UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC  20549





FORM
10-Q





ý           QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934




for the
quarterly period ended June 30, 2010





Commission
file number: 000-52455





LONGHAI
STEEL, INC.


(Exact
name of small business issuer as specified in its charter)





Nevada
            11-3699388(State
      or other jurisdiction of
              incorporation
      or organization)
            (IRS
      Employer identification No.)





No.
1 Jingguang Road, Neiqiu County


Xingtai
City, Hebei Province, China 054000


+86
(319) 686-1111


(Address, including zip
code, and telephone number, including area code, of registrant’s principal
executive offices)





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 ýNo
o





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





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 ý





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





The
number of shares outstanding of the Registrant’s Common Stock on August 15, 2010
was 10,000,000.









LONGHAI
STEEL, INC.


FORM 10-Q


Quarterly
Period Ended June 30, 2010





INDEX




PageSPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS
            1PART
      I. FINANCIAL INFORMATION
            4Item
      1.
            Financial
      Statements
            4Consolidated
      Balance Sheets as of June 30, 2010 and December 31, 2009
            4Consolidated
      Statements of Operations and Comprehensive Income for Three and Six Months
      ended June 30, 2010 and 2009
            5Consolidated
      Statements of Cash Flows for the Three and Six Months ended June 30, 2010
      and 2009
            5Notes
      to Consolidated Financial Statements
            7Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            14Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk.
            21Item
      4.
            Controls
      and Procedures
            21PART
      II. OTHER INFORMATION
            22Item
      1.
            Legal
      Proceedings
            22Item
      1A.
            Risk
      Factors
            22Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            22Item
      3.
            Defaults
      Upon Senior Securities
            22Item
      5.
            Other
      Information
            22Item
      6.
            Exhibits
            22SIGNATURES
            
            23




2




SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS




This
Quarterly Report on Form 10-Q contains forward-looking statements. The
forward-looking statements are contained principally in the sections entitled
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations”.” These statements involve known and unknown risks, uncertainties
and other factors which may cause our actual results, performance or
achievements to be materially different from any future results, performances or
achievements expressed or implied by the forward-looking statements. These risks
and uncertainties include, but are not limited to, the factors described in the
including those identified below, under “Part II — Other Information, Item 1A.
Risk Factors” and elsewhere herein. Therefore, actual results may differ
materially and adversely from those expressed in any forward-looking statements.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
However, your attention is directed to any further disclosures made on related
subjects in our subsequent annual and periodic reports filed with the Securities
and Exchange Commission on Forms 10-K, 10-Q and 8-K and Proxy Statements on
Schedule 14A.




In some
cases, you can identify forward-looking statements by terms such as
“anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,”
“plans,” “potential,” “predicts,” “projects,” “should,” “would” and similar
expressions intended to identify forward-looking statements. Forward-looking
statements reflect our current views with respect to future events and are based
on assumptions subject to risks and uncertainties. Given these uncertainties,
you should not place undue reliance on these forward-looking
statements.




Also,
forward-looking statements represent our estimates and assumptions only as of
the date of this Report. You should read this Report and the documents that we
filed as exhibits to this Report, completely and with the understanding that our
actual future results may be materially different from what we
expect.




Except as
required by law, we assume no obligation to update any forward-looking
statements publicly, or to update the reasons actual results could differ
materially from those anticipated in any forward-looking statements, even if new
information becomes available in the future.




3




PART
I - FINANCIAL INFORMATION







Item
1 - Financial Statements





LONGHAI
STEEL, INC. (FORMERLY ACTION INDUSTRIES, INC.)


CONSOLIDATED
BALANCE SHEETS


AS
OF JUNE 30, 2010 AND DECEMBER 31, 2009





June
      30, 2010
              (unaudited)
            
            
            December
      31, 2009
              (audited)ASSETSCurrent
      assetsCash
      and cash equivalents
            
            $
            592,938
            
            
            $
            115,510Notes
      receivable
            
            
            1,321,858
            
            
            
            -Accounts
      receivable
            
            
            65,040
            
            
            
            19,009Other
      receivables, net of allowance for doubtful accounts
            
            
            3,584,264
            
            
            
            2,799Advance
      to suppliers
            
            
            43,519,360
            
            
            
            15,663,763Inventories,
      net
            
            
            3,006,327
            
            
            
            2,393,159Taxes
      receivable
            
            
            428,480
            
            
            
            1,579,933Due
      from related parties
            
            
            15,244,809
            
            
            
            42,290,438Total
      current assets
            
            
            67,763,076
            
            
            
            62,064,611Property,
      plant and equipment, net
            
            
            25,448,759
            
            
            
            26,680,244TOTAL
      ASSETS
            
            $
            93,211,835
            
            
            $
            88,744,855LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesAccounts
      payable
            
            
            9,938,695
            
            
            
            15,536,226Advance
      from customers
            
            
            39,632,376
            
            
            
            33,245,360Income
      tax payable
            
            
            1,418,090
            
            
            
            2,325,984Current
      deferred tax liabilities
            
            
            2,065,656
            
            
            
            1,172,181Accrued
      expenses and other payables
            
            
            3,680,931
            
            
            
            5,169,708Due
      to related parties
            
            
            541,019
            
            
            
            -Total
      current liabilities
            
            
            57,276,767
            
            
            
            57,449,459Non-current
      deferred tax liabilities
            
            
            178,452
            
            
            
            190,351TOTAL
      LIABILITIES
            
            $
            57,455,219
            
            
            $
            57,639,810STOCKHOLDERS’
      EQUITYPreferred
      Stock, $.001 par value, 10,000,000 shares authorized, none issued and
      outstanding
            
            
            -
            
            
            
            -Common
      Stock, $.001 par value, 100,000,000 shares authorized, 10,000,000 and
      9,850,000 shares issued and outstanding, respectively
            
            
            10,000
            
            
            
            9,850Additional
      paid-in capital
            
            
            3,051,150
            
            
            
            2,655,041Statutory
      surplus reserves
            
            
            450,363
            
            
            
            -Accumulated
      other comprehensive income
            
            
            954,781
            
            
            
            806,818Retained
      earning
            
            
            31,290,322
            
            
            
            27,633,336TOTAL
      STOCKHOLDERS’ EQUITY
            
            
            35,756,616
            
            
            
            31,105,045TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            93,211,835
            
            
            $
            88,744,855




The accompanying notes are an
integral part of the financial statements




4




LONGHAI STEEL, INC. (FORMERLY ACTION INDUSTRIES,
INC.)


CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME


(UNAUDITED)




Six
      Months Ended June 30
            
            
            Three
      Months Ended June 302010
            
            
            2009
            
            
            2010
            
            
            2009Net
      revenue
            
            $
            234,378,730
            
            
            $
            189,793,620
            
            
            $
            128,402,079
            
            
            $
            100,731,907Cost
      of sales
            
            
            (227,358,937
            )
            
            
            (181,981,027
            )
            
            
            (125,556,443
            )
            
            
            (97,522,220
            )Gross
      profit
            
            
            7,019,793
            
            
            
            7,812,593
            
            
            
            2,845,636
            
            
            
            3,209,687Operating
      expenses:Impairment
      on inventory valuation
            
            
            (46,675
            )
            
            
            -
            
            
            
            (46,675
            )
            
            
            -General
      and administrative expenses
            
            
            (1,038,755
            )
            
            
            (518,249
            )
            
            
            (757,717
            )
            
            
            (348,371
            )Income
      from operations
            
            
            5,934,363
            
            
            
            7,294,344
            
            
            
            2,041,244
            
            
            
            2,861,316Interest
      income
            
            
            2,344
            
            
            
            1,472
            
            
            
            1,724
            
            
            
            951Interest
      expense
            
            
            (323,363
            )
            
            
            (57,694
            )
            
            
            (271,032
            )
            
            
            (48,258
            )Other
      expenses
            
            
            (4,784
            )
            
            
            (17,307
            )
            
            
            (3,708
            )
            
            
            (8,726
            )Income
      before income taxes
            
            
            5,608,560
            
            
            
            7,220,815
            
            
            
            1,768,228
            
            
            
            2,805,283Income
      tax expenses
            
            
            (1,501,211
            )
            
            
            (1,805,204
            )
            
            
            (540,668
            )
            
            
            (700,293
            )Net
      Income
            
            
            4,107,349
            
            
            
            5,415,611
            
            
            
            1,227,560
            
            
            
            2,104,990Other
      comprehensive income/(loss)
            
            
            147,963
            
            
            
            25,382
            
            
            
            142,986
            
            
            
            590Comprehensive
      income
            
            $
            4,225,312
            
            
            $
            5,440,993
            
            
            $
            1,370,546
            
            
            $
            2,105,580Basic
      and diluted income per common share:Basic
            
            $
            0.41
            
            
            $
            0.55
            
            
            $
            0.12
            
            
            $
            0.21Diluted
            
            
            0.41
            
            
            
            0.55
            
            
            
            0.12
            
            
            
            0.21Weighted
      average common shares outstanding:Basic
            
            
            9,929,558
            
            
            
            9,850,000
            
            
            
            10,000,000
            
            
            
            9,850,000Diluted
            
            
            9,929,558
            
            
            
            9,850,000
            
            
            
            10,000,000
            
            
            
            9,850,000




The
accompanying notes are an integral part of the financial statements





5




LONGHAI STEEL, INC. (FORMERLY ACTION INDUSTRIES,
INC.)


CONSOLIDATED
STATEMENTS OF CASH FLOWS


SIX
MONTHS ENDED JUNE 30, 2010 AND 2009 (UNAUDITED)




2010
            
            
            2009Cash
      flows from operating activities:Net
      income
            
            $
            4,107,349
            
            
            $
            5,415,611Adjustments
      to reconcile net incometo
      cash provided by (used in) operating activities:Stock
      option expenses
            
            
            394,445
            
            
            
            -Depreciation
      and amortization
            
            
            1,503,341
            
            
            
            1,483,617Reserve
      for inventory obsolescence
            
            
            46,675
            
            
            
            -Deferred
      tax assets
            
            
            875,853
            
            
            
            48,371Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (45,951
            )
            
            
            -Inventories
            
            
            (648,282
            )
            
            
            (3,552,654
            )Advances
      to suppliers
            
            
            (27,760,650
            )
            
            
            20,275,654Prepaid
      expenses and other current assets
            
            
            (3,610,603
            )
            
            
            (45,761
            )Accounts
      payable
            
            
            (5,674,318
            )
            
            
            13,526,604Advance
      from customers
            
            
            6,247,367
            
            
            
            18,541,189Related
      parties-net
            
            
            (15,156,265
            )
            
            
            -Accrued
      expenses and other current liabilities
            
            
            1,698,099
            
            
            
            1,293,967Income
      tax payable
            
            
            (917,665
            )
            
            
            1,040,984Cash
      provided by (used in) operating activities
            
            
            (38,940,605
            )
            
            
            58,027,582Cash
      flows from investing activities:Payment
      to related parties
            
            
            -
            
            
            
            (48,865,504
            )Purchase
      of notes receivable
            
            
            (1,321,858
            )
            
            
            (4,602,034
            )Purchase
      of property and equipment
            
            
            (2,293,350
            )
            
            
            (649,656
            )Net
      cash used in investing activities
            
            
            (3,615,208
            )
            
