UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 10-Q

(Mark One)

 

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

 

For the quarterly period ended September 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. 8,143,827 shares of common stock are issued and outstanding as of November 16, 2015. 

 

 

TABLE OF CONTENTS

 

		Page
		No.
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements.	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	28
Item 3.	Quantative and Qualitative Disclosures About Market Risk.	35
Item 4.	Controls and Procedures.	36
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings.	36
Item 1A.	Risk Factors.	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	36
Item 3.	Defaults Upon Senior Securities.	36
Item 4.	Mine Safety Disclosures.	36
Item 5.	Other Information.	36
Item 6.	Exhibits.	37

 

 

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.
	●	As the possible conversion of the loan with Wisdom & Wealth Investment & Management Co., Ltd. is approved by our shareholder meeting, that the other conditions precedent will be satisfied, that the related Loan will become convertible or that Wisdom & Wealth will seek to convert the Loan into shares of our common stock. In that event, we would be required to restructure the Loan prior to its maturity date or the Loan would be in default.
	●	As set forth in our Proxy Statement filed on September 23, 2015, the issuance of shares of our common stock upon conversion(s) of the Wisdom & Wealth Loan will be dilutive to our existing stockholders. In all likelihood, the market price of our common stock will decline as the number of our outstanding shares is increased upon conversion(s) of the Loan, particularly if the certificates are issued free of restrictive legend and those shares are resold into the market by Wisdom & Wealth.

 

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 Part I, Item 1A. Risk Factors appearing in our Annual Report on Form 10-K and Form 10-K/A for the year ended December 31, 2014 and our other filings with the Securities and Exchange Commission. 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 refers to Armco Metals Holdings, Inc., a Nevada corporation, and our subsidiaries, the term “MT” refers to metric tons, and the term “Recycling Facility” refers to our metal recycling facility located in the Banqiao Industrial Zone, part of Lianyungang Economic Development Zone in the Jiangsu province of China. In addition, “2014” refers to the year ended December 31, 2014 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.

 

 

ARMCO METALS HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS 

		September 30				December 31
		2015				2014
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash		$	1,656,096			$	1,884,887
Pledged deposits			9,846				498,615
Marketable securities			6,226				73,943
Accounts receivable, net			19,333,656				43,202,886
Inventories			16,023,705				9,154,463
Advance on purchases			5,682,270				1,093,402
Prepayments and other current assets			871,011				1,164,603
Total Current Assets			43,582,810				57,072,799
Property, plant and equipment, net			29,501,508				32,563,929
Land use rights, net			5,810,454				6,108,283
Deferred tax assets			587,264				279,563
Total Assets		$	79,482,036			$	96,024,574
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Loans payable		$	10,677,110			$	17,011,843
Banker's acceptance notes payable and letters of credit			1,707,287				1,767,790
Current maturities of capital lease obligation			-				720,819
Accounts payable			9,332,766				5,497,866
Advances received from Chairman and CEO			341,257				877,076
Due to related party			560,956				717,703
Customer deposits			1,417,492				1,467,281
Corporate income tax payable			815,073				815,073
Value added tax and other taxes payable			2,696,049				5,747,470
Deferred tax liabilities			1,165,504				2,965,196
Accrued expenses and other current liabilities			2,662,810				3,850,095
Total Current Liabilities			31,376,304				41,438,212
Total Liabilities			31,376,304				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, 8,143,827 and 5,615,088 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively			8,144				5,615
Additional paid-in capital			49,178,622				45,968,908
Retained earnings (deficit)			(3,713,432	)			4,491,948
Accumulated other comprehensive income:			2,632,398				4,119,891
Total Stockholders' Equity			48,105,732				54,586,362
Total Liabilities and Stockholders' Equity		$	79,482,036			$	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 Nine Months				For the Three Months				For the Nine Months				For the Three Months
		Ended				Ended				Ended				Ended
		September 30, 2015				September 30, 2015				September 30, 2014				September 30, 2014
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
NET REVENUES		$	128,443,424			$	48,471,441			$	74,996,063			$	32,198,170
COST OF GOODS SOLD			138,716,410				46,805,691				64,698,705				23,799,849
GROSSPROFIT			(10,272,986	)			1,665,750				10,297,358				8,398,321
OPERATING EXPENSES:
Selling expenses			40,507				19,417				186,867				53,934
Professional fees			452,290				163,952				543,229				117,690
General and administrative expenses			1,895,730				427,816				2,577,582				602,002
Operating cost of idle manufacturing facility			1,340,707				515,374				1,381,049				373,835
Total operating expenses			3,729,234				1,126,559				4,688,727				1,147,461
INCOME (LOSS) FROM OPERATIONS			(14,002,220	)			539,191				5,608,631				7,250,860
OTHER EXPENSE:
Interest income			(324,326	)			(324,173	)			(99,118	)			(318	)
Interest expense			1,254,751				281,856				3,274,244				632,472
Loss on sales of marketable securities			204,766				-				43,434				43,434
Change in fair value of derivative liabilities			(134,760	)			-				107,378				(1,597	)
Loan guarantee expense			-				-				13,002				-
Gain on forgiveness of short-term debt			(4,049,566	)			31,800				-				-
Government grant			(475,928	)			-				-				-
Other (income) expense			(194,397	)			(79,645	)			61,339				(13,689	))
Total other expense (income)			(3,719,460	)			(90,162	)			3,400,279				660,302
INCOME (LOSS) BEFORE INCOME TAX PROVISION			(10,282,760	)			629,353				2,208,352				6,590,558
INCOME TAX PROVISION (BENEFIT)			(2,077,380	)			187,957				1,789,904				1,789,904
NET INCOME (LOSS)			(8,205,380	)			441,396				418,448				4,800,654
OTHER COMPREHENSIVE INCOME (LOSS):
Change in unrealized income (loss) on marketable securities			(183,628	)			(364,487	)			70,633				38,165
Foreign currency translation loss			(1,671,121	)			(1,973,326	)			(375,956	)			(3,178	)
COMPREHENSIVE INCOME (LOSS)		$	(10,060,129	)		$	(1,890,417	)		$	113,125			$	4,835,641
NET INCOME (LOSS) PER COMMON SHARE - BASIC AND DILUTED:
Net income (loss) per common share – basic and diluted		$	(1.21	)		$	0.05			$	0.09			$	0.87
Weighted Average Common Shares Outstanding - basic			6,758,059				8,030,521				4,517,536				5,495,532
Weighted Average Common Shares Outstanding - diluted			6,758,059				8,030,521				4,530,348				5,531,263

 

See accompanying notes to the unaudited consolidated financial statements.  

