UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

(Mark One)

Form 10-Q

 

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

 

For the quarterly period ended June 30, 2015

 

or

 

☐	TRANSITION REPORT UNDER 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 incorporation or organization)	(I.R.S. Employer Identification No.)

 

1730 S Ampheltt Blvd #230 San Mateo CA	94402
(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 ☐No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

☒Yes ☐ No

 

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

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  

☐Yes ☒No

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 8,179,701 shares of common stock are issued and outstanding as of August 14, 2015.

 

 

TABLE OF CONTENTS

 

		Page No.
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements.	4
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	27
Item 3.	Quantative and Qualitative Disclosures About Market Risk.	34
Item 4.	Controls and Procedures.	34
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings.	35
Item 1A.	Risk Factors.	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	35
Item 3.	Defaults Upon Senior Securities.	35
Item 4.	Mine Safety Disclosures.	35
Item 5.	Other Information.	35
Item 6.	Exhibits.	36

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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;
	●	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 stockholders; and
	●	Our controlling stockholders may take actions that conflict with the interests of our stockholders.
	●	The potential uncertainties of new products and business lines may affect our operating results as we may not be able to carry and operate them successfully and may stop carry/operate them any time.
	●	Additional funding may involve the need for management to participate in the absence of alternative financing.
	●	Possible further write-offs of inventory may occur which we had a large inventory write-off in the second quarter of 2015.

 

You should read thoroughly this report and the documents that we refer to herein with the understanding that our actual future results may be materially different from and/or worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements including those made in this report, in Part I. Item 1A. Risk Factors appearing in our Annual Report on Form 10-K for the year ended December 31, 2014 and our other filings with the Securities and Exchange Commission. Other sections of this report include additional factors which could adversely impact our business and financial performance. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business 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. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.

 

.

 

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 refer to Armco Metals Holdings, Inc., a Nevada corporation, and our subsidiaries, In addition, “2014” refers to the year ended December 31, 2014, “2013” refers to the year ended December 31, 2013 and “2015” refers to the year ending December 31, 2015 

 

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

 

All share and per share information in this report gives effect to the 1:10 reverse stock split of our common stock on January 9, 2015.

 

 

  PART 1 - FINANCIAL INFORMATION

 

Item 1.          Financial Statements. 

 

 

ARMCO METALS HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS 

 

 

		June 30, 2015				December 31, 2014
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash		$	915,918			$	1,884,887
Pledged deposits			10,254				498,615
Marketable securities			3,471				73,943
Accounts receivable, net			18,877,616				43,202,886
Inventories, net			14,372,438				9,154,463
Advance on purchases			27,719,663				1,093,402
Prepayments and other current assets			941,017				1,164,603
Total Current Assets			62,840,377				57,072,799
Property, plant and equipment, net			31,392,928				32,563,929
Land use rights, net			6,083,827				6,108,283
Deferred tax assets			297,842				279,563
Total Assets		$	100,614,974			$	96,024,574
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Loans payable		$	11,349,788			$	17,011,843
Banker's acceptance notes payable and letters of credit			1,778,555				1,767,790
Current maturities of capital lease obligation			-				720,819
Accounts payable			2,970,014				5,497,866
Advances received from Chairman and CEO			169,117				877,076
Due to related parties			582,618				717,703
Customer deposits			26,000,106				1,467,281
Corporate income tax payable			817,202				815,073
Value added tax and other taxes payable			3,958,379				5,747,470
Deferred tax liabilities			727,305				2,965,196
Accrued expenses and other current liabilities			2,833,108				3,850,095
Total Current Liabilities			51,186,192				41,438,212
Total Liabilities			51,186,192				41,438,212
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value; 1,000,000 shares authorized; none issued or outstanding			-				-
Common stock, $0.001 par value, 200,000,000 shares authorized, 7,829,550 and 5,615,088 shares issued and outstanding as of June 30, 2015 and December 31, 2014, respectively			7,829				5,615
Additional paid-in capital			48,972,826				45,968,908
Retained earnings (deficit)			(4,154,828	)			4,491,948
Accumulated other comprehensive income			4,602,955				4,119,891
Total Stockholders' Equity			49,428,782				54,586,362
Total Liabilities and Stockholders' Equity		$	100,614,974			$	96,024,574

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

ARMCO METALS HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

 

 

		For the Six Months				For the Three Months				For the Six Months				For the Three Months
		Ended				Ended				Ended				Ended
		June 30, 2015				June 30, 2015				June 30, 2014				June 30, 2014
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
NET REVENUES		$	79,971,983			$	36,901,969			$	42,797,893			$	32,879,242
COST OF GOODS SOLD			91,910,719				44,950,003				40,898,856				29,816,401
GROSS PROFIT			(11,938,736	)			(8,048,034	)			1,899,037				3,062,841
OPERATING EXPENSES:
Selling expenses			21,090				11,553				202,690				101,835
Professional fees			288,338				211,134				355,782				141,328
General and administrative expenses			1,467,914				579,702				1,975,580				537,454
Operating cost of idle manufacturing facility			825,333				369,786				1,007,214				472,242
Total operating expenses			2,602,675				1,172,175				3,541,266				1,252,859
INCOME (LOSS) FROM OPERATIONS			(14,541,411	)			(9,220,209	)			(1,642,229	)			1,809,982
OTHER (INCOME) EXPENSE:
Interest income			(153	)			(58	)			(98,800	)			(532	)
Interest expense			972,895				690,022				2,641,772				1,968,830
Loss on sales of marketale securities			204,766				45,767
Change in fair value of derivative liabilities			(134,760	)			(150,187	)			108,975				586,884
Loan guarantee expense			-				-				13,002				-
Gain on forgiveness of short-term debt			(4,081,366	)			(6,918	)			-				-
Government grants			(475,928	)			-				-				-
Other (income) expense			(114,752	)			(29,366	)			75,028				16,725
Total other (income) expense			(3,629,298	)			549,260				2,739,977				2,571,907
LOSS BEFORE INCOME TAX PROVISION			(10,912,113	)			(9,769,469	)			(4,382,206	)			(761,925	)
INCOME TAX PROVISION			(2,265,337	)			(2,155,528	)			-				-
NET LOSS			(8,646,776	)			(7,613,941	)			(4,382,206	)			(761,925	)
OTHER COMPREHENSIVE INCOME (LOSS):
Change in unrealized income (loss) on marketable securities			180,859				32,557				32,468				10,530
Foreign currency translation gain (loss)			302,205				(40,678	)			(372,778	)			35,780
COMPREHENSIVE LOSS		$	(8,163,712	)		$	(7,622,062	)		$	(4,722,516	)		$	(715,615	)
NET LOSS PER COMMON SHARE - BASIC AND DILUTED:
Net loss per common share - basic and diluted		$	(1.41	)		$	(1.18	)		$	(1.09	)		$	(0.15	)
Weighted Average Common Shares Outstanding - basic and diluted			6,111,283				6,471,019				4,032,035				5,080,846

  

See accompanying notes to the unaudited consolidated financial statements. 

 

 

ARMCO METALS HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

For the Six Months Ended June 30, 2015

(Unaudited)

 

 

		Common Stock, $0.001 Par Value																Accumulated Other Comprehensive Income (Loss)
		Number of Shares				Amount				Additional Paid-in Capital				Retained Earnings				Change in Unrealized Gain (Loss) on Marketable Securities				Foreign Currency Translation Gain				Total Stockholders' Equity
Balance, December 31, 2014			5,615,088			$	5,615			$	45,968,908			$	4,491,948			$	(429,142	)		$	4,549,033			$	54,586,362
Issuance common shares for employees			260,106				260				355,327																355,587
Issuance of common shares for third party services			74,167				74				77,726																77,800
Issuance of common shares in conversion of convertible notes			1,229,279				1,229				1,133,281																1,134,510
Issuance of common shares in conversion of advances from Chairman and CEO			650,910				651				975,715																976,366
Reclassification of derivative liabilities due to conversion of convertible notes											461,869																461,869
Net loss															(8,646,776	)											(8,646,776	)
Change in unrealized gain on marketable securities																			180,859								180,859
Foreign currency translation gain (loss)																							302,205				302,205
Balance June 30, 2015			7,829,550			$	7,829			$	48,972,826			$	(4,154,828	)		$	(248,283	)		$	4,851,238			$	49,428,782

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

ARMCO METALS HOLDINGS, INC. 