            
            (54,117,194
            )Cash
      flows from financing activities:Proceeds
      from (payments to) related parties, net
            
            
            43,009,101
            
            
            
            (4,220,546
            )Financing
      Cost on Fixed Assets Purchase
            
            
            -
            
            
            
            15,193Net
      cash provided by (used in) financing activities
            
            
            43,009,101
            
            
            
            (4,205,353
            )Effect
      of exchange rate changes on cash
            
            
            23,110
            
            
            
            (880
            )Net
      increase (decrease) in cash and cash equivalents
            
            
            476,398
            
            
            
            (295,845
            )Cash
      and cash equivalents, beginning balance
            
            
            116,540
            
            
            
            363,903Cash
      and cash equivalents, ending balance
            
            $
            592,938
            
            
            $
            68,058SUPPLEMENTARY
      DISCLOSURE:Interest
      paid
            
            
            322,085
            
            
            
            57,694Income
      tax paid
            
            
            1,542,864
            
            
            
            849,321





The
accompanying notes are an integral part of the financial statements




6


LONGHAI
STEEL, INC. (Formerly Action Industries, Inc.)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


NOTE 1 - ORGANIZATION AND BUSINESS OPERATIONS




Longhai
Steel, Inc., a Nevada corporation (formerly Action Industries, Inc.) (the
"Company") was originally incorporated under the laws of the State of Georgia on
December 4, 1995. On March 14, 2008, the Georgia corporation was merged with and
into a newly formed Nevada corporation also named Action Industries, Inc. and
all of the outstanding shares of the Georgia corporation were exchanged for
shares in the surviving Nevada corporation.




On March
26, 2010, the Company completed a reverse acquisition transaction through a
share exchange with Kalington Limited (hereafter referred to as “Kalington”), a
Hong Kong entity established on November 5, 2009, and its shareholders, whereby
the Company acquired 100% of the issued and outstanding capital stock of
Kalington in exchange for 10,000 shares of our Series A Preferred Stock which
constituted 98.5% of the Company’s issued and outstanding capital stock on an
as-converted basis as of and immediately after the consummation of the reverse
acquisition. On June 22, 2010, the Company effected a 1-for-125 reverse stock
split of our issued and outstanding common stock (the “Reverse Stock
Split”).  Upon the date of the Reverse Stock Split all of the issued
and outstanding shares of Series A Preferred Stock automatically converted into
9,850,000 shares of common stock. Following the effectiveness of the Reverse
Stock Split and conversion of Series A Preferred Stock into common stock, there
were 10,000,000 shares of our common stock issued and outstanding and no shares
of preferred stock issued and outstanding. As a result of the reverse
acquisition, Kalington became the Company’s wholly-owned subsidiary and the
former stockholders of Kalington became our controlling stockholders. The share
exchange transaction with Kalington and the Shareholders, was treated as a
reverse acquisition for accounting and financial reporting purposes, with
Kalington as the acquirer and the Company as the acquired party. After the
reverse acquisition, the Company changed its name to Longhai Steel,
Inc.




As a
result of the reverse acquisition transaction, the Company now owns all of the
issued and outstanding capital stock of Kalington.




By virtue
of its ownership of Kalington, the Company also owns Xingtai Kalington
Consulting Service Co., Ltd. ("Kalington Consulting"), which is a wholly owned
foreign subsidiary of Kalington and effectively and substantially controls
Xingtai Longhai Wire Rod Co. Ltd., a company organized under the laws of the PRC
("Longhai PRC") and a leading producer of steel wire products in eastern China,
through a series of captive agreements known as variable interest agreements
(the “VIE Agreements”) with Kalington Consulting.




Prior to
the reverse acquisition of Kalington, the Company was primarily in the business
of providing prepaid long distance calling cards and other telecommunication
products and was in the development stage and had not commenced planned
principal operations. As a result of our reverse acquisition of Kalington, the
Company is no longer a shell company and active business operations were
revived.




All of
the Company’s business operations are now conducted through its Hong Kong and
Chinese subsidiaries, Kalington and Kalington Consulting, respectively, and our
controlled affiliate, Longhai PRC. The Company’s principal business is the
production of steel wire ranging from 6mm to 10mm in diameter. The Company
operates two wire production lines which have a combined annual capacity of
approximately nine hundred thousand tons per year. The Company’s products are
sold to a number of distributors who transport the wire to nearby wire
processing facilities. The Company’s wire is then further processed by third
party wire refiners into a variety of products such as nails, screws, and wire
mesh for use in reinforced concrete and fencing. The Company’s facilities and
head offices are located in the town of Xingtai in southern Hebei
Province.




Kalington
was established in Hong Kong on November 5, 2009 to serve as an intermediate
holding company.  Chaojun Wang, the Company's Chief Executive Officer,
Chairman of the Board and major shareholder, and William Hugh Luckman, a
shareholder currently serve as the directors of Kalington.  Kalington
Consulting was established in the PRC on March 18, 2010.




Longhai
PRC was originally formed on August 26, 2008 as a carve-out from the Longhai
Steel Group of companies. Chaojun Wang serves as the Chairman of the Board of
Directors and General Manager of Longhai PRC and owns 80% of the capital stock
of Longhai PRC.  Longhai’ PRC's additional shareholders are Wealth
Index International (Beijing) Investment Co., Ltd. (15% owner) and Wenyi Chen
(5% owner). Chaojun Wang also owns 80% of the capital stock of and is the chief
executive officer of the Longhai Steel Group.




Longhai
PRC leases five stories of office space and the building which houses our
production facilities from the Longhai Steel Group. Until 2008, Longhai PRC
purchased 100% of its steel billet from the Longhai Steel Group. Since 2009,
Longhai has also purchased steel billet from third party vendors. Steel billet
is the principal raw material used in our production of steel wire. Longhai PRC
also purchases production utilities from the Longhai Steel Group.