 

 

ARMCO METALS HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

For the Nine Months Ended September 30, 2014

(Unaudited)

		Common Stock, $0.001 Par Value																Accumulated Other Comprehensive Income (Loss)
		Number of Shares				Amount				Additional Paid-in Capital				Retained Earnings (Deficit)				Change in Unrealized Gain (Loss) on Marketable Securities				Foreign Currency Translation Loss				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 of common shares for employees			283,912				284				380,394																380,678
Issuance of common shares for third party services			111,667				112				86,688																86,800
Issuance of common stock in conversion of convertible notes			1,482,250				1,482				1,305,048																1,306,530
Issuance of common stock in conversion of loan to Chairman			650,910				651				975,715																976,366
Reclassification of derivative liabilities due to conversion of convertible notes											461,869																461,869
Net Loss															(8,205,380	)											(8,205,380	)
Change in unrealized gain on marketable securities																			183,628								183,628
Foreign currency translation adjustment																							(1,671,121	)			(1,671,121	)
Balance, September 30, 2015			8,143,827			$	8,144			$	49,178,622			$	(3,713,432	)		$	(245,514	)		$	2,877,912			$	48,105,732

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

ARMCO METALS HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		For Nine Months Ended September 30,
		2015				2014
		(Unaudited)				(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	(8,205,380	)		$	418,448
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Depreciation expense			2,026,860				2,099,052
Amortization expense			39,458				92,082
Gain on disposal of property plant and equipment			-				-
Deferred income taxes			(2,077,605	)			-
Gain on forgiveness of capital lease obligation			(125,371	)			-
Gain on forgiveness of short-term debt			(4,049,566	)			-
Change in fair value of derivative liabilities			(134,760	)			107,378
Loss on sales of marketable securities			204,766				43,434
Amortization of debt discount			611,339				1,991,581
Stock based compensation			380,678				1,033,908
Shares issued for third party services			86,800				268,002
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Changes in operating assets and liabilities:
Accounts receivable			23,080,817				(28,274,868	)
Inventories			(7,405,965	)			6,355,762
Advance on purchases			365,861				(490,624	)
Prepayments and other current assets			(4,733,772	)			340,861
Banker's acceptance notes payable and letters of credit			-				(6,656,663	)
Accounts payable			4,129,800				16,122,951
Customer deposits			441				821,096
Taxes payable			(2,930,373	)			3,490,127
Accrued expenses and other current liabilities			(1,071,065	)			596,902
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES			192,963				(1,640,571	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from release of pledged deposits			227				5,942,529
Payment made towards pledged deposits			-				(1,815,807	)
Proceeds from sales of marketable securities			46,579				113,808
NET CASH PROVIDED BY INVESTING ACTIVITIES			46,806				4,240,530
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans payable			163,255				11,099,278
Repayment of loans payable			(523,823	)			(14,486,944	)
Proceeds from capital lease obligation			-				162,600
Repayment of capital lease obligation			(107,712	)			(341,574	)
Advances from Chairman and CEO			241,756				172,613
Advances from (repayment to) related parties			(133,244	)			11,535
Proceeds from convertible notes			-				600,000
NET CASH USED IN FINANCING ACTIVITIES			(359,768	)			(2,782,492	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH			(108,792	)			130,717
NET CHANGE IN CASH			(228,791	)			(51,816	)
Cash at beginning of the period			1,884,887				596,557
Cash at end of the period		$	1,656,096			$	544,741
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Interest paid		$	162,433			$	715,937
Income taxes paid		$	-			$	-
NON CASH FINANCING AND INVESTING ACTIVITIES:
Debt discount due to derivative liabilities		$	596,629			$	1,950,820
Change in fair value of marketable security		$	183,628			$	-
Reclassification from short-term debt to convertible debt		$	-			$	5,554,468
Reclassification of derivative liability to equity		$	461,869			$	2,113,939
Common shares issued for conversion of debt and accrued interest		$	1,306,530			$	6,610,635
Capital lease obligation settled with pledge deposit		$	488,934			$	-
Common shares issued for the settlement of loan with Chairman		$	976,366			$	-

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

Armco Metals Holdings, Inc 

September 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 $1.30 per share.

  

 

As a result of the controlling financial interest of the former stockholder of Armco HK, for financial statement reporting purposes, the merger between the Company and Armco HK has been treated as a reverse acquisition with Armco HK deemed the accounting acquirer and the Company deemed the accounting acquiree under the acquisition method of accounting in accordance with section 805-10-55 of the FASB Accounting Standards Codification. The reverse acquisition is deemed a capital transaction and the net assets of Armco HK (the accounting acquirer) are carried forward to the Company (the legal acquirer and the reporting entity) at their carrying value before the acquisition. The acquisition process utilizes the capital structure of the Company and the assets and liabilities of Armco HK which are recorded at their historical cost. The equity of the Company is the historical equity of Armco HK retroactively restated to reflect the number of shares issued by the Company in the transaction.

 

Formation of Armco (Lianyungang) Holdings, Inc.

