’s economy growth decreased to 7.5 percent in the second quarter of 2013 from 7.7 percent in the first three months, as the government deliberately tamed the pace to avoid bubbles. China’s iron and steel industry was profitable for the first half overall but reported a loss in June, the first monthly deficit shown in this year. Steel prices have been dropping since February. At the end of June, the price of steel products fell by 6.45 percent compared with the beginning of this year, and down by 14.7 percent year on year, according to China Iron and Steel Association (CISA). Attributable to the declining steel market condition scrap steels also experienced decline on demand and price in the second quarter. In China’s metal ores market, the less competitive upstream businesses in the Chinese steel sector worsened the plight, as the iron ore monopolized by foreign countries declined much slower than the domestic steel price. Chrome and manganese ore also declined slightly while downstream products experienced a much larger decline since February due to supply domination by large foreign suppliers. Meanwhile, China’s output and inventory of steel products continued to increase on a year over year base, according to CISA.  Consequently, we experienced a significant decline in iron ore sales which was partially offset by increases in our sales of chrome and manganese ore. Our scrap recycling business, however, continually saw an increase in revenue compared to same period of last year mainly attributable to the improvement in our recycling business operation.

We continue to refine our business model in response to fluctuations in market prices.  We seek to secure longer term supply contracts in response to known opportunities rather than sell goods purchased at spot prices. We plan to negotiate transaction-specific terms with our customers to better manage risk and ensure an acceptable profit margin.  While this process can limit certain trading opportunities, we believe that it will enhance our competitive position when the ore market recovers. We have developed pre-selling model to supplement our cash flow. We continued to develop our new “Commodity Financing” model. We are also evaluating other potential methods such as hedging that can help us to manage market risks.

We formally commenced the operation of our scrap metal recycling facility in the Banqiao Industrial Zone of Lianyungang Economic Development Zone in the Jiangsu province of China (the “Recycling Facility”) late in the third quarter of 2010.    The Recycling Facility recycles automobiles, machinery, building materials, dismantled ships and various other scrap metals.  We sell and distribute the recycled scrap metal to the metal refinery industry in China utilizing our existing network of metal ore customers while continuing to seek new customers. During the second quarter of 2013, our net revenue in the scrap metal recycling business increased significantly to $18.8 million from $2.9 million in the second quarter of 2012.  Our production increased by 383% to 52,749 metric tons (“MT”) from 10,915 MT in the second quarter of 2012.   The significant increase in sales and production in our scrap metal recycling business was primarily a result of our improvement on overall operation including material acquisition, production and sales, and as well as our expanded customer base. Consequently, for the second quarter of 2013, our scrap metal business sold approximately 42,592 MT of scrap metals, generating approximately $ 18.8 million of revenue and $1.9 million of gross profit; for the first half of 2013, our scrap metal business sold approximately 65,593 MT of scrap metals, generating approximately $27.8 million of revenue and $2.7 million of gross profit.

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We continue to believe that our recycling business will become a strong drive in our Company’s growth as natural resources continue to be depleted and larger amounts of unprocessed scrap metal become available as a result of increases in consumer demand.  We also believe that the profit margin of our recycling business will gradually stabilize as we gain more experience in operating our Recycling Facility, marketing our products, and establishing our reputation and presence in the recycled scrap metal industry. We have conducted a series of tests and analysis to improve our cost control and eventually implement precise management at our Recycling Facility. We have also developed strategies to expand our sources for raw materials and establish a local supply chain to increase and stabilize the availability of raw materials near our recycling operation. In addition, as an effort to improve our operation and profitability of the recycling business, we strived to obtain a series of qualifications from Chinese government. We expect to continue to expand our overseas supply channels through potential business cooperation with suppliers in Japan and the United States. We also continue to expand our customer base with our sales increase in recycling business.

We invested approximately $50 million in the aggregate to acquire land use rights, construct the Recycling Facility and purchase equipment at the Recycling Facility in 2009 and 2010.  These capital expenditures were funded from a portion of the net proceeds we received from our equity and debt offerings and vendor financing.  During the second quarter of 2013, we continued to utilize bank facilities to finance our operations and expansions. We maintain seven bank facilities, which provide for the issuance of commercial lines of credit for letters of credit in the aggregate amount of $61 million, of which approximately $ 40 million is available to us at June 30, 2013.

Our Performance

For the three months ended June 30, 2013, our net revenues increased approximately 545%, and for six months ended June 30, 2013, our net revenues decreased approximately 22%, respectively, over the comparable periods in 2012. Our gross profit margin for the three and six months ended June 30, 2013 were 8.5% and 7.1%, respectively compared to 17% and 4% during the comparable prior year periods. The revenue increase for the second quarter of 2013 was mainly due to the significant increase in our metal recycling business sales. The revenues decrease for six months ended June 30, 2013 was primarily attributable to the significant decrease in sales of metal ore trading business in the first quarter of 2013. The margin decrease for the second quarter of 2013 was primarily due to an abnormally high margin in the same period of last year that was caused by an adjustment as a result of invoicing changes. By business segment, our trading business gross profit margin decreased for the six months ended June 30, 2013 to 2 % compared to 5% during the comparable prior year period; our recycling business gross profit margin increased for the three and six months ended June 30, 2013 to 11% and 9.7%, respectively, compared to (-0.47%) and 1% during the same period of 2012. Our recycling business contributed 66% and 90% of net our revenue and gross profit, respectively, for six months ended June 30, 2013, and continued to be the major sources of our net revenue and gross profit.