7


LONGHAI
STEEL, INC. (Formerly Action Industries, Inc.)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


Since
there is common control between the Company and Longhai PRC, for accounting
purposes, the acquisition of Longhai PRC has been treated as a recapitalization
with no adjustment to the historical basis of the assets and liabilities of the
consolidated company. The restructuring has been accounted for using the “as if”
pooling method of accounting and the operations were consolidated as if the
restructuring had occurred as of the beginning of the earliest period presented
in our consolidated financial statements and the current corporate structure had
been in existence throughout the periods covered by our consolidated financial
statements.




NOTE
2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES




Basis
of Presentation




The
accompanying unaudited interim consolidated financial statements as of June 30,
2010 and 2009 and for the three and six months ended June 30, 2010 and 2009 have
been prepared in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP") and pursuant to the rules and regulations
of the Securities and Exchange Commission.  Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with U.S. GAAP have been condensed or omitted pursuant to such rules
and regulations.  The consolidated financial statements in this report
should be read in conjunction with the December 31, 2009 audited financial
statements of the Company and the notes thereto included in the Company’s Form
8-K filed on March 26, 2010.




In the
opinion of management, the unaudited interim consolidated financial statements
for the three and six months ended June 30, 2010 and 2009 have been prepared on
the same basis as the audited consolidated statements as of December 31, 2009
and reflect all adjustments, consisting of normal recurring adjustments,
necessary for fair presentation of financial position and results of operations
for the interim periods presented have been reflected herein.  The
results of operations for the three and six months ended June 30, 2010 are not
necessarily indicative of the operating results for any subsequent quarter, for
the full fiscal year or any future periods.




All
significant inter-company balances and transactions have been eliminated in
consolidation. Certain prior period numbers are reclassified to conform to
current period presentation.




Principles
of Consolidation




The
accompanying consolidated financial statements include the accounts of Action
Industries and its 100%-owned subsidiary Kalington for the period from March 26
to June 30, 2010, its 100%-owned subsidiary Longhai for the six months ended
June 30, 2010.  All significant inter-company accounts and
transactions were eliminated in consolidation.




Basis
of Presentation




The
financial statements reflect the financial position, results of operations and
cash flows of the Company and all of its wholly owned and majority owned
subsidiaries as of June 30, 2010 and December 31, 2009 and for the six months
ended June 30, 2010 and 2009.  All intercompany items are eliminated
during consolidation.




Use
of Estimates




The
preparation of consolidated financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the consolidated financial statements and the amount
of revenues and expenses during the reporting periods.  Management
makes these estimates using the best information available at the time the
estimates are made.  However, actual results could differ materially
from those results.




Accounts
Receivable




The
Company’s policy is to maintain reserves for potential credit losses on accounts
receivable.  Management reviews the composition of accounts receivable
and analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves.  Accounts are written off
against the allowance when it becomes evident collection will not
occur.  As of June 30, 2010 and December 31, 2009, accounts receivable
were $65,040 and $19,009, respectively.




8


LONGHAI
STEEL, INC. (Formerly Action Industries, Inc.)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


Foreign
Currency Translation/Transactions




The
reporting currency of the Company is the U.S. dollar. The functional currency of
the Company's PRC subsidiaries is the RMB.  Assets and liabilities of
non-U.S. subsidiaries that operate in a local currency environment, where that
local currency is the functional currency, are translated into U.S. dollars at
exchange rates in effect at the balance sheet date; with the resulting
translation adjustments directly recorded to a separate component of accumulated
other comprehensive income.  Income and expense accounts are
translated at average exchange rates during the year.  Gains and
losses from foreign currency transactions are recorded in other income (loss),
net.  The functional currency is the local currency for all non-U.S.
subsidiaries.




The
balance sheet amounts at June 30, 2010, with the exception of shareholders'
equity, were translated at the exchange rate of 6.8086 RMB to the U.S. $1.00
compared to the exchange rate of 6.8376 RMB to the U.S. $1.00 at December 31,
2009.  The equity accounts were stated at their historical exchange
rates.  The average translation rates applied to the income and cash
flow statement amounts for the six months ended June 30, 2010 and 2009 was
6.83476 RMB and 6.84329 RMB to the U.S. $1.00, respectively.




Translation
adjustments resulting from this process are included in "accumulated other
comprehensive income" in the consolidated statement of stockholders’ equity and
were $954,781 and $806,818 as of June 30, 2010 and December 31, 2009,
respectively.




Earnings
Per Share




The
Company reports earnings per share in accordance with the provisions of ASC 260
“Earnings Per Share”.  ASC 260 requires the presentation of basic and
diluted earnings per share in conjunction with the disclosure of the methodology
used in computing such earnings per share.  Basic earnings per share
excludes dilution and is computed by dividing income available to common
stockholders by the weighted average common shares outstanding during the
period.  Diluted earnings per share takes into account the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised and converted into common stock using the treasury
method.




Common
stock equivalents represent the dilutive effect of the assumed exercise of the
outstanding stock options and warrants, using the treasury stock method, at
either the beginning of the respective period presented or the date of issuance,
whichever is later, and only if the common stock equivalents are considered
dilutive based upon the Company’s net income (loss) position at the calculation
dates.  As of June 30, 2010 and 2009, the Company did not have any
dilutive securities.