 

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

 

Formation of Armco Metals (Shanghai) Holdings, Ltd.

 

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

 

   

Note 2 - 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 periods presented.  Interim results are not necessarily indicative of the results for the full year.  These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2014 and notes thereto contained in the Company’s Annual Report on Form 10-K, as amended, 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 September 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 date(s) and for the reporting period(s) 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 accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period). 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 accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:

 

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

 

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

 

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

  

 

The carrying amounts of the Company’s financial assets and liabilities, such as cash, pledged deposits, accounts receivable, advance on purchases, prepayments and other current assets, accounts payable, customer deposits, corporate income/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 September 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 liability at every reporting period and recognizes gains or losses in the consolidated statements of operations and comprehensive income (loss) that are attributable to the change in the fair value of the derivative liabilities.

 

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

 

Recurring Fair Value Measures		Level 1				Level 2				Level 3				Total
September 30, 2015
Available-for-sale securities		$	6,226				-				-			$	6,226
December 31, 2014
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:

  

		September 30, 2015				December 31, 2014				September 30, 2014
Balance sheets			6.3638				6.1460				6.1547
Statements of operations and comprehensive income (loss)			6.1735				6.1457				6.1480

 

  

Net Income (Loss) per Common Share

 

Net income (loss) per common share is computed pursuant to section 260-10-45 of the FASB Accounting Standards Codification. Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock and potentially outstanding shares of common stock during the period to reflect the potential dilution that could occur from common shares issuable through stock options, warrants and convertible debt instruments, and also unvested restricted stock. 

 

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.

 

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 nine months ended September 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.

 

In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”. The amendments in the ASU defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

 

In August 2015, the FASB issued ASU No. 2015-15, “Interest-Imputation of Interest (Subtopic 835-30) - Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit”.  This Update states that the SEC staff would not object to an entity deferring and presenting debt issuance costs related to a line-of-credit arrangement as an asset and subsequently amortizing those costs ratably over the term of the arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The adoption of ASU 2015-11 is not expected to have a material impact on the Company’s consolidated financial statements.

 

In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments”. The amendments in ASU 2015-16 require that an acquirer recognize adjustments to estimated amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the estimated amounts, calculated as if the accounting had been completed at the acquisition date. The amendments also require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the estimated amounts had been recognized as of the acquisition date. The adoption of this standard is not expected to have a material impact on the Company’s financial position and results of operations.

 

 

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:

 

		September 30,				December 31,
		2015				2014
Deposit for letters of credit		$	9,846			$	10,492
Deposit for capital lease obligation			-				488,123
		$	9,846			$	498,615

 

 

 

 

Note 4 – Marketable Equity Securities, Available for Sale

 

As of September 30, 2015, the Company’s available for sale marketable securities were marked to market to its fair value of $6,226.

 

The Company sold 7,164,879 shares during the nine months ended September 30, 2015 for $46,579, 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.

 

										Other
										Comprehensive
										Income
										(Loss) -
		Original				Impairment				Change in
						Other Than				Unrealized
		Cost				Temporary				Gain (Loss)				Fair Value
Balance as of December 31, 2014		$	2,686,102			$	(2,366,941	)		$	(245,218	)		$	73,943
Sale of marketable securities			(2,121,934	)			1,870,589								(251,345	)
Total gains (realized/unrealized) included in:
Other comprehensive income (loss): Changes in unrealized gain (loss)											183,628				183,628
Balance as of September 30, 2015		$	564,168			$	(496,352	)		$	(61,590	)		$	6,226

   

 

Note 5 – Accounts Receivable

 

Accounts receivable consisted of the following:

		September 30,				December 31,
		2015				2014
Accounts receivable		$	19,339,734			$	43,257,621
Allowance for doubtful accounts			(6,078	)			(54,735	)
		$	19,333,656			$	43,202,886

 

 

Note 6 – Inventories

 

Inventories consisted of the following:

		September 30,				December 31,
		2015				2014
Raw materials - Scrap metal		$	8,889,703			$	2,602,983
Finished goods - processed scrap metal			8,857,167				7,684,154
Purchased merchandise for resale			377,865				697,217
Write-down of inventories			(2,101,030	)			(1,829,891	)
		$	16,023,705			$	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 September 30, 2015 or December 31, 2014.

 

Slow-Moving or Obsolescence Markdowns

 

The Company recorded no inventory obsolescence adjustments for the interim period ended September 30, 2015 and 2014.

 

Lower of Cost or Market Adjustments

 

There were 344,055 and $(1,958,544) of lower of cost or market adjustments for the interim period ended September 30, 2015 and 2014.

 

 

Note 7 – Loans Payable

 

Loans payable consisted of the following:

		September 30,				December 31,
		2015				2014
Bank loans – secured (i)		$	2,400,579			$	2,485,649
Third party loans (ii)			8,276,531				14,347,694
Convertible notes payable (iii)			-				178,500
		$	10,677,110			$	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:

 

$157,139 loans from Guanhutun Credit Union, collateralized by Henan Armco’s building and leasehold improvement;

  

$2,243,440 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, $2,120,337 bears no interest and $6,156,194 bears interest rates ranging from 6.0% to 8.0% per annum. The maturity dates of the loans ranged from December 31, 2015 to January 21, 2016.

 

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 (“Chaoyang Investing & Construction Company”), and the related collateral was released as of December 31, 2014.

 

On March 6, 2015, Chaoyang Investing & Construction Company agreed to forgive 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.

 

On September 7, 2015, Armco Metal Holdings signed an agreement to guarantee to Chaoyang Investing & Construction Company the prompt payment of the above loan in order to facilitate the sale of the loan.