As noted above, our recycling business saw a gross profit margin of 11% and 9.7% for the second quarter and first half of 2013, respectively, which represents a sharp increase from (-0.47%) and 1% of gross profit margin in this business for the same periods in 2012. We believe that the increases in gross profit margin were primarily due to the significant improvement of our recycling operations, specifically improvement on production process, cost control, supply chain and customer base.

We had a net income of $0.95 million and net loss of $0.14 million for the three and six months ended June 30, 2013, respectively, compared to our net loss of $1.7 million and $3.4 million over the comparable periods in 2012.  The net income and loss were further discussed under our “Results of Operations” section.

5

Our Outlook

As noted above, while overall profits of China steel industry had improved over the first quarter of 2013 the momentum was losing in the second quarter, in the short term, the market remains precarious and weak due to excessive supply and economy slowdown; in the middle and long term, we believe that the low-income housing construction, on-going urbanization and increasing domestic consumption in China will continue to support the growth of the steel industry. Worldwide, with the abatement of the Eurozone crisis and recovery in the U.S. economy, we expect global steel demand will improve gradually in line with the recovery in the user industries, automotive and residential construction.  In the long run, we also expect our recycling business to benefit substantially from the measures and policies to be implemented gradually by the Chinese government according to its 12th Five Year Plan (2011-2015).  Under this plan, China intends to restructure its iron and steel industry to be more energy efficient and have increased environmental protection by adopting and developing the most advanced technology in the world.

Metal Ore Trading.   The metal ore prices rebounded in the fourth quarter of 2012 and began declining in the middle of first quarter of 2013. The price drops was attributed to flagging domestic demands for metal ore products amid poor economic conditions at home and abroad. We expect that the metal ore market will continue to witness weak performances in the short term. To manage market risks, we significantly decreased new purchase of metal ore and delivered sales orders for our ore inventories in second quarter. Our trading business sales dropped drastically by 66% to $14.2 million for the six months ended June 30, 2013 compared to $42.0 million in the same period in 2012. For the three months ended June 30, 2013, our trading business sales increased by 539% to $8.9 million compared to $1.4 million in the comparable period of 2012 due to the sales increased for chrome ore and manganese ore delivered in the quarter. We continued to firm our business relationship with worldwide suppliers and stabilize our supply capacity. We believe that our effort to build our supply capacity will benefit us in the long term and strengthen our market position in the industry in the PRC. Moreover, we continued to develop our new “Commodity Financing” model and expect to make some major progresses which we have obtained support from several banks.

Scrap Metal Recycling. Both the net revenue and gross profit margin for our recycling business increased significantly compared to same period of prior year due to the factors described above. The gross profit margin for our recycling business increased significantly to 11% and 9.7%, respectively, for the three months and six months ended June, 30, 2013 compared to (-0.47%) and 1%, respectively, for the same periods of 2012 due to the improvement of our recycling business operation, while the net revenues generating in the second quarter and first half of 2013 increased approximately 548% and 139%, respectively, compared to the same periods of 2012. Through the past two years’ operation, we have achieved many major goals such as optimizing production process, improving cost control and management, developing and streamlining supply chain, establishing long term strategic partnership with key clients, obtaining various qualifications and licenses, and building our brand in the industry. Recently in the second quarter we have increased our production of recycled nonferrous metal scraps which is expected to further improve our recycling business profitability. We believe that we will benefit from the Chinese governmental mandates to increase the use of scrap metal steel as it encourages the use of scrap as opposed to the use of iron ore to satisfy the demand for steel products per China’s Five Year Plan and related national policies.  We intend to devote a significant amount of our resources towards the improvement of our operations and if appropriate, its expansion. At the same time, we will continue to pursue our strategy to create a local network of raw material suppliers for our Recycling Facility and expand our oversea supply channels. We also have expanded our customer base with sales increase.

While we believe our business is well positioned to grow in the coming years, we will need to continue our efforts to provide capital liquidity to support that growth, although we can offer no assurances that we can acquire such capital on terms acceptable to us.

6

RESULTS OF OPERATIONS

The table below summarizes the consolidated operating results for the three and six months ended June 30, 2013 and 2012.