NOTE
3 - INVENTORY




Inventory
as of June 30, 2010 and December 31, 2009 were as follows:




June
      30,
              2010
            
            December
      31,
              2009Raw
      material
            
            $
            1,320,490
            
            $
            27,292Finished
      goods
            
            
            202,207
            
            
            849,000Auxiliary
      inventory (spare parts)
            
            
            1,530,485
            
            
            1,516,867Impairment
      on valuation
            
            
            (46,855)
            
            
            -Total
      inventory
            
            $
            3,006,327
            
            $
            2,393,159




9


LONGHAI
STEEL, INC. (Formerly Action Industries, Inc.)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


NOTE
4 - ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER PAYABLES




As of
June 30, 2010 and December 31, 2009, the accounts payable, unearned revenue and
accrued liabilities of the Company were summarized as follows:




June
      30,
              2010
            
            
            December
      31,
              2009Accounts
      payable
            
            $
            9,938,695
            
            
            $
            15,536,226Unearned
      revenue
            
            
            39,632,376
            
            
            
            33,245,360Accrued
      liabilities and other payables:–
      payroll payable
            
            
            160,125
            
            
            
            97,894–
      customer deposits
            
            
            3,527,448
            
            
            
            2,923,634–
      payable for equipment purchased
            
            
            -
            
            
            
            2,119,889–
      others
            
            
            (6,642)
            
            
            
            28,291Subtotal
      of accrued expenses and other payables
            
            $
            3,680,931
            
            
            $
            5,169,708





NOTE
5 - RELATED PARTY BALANCES AND TRANSACTIONS




Due from related
parties




As of
June 30, 2010 and December 31, 2009, due from related parties was summarized as
follows:




June
      30,
              2010
            
            
            December
      31,
              2009Xingtai
      Longhai Steel Group Co., Ltd.
            
            $
            -
            
            
            $
            42,047,673Xingtai
      Longhai Steel Group Metal Product Co., Ltd.
            
            
            
            
            
            
            242,765Xingtai
      Shenrui Trading Company
            
            
            15,244,809
            
            
            
            -Total
            
            $
            15,244,809
            
            
            $
            42,290,438




The
Company loaned cash deposits received from third party customers to Xingtai
Longhai Steel Group Co., Ltd., a related party under the control of Mr. Wang
Chaojun, the Company's Chief Executive Officer.  As of June 30, 2010
and December 31, 2009, amounts due the Company under these loans were Nil and
$42,047,673, respectively.




The
Company offered customers sales discounts in return for cash
deposits.  These cash deposits were subsequently loaned to Xingtai
Longhai Steel Group Co., Ltd.  In consideration for the foregoing
loans, the Company received reimbursements from Xingtai Longhai Steel Group Co.,
Ltd. on sales discounts to third party customers in the amount of $1,527,203 and
$3,853,889 in the six months ended June 30, 2010 and 2009, respectively and
reimbursements of Nil and $2,906,024 in the three months ended June 30, 2010 and
2009, respectively.  The Company recorded these reimbursements as
earned finance income which is included in net revenue.




The
Company also sells steel wire to Xingtai Longhai Steel Group Metal Product Co.,
Ltd. (“Longhai Metal”), one of the Longhai Group of companies and a related
party under the control of Mr. Wang Chaojun, the Company's Chief Executive
Officer.  As of June 30, 2010 and December 31, 2009, accounts
receivable from the sale of steel wire to Longhai Metal were Nil and $242,765,
respectively.




In May
2010 the Company placed an order for steel billet with Xingtai Shenrui Trading
Company, a related party under indirect control of Mr. Wang Chaojun, the
Company's Chief Executive Officer and gave Xingtai Shenrui a cash deposit in the
amount of $15,244,809 in connection with this order.  The order was
subsequently cancelled but as of June 30, 2010 the cash deposit had not yet been
returned to the Company and thus is reflected on the Company's balance sheet as
"due from related parties."  The cash deposit was returned in full by
August 4, 2010.




10


LONGHAI
STEEL, INC. (Formerly Action Industries, Inc.)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


Due to related
parties




As of
June 30, 2010 and December 31, 2009, due to related parties was summarized as
follows:




June
      30,
              2010
            
            
            December
      31,
              2009Xingtai
      Longhai Steel Group Co., Ltd.
            
            $
            541,019
            
            
            $
            -





The
Company purchases gas and other utilities used in the production of steel wire,
from Xingtai Longhai Steel Group Co., Ltd., a related party under the control of
Mr. Wang Chaojun, the Company's Chief Executive Officer.  As of June
30, 2010 and December 31, 2009, accounts payable related to the purchase of such
utilities were $541,019 and Nil, respectively.




Related party
transactions




Revenue




Revenue
from the sale of steel wire to Longhai Metal in the six months ended June 30,
2010 and 2009, was Nil and $3,954,193, respectively.  Revenue from the
sale of steel wire to Longhai Metal in the three months ended June 30, 2010 and
2009, was Nil and $391,044, respectively.




Revenue
from the sale of steel wire to Xingtai Shenrui in the six months ended June 30,
2010 and 2009, was $15,450,433 and Nil, respectively.  Revenue from
the sale of steel wire to Xingtai Shenrui in the three months ended
June 30, 2010 and 2009, was Nil and Nil, respectively.




In
addition, during the six months ended June 30, 2010 and 2009, the Company sold
scrap metal to members of the Longhai Group of companies in the amount of
$2,369,632 and $1,875,373, respectively.  During the three months
ended June 30, 2010 and 2009 the Company sold scrap metal to members of the
Longhai Group of companies in the amount of $1,241,227 and $916,545,
respectively. These amounts are included in the Company's income statement as
net revenue.




Expenses




During
the six months ended June 30, 2010 and 2009, the Company purchased gas and
other utilities from the Longhai Group in the amount of $5,235,047 and
$4,924,584, respectively.  During the three months ended June 30, 2010
and 2009, the Company purchased gas and other utilities from the Longhai
Group in the amount of $2,721,667 and $2,697,407,
respectively.