CONSOLIDATED STATEMENTS OF CASH FLOWS 

 

		For Six Months Ended June 30,
		2015				2014
		(Unaudited)				(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(8,646,776	)		$	(4,382,206	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation expense			1,364,119				1,405,506
Amortization expense			26,890				61,322
Gain on disposal of property plant and equipment			-				(339	)
Deferred income taxes			(2,266,366	)			-
Gain on forgiveness of capital lease obligation			(125,371	)			-
Gain on forgiveness of short-term debt			(4,081,366	)			-
Change in fair value of derivative liabilities			(134,760	)			108,975
Loss on sales of marketale securities			204,766				-
Amortization of debt discount			504,249				1,985,325
Stock based compensation			355,587				1,182,781
Shares issued for third party services			77,800				-
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Changes in operating assets and liabilities:
Accounts receivable			24,521,722				2,116,260
Inventories			(5,148,146	)			7,077,767
Advance on purchases			(25,339,535	)			(538,812	)
Prepayments and other current assets			(981,334	)			396,061
Banker's acceptance notes payable and letters of credit			-				(6,663,274	)
Accounts payable			(2,553,235	)			(7,266,050	)
Customer deposits			24,457,430				1,237,852
Taxes payable			(1,819,149	)			315,184
Accrued expenses and other current liabilities			(1,025,609	)			29,042
NET CASH USED IN OPERATING ACTIVITIES			(609,084	)			(2,934,606	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from release of pledged deposits			227				5,932,261
Payment made towards pledged deposits			-				(1,809,397	)
Proceeds from disposal of property, plant and equipment			-				1,628
Cash received from sales of marketable securities			46,565				-
NET CASH PROVIDED BY INVESTING ACTIVITIES			46,792				4,124,492
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans payable			163,255				11,535,286
Repayment of loans payable			(508,177	)			(12,970,719	)
Proceeds from capital lease obligation			-				162,600
Repayment of capital lease obligation			(107,712	)			-
Advances from Chairman and CEO			158,537				144
Repayment to related parties			(134,498	)			(32,534	)
NET CASH USED IN FINANCING ACTIVITIES			(428,595	)			(1,305,223	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH			21,918				221,582
NET CHANGE IN CASH			(968,969	)			106,245
Cash at beginning of the period			1,884,887				596,557
Cash at end of the period		$	915,918			$	702,802
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Interest paid		$	28,904			$	236,240
Income taxes paid		$	-			$	-
NON CASH FINANCING AND INVESTING ACTIVITIES:
Debt discount due to conversion feature		$	596,629			$	1,950,820
Change in fair value of marketable security		$	180,859			$	32,468
Reclassification from short-term debt to convertible debt			-			$	5,554,468
Reclassification of derivative liability to equity		$	461,869			$	2,101,665
Common shares issued for conversion of debt and accrued interest		$	1,134,510			$	6,551,712
Capital lease obligation settled with pledge deposit		$	488,934			$	-
Common shares issued for conversion of advances from Chairman and CEO		$	976,366			$	-

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

Armco Metals Holdings, Inc.

June 30, 2015 and 2014

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.)

 

Armco Metals Holdings, Inc. (“Armco Metals Holdings” or the “Company”) was incorporated under the laws of the State of Nevada as Cox Distributing, Inc. on April 6, 2007. On June 27, 2008, the Company 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 nonferrous 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 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.   

 

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 $13.0 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 - Significant and Critical Accounting Policies and Practices

 

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 period 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, 2014 and notes thereto contained in the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2015.

 

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.

 

The Company's consolidated subsidiaries and/or entities as of June 30, 2015 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 reporting period ending dates and for the reporting periods then ended.

 

 

All inter-company balances and transactions have been eliminated.

 

Use of Estimates and Assumptions and Critical Accounting Estimates and Assumptions

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management makes its best estimate of the outcome for these items based on historical trends and other information available when the financial statements are prepared. Changes in estimates are recognized in accordance with the accounting rules for the estimate, which is typically in the period when new information becomes available to management. 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 U.S. GAAP, and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:

 

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

  

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

 

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

 

The carrying amounts of the Company’s financial assets and liabilities, such as cash, pledged deposits, accounts receivable, advance on purchases, prepayments and other current assets, accounts payable, customer deposits, corporate income/VAT 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, and capital lease obligation 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, 2015 and December 31, 2014.

 

The Company’s Level 3 financial liabilities consist of convertible notes with embedded conversion feature for which there are no current market for these securities such that the determination of fair value requires significant judgment or estimation. The Company valued the derivative liabilities using a Black-Scholes model. These models incorporate transaction details such as Company stock price, contractual terms, maturity, risk free rates.

 

 

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 Liabilities

 

The Company uses Level 3 of the fair value hierarchy to measure the fair value of the derivative liabilities and revalues its derivative liabilities 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 liabilities.

  

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for a fair value as of June 30, 2015, and December 31, 2014:

 

Recurring Fair Value Measures		Level 1				Level 2				Level 3				Total
June 30, 2015
Derivative liability			-				-				-				-
Available-for-sale securities		$	3,471				-				-			$	3,471
December 31, 2014
Derivative liability			-				-				-				-
Available-for-sale securities		$	73,943				-				-			$	73,943

 

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.

 

Foreign Currency Translation

 

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, 2015				December 31, 2014				June 30, 2014
Balance sheets			6.1088				6.1460				6.1564
Statements of operations and comprehensive income (loss)			6.1254				6.1457				6.1419

 

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, warrants and non-vested shares.

 

For the periods presented, the computation of diluted loss per share equaled basic loss per share as the inclusion of any dilutive instruments would have had an anti-dilutive effect on the earnings per share calculation in the periods presented.

 

The following table shows the potentially outstanding dilutive common shares excluded from the diluted net income (loss) per common share calculation as they were anti-dilutive:

 

		Potentially Outstanding Dilutive
		Common Shares
		For the Six				For the Six
		Months Ended				Months Ended
		June 30, 2015				June 30, 2014
Conversion Feature Shares
Common shares issuable under the conversion feature of convertible notes payable			265,233				41,698
Sub-total: Conversion feature shares			265,233				41,698
Unvested common shares issued to employees
Unvested common shares issued to director, vested in July, October, December 2014 and January 2015			-				37,813
Sub-total: Unvested common shares issued to employees			-				37,813
Stock Option Shares
Options issued on October 5, 2010 to employees to purchase common shares with an exercise price of $50.00 per share expiring five (5) years from the date of issuance			4,000				4,000
Sub-total: Stock option shares:			4,000				4,000
Warrant Shares
153,847 and 7,692 Warrants issued on April 20, 2010 to investors to purchase common shares with an exercise price of $75.00 per shares expiring five (5) years from the date of issuance			-				161,539
Sub-total: Warrant shares			-				161,539
Total potentially outstanding dilutive common shares			269,233				245,050

   

 

Government Grants

 

Government grants include cash subsidies as well as other subsidies received from the PRC government by the subsidiaries of the Company. Such subsidies are generally provided as incentives from the local government to encourage the expansion of local business. Government grants are recognized when received and all the conditions specified in the grant have been met. Government grants recognized as other income were $475,928 and $0 for the six months ended June 30, 2015 and 2014, respectively.

 

Recently Issued Accounting Pronouncements

 

In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs”. The amendments in the ASU are intended to simplify the presentation of debt issuance costs. These amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments in this ASU are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

 

In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”. The amendments in ASU 2015-11 require an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. A reporting entity should apply the amendments prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The adoption of ASU 2015-11 is not expected to have a material impact on the Company’s consolidated financial statements.

 

Reclassification

 

Certain prior period amounts have been reclassified to conform to the current period presentation. The reclassification had no impact on net earnings and financial position.

 

 

Note 3 – Pledged Deposits

 

Pledged deposits consist of cash held in financial institutions for (a) outstanding letters of credit and (b) capital lease obligation.

 

Pledged deposits consisted of the following:

 

 

		June 30,				December 31,
		2015				2014
Deposit for letters of credit		$	10,254			$	10,492
Deposit for capital lease obligation			-				488,123
		$	10,254			$	498,615

 

 

Note 4 – Marketable Equity Securities, Available for Sale

  

As of June 30, 2015, the Company’s available for sale marketable securities were marked to market to its fair value of $3,471 and reported a $180,859 change in unrealized loss on marketable securities for the six months ended June 30, 2015 as other comprehensive income (loss) in its Stockholders’ Equity.

 

The Company sold 7,164,879 shares during the six months ended June 30, 2015 for $46,565, with a realized loss on sales of $204,766.

 

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				Other Comprehensive Income (loss)- Change in Unrealized gain (loss)				Fair Value
Balance as of December 31, 2014		$	2,686,102				(2,366,941	)			183,924				(429,142	)			73,943
Sales of the securities			(251,331	)															(251,331	)
Total gain (realized/unrealized) included in:
Other comprehensive income: Change in unrealized loss															180,859				180,859
Balance as of June 30, 2015		$	2,434,771			$	(2,366,941	)		$	183,924			$	(248,283	)		$	3,471

 

Note 5 – Accounts Receivable

 

Accounts receivable consisted of the following:

 

		June 30,				December 31,
		2015				2014
Accounts receivable		$	18,883,947			$	43,257,621
Allowance for doubtful accounts			(6,331	)			(54,735	)
		$	18,877,616			$	43,202,886

 

 

Note 6 – Inventories

 

Inventories consisted of the following:

 

		June 30,				December 31,
		2015				2014
Raw materials - Scrap metal		$	4,283,866			$	2,602,983
Finished goods - processed scrap metal			22,158,696				7,684,154
Purchased merchandise for resale			415,859				697,217
Write-down of inventories			(12,485,983	)			(1,829,891	)
		$	14,372,438			$	9,154,463

  

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, 2015 or December 31, 2014.