 

On the same day, Chaoyang Investing & Construction Company transferred the loan together with interest and related guaranty to Shanghai Wisdom & Wealth Investment & Management Co., Ltd. (hereafter referred to as “Wisdom & Wealth”). The interest rate of the loan is 6.42% and the mature date is December 31, 2015.

 

On September 8, 2015, Armco Metals Holdings signed an agreement with Wisdom & Wealth to permit Wisdom & Wealth to convert the loan and outstanding interest into the Company’s common shares with conversion rate of 85% market price with minimum conversion price of $0.2 per share. Upon conversion, the Company may need to issue in excess of 20% of the Company’s outstanding common stock. In accordance with Section 713 of the NYSE Company Guide, the Company is required to obtain stockholder approval prior to the issuance of any shares of its common stock upon the conversion of the loan as the ultimate issuance could be equal to 20% or more of the presently outstanding common stock at a conversion price of less than the greater of the book or market value of the stock, a change of control of the Company may occur. Under the terms of the agreement, Wisdom & Wealth agreed not to exercise any control over the Company or otherwise attempt to influence our management and to vote all of its shares in favor of or against the action as determined by the decision of a majority of the Company's stockholders.

  

 

While the Company’s stockholders approved the possible issuance of in excess of 20% of the Company’s outstanding common stock upon the possible conversion of the loan, the Company has not obtained the approval of NYSE Regulation for the listing of additional shares. The loan is not presently convertible until the above contingency is resolved.

 

The Company analyzed the modification of the debt terms under ASC 470-60 “Trouble Debt Restructurings” and ASC 470-50 “Extinguishment of Debt”. The Company determined the modification is substantial and the transaction should be accounted for as an extinguishment with the old debt written off and the new debt initially recorded at fair value with a new effective interest rate.

 

 

 (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 loan principal and accrued interest of $3,110 into 115,317 shares with the conversation rate of $0.7077/share.

 

On April 24, 2015, Fremerly 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 Fremerly where Armco Metal 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. On July 21, 2015, Heqi converted $172,020, including $170,937 principal and $1,083 interest into 252,971 shares with the conversation of $0.68/share. The remaining balance of $89,063 principal of the note was transferred to Company’s Chairman and Chief Executive Officer and the conversion option of the loan was removed. The loan became due on demand with zero interest rate and the balance was included in advances received from Chairman and CEO. The Company analyzed the modification of the terms under ASC 470-60 “Trouble Debt Restructurings” and ASC 470-50 “Extinguishment of Debt”. The Company determined the modification is not substantial and the transaction should not be accounted for as an extinguishment with the old debt written off and the new debt initially recorded at fair value with a new effective interest rate.

 

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:

 

		September 30,				December 31,
		2015				2014
Renewable Metals
Letters of credit maturing on February 2, 2015		$	1,707,287			$	1,767,790
		$	1,707,287			$	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 received 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 unsecured loan. On the same day, the Company approved converting the loan with the amount of $976, 366 into common shares of 650,910 shares with the conversion price of $1.5/share.

 

As of September 30, 2015 and December 31, 2014, the advance balance was $341,257 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 nine months ended September 30, 2015 and September 30, 2014 was RMB 90,000 (approximately $14,578) and RMB 90,000 (approximately $14,639), respectively.

 

Due to Other Related Parties

 

Due to other related parties consists of the following:

 

		September 30,				December 31,
		2015				2014
Keli Yao		$	-			$	-
Yi Chu			560,956				717,703
Total		$	560,956			$	717,703

 

 

The balance of $560,956 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:

 

 

		September 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 September 30, 2015, there were nil warrants nor derivative liability associated with the warrants outstanding.

 

The table below summarizes the Company’s 2010 warrant activities through September 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, September 30, 2015			-				-				-				-				-
Earned and exercisable, September 30,2015			-				-				-				-				-
Unvested, September 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 Metal 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. On July 21, 2015, Heqi converted $172,020, including $170,937 principal and $1,083 interest into 252,971 shares with the conversation of $0.68/share. The remaining balance of $89,063 principal of the note was transferred to Mr. Yao. As of September 30, 2015, the convertible note balance with Heqi was zero.

 

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 0.2-0.51year.

 

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. The debt discount associated with derivative liabilities was fully amortized into interest expense for the nine months ended September 30, 2015 as the notes were either converted or matured.

 

 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 September 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 denies both motions. Plaintiff and the Director Defendants are currently making progress towards settling the lawsuit. The proposted settlement amount for the case is $100,000, which has not been recognized by the Company in its financial statements. The Court will schedule a trial date if such settlement is eventually not finalized.

 

 

 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 September 30, 2015 were as follows:

 

 

	Date of		Total				Facilities				Facilities
	Expiration		Facilities				Used				Available
Armco HK
RZB (Beijing) Branch (i)	November 30, 2016			5,500,000				-				5,500,000
DBS (Hong Kong) Limited (ii)	October 9 ,2015			20,000,000				-				20,000,000
Sub-total - Armco HK				25,500,000				-				25,500,000
Renewable Metals
Bank of China Lianyungang Branch (iii)	December 27, 2015			7,856,941				-				7,856,941
Bank of Communications Lianyungang Branch (iv)	February 2, 2016			11,313,995				1,707,286				9,606,709
Sub-total – Renewable Metals				19,170,936				1,707,286				17,463,650
			$	44,670,936			$	1,707,286			$	42,963,650

 

 

 

 

(i)

On July 25, 2015, Armco HK entered into Amendment No. 6 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 $5,500,000, expiring November 30, 2016. 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. 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 1.75% 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. As of September 30, 2015, Armco HK and DBS Bank were in the process renewing the line of credit. The lender may terminate the facility at any time at its sole discretion. The facility is secured by the charge on cash deposit of the borrower, the borrower’s restricted pledged deposit in the minimum amount of 3% of the letter of credit amount, the Company’s letter of comfort and the guarantee of Mr. Yao.