	For the Six Months Ended June 30,									For the Three Months Ended June 30,
	2013				2012					2013				2012
Revenues	$	42,027,253			$	53,578,925				$	27,684,176			$	4,294,734
Cost of revenues		38,549,274	92	%		51,393,910		96	%		24,850,862	90	%		3,569,816		83	%
Lower of cost or market adjustment		481,925	1	%							481,925	2	%
Gross profit		2,996,054	7	%		2,185,015		4	%		2,351,389	8	%		724,918		17	%
Total operating expenses		2,944,981	7.0	%		3,621,563		6.8	%		1,249,343	4.5	%		1,933,638		45.0	%
Operating (loss) income		51,073	0.1	%		(1,436,548	)	(2.7	)%		1,102,046	4.0	%		(1,208,720	)	(28.1	)%

Net Revenues

Net revenues for the three and six months ended June 30, 2013, were $27.7 million  and $42.0 million, respectively, representing an increase of $23.4 million and a decrease of $11.6 million over the comparable periods in 2012.  The increase in net revenues for the second quarter is mainly due to a $15.9 million increase in sales of scrap metals, a $3.8 million increase in sales of chrome ore, a $1.9 million increase in sales of manganese ore, and $0.7 million increase in sales of Titanium. The decrease in net revenues for the six month period ended June 30, 2013 is primarily due to a $34.7 million decrease in sales of iron ore, partially offset by a $16.9 million increase in sales of scrap metals, a $3.2 million increase in sales of manganese ore, and a $1.2 million increase in sales of chromium ore.  The type of products we buy and sell are subject to change and are dependent upon availability and the demands of our customers.

Cost of Goods Sold

Cost of goods sold for the three months ended June 30, 2013 was $24.8 million, representing an increase of $21.3 million and a gross profit margin of 8.5%, compared to $3.6 million and a gross profit margin of 17%, in the same period in 2012.  In the second quarter of 2013, a $0.5 million inventory of cost or market adjustment was made as a result of a revaluation on scrap metals inventory. The profit margin decrease in the quarter was primarily due to an abnormally high margin in the same period of last year that was caused by an adjustment as a result of invoicing changes. Cost of goods sold for the six months ended June 30, 2013 was $38.5 million, representing a decrease of $12.8 million, a gross profit margin of 7%, compared to $51.4 million and a gross profit margin of 4%, in the same period in 2012.  This profit margin increase was primarily due to increase in profit margin in sales of scrap metal compared to prior period as a result of improved recycling business operation. The gross margin for our scrap metal recycling business increased for the six month period to 9.7% compared to 1.1% for the same period of 2012.

Total Operating Expenses

Operating expenses for the three and six months ended June 30, 2013 were $1.2 million and $2.9 million, representing decrease of $0.7 million for each period, compared to the three and six months ended June 30, 2012, respectively.

For the three months ended June 30, 2013, the decrease in operating expenses was primarily due to a decrease in general and administrative expenses of $0.47 million, a decrease in operating cost of idle manufacturing facility of $0.17 million as a result of the higher production level, and a decrease in selling expenses of $0.08 million. These decreases were partially offset by an increase in professional fees of $0.03 million.

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For the six months ended June 30, 2013, the decrease in operating expenses was primarily due to a decrease in general and administrative expenses of $0.46 million primarily resulting from decreased non-cash shares compensation to management and employees of $0.31 million, a decrease in operating cost of idle manufacturing facility of $0.25 million resulting from increased production, and a decrease in selling expenses of $0.27 million. These decreases were partially offset by an increase in professional fees of $0.21 million, including legal fees, audit fees, investor relations, website design and SEC filing services. .

Other (Income) expense

Total other expense for the three and six months ended June 30, 2013 were $0.08 million and $0.13 million, respectively. During the three and six months ended June 30, 2012, we had other expense of $0.43 million and $1.78 million, respectively.

For the three months ended June 30, 2013, interest expenses decreased slightly to$0.38 million from $0.42 million compared to the comparative period in 2012. During the second quarter, the change in fair value of derivative liability and foreign currency transaction loss-marketable securities decreased $0. 3 million and $0.03 million respectively, compared to same period of 2012. 

For the six months ended June 30, 2013, total other expenses decreased $1.6 million, compared to the same period in 2012, mainly due to a decrease in change in fair value of derivative liability of $0.92 million, a decrease in impairment other than temporary – marketable securities of $0.39 million, a decrease in other expense of $0.17 million, a decrease in interest expense of $0.1 million, and a decrease in foreign currency transaction loss – marketable securities of $0.06 million.

Income tax expense

Income tax expenses for the three and six months ended June 30, 2013 was $0.07 million and $0.06 million, respectively. In the comparative periods in 2012, income tax expense was $0.06 million and $0.15 million, respectively.  Our income tax expense was derived mainly from operational results at our Hong Kong subsidiary applying an effective tax rate of 16.5%.

Net Income (loss)

For the three and six months ended June 30, 2013, we had a net income of $0.95 million and a net loss of $0.14 million, respectively, comparable to a net loss totaling $1.7 million and $3.4 million, respectively for the comparable 2012 periods. The increase in net income and the decrease in net loss were due to significantly increased revenues and improved gross margin in our recycling business which recycling business revenues increased 548% and 139%, respectively, for the three and six month periods, and recycling business gross margin increased to 11% and 9.7% from (-0.47%) and 1.1%, respectively, for three and six months comparable periods of 2012. For the six months ended June 30, 2013, the total other expense decreased $1.6 million compared to same period of 2012, which also accounts for the decrease in net loss.   