 

Slow-Moving or Obsolescence Markdowns

 

The Company recorded no inventory obsolescence adjustments for the six months ended June 30, 2015 and 2014.

 

Lower of Cost or Market Adjustments

 

There were $10,616,101 and $(541,834) of lower of cost or market adjustments that were included in cost of goods sold for the six months ended June 30, 2015 and 2014, respectively.

 

Note 7 – Loans and Convertible Note Payable

 

Loans payable consisted of the following:

 

		June 30,				December 31,
		2015				2014
Bank loans – secured (i)		$	2,500,786			$	2,485,649
Third party loans (ii)			8,690,216				14,347,694
Convertible notes payable (iii)			158,786				178,500
		$	11,349,788			$	17,011,843

 

(i) Bank loans 

 

The Company obtained those short term loans from Shanghai Pudong Development Bank and Guanhutun Credit Union, respectively. Interest rates for the loans ranged from 2.47% to 11.59% per annum. The maturity dates of the loans ranged from March 16, 2016 to April 9, 2016.

 

Corporate or personal guarantees were provided for the bank loans as follows:

 

$163,698 loans from Guanhutun Credit Union, collateralized by Henan Armco’s building and leasehold improvement;

 

$2,337,087 loans from Shanghai Pudong Development Bank, collateralized by Renewable Metals inventories and guaranteed by the Company’s Chairman and Chief Executive Officer

 

  

(ii) Third party loans

 

Among third party loans, $411,799 bears no interest and $8,269,583 bears interest rates ranging from 6.0% to 8.0% per annum. The maturity dates of the loans ranged from July 20, 2015 to December 31, 2015.

 

Collateralization of Property, Plant and Equipment and Land Use Rights

 

Both Renewable Metals and Lianyungang Armco’s property, plant and equipment and land use rights representing all of the Company’s land use rights were collateralized for bank loans of RMB 50,000,000 (approximately $8,135,373) with the Bank of China Lianyungang Branch. On December 25, 2014, China Orient Asset Management Corporation, an organization authorized by the People’s Bank of China to dispose of bad assets from banks, mainly from Bank of China, transferred the loan to Lianyungang Chaoyang Investment Construction Development Co., Ltd, and the related collateral was released as of December 31, 2014.

 

On March 6, 2015, Chaoyang Investing & Construction Company agreed to waive 50% of the loan (RMB 25,000,000, approximately $4,060,617) for the Company in order to attract future investment from the Company. The interest (RMB 3,141,048, approximately $511,097) of the loan for the year ended December 31, 2014 was not waived but won’t bear any further interest. The interest rate of the remaining loan (RMB 25,000,000, approximately $4,092,457) is 6.42%. As of the filing date, the Company has not made the scheduled repayment of RMB 12,500,000 (approximately $2,046,228) and is in the process of negotiating with the creditor to extend such payment to December 31, 2015 and for possible debt restructuring. Based on the loan agreement, the outstanding principal and interest of the loan should be paid off by December 31, 2015.

 

 

 

(iii)Convertible notes payable

 

On March 3, 2015, Magna Equities II LLC converted its outstanding balance of $100,000 principal of the convertible note and its accrued interest of $4,067 into 142,779 shares with the conversation rate of $0.72887/share.

 

On May 8, 2015, KBM Worldwide Inc. converted its outstanding balance of $78,500 of principal of the convertible note and its accrued interest of $3,110 into 115,317 shares with the conversion rate of $0.7077/share.

 

On April 24, 2015, Fremery Holding Ltd. (“Fremery”) and Shanghai Heqi Investment Center (“Heqi”) entered into an agreement to transfer $1.2 million of the loan Renewable Metals previously borrowed from Fremery where Armco Metals Holdings was a guarantor to Heqi with the interest rate of 6% per annum and the due date on or before July 20, 2015. On April 27, 2015, Armco Metals Holdings signed an agreement with Heqi to permit Heqi to convert its loan and outstanding interest into the Company’s common shares with conversion rate of 85% multiplied by the volume weighed average price for the common stock during the 10 trading days ending on the latest complete trading day prior to the conversion date with maximum conversion shares amount of 1,224,154 shares of common stock. On May 20, 2015, Heqi converted $334,600, including $330,000 principal and $4,600 interest into 302,805 shares of common shares with the conversion rate of $1.10500/share. On June 3, 2015, Heqi converted $282,030, including $280,000 principal and $2,030 interest into 313,019 shares with the conversion rate of $0.90100/shares. On June 26, 2015, Heqi converted $332,203, including $330,000 principal and $2,203 interest into 355,359 shares with the conversion rate of $0.93484/share.

 

As of June 30, 2015, the convertible note balance with Heqi was $167,620, including the principal balance of $260,000 and the debt discount of $92,380, with the interest rate of 6% per annum.

 

See Note 11 for derivative analysis on the convertible notes.

 

Note 8 – Banker’s Acceptance Notes Payable and Letters of Credit

 

Banker’s acceptance notes payable consisted of the following:

 

			June 30,				December 31,
			2015				2014
Renewable Metals
	Letters of credit maturing on August 2, 2015		$	1,778,555			$	1,767,790
			$	1,778,555			$	1,767,790

 

Note 9 – Related Party Transactions

 

The related parties consist of the following:

 

Kexuan Yao (“Mr. Yao”)	The Company’s Chairman, Chief Executive Officer and principal stockholder
Keli Yao	Kexuan Yao’s brother
Yi Chu	Kexuan Yao’s wife

 

 

Advances from Chairman and CEO

 

From time to time, the Chairman, Mr. Yao advances funds to the Company for working capital purpose. Those advances are unsecured, non-interest bearing and due on demand. On June 9, 2015, the Company entered into an agreement to acknowledge the advancement of $976,366 from Mr. Yao as an unsecured loan. On the same day, the Company approved converting the loan into common shares of 650,910 shares with the conversion price of $1.5/share.

 

As of June 30, 2015 and December 31, 2014, the advance balance from Mr. Yao was $167,117 and $877,076, respectively.

 

Operating Lease from Chairman and CEO

 

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 Mr. Yao for RMB 10,000 per month. The lease expired on December 31, 2008 and has been extended through December 31, 2015. Rental expense incurred for the six months ended June 30, 2015 and June 30, 2014 was RMB 60,000 (approximately $9,822) and RMB 60,000 (approximately $9,746), respectively.

 

Due to Other Related Parties

 

Due to other related parties consists of the following:

 

		June 30,				December 31,
		2015				2014
Keli Yao		$	-			$	-
Yi Chu			582,618				717,703
Total		$	582,618			$	717,703

 

 

The balance of $582,618 due to related parties represents the loan owed to the related parties, which is interest free, unsecured and repayable on demand.

 

 

Note 10 – Capital Lease Obligation

  

Capital lease obligation consisted of the following:

 

 

		June 30,				December 31,
		2015				2014
Total capital lease obligation		$	-			$	720,819
Less current maturities			-				(720,819	)
Total Capital lease obligation, net of current maturities		$	-			$	-

 

 

On December 12, 2011, the Company entered into a leasing agreement with China Financial Leasing Co., Ltd. for a term of three years and an interest rate of 11.0% per annum, payable quarterly in arrears. The lease agreement is collateralized by certain of Renewable Metals' machinery and equipment. The leasing agreement was amended on September 15, 2012 to change the interest rate to 10.17% per annum. The capital lease obligation obtained by the Company is RMB 37,500,000 (approximately $5,935,517) and the Company is required to maintain a security deposit of RMB 3,000,000 (approximately $488,122). The leasing agreement expired on December 15, 2014. There was no extra interest charged on the overdue capital lease obligation of $560,988. On March 31, 2015, China Financial Leasing Co., Ltd. agreed to use the deposit of RMB 3,000,000 to settle the overdue capital lease obligation. As a result, a gain of $89,397 was recognized as other income by the Company.

 

On November 18, 2010, the Company entered into a leasing agreement with Jiangsu Financial Leasing Co., Ltd. for a term of three years and an interest rate of 11.8% per annum, payable monthly in arrears. The lease agreement is collateralized by certain of Renewable Metals' machinery and equipment. The leasing agreement was amended on September 17, 2013 to change the lease term to 46 months and the monthly payment was adjusted. The capital lease obligation obtained by the Company is RMB 15,000,000 (approximately $2,261,284). The leasing agreement expired on September 23, 2014. There was no extra interest charged on the overdue capital lease obligation of $159,831. On March 23, 2015, the Company paid an additional RMB 800,000 (approximately $130,826). On March 29, 2015, Jiangsu Financial Leasing Co., Ltd. agreed to waive the remaining overdue capital lease obligation of $35,974, which was recognized as other income by the Company.