In
addition, the Longhai Group rents office and workshop space to the
Company.  Rent expense for the six months ended June 30, 2010 and 2009
was $14,180 and $14,162, respectively.  Rent expense for the three
months ended June 30, 2010 and 2009 was $7,091 and $7,084
respectively.




NOTE 6
- INCOME TAX




The
Company's subsidiary, Longhai PRC is subject to the Income Tax Law of the
PRC concerning privately-run enterprises.  Privately-run enterprises
are generally subject to income tax at the statutory rate of 25%.




The
following table summarizes the temporary differences which result in deferred
tax assets and liabilities as of June 30, 2010 and December 31,
2009:




11




LONGHAI
STEEL, INC. (Formerly Action Industries, Inc.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


June
      30,
              2010
            
            
            December
      31, 2009Current
      deferred tax assets:Inventory
      impairment reserve
            
            
            11,714
            
            
            
            -Cost
      of revenue on goods delivered but not invoiced
            
            
            -
            
            
            
            161,673Expenses
      deductible in next year
            
            
            44,805
            
            
            
            31,547Other
            
            
            351,078
            
            
            
            -Total
      current deferred tax assets
            
            
            407,597
            
            
            
            193,220Total
      deferred tax assets
            
            $
            407,597
            
            
            $
            193,220





June
      30,
              2010
            
            
            December
      31, 2009Current
      deferred tax liabilities:Tax
      on financing service not invoiced to related party
            
            
            2,473,253
            
            
            
            1,365,401Total
      current deferred tax liabilities
            
            
            2,473,253
            
            
            
            1,365,401Non-current
      deferred tax liabilities:Depreciation
      of fixed assets
            
            $
            178,452
            
            
            $
            190,351Total
      deferred tax liabilities
            
            $
            2,651,705
            
            
            $
            1,555,752Net
      current deferred tax liabilities
            
            
            2,065,656
            
            
            
            1,172,181Net
      non-current deferred tax liabilities
            
            
            178,452
            
            
            
            190,351





The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the six months ended June 30, 2010 and 2009:




2010
            
            
            2009U.S.
      statutory rates
            
            
            34.0
            %
            
            
            34.0
            %Tax
      rate difference
            
            
            (9.0
            %)
            
            
            (9.0
            %)Tax
      per financial statements
            
            
            25.0
            %
            
            
            25.0
            %





NOTE 7
– SHAREHOLDERS’ EQUITY




Series
A Convertible Preferred Stock




On March
25, 2010, the Company filed a Certificate of Designation establishing the Series
A Preferred Stock and setting forth the rights, preferences and privileges of
the Series A Preferred Stock.  On or about March 25, 2010, the Company
issued 10,000 shares of Series A Preferred Stock.




Pursuant
to the Certificate of Designation, the shares of Series A Preferred Stock
automatically convert into shares of common stock on the basis of one share of
Series A Preferred Stock for every 985 shares of common stock immediately
subsequent to the effectiveness of the Company's 1-for-125 reverse split of its
outstanding common stock (the "Reverse Stock Split").




The
Reverse Stock Split was effective on June 22, 2010 and the 10,000 outstanding
shares of Series A Preferred Stock automatically converted into 9,850,000 shares
of common stock, which constitutes 98.5% of the Company's outstanding common
stock.  For accounting purposes, we treated the Series A Preferred
Stock as being converted fully to common stock on a post- reverse split basis
for all periods presented.




12




Following
the Reverse Stock Split and the conversion of Series A Preferred Stock into
common stock, the Company has 10,000,000 shares of common stock issued and
outstanding and no shares of preferred stock issued and
outstanding.




NOTE 8
– STOCK OPTION PLAN




On April
1, 2010, the Company granted a newly appointed executive officer a 5-year option
to purchase 200,000 shares of the Company’s common
stock. According to the stock option agreement, the option has a per share
exercise price equal to $6.00, the fair market value of the stock on the date of
grant. Half of the options are immediately exercisable and one-fourth will vest
on each anniversary date of the grant over the next two years.





The
Company uses the Black-Scholes option-pricing model to estimate the fair value
of its stock options. The fair value of options was
estimated on the date of grant. Valuation assumptions used in the Black-Scholes
option-pricing model for options issued include (1)
discount rate of 1.63% based upon United States Treasury yields in effect at the
time of the grant, (2) expected term of 2.875 years based
upon simplified calculations due to the limited period of time the Company’s
equity shares have been publicly traded, (3) expected volatility
of 88%, and (4) zero expected dividends. The calculated fair value of the grant
was $3.32 per share. No stock options were exercised
during the six months ended June 30, 2010.




13




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




Overview




On March
26, 2010, the Company completed a reverse acquisition transaction through a
share exchange with Kalington Limited (hereafter referred to as “Kalington”), a
Hong Kong entity established on November 5, 2009, and its shareholders, whereby
the Company acquired 100% of the issued and outstanding capital stock of
Kalington in exchange for 10,000 shares of our Series A Preferred Stock which
constituted 98.5% of the Company’s issued and outstanding capital stock on an
as-converted basis as of and immediately after the consummation of the reverse
acquisition. As a result of the reverse acquisition, Kalington became the
Company’s wholly-owned subsidiary and the former stockholders of Kalington
became our controlling stockholders. The share exchange transaction with
Kalington and the Shareholders, was treated as a reverse acquisition for
accounting and financial reporting purposes, with Kalington as the acquirer and
the Company as the acquired party. After the reverse acquisition, the Company
changed its name to Longhai Steel, Inc.  By virtue of its ownership of
Kalington, the Company also owns Xingtai Kalington Consulting Service Co., Ltd.
("Kalington Consulting"), which is a wholly owned foreign subsidiary of
Kalington and effectively and substantially controls Xingtai Longhai Wire Rod
Co. Ltd., a company organized under the laws of the PRC ("Longhai PRC") and a
leading producer of steel wire products in eastern China, through a series of
captive agreements known as variable interest agreements (the “VIE Agreements”)
with Kalington Consulting.