 

 

(iii)

On March 15, 2013, Renewable Metals entered into a line of credit facility in the amount of RMB 50,000,000 (approximately $7.8 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.

 

 

(iv)

On July 5, 2013, Renewable Metals obtained a RMB 72,000,000 (approximately $11.3 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. As of September 30, 2015, the company is in the process of renewing the facility. The amount shall not be changed and the date of expiration shall be February 2, 2016. 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 $106,058).

 

On April 13, 2015, Armco Metals Holding entered into a lease agreement for the lease of its principal executive offices which 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. 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. 99,167 common shares were earned for the nine months ended September 30, 2015. The total value of $72,550 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 nine months ended September 30, 2015, the Company granted 238,912 shares of its common stock to its employees and directors for their service of approximately $324,428, in lieu of cash, which were recorded as compensation expense for the nine months ended September 30, 2015.

 

On March 19, 2015, the Company granted 60,000 shares of its common stock to its Chairman and CEO Kexuan 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 September 30, 2015, 45,000 shares were vested and record as compensation expense at amount of $56,250.

  

 

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
Vested, December 31, 2014			795,462			$	4,118,012
Unvested, December 31, 2014			-				-
Options – granted			-				-
Options – canceled			-				-
Shares – granted			298,912				399,428
Shares – canceled			(-	)			(-	)
Balance, September 30, 2015			1,094,374			$	4,517,440
Vested, September 30, 2015			1,079,374				4,498,690
Unvested, September 30, 2015			15,000			$	18,750

  

 The total number of the common shares authorized under the Amended and Restated 2009 Stock Incentive Plan was 1,120,000. As of September 30, 2015, there were 25,626 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 20.20% and 81.1% for the nine months ended September 30, 2015 and September 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 September 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 Nine Months Ended
		September 30				September 30
		2015				2014
Cusomter A			43.9	%			-	%
Cusomter B			18.3	%			-	%
Cusomter C			14.9	%			15.7	%
Cusomter D			11.5	%			65.8	%
			88.6	%			81.5	%

 

 

		Net Accounts Receivable at
		September 30				December 31,
		2015				2014
Cusomter A			77.0	%			-	%
Cusomter B			15.0	%			-	%
Cusomter C			6.0	%			21.1	%
			98.0	%			21.1	%

  

 

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 Nine Months Ended
		September 30				September 30
		2015				2014
Vendor A			51.4	%			88.2	%
Vendor B			28.6	%			10.1	%
Vendor C			6.0	%			-	%
			86.0	%			98.3	%

 

 

 

		Accounts Payable at
		September 30				December 31,
		2015				2014
Vendor A			71.2	%			89.1	%
Vendor B			17.0	%			-	%
Vendor C			3.7	%			-	%
			91.9	%			89.1	%

 

 

 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 nine months ended September 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 OF OUR PERFORMANCE AND OPERATIONS

 

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.

 

              China’s gross domestic product growth fell to 6.9% in the third quarter, the slowest rate since the depths of the global financial crisis in 2009. China's steel industry continued to struggle in the first nine months of the year, as consumption slumped, prices hit a record low, and over supply remained a major problem despite a fall in output, based on industry expert analysis and data. “As demand quickly contracted, still mills are lowering prices in competition to get contracts while China's steel demand evaporated at unprecedented speed as the nation's economic growth slowed”, comments from officials at China Iron & Steel Association. The data for the first nine months of 2015 shows that the steel industry in China is finally contracting. All these developments are negative to the global seaborne iron ore market which iron ore bottomed this year at $44.59 on July 8. Under the pressure from the constant declining price of iron ore, scrap steel demand and price remained sluggish in the third quarter. In respond to the market change, we continued to adjust and improve our product in selection and process. In the trading business, we continued to cut our purchases and sales in metal ores to manage market risks and increase the sales in the billet that earns higher profit margin. In addition, we continued to sell raw wood. In the recycling business, we increased the recycling process in separating and producing more high value non-ferrous scrap products from scrap materials Overall, our revenue for the first nine months of 2015 increased significantly by 71% while gross profit decreased substantially by 200%, respectively, compared to same period of last year. The increase in the net revenue was mainly due to the trading sales increased in the sales of raw wood and billet. The gross profit significant decreases were mainly attributable declined price and inventory write-off. For the three months ended September 30, 2015, revenue increased significantly by 51% and gross profit decreased about 80% compared to same period of prior year mainly due to the reasons discussed above.

                 

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 third quarter of 2015, our net revenue in the scrap metal recycling business decreased by 47.7% to $16.8 million from $32.1 million in the third quarter of 2014.  Our production decreased to 19,026 metric tons (“MT”) from 57,497 MT in the third quarter of 2014. For the third quarter of 2015, our scrap metal business sold approximately 41,193 MT of scrap metals, generating approximately $16.8 million of revenue and 1.5 million of gross profit; for the first nine months of 2015, our scrap metal business sold approximately 120,092 MT of scrap metals, generating approximately $57.7 million of revenue and (-$10.4) million of gross profit as result of a substantial inventory write-down.

 

In the trading business, the net revenue in the third quarter of 2015 increased approximately by 263% to $31.7 million from $0.12 million in the third quarter of 2014 mainly due to the increase sales in raw wood of $21.4 million and increased sales in billet of $6.7 million. The gross profit generated from trading business in the third quarter of 2015 is $0.19 million, representing a gross margin of $0.01%. For the first nine months of 2015, the net revenue in our trading business increased by approximately 600% to $70.8 million from $10.0 million in the first nine months of 2014 primarily due to the increase sales in the new products raw wood of $39.3 million and barley of $15.7 million. The gross margins for the sales of raw wood are approximately 0.12% and 0.10% for the three months and nine months ended on September 30, 2015, respectively. The gross margin for the sales of barley is approximately 0.11% for the first nine months of 2015 and no sales in barley in the second and third quarter. The gross profit in the trading business for the first nine months of 2015 was $144,582, representing a gross margin 0.002%.