Comprehensive Income (Loss)

During the three and six months ended June 30, 2013, our comprehensive income amounted to $0.35 million and $1.68 million, respectively, compared to comprehensive loss of $1.69 million and $3.11 million in the comparative periods in 2012. Comprehensive income (loss) consists of our net income and other comprehensive income, including change in unrealized loss of marketable securities and foreign currency translation gain (loss).  The functional currency of four of our subsidiaries operating in the PRC is the Chinese Yuan or RMB. The financial statements of our subsidiaries are translated to U.S. dollars using the exchange rate prevailing as of the date of the balance sheet for assets and liabilities, and average exchange rates (for the period) for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations.  As a result of these translations, we reported a foreign currency translation gain of $0.91 million for the first six months of 2013, comparable to a gain of $0.25 million for the same period in 2012. The non-cash gains had the effect of increasing our reported comprehensive income in both periods. We had an unrealized loss of marketable securities of $0.41 million for the first six months of 2013, comparable to an unrealized income of marketable securities of $797 for the same period in 2012.

8

LIQUIDITY AND CAPITAL RESOURCES

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

Our cash balance at June 30, 2013 totaled $1.2 million, a decrease of $0.2 million as compared to $1.4 million at December 31, 2012.  At June 30, 2013 our working capital was $3.0 million, as compared to $0.3 million at December 31, 2012.

As of June 30, 2013, we had invested a total of approximately $50 million for the acquisition of land use rights, construction and equipment purchases for the facilities we operate. We expect to expand the production capacity at the facilities in the future and to build or acquire additional facilities in the future, depending on market conditions.  We have not set a timeframe for this expansion.

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

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

On January 28, 2013 we sold 3,242,712 shares of our common stock at a price of $0.50 per share in a registered direct public offering.  We received proceeds of $1,621,356. We plan to use the proceeds as general working capital.

On March 29, 2013 we signed a promissory note with Mr. Yao, our Chairman and CEO. The promissory note is in the amount of $1 million with one year term at interest rate of 8% per annum simple interest and principal and interest are due at maturity. The use of proceeds received from the note is to supplement our general working capital.

We believe we can get sufficient working capital for our operations for at least the next 12 months.  We have bank facilities which provide for cash borrowings or the issuance of commercial letters of credit that we require in our metal ore trading business in the aggregate amount of $61 million.  Approximately $40 million was available under these facilities at June 30, 2013.

Substantially all of our cash reserves are held in the form of RMB in bank accounts at financial institutions located in the PRC.  Cash held in banks in the PRC is not insured.  The Chinese regulatory authorities impose a number of restrictions regarding RMB conversions and restrictions on foreign investments.  Accordingly, our cash on deposit in banks in the PRC is not readily deployable by us for purposes outside of China.

9

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. At June 30, 2013, no balance was outstanding under this facility.

On June 8, 2013, Henan Armco obtained a RMB 30,000,000 (approximately $4.8 million) line of credit from Bank of China for issuance of letters of credit to finance the purchase of metal ore and scrap metal expiring May 23, 2014. The facility is secured by the guarantee provided by Renewable Metals 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. At June 30, 2013, the balance outstanding under this facility was approximately $1.65 million.

On June 18, 2012, Henan Armco obtained a RMB 40,000,000 (approximately $6.4 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, President and Chief Executive Officer. At June 30, 2013, no balance was outstanding under this facility.

On September 19, 2012, Henan Armco obtained a RMB 78,000,000 (approximately $12.6 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. At June 30, 2013, the balance outstanding under this facility was $1.61 million.

On March 15, 2013, Renewable Metals entered into a line of credit facility in the amount of RMB50, 000,000 (approximately $8.0 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 and guaranteed by Mr. Kexuan Yao, Ms. Yi Chu, and Henan Armco, respectively. At June 30, 2013, the balance outstanding under this facility was $8.0 million.

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. At June 30, 2013, the balance outstanding under this facility was approximately $2.4 million.

On July 5, 2011, Renewable Metals obtained a RMB 72,000,000 (approximately $11.6 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, President and Chief Executive Officer. At June 30, 2013, the balance outstanding under this facility was $6.8 million.

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The following table provides certain selected balance sheet comparisons as of June 30, 2013 and December 31, 2012.