On June
22, 2010, the Company effected a 1-for-125 reverse stock split of our issued and
outstanding common stock (the “Reverse Stock Split”).  Upon the date
of the Reverse Stock Split all of the issued and outstanding shares of Series A
Preferred Stock automatically converted into 9,850,000 shares of common stock.
Following the effectiveness of the Reverse Stock Split and conversion of Series
A Preferred Stock into common stock, there were 10,000,000 shares of our common
stock issued and outstanding and no shares of preferred stock issued and
outstanding.




We are a
leading producer of steel wire products in eastern China. Demand for our steel
wire is driven primarily by spending in the construction and infrastructure
industries. We have benefited from strong fixed asset investment and
construction growth as the PRC has rapidly grown increasingly urbanized and
invested in modernizing its infrastructure.




Our
principal business is the production of steel wire ranging from 6mm to 10mm in
diameter. We operate two wire production lines, which have a combined annual
capacity of approximately 0.9MMT. Our products are sold to a number of
distributors who transport the wire to nearby wire processing facilities. Our
wire is then further processed by these third party wire refiners into a variety
of products such as nails, screws, and wire mesh for use in reinforced concrete
and fencing. Our facilities and head offices are located in the town of Xingtai
in southern Hebei Province.




Principal Factors Affecting Our
Financial Performance




Our
operating results are primarily affected by the following factors:




·
            Growth in
      the Chinese Economy -We operate our facilities in China and derive
      almost all of our revenues from sales to customers in China. Economic
      conditions in China, therefore, affect virtually all aspects of our
      operations, including the demand for our products, the availability and
      prices of our raw materials and our other expenses. China has experienced
      significant economic growth, achieving a compound annual growth rate of
      over 10% in gross domestic product from 1996 through 2008. China is
      expected to experience continued growth in all areas of investment and
      consumption, even in the face of a global economic recession. However,
      China has not been entirely immune to the global economic slowdown and is
      experiencing a slowing of its growth
rate.




·
            Supply and
      Demand in the Steel Market –We are subject to macroeconomic
      factors dictating the supply and demand of steel and wire in the PRC.
      Steel commodity prices have been volatile in the past, and while they have
      stabilized since the first quarter of 2009, our revenues and earnings
      could be dramatically affected by increases and decreases in raw material
      and wire costs.




·
            Infrastructure
      and Construction Growth –We have in the past benefited from strong
      growth in fixed asset investment in roads, residential and commercial
      construction, bridges and other fundamental infrastructure and
      construction projects in the PRC. As the Chinese economy matures and
      develops, we expect this growth to slow and fixed asset investment to fall
      as a percentage of GDP, however, we believe demand for our products will
      remain strong for many years to
come.




14




Taxation




United States and
Hong Kong




We are
subject to United States tax at a tax rate of 34%. No provision for income taxes
in the United States has been made as we have no income taxable in the United
States due to the fact that we operate pursuant to a VIE structure with Longhai
PRC. Our subsidiary, Kalington, is incorporated in Hong Kong and is taxed on
profits generated in Hong Kong at the rate of 16.5%. However, since Kalington is
merely a holding company, we do not expect to generate any profits in Hong Kong
or be subject to such taxes.




People’s Republic
of China




Income Taxes – We account for
income taxes in accordance with ASC 740 “Income Taxes.” ASC 740 requires an
asset and liability approach for financial accounting and reporting for income
taxes and allows recognition and measurement of deferred tax assets based upon
the likelihood of realization of tax benefits in future years. Under the asset
and liability approach, deferred taxes are provided for the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. A
valuation allowance is provided for deferred tax assets if it is more likely
than not these items will either expire before we are able to realize their
benefits, or that future deductibility is uncertain. There was no deferred tax
asset or liability for the years ended December 31, 2009 and 2008.




Because
all of our operations are conducted in the PRC, we are governed by the Income
Tax Law of the PRC applied to privately-run enterprises. On March 16, 2007, the
National People’s Congress of China passed a new Enterprise Income Tax Law (the
"New EIT Law") and its implementing rules, both of which became effective on
January 1, 2008. Before the implementation of the New EIT Law, foreign invested
enterprises (“FIE’s”) established in the PRC, unless granted preferential tax
treatment by the PRC government, were generally subject to an earned income tax,
or EIT, at the rate of 33%, which included a 30% state income tax and a 3% local
income tax. The New EIT Law and its implementing rules impose a unified EIT rate
of 25% on all domestic-invested enterprises and FIEs, unless they qualify under
certain limited exceptions.




In
addition to the changes to the current tax structure, under the New EIT Law, an
enterprise established outside of China with “de facto management bodies” within
China is considered a resident enterprise and will normally be subject to an EIT
of 25% on its global income. The implementing rules define the term “de facto
management bodies” as “an establishment that exercises, in substance, overall
management and control over the production, business, personnel, accounting,
etc., of a Chinese enterprise.” If the PRC tax authorities subsequently
determine that we should be classified as a resident enterprise, then our
organization’s global income will be subject to PRC income tax at the rate of
25%. For a detailed discussion of PRC tax issues related to resident enterprise
status, see “Risk Factors –
Risks Related to Doing Business in China – Under the New EIT Law we may be
classified as a “resident enterprise” of China. Such classification will likely
result in unfavorable tax consequences to us and our non-PRC
shareholders" contained in our Current Report on Form 8-K filed with the
SEC on March 26, 2010.