 

 

Note 11 – Derivative Instruments and the Fair Value of Financial Instruments

 

(i)

Warrants Issued in April 2010 (“2010 Warrants)

 

 

As of June 30, 2015, there were nil warrants outstanding. Thus as of June 30, 2015 there was no derivative liability associated with the warrants. 

 

The table below summarizes the Company’s 2010 warrant activities through June 30, 2015:

 

		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, 2014			161,539				75				75				-				-
Granted			-				-				-				-				-
Canceled for cashless exercise			-				-				-				-				-
Exercised (Cashless)			-				-				-				-				-
Exercised			-				-				-				-				-
Expired			(161,539	)
Balance, June 30, 2015			-				-				-				-				-
Earned and exercisable, June 30,2015			-				-				-				-				-
Unvested, June 30, 2015			-			$	-			$	-			$	-			$	-

 

(ii)

Convertible Note

  

On August 27, 2014, the Company issued a convertible note which is convertible after 180 days from the issuance date at 58% of the average of the three lowest daily trading price of the Company’s common stock of any of the ten consecutive trading days and including the trading day immediately preceding conversion, in the amount of $100,000. On February 23, 2015, the note became convertible. On March 3, 2015, the Company received a conversation notice from its convertible notes holder, Magna Equities II LLC, to convert $100,000 plus interest of $4,067 of the note into 142,779 shares of the Company’s common stock, at a conversation price of $0.72887/share.

 

On October 29, 2014, the Company issued a convertible note which is convertible after 180 days from the issuance date at 63% of the average of the lowest 3 trading prices of the Company’s common stock of any of the ten consecutive trading days and including the trading day immediately preceding conversion, in the amount of $78,500. On April 27, 2015, the note became convertible. On May 8, 2015, the Company received a conversion notice from its convertible notes holder, KBM Worldwide Inc., to convert $78,500 plus interest of $3,110 of the note into 115,317 shares of the Company’s common stock, at a conversion price of $0.7077/share.

 

On April 24, 2015, Fremery Holding Ltd. (“Fremery”) and Shanghai Heqi Investment Center (“Heqi”) entered into an agreement to transfer $1.2 million of the loan Renewable Metals previously borrowed from Fremery where Armco Metals Holdings was a guarantor to Heqi with the interest rate of 6% per annum and the due date on or before July 20, 2015. On April 27, 2015, Armco Metals Holdings signed an agreement with Heqi to permit Heqi to convert its loan and outstanding interest into the Company’s common shares with conversion rate of 85% multiplied by the volume weighed average price for the common stock during the 10 trading days ending on the latest complete trading day prior to the conversion date with maximum conversion shares amount of 1,224,154 shares of common stock. On May 20, 2015, Heqi converted $334,600, including $330,000 principal and $4,600 interest, into 302,805 shares of common shares with the conversion rate of $1.10500/share. On June 3, 2015, Heqi converted $282,030, including $280,000 principal and $2,030 interest, into 313,019 shares with the conversion rate of $0.90100/shares. On June 26, 2015, Heqi converted $332,203, including $330,000 principal and $2,203 interest, into 355,359 shares with the conversion rate of $0.93484/share.

 

As of June 30, 2015, the convertible note balance with Heqi was $167,620, including the principal balance of $260,000 and the debt discount of $92,380, with the interest rate of 6% per annum.

 

The Company analyzed the conversion option of the convertible debt. The Company considered derivative accounting under ASC 815-15 “Derivatives and Hedging” and determined that the embedded conversion feature should be classified as a liability due to there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options. The embedded conversion feature was measured at fair value at the date of inception and at the end of each reporting period or termination of the instruments with the change in fair value recorded to earnings.

 

 

The fair value of the instruments was determined by using Black-Scholes option-pricing model based on the following assumptions: dividend yield of 0%, volatility of 110%-138% risk free rate of 0.01%-0.08%, and an expected term of 0.2-0.51 year.

 

The fair value of the instruments determined using Black-Scholes option –pricing model as of the dates the notes became convertible was $596,629, and was recorded as debt discount, of which $504,249 was amortized into interest expense for the six months ended June 30, 2015.

 

 The following table summarizes the change of fair value of the derivative debt liabilities.

 

Balance at December 31, 2014		$	-
To record derivative liabilities as debt discount			596,629
Change in fair value of derivative liabilities			(134,760	)
Settlement of derivative liability due to conversion of related notes			(461,869	)
Balance at June 30, 2015		$	-

 

Note 12 – Commitments and Contingencies

 

 

Litigation

 

The Company and its directors are a party to a lawsuit filed on March 29, 2013 by Albert Perron, derivatively on behalf of the Company, in the District Court for Clark County, Nevada (Case No. A-13-679151-C), which seeks a declaratory judgment, rescission, unspecified damages, equitable and injunctive relief, and attorney's fees. The Plaintiff's 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 (the “Plan”), as further amended, by issuing shares to Mr. Kexuan Yao (“Mr. Yao”) under the February 2012 employment agreement (“Employment Agreement”) that exceeded the amount allowed under the Plan. William Thomson (“Mr. Thomson”), Mr. Yao, Jimping (K.P.) Chan (“Mr. Chan”), Tao Pang (“Mr. Pang”) and Weiping Shen (“Mr. Shen”) (The “Director Defendants”) have filed an answer to this lawsuit in which they have denied the claims being made. The Company and Director Defendants' position is that the shares at issue in this matter were granted to Mr. Yao in accordance with the Plan. Mr. Thomson and Mr. Yao moved for summary judgment (“Defendants' MSJ”) on the Plaintiff's meritless claims on July 18, 2014. Mr. Chan, Mr. Pang, and Mr. Shen joined Defendant' MSJ on August 20, 2014. Plaintiff filed his own Motion for Summary Judgment (“Plaintiff's MSJ) on August 18, 2014, and his response in opposition to Defendants' MSJ on August 22, 2014. A hearing on Defendants' MSJ and Plaintiff's MSJ was held on September 18 2014, wherein the Court denied Plaintiff's MSJ and granted Defendant's MSJ in part holding that the Employment Agreement with Mr. Yao did not violate the terms of the Plan. However, in denying Defendants' MSJ in part, the Court, Sua sponte, found that an issue of material fact remained as to whether the Company's board approved each issuance subsequent to 2012 in accordance with the vesting dates contained the Employment Agreement to ensure that Mr. Yao did not receive an excess of shares in any one (1) year period in violation of the Plan. On October 29, 2014, the Director Defendants filed a Motion for Reconsideration of Partial Denial of Motion for Summary Judgment. The Company joined the Motion for Reconsideration of Partial Denial of Motion for Summary Judgment on October 30, 2014. On or about November 5, 2014, Plaintiff filed Plaintiff's Motion for Reconsideration, essentially rearguing Plaintiff's MSJ. The Court held a hearing on both motions for reconsideration on December 19, 2014, and denied both motions. The case is currently scheduled for trial to begin on November 16, 2015. The Company and Director Defendants continue to believe that Plaintiff’s claims have no merit and will continue to defend this case 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 uncommitted trade credit facilities at June 30, 2015 were as follows:

 

	Date of Expiration		Total Facilities				Facilities Used				Facilities Available
Armco HK
RZB Bank (i)	July 31, 2015		$	7,000,000			$	-			$	7,000,000
DBS (Hong Kong) Limited (ii)	October 9, 2015			20,000,000				-				20,000,000
Sub-total - Armco HK				27,000,000				-				27,000,000
Henan Armco
ICBC (iii)	August 29, 2015			3,273,965				-				3,273,965
Guangdong Development Bank Zhengzhou Branch (iv)	May 15, 2015			15,715,034				-				15,715,034
Sub-total – Henan Armco				18,988,999				-				18,988,999
Renewable Metals
Bank of China Lianyungang Branch (v)	December 27, 2015			8,184,914				-				8,184,914
Bank of Communications Lianyungang Branch (vi)	August 2, 2015			11,786,276				1,778,467				10,007,809
Sub-total – Renewable Metals				19,971,190				1,778,467				18,192,723
			$	65,960,189			$	1,778,467			$	64,181,722

 

(i)

On March 12, 2014, Armco HK entered into Amendment No. 5 to the March 25, 2009 uncommitted Trade Finance Facility with RZB Austria Finance (Hong Kong) Limited. The amendment indicates that the total facilities amount shall be decreased from $15,000,000 to $7,000,000, expiring July 31, 2015. 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 6.25% 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. As of June 30, 2015, Armco HK and RZB bank were in the process renewing the line of credit. The amount of the Amendment No.6 shall be decreased from $7,000,000 to $5,500,000, expiring November 30, 2016. 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. 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 October 10, 2014, Armco HK extended the Banking Facilities Agreement with DBS Bank (Hong Kong) Limited (originally entered on December 21, 2011) of $20,000,000 for issuance of commercial letters of credit in connection with the Company’s purchase of metal ore. The Company pays interest at LIBOR or DBS Bank’s cost of funds plus 2.50% per annum on issued letters of credit in addition to an export bill collection commission equal to 12.5% of the first $50,000 and 6.25% of the balance and an opening commission of 25% on the first $50,000 and 6.25% of the balance for each issuance.  Amounts advanced under this facility are repaid from the proceeds of the sale of metal ore.  The lender may terminate the facility at anytime at its sole discretion. The facility is secured by the charge on cash deposit of the borrower, the borrower’s restricted pledged deposit in the minimum amount of 3% of the letter of credit amount, the Company’s letter of comfort and the guarantee of Mr. Yao.