	June 30, 2013		December 31, 2012		Increase (Decrease)			% of change
Cash	$	1,156,813	$	1,367,171		(210,358	)		-15.4	%
Pledged deposits		10,209,744		4,590,829		5,618,915			122.4	%
Marketable securities		802,035		1,213,641		(411,606	)		-33.9	%
Banker's acceptance notes receivable		1,140,647		7,926		1,132,721			14291.2	%
Accounts receivable, net		9,375,065		15,699,390		(6,324,325	)		-40.3	%
Inventories		21,359,682		13,378,445		7,981,237			59.7	%
Advance on purchases		2,325,010		2,238,652		86,358			3.9	%
Prepayments and other current assets		1,155,975		453,299		702,676			155.0	%
Total Current Assets		47,524,971		38,949,353		8,575,618			22.0	%
Loans payable		15,783,650		19,109,930		(3,326,280	)		-17.4	%
Banker's acceptance note payable and letters of credit		16,179,397		8,624,734		7,554,663			87.6	%
Current maturities of capital lease obligation		3,018,616		2,615,296		403,320			15.4	%
Accounts payable		5,066,255		1,141,583		3,924,672			343.8	%
Advances received from Chairman and CEO		1,440,677		-		1,440,677		n/a
Customer deposits		285,886		1,577,194		(1,291,308	)		-81.9	%
Corporate income tax payable		374,459		407,621		(33,162	)		-8.1	%
Derivative Warrant liability		10,179		306,708		(296,529	)		-96.7	%
Value added tax and other taxes payable		1,298,091		2,504,677		(1,206,586	)		-48.2	%
Accrued expenses and other current liabilities		1,046,541		2,355,903		(1,309,362	)		-55.6	%
Total Current Liabilities		44,503,751		38,643,646		5,860,105			15.2	%

Our current assets at June 30, 2013 were $47.5 million, an increase of $8.6 million, or 22%, from December 31, 2012. This overall increase reflects an increase of $8.0 million in inventories, an increase of $5.6 million in pledged deposits, an increase of $1.1 million in banker’s acceptance notes receivable, an increase of $0.7 million in prepayment and other current assets, and an increase of $0.1 million in advance on purchase, partially offset by a decrease of $6.3 million in accounts receivable, a decrease of $0.4 million in marketable securities, and a decrease of $0.21 million in cash.  

Inventories increased $8.0 million at June 30, 2013 compared to December 31, 2012, primarily due to the increase of scrap metal inventories for increased production with expanded customer base.

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Pledged deposits at June 30, 2013 of $10.2 million represent deposits with financial institutions as collateral to letters of credit and bank acceptable notes payable we provide to suppliers for the purchase of inventories.  The amounts will be released to pay vendors upon acceptance of goods.

Our accounts receivable decreased $6.3 million at June 30, 2013 from December 31, 2012 mainly due to the timing difference between the sales and collections of sales and our collections of scrap metals sales during the quarters.

Bank acceptance notes receivable increased $1.1 million at June 30, 2013 from December 31, 2012 primarily attributable to the increase in scrap metals sales amount to be collected under bank acceptance notes.

Our prepayments and other current assets increased $0.7 million at June 30, 2013 compared to December 31, 2012 primarily due to the increases in deposits related to our scrap metal recycling operations and prepayments and deposits for our metal ore trading business.

Advance on purchases increased $0.1 million at June 30, 2013 compared to December 31, 2012, and consisted of prepayments to vendors for merchandise and deposits on pending purchases.  These advances on purchases are customary in our business and help us secure inventory below prevailing market prices, thereby providing us with a better opportunity to increase our gross profit margins.

Marketable securities decreased $0.41 million at June 30, 2013 compared to December 31, 2012 due to the temporary decrease in the market value of our securities.

Cash decreased $0.2 million at June 30, 2013 compared to December 31, 2012 reflecting more cash using in operation.

At June 30, 2013, our total current liabilities increased $5.9 million, or 15%, from December 31, 2012, which reflected  mainly an increase in banker's acceptance notes payable and letter of credit of $7.55 million, an increase in accounts payable of $3.92 million, an increase from advances received from chairman and CEO of $1.44 million, and an increase in current maturities of capital lease obligation of $0.40 million, partially offset by a decrease in loan payable of $3.33 million, a decrease in accrued expenses and other current liabilities of $1.31 million, a decrease in customer deposits of $1.29 million, a decrease in value added tax and other taxes payable of $1.21 million, a decrease in derivative warrant liability of $0.30 million, and a decrease in corporate income tax payable of $0.03 million.

Banker's acceptance note payable increased $7.55 million at June 30, 2013 compared to December 31, 2012 primarily due to an increase in short-term borrowing used in raw materials acquisition.

Accounts payable increased $3.9 million at June 30, 2013 compared to December 31, 2012 mainly due to the new purchases we made but not yet paid during the first two quarters.

At June 30, 2013, we owed our Chairman and CEO, Mr. Kexuan Yao, $1.44 million for funds he advanced to us for working capital purposes, a net increase of $1.44 million from December 31, 2012 as result of new advances used for our operation during the second quarter.

Customer deposits decreased $1.29 million at June 30, 2013 compared to December 31, 2012 due to timing of customer orders and amounts that we require for deposits. We recognize customer deposit as revenue when the goods have been delivered and the risk of loss has transferred to the customer either at the port of origin or port of destination based on the shipping terms we agree to with our customer.