 

During the first nine months 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. At the same time, the Company continues to explore opportunities for business transformation by mergers and acquisitions.

 

Despite the ongoing slowdown of China economy and sluggish market for our products, 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.

 

 

Our Performance

 

Our net revenues increased by approximately 51% in the third quarter of 2015 compared to the same period in 2014 and our gross margin decreased significantly to 3.44% from 26.1%. Our operating expenses decreased slightly by 1.8% or $0.02 million in the third quarter compared to the same period in 2014 mainly due to the decreases in general and administrative expenses and selling expenses. Our net income in the third quarter was $0.4 million, compared with net income of $4.8 million in the third quarter of 2014.  The substantial decrease in profit was primarily resulted from significant decrease in both net revenue and gross margin of our recycling business during the quarter. By business section, in third quarter our net revenue from recycling business decreased by 47.7% to $16.8 million from $32.1 million and the gross margin decreased to 8.9% from 26.04% respectively, compared to same period of 2014.  Our net revenue from trading business increased by approximately 263% to $31.7 million from $0.12 million in the third quarter of 2015 and the gross margin decreased to 0.72% from 12.7%, respectively, compared to the same period of 2014.

 

Our net revenues increased by 71% in the first nine months of 2015 compared to the same period in 2014 and our gross profit margin decreased significantly to -8.0% from 13.73%, respectively.  The increase in revenues in the first nine month was due to significantly increased sales from our trading business during the first nine months compared to the same period of 2014 and partially offset by the decrease in revenues from recycling business in the first nine months compared to same period of 2014. The deteriorated gross margin was primarily attributable to the significantly decreased gross profit in our recycling business and inventory write-off during the period. Our operating expenses during the first nine months of 2015 decreased by $0.96 million or 20.5% compared to the same period in 2014, mainly due to decreased general and administrative expenses, selling expenses, professional fees, and operating cost of idle manufacturing facility.  Our net loss for the first nine months of 2014 was $8.2 million, compared to net income of $0.4 million from the same period of 2014.  

  

 

RESULTS OF OPERATIONS

 

The table below summarizes the consolidated operating results for the three and nine months ended September 30, 2015 and 2014. 

 

		For the Nine Month Ended September,																For the Three Month Ended September,
		2015								2014								2015								2014
Net revenues		$	128,443,424				100	%		$	74,996,063				100	%		$	48,471,441				100	%		$	32,198,170				100	%
Cost of goods sold			138,716,410				108.0	%			64,698,705				86.3	%			46,805,691				96.6	%			23,799,849				73.9	%
Gross profit		$	(10,272,986	)			-8.0	%			10,297,358				13.7	%			1,665,750				3.4	%			8,398,321				26.1	%
Total operating expenses			3,729,234				2.9	%			4,688,727				6.3	%			1,126,559				2.3	%			1,147,461				3.6	%
Operating income (loss)		$	(14,002,220	)			-10.9	%		$	5,608,631				7.5	%			539,191				1.1	%			7,250,860				22.5	%

 

 

 

Net Revenues

 

Net revenues for the third quarter of 2015 increased by approximately 51% over the same period in 2014, primarily as a result of an increase in sales of raw wood of $21.4 million and an increase in sales of billet of $4.3 million, partially offset by $11.5 million decrease in sales of scrap metal.

 

Net revenues for the first nine months of 2015 increased by approximately 71% over the same period in 2014, mainly as sales of raw wood increased by $39.3 million, sales of barley increased by $15.7 million, sales of billet increased by $7.8 million and sales of scrap metals increased by $0.6 million, partially offset by $7.5 million decrease in sales of chromium. Revenue for the nine month period increased compared to the same period of 2014 primarily due to increased sales from new products in our trading business.

   

Cost of Goods Sold

 

Cost of goods sold for the third quarter of 2015 was $46.8 million, an increase of $23 million over the same period in 2014 and represents a gross profit margin of 3.4% compared to 26.1% in the third quarter of 2014. This gross profit margin decrease was primarily due to the significantly decreased margins on our sales of scrap metals which we experienced market price and demand decline on our products during the period compared to same period of last year.

 

For the first nine months of 2015, cost of goods sold was $138.7 million, an increase of $74.0 million from the same period in 2014, and represents a gross profit margin of -8.0% compared to 13.7% for the same period in 2014. This profit margin decrease was, as described previously, primarily due to the decrease in profit margins in sales of scrap metals compared to same period in 2014 and a big inventory write-off in the period as described in previous filing.

 

Total Operating Expenses

 

Operating expenses for the three and nine months ended September 30, 2015 were $1.1 million and $3.7 million, representing a decrease of $0.02 million and a decrease of $0.96 million, compared to the three and nine months ended September 30, 2014, respectively.  

 

For the three months ended September 30, 2015, the decrease in operating expenses was primarily due to a decrease in general and administrative expenses of $0.17 million and a decrease in selling expenses of $0.03 million. These decreases were partially offset by an increase in professional fees of $0.05 million and an increase in operating cost of idle manufacturing facility of $0.14 million.  

 

For the nine months ended September 30, 2015, the decrease in operating expenses was primarily due to a decrease in general and administration expenses of $0.68 million, a decrease in selling expenses of $0.15 million, a decrease in professional fees of $0.09 million, and a decrease in operating cost of idle manufacturing facility of $0.04 million.

 

Other (Income) expense

 

Total other income for the three and nine months ended September 30, 2015 were $0.09 million and $3.7 million, respectively. During the three and nine months ended September 30, 2014, we had other expenses of $0.66 million and $3.4 million, respectively.