   

	(iii)	On September 10, 2013, Henan Armco obtained a RMB 20,000,000 (approximately $3.3 million) line of credit from ICBC, 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. Yao.
	(iv)	On May 16, 2014, Henan Armco obtained a RMB 96,000,000 (approximately $15.7 million) line of credit from Guangdong Development Bank Zhengzhou Branch for issuance of letters of credit to finance the purchase of metal ore. As of June 30, 2015, Henan Armco and the bank were in the process renewing the line of credit to expiring May 16, 2016. 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. 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 RMB 50,000,000 (approximately $8.2 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. Yao, Ms. Yi Chu, and Henan Armco, respectively.

  

(vi)

On July 5, 2011, Renewable Metals obtained a RMB 72,000,000 (approximately $11.8 million) line of credit from Bank of Communications, Lianyungang Branch expiring August 2, 2015. 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. Yao.

 

Employment with the Chairman and CEO 

 

On March 19, 2015, the Company entered into a new employment agreement (the “Employment Agreement”) with Mr. Yao for the period of January 1, 2015 to December 31, 2015. Pursuant to the Employment Agreement, Mr. Yao is entitled to, among other, the following compensation and benefits:

 

a.

Base Salary. The Company shall pay the Executive a salary of $250,000 per annum.

 

b.

Bonus. 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 2.5 months following the year with respect to which the Base Salary is payable. During the employment term, the Compensation Committee has the discretion to grant the Executive additional bonus at its sole discretion.

  

c.

Restricted Shares: The Executive received a restricted stock grant of 60,000 shares of common stocks under the Company’s Amended and Restated 2009 Stock Incentive Plan, as amended, vesting in four equal quarterly installment beginning on April 1, 2015.

 

d.

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

  

e.

Paid Vacation: The Executive will have paid vacation of at least less than 25 business days per year, to be accredited accordance with the ordinary policies.

 

f.

Expenses Reimbursement: The Company agreed to pay or reimburse the Executive for any expenses, including reasonable attorney’s fees and expenses, actually incurred (and, in the case of reimbursement, paid) by him, up to a maximum of $10,000, in connection with : (i) obtaining the proper work permits and/or visa and/or United States Permanent Resident Card necessary for the Executive to provide services in the United States, and (ii) the preparation of his spouse’s (if applicable) United States income tax returns as required by law; and

 

  

g.

Life Insurance Benefit Premium payment: The Company agrees to reimburse the Executive the amount of the premium paid by him on a term life policy for benefit of his and his designated beneficiaries with a death benefit of $2 million.

 

Operating Leases

 

(i)     Operating Lease - Office Space 

 

On July 1, 2014, Armco Shanghai entered into a non-cancelable operating lease for office space that expires on July 31, 2016. The annual lease payment is RMB 674,933 (approximately $110,485).

 

On April 13, 2015, Armco Metals Holding entered into a lease agreement for the lease of its principal executive offices that expires in April 2018. The base monthly rental is $1,629.85 for the first year and will increase 4% each year. The Company is also responsible for its proportionate share of the building's monthly operating expenses which are presently estimated at $660.75 per month.

 

 

Note 13 – Stockholders’ Equity

  

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

 

Legal Services Agreement – All Bright Law Offices

 

On April 7, 2014, the Company entered into a Legal Services Agreement (“Legal Agreement”) with All Bright Law Office. Pursuant to the Legal Agreement, All Bright agreed to provide Chinese-law related legal counsel services from April 1, 2013 to March 31, 2015 in exchange for 50,000 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 six months ending June 30, 2015

 

12,500 common shares earned for the quarter ended March 31, 2015 were valued at $1.14 per share, which was the market price on quarter end date, or $14,250, which was recorded as legal expenses.

 

Consulting Services Agreement – Shanghai Heqi Investment Center  

 

On January 13, 2015, the Company entered into a Consulting Services Agreement (“Consulting Agreement”) with Heqi, a China based company. Pursuant to the Consulting Agreement, Heqi agreed to provide consulting services from February 1, 2015 to January 31, 2016 in exchange for 150,000 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 Heqi. 

 

Shares Earned during the six months ending June 30, 2015

 

24,167 and 37,500 common shares earned for the quarter ended March 31, 2015 and June 30, 2015 respectively were valued at $1.14 per share and $0.955 per share for each quarter, which was the market price as of quarter end date, or $27,550 and $36,000 respectively, which was recorded as consulting expenses.

 

2009 Stock Incentive Plan as Amended

 

2014 Amendment to the 2009 Stock Incentive Plan

 

At the 2014 Annual Meeting of Stockholders (the “2014 Annual Meeting”) of the Company held on November 17, 2014, 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 300,000 shares to 1,120,000 shares of the Company’s common stock.

 

 

Shares Awarded during 2015

 

During the six months ended June 30, 2015, the Company granted 230,106 shares of its common stock to its employees and directors for the first two quarters of their 2015 service of approximately $318,087, in lieu of cash, which were recorded as compensation expense for the six months ended June 30, 2015.

 

On March 19, 2015, the Company granted 60,000 shares of its common stock to Mr. Yao for part of his compensation for the period of January 1, 2015 to December 31, 2015, vesting in four equal quarterly installments. As of June 30, 2015, 30,000 shares were vested and record as compensation expense at amount of $37,500.

 

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				Fair Value at
		Shares or Options				Date of Grant
Balance, December 31, 2014			795,462			$	4,118,012
Options – granted			-				-
Options – canceled			-				-
Shares – granted			290,106				393,087
Shares – canceled			(-	)			(-	)
Balance, June 30, 2015			1,085,568			$	4,511,099
Vested, June 30, 2015			1,055,568				4,473,599
Unvested, June 30, 2015			30,000			$	37,500

 

 

 The total number of the common shares authorized under the Amended and Restated 2009 Stock Incentive Plan was 1,120,000. As of June 30, 2015, there were 34,432 shares of common stock remaining available for issuance under the Amended and Restated 2009 Stock Incentive Plan.

 

Note 14 – Income Taxes

 

Armco Metals Holdings is a non-operating holding company. Armco HK, the Company’s Hong Kong Subsidiary is subject to Hong Kong SAR income taxes. Henan Armco, Renewable Metals, Lianyungang Armco and Armco Shanghai, the Company’s PRC subsidiaries are subject to PRC income taxes, file income tax returns under the Income Tax Law of the People’s Republic of China concerning Foreign Investment Enterprises and Foreign Enterprises and local income tax laws (the “PRC Income Tax Law”) accordingly. Henan Armco, Renewable Metals, Lianyungang Armco and Armco Shanghai derive substantially all of their income (loss) before income taxed and related tax expenses from PRC sources.

 

United States Income Tax

 

     Armco Metals Holdings is incorporated in the State of Nevada and is subjected to United Sates of America tax law.

 

No provision for U.S. federal and state incomes taxes has been made in our consolidated financial statements for those non-U.S. subsidiaries whose earnings are considered to be reinvested. A distribution of these non-U.S. earnings in the form of dividends, or otherwise, would subject the Company to both U.S. federal and state income taxes, as adjusted for non-U.S. tax credits, and withholding taxes payable to the various non-U.S. countries. Determination of the amount of any unrecognized deferred income tax liability on these undistributed earnings is not practicable.

 

       Hong Kong SAR Income Tax

 

Armco HK is registered and operates in the Hong Kong Special Administrative Region (“HK SAR”) of the People’s Republic of China (“PRC”) and is subject to HK SAR tax law. Armco HK’s statutory income tax rate is 16.5%.

 

       PRC Income Tax

 

Henan Armco, Renewable Metals, Lianyungang Armco and Armco Shanghai are governed by and file separate income tax returns under the PRC Income Tax Law, which, until January 2008, generally subject to tax at a statutory rate of 33% (30% state income tax plus 3% local income tax) on income reported in the statutory financial statements after appropriate tax adjustments. On March 16, 2007, the National People’s Congress of China approved the Corporate Income Tax Law of the People’s Republic of China (the “New CIT Law”), effective January 1, 2008. Under the New CIT Law, the corporate income tax rate applicable to all Companies, including both domestic and foreign-invested companies, will be 25%. However, tax concession granted to eligible companies prior to March 16, 2007 will be grand fathered in.