Loans payable decreased $3.33 million at June 30, 2013, compared to December 31, 2012, primarily due to our repayment of short-term borrowing under our letter of credit facilities in the first two quarters of 2013. The short-term borrowing usually is used to finance the payment of our purchase and is paid when we collected the payment from our customer. We used collections of accounts receivable to repay these short-term borrowings.

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Accrued expenses and other current liabilities decreased $1.31 million at June 30, 2013 compared to December 31, 2012 due to timing difference of booking and payment of our payables. Accrued expenses consist of accrued expenses and other payables related to expenses and fees occurred in our operation.

Value added tax and other taxes payable decreased $1.2 million at June 30, 2013 from December 31, 2012 mainly due to the offset by our newly increased purchases and payment in the first six months of 2013.

Derivative warrant liability decreased $0.30 million at June 30, 2013 from December 31, 2012 reflecting the fair valuation of the outstanding warrants issued in 2008 and expiring in July and August, 2013.

Current maturities of capital lease obligation increased $0.4 million at June 30, 2013 compared to December 31, 2012 reflecting the increase of capital lease obligation due within one year.

Corporate income tax payable decreased $0.03 million at June 30, 2013 compared to December 31, 2012 mainly due to tax payable decrease for the first six months of 2013.

We do not have any commitments for capital expenditures at June 30, 2013. 

Statement of Cash Flows

For the first six months of 2013, our net decrease in cash totaled $0.21 million, and was comprised of $2.08 million used in operating activities and $5.69 million used in investing activities, offset by $8.26 million provided by financing activities.

For the first six months of 2012, our net decrease in cash totaled $0.16 million, and was comprised of $4.95 million used in operating activities and $2.85 million used in investing activities, offset by $7.65million provided by financing activities.

Cash flows from Operating Activities

For the first six months of 2013 cash used in operations of $2.08 million was mainly comprised of an increase in inventory of $7.69 million, a decrease in customer deposits of $1.32 million, a decrease in accrued expenses and other current liabilities of $1.25 million, a decrease in taxes payable of $1.29 million, an increase in bank acceptance notes receivable of 1.13 million, and an increase of prepayments and other current assets of $0.76 million. These cash outflows were partially offset by a decrease in accounts receivable of $6.64 million and an increase in accounts payable of $3.88 million.

For the first six months of 2012 cash used in operations of $4.95 million was mainly comprised of a decrease in accounts payable of $17.6 million, a decrease in customer deposits of $5.2 million, a decrease in accrued expenses and other current liabilities of $1.1 million, and an increase of prepayments and other current assets of $0.58 million. These cash outflows were partially offset by a decrease in inventory of $19.8 million, an increase in advance on purchase of $0.8 million, an increase in taxes payable of $0.3 million.

Cash flows from Investing Activities

For the six months ended June 30, 2013 cash used in investing activities of $5.69 million was due to payment made toward pledged deposits of $11.04 million and purchases of property and equipments of $0.17 million, partially offset by proceeds received from the release of pledge deposits of $5.52 million

For the six months ended June 30, 2012 cash used in investing activities of $2.85million was due to purchases of property and equipments of $1.3 million and payment made toward pledged deposits of $13.67 million, partially offset by proceeds received from the release of pledge deposits of $12.16 million

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Cash provided by Financing Activities

For the six months ended June 30, 2013 cash provided by financing activities of $8.26 million was mainly due to proceeds from loans payable of $20.90 million, banker's acceptance notes payable of $7.38 million, advances from chairman and CEO of $2.15 million, proceeds from sales of common stock of $1.62 million, and proceeds from related party loan of $1.02 million, partially offset by the repayment of loans payable of $24.50 million and repayment of mortgage payable of $0.32 million.

For the six months ended June 30, 2012 cash provided by financing activities of $7.65 million was mainly due to proceeds from loans payable of $51.3 million and banker's acceptance notes payable of $3.2 million, partially offset by the repayment of loans payable of $45.5 million and repayment of mortgage payable of $1.1 million, and repayment to Chairman and CEO of $0.31 million.

Off Balance Sheet Arrangements

Under SEC regulations, we are required to disclose our off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, such as changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. An off-balance sheet arrangement means a transaction, agreement or contractual arrangement to which any entity that is not consolidated with us is a party, under which we have:

- Any obligation under certain guarantee contracts;

- Any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets;

- Any obligation under a contract that would be accounted for as a derivative instrument, except that it is both indexed to our stock and classified in stockholder’s equity in our statement of financial position; and

- Any obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us.

We do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations. These transactions are recognized in our financial statements in accordance with the generally accepted accounting principles in the United States.

Contractual Obligations and Commitments.    

At June 30, 2013, our long-term debt and financial obligations and commitments by due dates were as follows:

	Payments due by period
Contractual obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
BBanker's acceptance notes payable and letters of credit (1)		16,179,397		16,179,397		-		-		-
Long-Term Debt Obligations(2)		1,019,302		1,019,302		-		-		-
Short-Term Loans Payable (3)		15,783,650		15,783,650		-		-		-
Capital Lease Obligations (4)		4,140,011		3,018,616		1,121,395		-		-
Operating Lease Obligations (5)		138,096		76,149		61,947		-		-
Purchase Obligations		-		-		-		-		-
Other Long-Term Liabilities Reflected on the Registrant's Balance Sheet under GAAP		-		-		-		-		-
Total		37,260,456		36,077,114		1,183,342		-		-

(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.