 

For the three months ended September 30, 2015, interest expenses decreased $0.35 million over the comparative period in 2014, mainly due to decreases in use of borrowings in the third quarter, interest income increased $0.32 million compared to last same period, other expenses decreased $0.07 million and our loss on sales of marketable securities decreased $0.04 million for the quarter.

  

 

For the nine months ended September 30, 2015, total other income increased $7.1 million, compared to the same period in 2014, mainly due to a gain on forgiveness of short-term debt of $4.0 million described in previous filing, a decrease in interest expense of $2.0 million, a government grant of $0.48 million, a decrease in other expenses of $0.26 million, a decrease in change in fair value of derivative liability of $0.24 million, and an increase in interest income of $0.23 million. These decreases in total other expenses were partially offset by an increase in investment loss of $0.16 million.

 

Income tax (benefit) expense

 

Income tax (benefit) expenses for the three and nine months ended September 30, 2015 were $0.19 million and ($2.1) million, respectively. In the comparative periods in 2014, income tax (benefit) expense was $1.8 million for both periods.   The decrease in income tax payable was due to the decrease in income from our recycling business in the third quarter of 2015 which is subject to a 25% income tax rate.

  

The effective rate is 20.2% and 81.1% for the nine months ended September 30, 2015 and September 30, 2014, respectively.

 

 

 

Net income (loss)

 

Our net income in the third quarter of 2015 was $0.4 million, compared with a net income of $4.8 million in the third quarter of 2014. The significant decline in profit is primarily due to the substantial decrease in gross profit margin to 3.4% in this quarter from 26.1% of same period in 2014; partially offset by a $0.75 million decrease in total other expenses.

 

Our net income for the first nine months of 2015 was $8.2 million, compared to net income of $0.4 million from the same period of 2014 due to a decrease of $20.6 million in gross profit, partially offset by a decrease of $7.1 million in total other expenses and $0.96 million decrease in operating expenses.

 

Comprehensive Income (Loss)

 

During the three and nine months ended September 30, 2015, our comprehensive loss amounted to $2.0 million and $10.1 million, respectively, compared to comprehensive income of $4.8 million and $0.11 million in the comparative periods in 2014, respectively. 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 loss of $1.67 million the first nine months of 2015, comparable to a loss of $0.38 million for the same period in 2014. These non-cash losses and gains had the effect of decreasing our reported comprehensive income both in 2015 and 2014.

 

   

LIQUIDITY AND CAPITAL RESOURCES

 

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

 

The following table provides certain selected balance sheet comparisons as of September 30, 2015 and December 31, 2014. 

 

 

		30-Sep-15				31-Dec-14				Increase (decrease)				%
Cash		$	1,656,096			$	1,884,887			$	(228,791	)			(12.1	)%
Pledged deposits			9,846				498,615				(488,769	)			(98.0	)%
Marketable securities			6,226				73,943				(67,717	)			(91.6	)%
Accounts receivable, net			19,333,656				43,202,886				(23,869,230	)			(55.2	)%
Inventories			16,023,705				9,154,463				6,869,242				75.0	%
Advance on purchases			5,682,270				1,093,402				4,588,868				419.7	%
Prepayments and other current assets			871,011				1,164,603				(293,592	)			(25.2	)%
Total Current Assets			43,582,810				57,072,799				(13,489,989	)			(23.6	)%
Loan payable			10,677,110				17,011,843				(6,334,733	)			(37.2	)%
Banker's acceptance notes payable and LC			1,707,287				1,767,790				(60,503	)			(3.4	)%
Current maturities of capital lease obligation			-				720,819				(720,819	)			(100.0	)%
Accounts payable			9,332,766				5,497,866				3,834,900				69.8	%
Advances received from Chairman and CEO			341,257				877,076				(535,819	)			(61.1	)%
Due to related party			560,956				717,703				(156,747	)			(21.8	)%
Customer deposits			1,417,492				1,467,281				(49,789	)			(3.4	)%
Corporate income tax payable			815,073				815,073				-				-	%
Value added tax and other tax payable			2,696,049				5,747,470				(3,051,421	)			(53.1	)%
Deferred tax liability			1,165,504				2,965,196				(1,799,692	)			(60.7	)%
Accrued expenses and other current liabilities			2,662,810				3,850,095				(1,187,285	)			(30.8	)%
Total Current Liabilities			31,376,304				41,438,212				(10,061,908	)			(24.3	)%

 

 

 

               Our cash balance at September 30, 2015 totaled $1.7 million, a decrease of $0.23 million as compared to $1.9 million at December 31, 2014.  At September 30, 2015 our working capital was $12.2 million, as compared to $15.6 million at December 31, 2014. This increase in working capital is mainly as result of gain on forgiveness on short-term debt and conversion of convertible notes to our stock during the first nine months of 2015.

 

                 Our current assets at September 30, 2015 were $43.6 million, a decrease of $13.5 million, or 23.6%, from December 31, 2014. This overall decrease was primarily attributable to the decrease of $23.9 million in accounts receivable, the decrease of $0.49 million in pledged deposits, the decrease of $0.29 million in prepayments and other current assets, the decrease of $0.23 million in cash, and a decrease of $0.07 million in marketable securities, partially offset by an increase of $6.9 million in inventories and an increase of $4.6 million in advance on purchases.

 

                 Our accounts receivable decreased $23.9 million at September 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 and other trading business sales during the quarters.

 

                 Inventories increased $6.9 million at September 30, 2015 compared to December 31, 2014, primarily due to the slow sales of inventories and the increased purchases in our trading business during the first nine months of 2015.

 

                Pledged deposits decreased by $0.49 million reflecting less deposit 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 $0.29 million at September 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 metal ore trading business.

 

               Advance on purchases increased $4.6 million at September 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.

  

 

               Marketable securities decreased $0.07 million at September 30, 2015 compared to December 31, 2014 due to the temporary decrease in the market value of the securities and our sales of portion of the securities on market during the period.