  

The effective rate is 20.76% and 0% for the six months ended June 30, 2015 and June 30, 2014, respectively.

 

Note 15 – Concentrations and Credit Risk

 

Credit Risk Arising from Financial Instruments

 

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

 

As of June 30, 2015, 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 in the history.

 

 

Customers and Credit Concentrations

 

Customer concentrations and credit concentrations are as follows:

		Net sales
		For the Six Months Ended
		June 30,				June 30,
		2015				2014
Cusomter A			42.3	%			-	%
Cusomter B			24.1	%			15.5	%
Cusomter C			14.5	%			-	%
Cusomter D			12.3	%			54.0	%
			93.2	%			69.5	%

 

 

		Net Accounts Receivable at
		June 30,				December 31,
		2015				2014
Cusomter A			49.3	%			30.4	%
Cusomter B			28.5	%			24.1	%
Cusomter C			14.1	%			19.8	%
			91.9	%			74.3	%

 

 

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 Purchase
		For the Six Months Ended
		June 30,				June 30,
		2015				2014
Vendor A			59.5	%			79.2	%
Vendor B			35.1	%			13.0	%
			94.6	%			92.2	%

 

 

		Accounts Payable at
		June 30,				December 31,
		2015				2014
Vendor A			59.1	%			49.2	%
Vendor B			14.0	%			29.6	%
			73.1	%			78.8	%

 

 

Note 16 – Subsequent Events

 

In a meeting held on June 10, 2015, the Company approved to establish an OTO (Online to Offline) platform for steel scrap business with its business partners. The OTO platform will be operated through Shanghai Meng Yi Network Technology Co., Ltd. (“Meng Yi”), a newly established company, with registered capital of RMB 10 million (approximately $1.6 million). Meng Yi obtained its business license on July 9, 2015 and is in the process of obtaining ICP license. The Company’s subsidiary, Armco Shanghai, will be the largest shareholder with 34.3% equity interest by contributing RMB 1.45 million (approximately $0.23 million) and business know-how.

 

On July 21, 2015, the Company received a notice from Heqi to request to convert $170,937 principal of the note and $1,083 of the accrued interest into 252,971 common shares, at the conversion rate of $0.6800/share, pursuant to the terms set forth in the convertible note agreement. The remaining balance of $89,063 principal of the note was paid off by Mr. Yao subsequently.

 

On August 1, 2015, the Company’s board of directors approved to grant to 8,806 shares of common stock of the Company to its employees as part of salary compensation based on 20% discount of the lowest closing stock price of July 2015 and to be vest at the first day of August 2015.

 

 

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

 

The following discussion and analysis of our consolidated financial condition and results of operations for the three and six months ended June 30, 2015 and 2014 should be read in conjunction with the consolidated financial statements, including footnotes, and other information presented elsewhere in this report. 

 

Overview 

 

Our Business and Recent Developments 

 

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

 

Growth in China economy held at 7 percent in the second quarter, while the steel demand has been constantly declining this year because of the slowing economy. Total steel output declined 1.3 percent to 409.97 million tonnes for the first half of 2015 compared with the same period a year ago, and crude steel output dropped 0.8 percent in June from a year earlier, government data showed, with demand hit by slowing economic growth and property slowdown in China. Chinese steel prices are at their lowest in more than 20 years as the slowing economy cuts into demand for a range of commodities including iron ore and steel, especially the scrap steel, one of our major products. Consequently, the price decline in scrap steel resulted in an approximately $10 million of inventory write-down in our recycling business and a net loss of $7.6 million for the second quarter.

 

 

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, China, in the late third quarter of 2010. The facility recycles automobiles, machinery, building materials, dismantled ships and various other scrap metals.  We sell and distribute the recycled scrap metal to the metal refinery industry in the PRC utilizing our existing network of metal ore customers while continuing to seek new customers. During the second quarter of 2015, our net revenue in the scrap metal recycling business decreased slightly by 2% to $25.7million from $26.1 million in the second quarter of 2014.  Our production increased to 57,958 metric tons (“MT”) from 33,458 MT in the second quarter of 2014.   For the second quarter of 2015, our scrap metal business sold approximately 42,498 MT of scrap metals, generating approximately $25.7 million of revenue and (- $8.1) million of gross profit; for the first half of 2015, our scrap metal business sold approximately 78,898 MT of scrap metals, generating approximately $40.9 million of revenue and (-$11.9) million of gross profit as result of a substantial inventory write-down.

 

In the trading business, the net revenue in the second quarter of 2015 increased by 40% to $11.2 million from $6.7 million in the second quarter of 2014 mainly due to the increase sales in raw wood of $9.2 million. The gross profit generated from trading business in the second quarter of 2015 is $2,896, representing a gross margin of $0.03%. For the first half of 2015, the net revenue in our trading business increased by 64% to $39.0 million from $14.0 million in the first half of 2014 primarily due to the increase sales in the new products raw wood of $18.0 million and barley of $15.9 million. The gross margins for the sales of raw wood are approximately 0.15% and 0.07% for the three months and six months ended on June 30, 2015, respectively. The gross margin for the sales of barley is approximately 0.11% for the first half of 2015 and no sales in barley in the second quarter. The gross profit in the trading business for the first half of 2015 was negative (-$28,709), representing a gross margin (-0.074%).

 

During the first half of 2015, in an effort to address the changing market conditions and unpredictable fluctuations in market prices, as well as to maintain our operation flexibility in our trading business, we continued to refine our business model and adjust our product line. We increased new products, such as wood and barley into our trading product line. We also expanded our business to exporting steel products to overseas market, such as Saudi Arabia, Vietnam and Turkey, while in the past we usually only dealt in importing metal ore and scraps into China. With recent tax elimination and reduction on export tariff by China government for some iron and steel products, we seek to grow our exporting business and expect to be benefited from the favorable export tariff change. To manage market risks, we are evaluating other potential methods such as further diversifying products and hedging tools.

 

We believe that our recycling business will become an increasingly strong driver in our company’s growth as natural resources continue to be depleted and PRC government continue to advocate sustainable and circular development with emphasis on environment protection, larger amounts of unprocessed scrap metal become available and increased in consumer demand in the long term. While we continue to work on improving our operation and developing our platform strategy, we are establishing an OTO (Online to Offline) platform for steel scrap business with business partners. This is a new strategic development for us to expand and enlarge the steel scrap business from traditional trading model to OTO platform with additional value-added services. The OTO platform will connect decentralized steel scrap suppliers from upstream with downstream steel mills via internet and provide the services for facilitating steel mill's purchase from and payment to suppliers. Currently and in the short term, it provides a match and complements our business; for the long term Creating the OTO platform is an important strategic development which could lead the business transition for the Company from solely selling steel scrap products in traditional methods to providing both services and products in the steel scrap business through the online platform. Once the platform grows to certain scale, we believe the greater sales revenue and profit for our steel scrap business could be expected. As of the filing date, we received business certificates for the new joint venture created for operating OTO platform and we are currently working on obtaining the license for operating internet services in China for the new joint venture.

 

Despite the ongoing slowdown of China economy, management believes our business will benefit from China recent development. Recently China’s top economic planning agency, the National Development and Reform Commission (NDRC), released a new action plan outlining key details of Beijing’s “One Belt, One Road” initiative. Initially billed as a network of regional infrastructure projects, this latest release indicates that the scope of the “Belt and Road” initiative has continued to expand and will now include promotion of enhanced policy coordination across the Asian continent, financial integration, trade liberalization, and people-to-people connectivity. In addition, China government is working on a development plan to boost the economic integration of Beijing and its surrounding provincial areas, namely Tianjin municipality and Hebei province. Better guidelines to promote the economic integration of the areas would help them complement each other with respective advantages, as well as propelling economic transformation and upgrading the Bohai Sea rim. These national economy development strategies will stimulate the investment and boost the demand for steel products, as well as our products.

 

 

RESULTS OF OPERATIONS   

 

 

               The table below summarizes the consolidated operating results for the three and six months ended June 30, 2015 and 2014.  The percentages represent each line item as an approximate percentage of net revenues unless otherwise noted.