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Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP.  The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

A summary of significant accounting policies is included in Note 2 to the consolidated financial statements included in this report.  Of these policies, we believe that the following items described in Note 2 are the most critical in preparing our financial statements and will be discussed further below.

 Fair Value of Financial Instruments

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

Level 1	Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level 2	Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
Level 3	Pricing inputs that are generally observable inputs and not corroborated by market data.

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 our 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.

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Our 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 us for similar financial arrangements at March 31, 2013 and December 31, 2012. 

Our 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.  We 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.

Fair Value of Financial Assets and Liabilities Measured on a Recurring Basis

Level 1 Financial Asset – Marketable Securities

We use 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

We use Level 3 of the fair value hierarchy to measure the fair value of the derivative liabilities and revalue 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.

Carrying Value, Recoverability and Impairment of Long-Lived Assets

We have adopted paragraph 360-10-35-17 of the FASB Accounting Standards Codification for its long-lived assets. Our 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.

We assess the recoverability of its long-lived assets by comparing the projected undiscounted net cash flows associated with the related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets.  Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable.  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.

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We consider 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.  We evaluate 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).

Marketable Securities, Available for Sale

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

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

We follow 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.

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Derivative Warrant Liability

We evaluate our 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

Revenue Recognition

We apply 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.  We consider 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.

We derive our 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 we recognize revenue, no provisions are made for returns because, historically, there have been very few sales returns and adjustments that have impacted the ultimate collection of revenues.

Stock-Based Compensation for Obtaining Employee Services

We account for our stock based compensation in which we obtain 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.

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The fair value of 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 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.  The Company uses historical data to estimate employee termination behavior.  The contractual term of share options or similar instruments is used as expected term of share options or similar instruments for the Company if it is a newly formed corporation.

☐ Expected volatility of the entity’s shares and the method used to estimate it.  An entity that uses a method that employs different volatilities during the contractual term shall disclose the range of expected volatilities used and the weighted-average expected volatility.  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 contractual life of the option 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 contractual life of the option and similar instruments.

Our policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award.

Equity Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services

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

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

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

☐ Expected term of share options and similar instruments: Pursuant to Paragraph 718-10-50-2 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.  We use historical data to estimate holder’s expected exercise behavior.  The contractual term of share options or similar instruments is used as expected term of share options or similar instruments for the Company if it is a newly formed corporation.

☐ Expected volatility of the entity’s shares and the method used to estimate it.  An entity that uses a method that employs different volatilities during the contractual term shall disclose the range of expected volatilities used and the weighted-average expected volatility.  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. We use 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 our current dividend yield as the best estimate of projected dividend yield for periods within the expected contractual life of the option 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 contractual life of the option and similar instruments.

Pursuant to ASC paragraph 505-50-25-7, if fully vested, nonforfeitable 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, nonforfeitable 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, nonforfeitable 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 stock option that the counterparty has the right to exercise expires unexercised.

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Pursuant to Paragraph 505-50-30-S99-1, if we receive 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.

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.

Our 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.

Recently Issued Accounting Pronouncements

In January 2013, the FASB issued ASU No. 2013-01, "Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities". This ASU clarifies that the scope of ASU No. 2011-11, "Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities." applies only to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in FASB Accounting Standards Codification or subject to a master netting arrangement or similar agreement. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013.

In February 2013, the FASB issued ASU No. 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income." The ASUadds new disclosure requirements for items reclassified out of accumulated other comprehensive income by component and their corresponding effect on net income. The ASU is effective for public entities for fiscal years beginning after December 15, 2013.

In February 2013, the Financial Accounting Standards Board, or FASB, issued ASU No. 2013-04, "Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for which the Total Amount of the Obligation Is Fixed at the Reporting Date." This ASU addresses the recognition, measurement, and disclosure of certain obligations resulting from joint and several arrangements including debt arrangements, other contractual obligations, and settled litigation and judicial rulings. The ASU is effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2013.

In March 2013, the FASB issued ASU No. 2013-05, "Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity." This ASU addresses the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. The guidance outlines the events when cumulative translation adjustments should be released into net income and is intended by FASB to eliminate some disparity in current accounting practice. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013.