 

Cash decreased $0.23 million at September 30, 2015 compared to December 31, 2014.

 

                At September 30, 2015, our total current liabilities decreased $10.1 million, or 24.3%, from December 31, 2014, which reflected  mainly a decrease in loan payable of $6.3 million, a decrease in value added tax and other taxes payable of $3 million, a decrease in deferred tax liabilities of $1.8 million, a decrease in accrued expenses and other current liabilities of $1.2 million, a decrease in current maturities of capital lease obligation of $0.72 million, a decrease in advances received from Chairman and CEO of $0.54 million, a decrease in due to related party of $0.16 million, a decrease in banker's acceptance notes payable and letter of credit of $0.06 million, and a decrease in customer deposit of $0.05 million, partially offset by an increase in accounts payable of $3.8 million.

 

               Accounts payable increased $3.8 million at September 30, 2015 compared to December 31, 2014 mainly due to our increased purchases of scrap materials for our recycling production during the quarters of 2015. All of the payable has been paid as of report date.

 

               Loans payable decreased $6.3 million at September 30, 2015, compared to December 31, 2014, primarily due to forgiveness of short-term debt by our creditor and our repayment of short-term borrowing under our letter of credit facilities in the first nine months 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.

  

                Banker's acceptance notes payable and letters of credit slightly decreased $0.06 million at September 30, 2015 compared to December 31, 2014 primarily due to a decrease in short-term borrowings used in raw material acquisitions.

 

                Value added tax and other taxes payable decreased $3 million at September 30, 2015 from December 31, 2014 mainly due to the taxes payable offset and paid in the first nine months of 2015.

 

               Customer deposits increased $0.05 million at September 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.

 

Accrued expenses and other current liabilities decreased $1.2 million at September 30, 2015, compared to December 31, 2014. The decrease was mainly due to the decrease in the accrued cost for our increased recycling production.

 

Current maturities of capital lease obligation decreased $0.7 million at September 30, 2015 compared to December 31, 2014 reflecting the decrease of capital lease obligation due within one year.

 

At September 30, 2015, we owed our Chairman and CEO, Mr. Kexuan Yao, $0.34 million for funds he advanced to us for working capital purposes, a net decrease of $0.54 million from December 31, 2014 as result of debt conversion during the first nine months of 2015.

  

The company intends to invest approximately $161,000 in the OTO platform described above in the next 12 months at September 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 September 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 $44.7 million. Approximately $43.0 million was available under these facilities at September 30, 2015. We have approximately $10 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 nine months of 2015, our net decrease in cash was $0.23 million, and was comprised of $0.36 million used in financing activities, offset by $0.19 million provided by operating activities and $0.05 million provided by investing activities.

 

For the first nine months of 2014, our net decrease in cash was $0.05 million, and was comprised of $4.24 million provided by investing activities, offset by $1.64 million used in operating activities and $2.78 million used in financing activities.

 

Cash Flows from Operating Activities

 

For the first nine months of 2015 net cash provided by operating activities of $0.19 million was mainly comprised of a decrease in accounts receivable of $23.1 million, an increase in accounts payable of $4.1 million, and a decrease in advance on purchases of $0.37 million. These cash inflows were partially offset by an increase in inventories of $7.4 million, an increase in prepayments and other current assets of $4.7 million, a decrease in taxes payable of $2.9 million, and a decrease in accrued expenses and other current liabilities of $1.1 million.

 

For the first nine months of 2014 net cash used in operating activities of $1.64 million was mainly comprised of an increase in accounts payable of $16.1 million, a decrease in inventories of $6.4 million, an increase in taxes payable of $3.49 million, an increase in customer deposits of $0.82 million, an increase in accrued expenses and other current liabilities of $0.60 million, and a decrease in prepayments and other current assets of $0.34 million. These cash inflows were partially offset by an increase in accounts receivable of $28.3 million, a decrease in banker’s acceptance notes payable and letters of credit of $6.66 million, and an increase in advance on purchases of $0.49 million.  

 

Cash Flows from Investing Activities

 

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

 

For the nine months ended September 30, 2014 net cash provided by investing activities of $4.24 million was due to proceeds received from the release of pledge deposits of $5.94 million and cash received from sales of marketable securities of $0.11 million, partially offset by payment made toward pledged deposits of $1.82 million.

 

Cash Flows from Financing Activities

 

For the nine months ended September 30, 2015 net cash used in financing activities of $0.36 million was mainly due to repayment of loans payable of $0.52 million, repayment of capital lease obligation of $0.11 million, and repayment to related parties of $0.13 million, partially offset by proceeds from loans payable of $0.16 million and advances from CEO of $0.24 million.

 

For the nine months ended September 30, 2014 net cash used in financing activities of $2.78 million was mainly due to repayment of loans payable of $14.49 million and repayment of capital lease obligation of $0.34 million, partially offset by proceeds from loans payable of $11.1 million, proceeds from capital lease obligation of 0.16 million, proceeds from convertible notes of $0.6 million, advances from CEO of $0.17 million, and advances from related party of $0.01 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 September 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		$	1,707,287			$	1,707,287			$	-			$	-			$	-
Short-Term Loans Payable			10,677,110				10,677,110				-				-				-
Capital Lease Obligations			-				-				-				-				-
Operating Lease Obligations			141,274				108,265				33,009				-				-
Purchase Obligations			-				-				-				-				-
Other Long-Term Liabilities Reflected on the Registrant's Balance Sheet under GAAP			-				-				-				-				-
Total		$	12,525,671			$	12,492,662			$	33,009			$	-			$	-

   

 

 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.
November 16, 2015	By: /s/ Kexuan Yao
	Kexuan Yao, Chief Executive Officer
	By: /s/ Fengtao Wen
	Fengtao Wen, Chief Financial Officer

 

 

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