 

		For the Six Months Ended June 30,																For the Three Months Ended June 30,
		2015								2014								2015								2014
Net revenues		$	79,971,983							$	42,797,893							$	36,901,969							$	32,879,242
Cost of goods sold			91,910,719				114.9	%			40,898,856				95.56	%			44,950,003				121.8	%			29,816,401				90.7	%
Gross profit			(11,938,736	)			-14.9	%			1,899,037				4.4	%			(8,048,034	)			-21.8	%			3,062,841				9.3	%
Total operating expenses			2,602,675				3.3	%			3,541,267				8.3	%			1,172,174				3.2	%			1,252,860				3.8	%
Operating income (loss)			(14,541,411	)			-18.2	%			(1,642,230	)			-3.8	%			(9,220,208	)			-25.0	%			1,809,981				5.5	%

 

 

Net Revenues 

 

                Net revenues for the three and six months ended June 30, 2015, were $36.9 million and $80.0 million, respectively, representing an increase of $4.0 million and an increase of $37.2 million over the comparable periods in 2014.  The increase in net revenues for the second quarter is mainly due to a $9.2 million increase in sales of raw wood, partially offset by a $2.7 million decrease in sales of chrome ore, a $1.3 million decrease in sales of scrap metals and a $1.0 million decrease in sales of billet. The increase in net revenues for the six month period ended June 30, 2015 is primarily due to a $18.0 million increase in sales of raw wood, a $15.9 million increase in sales of barley, a $12.1 million increase in sales of scrap metals, and a $1.2 million increase in sales of billet, partially offset by a $7.4 million decrease in sales of chromium ore, and a $2.2 million decrease in sales of manganese ore.  The type of products we buy and sell are subject to change and are dependent upon availability and the demands of our customers. By business section, during the quarter, our recycling business and trading business generated revenue of $25.7 million and $11.2 million, decreased by $4.6 million or 15.12% and increased $8.6 million or 330%, respectively, compared to same period of last year. The increase in trading business revenue was primary due to the new product, raw wood, brought into our trading business line in the first quarter of 2015, as discussed above.

 

Cost of Goods Sold 

 

                 Cost of goods sold for the three months ended June 30, 2015 was $45.0 million, representing an increase of $15.1 million and a gross profit margin of - 21.8%, compared to $29.8 million and a gross profit margin of 9.3%, in the same period in 2014.  Cost of goods sold for the six months ended June 30, 2015 was $91.9 million, representing an increase of $51.0 million, a gross profit margin of -14.9%, compared to $40.9 million and a gross profit margin of 4.4%, in the same period in 2014. The profit margin decrease was primarily due to an inventory write-down of $10.6 million in our recycling business compared to in the same period of last year as a result of adverse market change described above. The gross margin for our scrap metal recycling business decreased for the six month period to -29.1% compared to 4.7% for the same period of 2014 due to the reason described above. For our scrap sales, from a same batch of scrap raw materials we purchased which contains different kinds of scraps, after sorted and separated, some processed scraps from the materials may be steel scraps with low value and may generate lower margins or negative margins when sold, while other processed scraps from the same batch of raw materials may be non-ferrous scraps with high added value, such as scrap copper and aluminium scrap, and may generate high gross margin when sold. When the scraps with low value are sold in the first half of the year the sales present a low gross margin, while the non-ferrous scraps with high added value are sold and recorded in the second half our sales will have a high margin in the second half. In addition, the fluctuation of the scrap steel price also has substantial and direct impact on our gross margin which our inventory are valued based on the accounting policy of the lower of cost or market. As a result, the cutoff of quarterly report causes the fluctuation of gross margin in different quarter reports.

 

Total Operating Expenses 

 

Operating expenses for the three and six months ended June 30, 2015 were $1.2 million and $2.6 million, representing a decrease of $0.08 million and a decrease of $0.94 million, compared to the three and six months ended June 30, 2014, respectively.

  

                  For the three months ended June 30, 2015, the operating expenses remained approximately flat compared to the same period of last year.

 

                   For the six months ended June 30, 2015, the decrease in operating expenses was primarily due to a decrease in general and administrative expenses of $0.5 million, a decrease in operating cost of idle manufacturing facility of $0.18 million resulting from increased production, a decrease in selling expenses of $0.18 million, and a decrease in professional fees of $0.07 million.  

 

 

Total Other (Income) Expense  

                  

               Total other expense for the three months ended June 30, 2015 were $0.55 million and total other income for the six months ended June 30, 2015 were $3.63 million, respectively. During the three and six months ended June 30, 2014, we had other expense of $2.6 million and $2.7 million, respectively.

 

                  For the three months ended June 30, 2015, interest expenses decreased significantly to $0.69 million from $2.0 million compared to the comparative period in 2014 mainly due to the decrease in discounts associated with the conversion of convertible notes. During the second quarter, the change in fair value of derivative liability decreased $0.74 million compared to the same period of 2014. 

 

                  For the six months ended June 30, 2015, total other income increased $6.37 million, compared to the same period in 2014, mainly due to a gain on forgiveness of short-term debt of $4.08 million, a decrease in interest expense of $1.67 million mainly as result of decrease in discount associated with conversion of convertible notes, a decrease in other expense of $0.67 million, and a decrease in change in fair value of derivative liability of $0.24 million, partially offset by an increase in investment loss of $$0.2 million and a decrease in interest income of $0.10 million .                 

 

Income Tax Expense 

 

                  Income tax benefit for the three and six months ended June 30, 2015 were $2.16 million and $2.27 million, respectively. In the comparative periods in 2014, income tax expense was $0 for each period.  

 

Net Loss   

 

                  For the three and six months ended June 30, 2015, we had a net loss of $7.61 million and a net loss of $8.65 million, respectively, comparable to a net loss totaling $0.76 million and a net loss of $4.38 million, respectively for the comparable 2014 periods. The increase in net loss were due to the inventory write-down of $10.6 million described above resulting the decreased gross margin in our recycling business which our recycling business gross margin decreased to -31.33% and -29.10% from 9.76% and 4.7%, respectively, for three and six months comparable periods of 2014.

 

Comprehensive Income (Loss)

 

                 During the three and six months ended June 30, 2015, our comprehensive loss amounted to $8.05 million and $8.59 million, respectively, compared to comprehensive loss of $0.72 million and $4.72 million in the comparative periods in 2014. 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 income of $0.30 million for the first six months of 2015, comparable to a loss of $0.37 million for the same period in 2014. The non-cash income had the effect of increasing our reported comprehensive income in period of first half of 2015 while the non-cash loss had the effect of decreasing our reported comprehensive income in same period of 2014. We had an unrealized loss of marketable securities of $0.25 million for the first six months of 2015, comparable to an unrealized income of marketable securities of $0.03 million for the same period in 2014.  

 

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, 2015 totaled $0.92 million, a decrease of $0.97 million as compared to $1.88 million at December 31, 2014.  At June 30, 2015 our working capital was $11.65 million, as compared to $15.63 million at December 31, 2014. This decrease in working capital is mainly as result of the net loss during the first half of 2015.

 

                 Our current assets at June 30, 2015 were $62.84 million, an increase of $5.77 million, or 10%, from December 31, 2014. This overall increase reflects an increase of $26.63 million in advance on purchases and an increase of $5.22 million in inventories, partially offset by a decrease of $24.33 million in accounts receivable, a decrease of $0.97 million in cash, a decrease of $0.49 million in pledged deposits, a decrease of $0.22 million in prepayment and other current assets, and a decrease of $0.07 million in marketable securities.  

 

               Advance on purchases increased $26.63 million at June 30, 2015 compared to December 31, 2014, 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. Specifically the significant change at this quarter end was due to the advance increased for the new products described above in trading business this year.

 

 

                 Inventories increased $5.22 million at June 30, 2015 compared to December 31, 2014, primarily due to our purchases of raw material inventories and the increased scrap metal production during the first half of 2015.

 

                 Our accounts receivable decreased $24.33 million at June 30, 2015 from December 31, 2014 mainly due to the timing difference between the sales and collections of sales and our collections of scrap metals sales during the quarters.

 

Cash decreased $0.97 million at June 30, 2015 compared to December 31, 2014 reflecting the cash used in our operation and financing activities.

 

                Pledged deposits at June 30, 2015 of $0.01 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 prepayments and other current assets decreased $0.22 million at June 30, 2015 compared to December 31, 2014 primarily due to the decreases in deposits related to our scrap metal recycling operations and prepayments and deposits for our trading business.

 

                Marketable securities decreased $0.07 million at June 30, 2015 compared to December 31, 2014 due to the temporary decrease in the market value of our securities.

 

                At June 30, 2015, our total current liabilities increased $9.75 million, or 24%, from December 31, 2014, which reflected  mainly an increase in customer deposits of $24.53 million and an increase in banker's acceptance notes payable and letter of credit of $0.01 million, partially offset by a decrease in loan payable of $5.66 million, a decrease in accounts payable of $2.53 million, a decrease in deferred tax liabilities of $2.24 million, a decrease in value added tax and other taxes payable of $1.79 million, a decrease in accrued expenses and other current liabilities of $1.02 million, a decrease in current maturities of capital lease obligation of $0.72 million, a decrease in advances received from Chairman and CEO of $0.71 million, and a decrease in due to related party of $0.14 million, .

                

                Customer deposits increased $24.53 million at June 30, 2015, compared to December 31, 2014.  This increase is due to timing of customer orders and amounts that we require for deposits and the orders we delivered against the customer deposits.  We recognize customer deposits 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. Specifically the significant change at this quarter end was due to the customer deposit increase in the new products described above in trading business this year and most of the orders associated with the customer deposits were delivered at early of July.