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In March 2013, the FASB issued ASU 2013-07, “Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting.”The amendments require an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. Liquidation is imminent when the likelihood is remote that the entity will return from liquidation and either (a) a plan for liquidation is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the plan will be blocked by other parties or (b) a plan for liquidation is being imposed by other forces (for example, involuntary bankruptcy). If a plan for liquidation was specified in the entity’s governing documents from the entity’s inception (for example, limited-life entities), the entity should apply the liquidation basis of accounting only if the approved plan for liquidation differs from the plan for liquidation that was specified at the entity’s inception. The amendments require financial statements prepared using the liquidation basis of accounting to present relevant information about an entity’s expected resources in liquidation by measuring and presenting assets at the amount of the expected cash proceeds from liquidation. The entity should include in its presentation of assets any items it had not previously recognized under U.S. GAAP but that it expects to either sell in liquidation or use in settling liabilities (for example, trademarks). The amendments are effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein. Entities should apply the requirements prospectively from the day that liquidation becomes imminent. Early adoption is permitted.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Smaller reporting companies are not required to provide the information required by this item.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported as specified in the SEC’s rules and forms and that such information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer, or CEO, and our Chief Financial Officer, or CFO, to allow timely decisions regarding required disclosure. Management, with the participation of our CEO and CFO, performed an evaluation of the effectiveness of our disclosure controls and procedures as of June 30, 2013. Based on that evaluation, we have identified a material weakness in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)): a lack of sufficiently qualified accounting and other finance personnel with appropriate U.S. GAAP knowledge and experience. Solely as a result of these material weaknesses, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were not effective as of June, 2013. The general experience of our accounting and finance personnel and the qualifications of our audit committee financial expert are described in more detail below.

General Experience of Company Accounting and Finance Personnel

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

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

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

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

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

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

Experience of Audit Committee Financial Expert

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

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

Mr. Thomson currently serves as a director of theScore Inc., Asia Bio-Chem Group Co. Ltd. and Chile Mining Technologies Inc., in addition to our company. He has served on a total of at least 16 boards of public companies, beginning in 1968. Of these companies, Mr. Thomson has served on the audit committee for six and was the audit committee chair of each of these six companies. He is currently the audit committee chair of each of the four boards on which he serves.

Remediation

As an effort to improve our disclosure controls and procedures and internal controls and procedures, we have engaged a consultant, who has U.S. GAAP knowledge, to assist in the preparation of our U.S. GAAP financial statements since February 2011.

During the quarter covered by this report, we did not make any meaningful progress in improving our disclosure controls and procedures and internal controls and procedures. We believe that the following measures would remediate the discussed material weaknesses:

● hiring additional personnel with sufficient U.S. GAAP experience;

● engaging a professional service firm that has expertise in assisting accounting matters with publicly-traded companies; and

● providing trainings to improve understanding of U.S. GAAP of our CFO and other accounting personnel.

Management intends to implement the above measures to remediate the material weaknesses in our internal controls as soon as practicable after the Company’s financial position permits.

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Changes in Internal Control

There were no changes in our internal control over financial reporting identified in connection with the evaluation of our controls performed during the quarter ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

Except as described below, there are no material pending legal proceedings to which we are a party or of which any of our property is the subject.

Our company and our directors are a party to a lawsuit filed on March 29, 2013 by Albert Perron in the District Court for Clark Count, Nevada (Case No.: A-13-679151-C), which seeks a declaratory judgment, rescission, unspecified damages, equitable and injunctive relief, and attorney’s fees. The complaint alleges that the directors breached their fiduciary duties to the Company by exceeding their authority under the Company’s Amended and Restated 2009 Stock Incentive Plan, as further amended (the “Plan”), by issuing shares to Mr. Kexuan Yao that exceeded the amount allowed under the Plan.

On August 12, 2013, the Company and certain directors filed an answer to the complaint denying all the allegations of wrongdoing. The Company’s position is that the shares at issue in this matter granted to Mr. Yao were authorized under the Plan. The Company and the directors intend to defend this matter vigorously. 

Item 1A. Risk Factors

There were no material changes to the Risk Factors disclosed in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2012. For more information concerning our risk factors, please see “Item 1A. Risk Factors” of our Annual Report on Form 10-K.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits

No. Description

4.1 Form of Amendment No.2 to Subscription Agreement and Common Stock Purchase Warrant dated January 11, 2013, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K as filed on January 17, 2013.

10.1 Form of Subscription Agreement dated as of January 28, 2013, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K for as filed on January 29, 2013.

31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1+ Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101* Financial statements from the quarterly report on Form 10-Q of Armco Metals Holdings, Inc. for the quarter ended June 30, 2013, formatted in XBRL: (i) the Unaudited Condensed Consolidated Balance Sheets, (ii) the Unaudited Condensed Consolidated Statements of Income, (iii) the Unaudited Condensed Consolidated Statements of Cash Flows and (iv) the Notes to Unaudited Condensed Consolidated Financial Statements tagged as blocks of text.

+In accordance with the SEC Release 33-8238, deemed being furnished and not filed.

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

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Armco Metals Holdings, Inc.
Date: August 14, 2013	By:	/s/ Kexuan Yao
		Kexuan Yao
		Chief Executive Officer
		(Duly Authorized Officer and Principal Executive Officer)
Date: August 14, 2013	By:	/s/ Fengtao Wen
		Fengtao Wen
		Chief Financial Officer
		(Duly Authorized Officer and Principal Financial Officer)

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