 

                Banker's acceptance notes payable and letters of credit increased $0.01 million at June 30, 2015 compared to December 31, 2014 primarily due to an increase in short-term borrowings used in raw material acquisitions.

 

               Loans payable decreased $5.66 million at June 30, 2015, compared to December 31, 2014, primarily due to a one-time forgiveness of short-term debt and our repayment of short-term borrowing under our letter of credit facilities in the first two quarters of 2015. 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.

 

                Accounts payable decreased $2.53 million at June 30, 2015 compared to December 31, 2014 mainly due to our payment made to previous purchases during the first half of 2015.

 

               Deferred tax liability at June, 2015 decreased by $2.24 million from December 31, 2014, primarily due to decreases in taxable income for our China subsidiaries in the first half of 2015.

 

               Value added tax and other taxes payable decreased $1.79 million at June 30, 2015 from December 31, 2014 mainly due to the taxes and payable being paid and offset in the first half of 2015.

 

                Accrued expenses and other current liabilities decreased $1.02 million at June 30, 2015 from December 31, 2014 mainly due to the payment made to the liabilities in the first half of 2015.

  

                Current maturities of capital lease obligation decreased $0.72 million at June 30, 2015 compared to December 31, 2014 reflecting the payment made to the capital lease obligation during the first half of 2015.

 

               At June 30, 2015, we owed our Chairman and CEO, Mr. Kexuan Yao, $0.17 million for funds he advanced to us for working capital purposes, a net decrease of $0.7 million from December 31, 2014 as result of a conversion of some advance to our common stock during the second quarter.

 

The company intend to invest approximately $161,000 in the OTO platform described above in the next 12 months at June 30, 2015 and the investment plan is subject to change based on management's ongoing review on the progress of the project over time.

 

              As of June 30, 2015, we had invested a total of approximately $51.3 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 need to continue 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.

 

 

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 $66 million. Approximately $64.2 million was available under these facilities at June 30, 2015. We have approximately $12 million of debt which become due within the next 12 months. We expect to satisfy these obligations through our operation. In addition, we are currently under negotiation with several parties for a debt restructuring amounted to approximately $4 million to improve our financial and cash flow position.

 

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.

 

Statement of Cash Flows

 

                  For the first six months of 2015, our net decrease in cash totaled $0.97 million, and was comprised of $0.61 million used in operating activities and $0.43 million used in financing activities, offset by $0.05 million provided by investing activities.

 

                  For the first six months of 2014, our net increase in cash totaled $0.11 million, and was comprised of $2.93 million used in operating activities and $1.31 million used in financing activities, offset by $4.12 million provided by investing activities.

 

Cash flows used in Operating Activities

 

For the first six months of 2015 cash used in operations of $0.61 million was mainly comprised of an increase in advance on purchases of $25.34 million, an increase in inventory of $5.15 million, an increase in prepayments and other current assets of $0.98 million, a decrease in accounts payable of $2.55 million, a decrease in taxes payable of $1.82 million, and a decrease in accrued expenses and other current liabilities of $1.03 million. These cash outflows were partially offset by a decrease in accounts receivable of $24.52 million and an increase in customer deposits of $24.46 million. .

 

                 For the first six months of 2014 cash used in operations of $2.93 million was mainly comprised of an decrease in inventory of $7.08 million, a decrease in accounts receivable of $2.11 million, an increase in customer deposits of $1.24 million, a decrease in prepayments and other current assets of $0.40 million, and an increase in taxes payable of $0.315 million. These cash inflows were partially offset by a decrease in accounts payable of $7.27 million, a decrease in Banker's acceptance notes payable and letters of credit of $6.66 million and an increase in advance on purchase of $0.539 million.

 

Cash flows from Investing Activities

 

                  For the six months ended June 30, 2015 cash provided by investing activities of $0.05 million was due to proceeds received from the sales of marketable securities.

 

                  For the six months ended June 30, 2014 cash provided by investing activities of $4.12 million was due to proceeds received from the release of pledge deposits of $5.93 million, partially offset by payment made toward pledged deposits of $1.81 million.

 

Cash used in Financing Activities

 

                 For the six months ended June 30, 2015 cash used in financing activities of $0.43 million was mainly due to repayment of loans payable of $0.51 million, payment to advance from related party of $0.13 million, payment to capital lease obligation of $0.11 million, partially offset by the proceeds from loans payable of $0.16 million and advances from Chairman and CEO of $0.16 million.

 

                 For the six months ended June 30, 2014 cash used in financing activities of $1.31 million was mainly due to repayment of loans payable of $12.97 million, and payment to advance from related party of $0.03 million, partially offset by the proceeds from loans payable of $11.53 million and proceeds from capital lease obligation of $0.162 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 generally accepted accounting principles in the United States.

 

Contractual Obligations and Commitments 

 

At June 30, 2015, our long-term debt and financial obligations and commitments by due dates were as follows:

 

		Payments due by period
Contractual obligations		Total				Less than 1 year				1-3 years				3-5 years				More than 5 years
Banker's acceptance notes payable and letters of credit		$	1,778,555			$	1,778,555			$	-			$	-			$	-
Short-Term Loans Payable			11,349,788				11,349,788				-				-				-
Capital Lease Obligations			-				-				-				-				-
Operating Lease Obligations			186,956				139,670				47,286				-				-
Purchase Obligations			-				-				-				-				-
Other Long-Term Liabilities Reflected on the Registrant's Balance Sheet under GAAP			-				-				-				-				-
Total		$	13,315,299			$	13,268,013			$	47,286			$	-			$	-

   

 

 Critical Accounting Policies  

  

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. We believe the critical accounting policies in Note 1 to the consolidated financial statements appearing elsewhere in this report affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. Actual results may differ from these estimates under different assumptions and conditions.

 

 

Item 3.          Quantitative and Qualitative Disclosures About Market Risk. 

 

Not applicable for a smaller reporting company.

 

Item 4.          Controls and Procedures. 

 

Evaluation of Disclosure Controls and Procedures. We are required to maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based on their evaluation as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective such that the information relating to our company, required to be disclosed in our Securities and Exchange Commission reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure as a result of continuing weaknesses in our internal control over financial reporting.

 

 

As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, based on management’s assessment of the effectiveness of our internal controls over financial reporting, management concluded that our internal controls over financial reporting were not effective as of December 31, 2014, due to insufficiently qualified accounting and other finance personnel with an appropriate level of U.S. GAAP knowledge and experience. Management believes that our lack of experience with U.S. GAAP constitutes a material weakness in our internal control over financial reporting. Until such time, if ever, that we remediate the material weakness in our internal control over financial reporting we expect that the material weaknesses in our disclosure controls and procedures will continue.

 

Changes in Internal Control over Financial Reporting. There have been no changes in our internal control over financial reporting during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION 

 

Item 1.          Legal Proceedings. 

 

None.

 

 

 

Item 1A.       Risk Factors. 

 

The most significant risk factors applicable to the Company are described in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2014. There have been no material changes to those risk factors.

 

 

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

  

                   On July 21, 2015, the Company received a notice from Shanghai Heqi Investment Center (“Heqi”) to convert total $170,937 principle of the note and $1,083 of the accrued interest into 252,971 common shares, at the conversion rate of $0.6800/share, pursuant to the terms set forth in the convertible note agreement. On July 21, 2015, Mr. Kexuan Yao, the Company's Chairman and CEO, undertook to pay off the remaining balance of $89,063 principle of the note and the Company recorded an advance from Mr. Yao for the same amount and the remaining principal balance under the note is zero now. The recipient was an accredited investor and the issuances were exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”) in reliance on exemptions under Section 3(a)(9) of that act.

  

Item 3.          Defaults Upon Senior Securities. 

 

None. 

 

Item 4.          Mine Safety Disclosures. 

 

Not applicable to our company’s operations.

 

Item 5.          Other Information. 

 

None.

 

 

Item 6.             Exhibits. 

 

No.	Description
31.1	Rule 13a-14(a)/ 15d-14(a) Certification of Chief Executive Officer *
31.2	Rule 13a-14(a)/ 15d-14(a) Certification of Chief Financial Officer*
32.1	Section 1350 Certification of Chief Executive Officer and Chief Financial Officer*
101.INS	XBRL Instance Document *
101.SCH	XBRL Taxonomy Extension Schema *
101.CAL	XBRL Taxonomy Extension Calculation *
101.DEF	XBRL Taxonomy Extension Definition Linkbase *
101.LAB	XBRL Taxonomy Extension Label Linkbase *
101.PRE	XBRL Taxonomy Extension Presentation *

 

*	filed herewith

 

SIGNATURES 

 

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

 

	Armco Metals Holdings, Inc.
August 14, 2015	By: /s/ Kexuan Yao
	Kexuan Yao, Chief Executive Officer
	By: /s/ Fengtao Wen
	Fengtao Wen, Chief Financial Officer

 

 

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