In fiscal
years 2009 and 2008 we were subject to tax at a statutory rate of 25% on income
reported in our statutory financial statements filed after appropriate tax
adjustments in the relevant periods. Our future effective income tax rate
depends on various factors, such as tax legislation, the geographic composition
of our pre-tax income and non-tax deductible expenses incurred. Our management
carefully monitors these legal developments and will timely adjust our effective
income tax rate when necessary.




Value Added Taxes – We are
also subject to value added tax, or VAT, on the sale of our products. The
applicable VAT rate is 17% for products sold in the PRC. The amount of VAT
liability is determined by applying the applicable tax rate to the invoiced
amount of goods sold (output VAT) less VAT paid on purchases made with the
relevant supporting invoices (input VAT). Under the commercial practice in the
PRC, we pay VAT based on tax invoices issued. The tax invoices may be issued
subsequent to the date on which revenue is recognized, and there may be a
considerable delay between the date on which the revenue is recognized and the
date on which the tax invoice is issued. In the event that the PRC tax
authorities dispute the date on which revenue is recognized for tax purposes,
the PRC tax office has the right to assess a penalty, which can range from zero
to five times the amount of the taxes which are determined to be late or
deficient. Any tax penalty assessed is expensed as a period expense if and when
a determination has been made by the taxing authorities that a penalty is due.
As of December 31, 2009 and 2008, we accrued zero and $1,328,830, respectively,
of unpaid VAT.




Results
of Operations




Comparison of Three Months Ended June
30, 2010 and June 30, 2009 (Unaudited)




The
following table sets forth key components of our results of operations during
the three month periods ended June 30, 2010 and 2009, both in dollars and as a
percentage of our revenues.




15




Three Months
      Ended
            
            
            Three Months
      EndedJune 30,
      2010
            
            
            June 30,
      2009% of
            
            
            
            
            
            % ofAmount
            
            
            Revenues
            
            
            Amount
            
            
            RevenuesNet
      revenue
            
            $
            128,402,079
            
            
            
            
            
            
            100,731,907Cost
      of sales
            
            
            (125,556,443
            )
            
            
            97.8
            
            
            
            (97,522,220
            )
            
            
            96.8Gross
      profit
            
            
            2,845,636
            
            
            
            2.2
            
            
            
            3,209,687
            
            
            
            3.2General
      and administrative expenses
            
            
            (804,392
            )
            
            
            0.6
            
            
            
            (348,371
            )
            
            
            0.3Income
      from operations
            
            
            2,041,244
            
            
            
            1.6
            
            
            
            2,861,316
            
            
            
            2.8Income
      before income taxes
            
            
            1,768,228
            
            
            
            1.4
            
            
            
            2,805,283
            
            
            
            2.8Income
      tax expense
            
            
            (540,668
            )
            
            
            0.4
            
            
            
            (700,293
            )
            
            
            0.7Net
      income
            
            
            1,227,560
            
            
            
            1.0
            
            
            
            2,104,990
            
            
            
            2.1Other
      comprehensive income
            
            
            142,986
            
            
            
            0.1
            
            
            
            590
            
            
            
            *Comprehensive
      income
            
            $
            1,370,546
            
            
            
            1.1
            
            
            
            2,105,580
            
            
            
            2.1




* less than 0.1%




Net Revenues. Net revenues
consists of revenue from the sale of steel wire and scrap metal.  Our
revenues increased to $128.40 million in the three months ended June 30, 2010
from $100.73 million in the same period in 2009, representing a 27.5% increase.
This increase was mainly due to the period-over-period increase of 20.5% in average steel wire prices.




Cost of Sales. Our cost of
sales increased $28.03 million to $125.60 million in the three months ended June
30, 2010, from $97.52 million in the same period in 2009. The cost of goods sold
as a percentage of total revenues increased from 96.8% to 97.8% primarily due to
an increase in the average price of steel billet by 22.6% during the
period.




Gross Profit and Gross
Margin. Our gross profit decreased $0.36 million to $2.85 million in the
three months ended June 30, 2010 from $3.21 million in the same period in 2009.
Gross margin declined from 3.2% for the three months ended June 30, 2009 to 2.2%
for the three months ended June 30, 2010. The decrease in gross margin was
primarily due to an increase in the price of steel billet.




General and Administrative Expenses.Our general and administrative expenses increased $0.45 million to $0.80
million in the three months ended June 30, 2010, from $0.35 million in the same
period in 2009. The majority of the increase is due to the stock based
compensation in connection with a stock option granted to an executive with the
amount of $0.4 million.




Income Before Income Taxes.Our income before income taxes decreased to $1.77 million in the three
months ended June 30, 2010 from $2.81 million in the same period in 2009. This
decrease was due to a decrease in our gross profit as discussed
above.




Income Tax.Income tax
decreased to $0.54 million in the three months ended June 30, 2010 from $0.70
million in the same period in 2009 as we had lower taxable income.




Net Income. In the three
months ended June 30, 2010, we generated net income of $1.22 million, compared
to $2.10 million in the same period in 2009. This decrease was primarily
attributable to the factors discussed above.




16




Comparison of Six Months Ended June
30, 2010 and June 30, 2009 (Unaudited)




The
following table sets forth key components of our results of operations during
the six month periods ended June 30, 2010 and 2009, both in dollars and as a
percentage of our revenues.




Six Months
      Ended
            
            
            Six Months
      EndedJune 30,
      2010
            
            
            June 30,
      2009% of
            
            
            
            
            
            % ofAmount
            
            
            Revenues
            
            
            Amount
            
            
            RevenuesNet
      revenues
            
            $
            234,378,730
            
            
            
            
            
            
            189,793,620Cost
      of sales
            
            
            (227,358,937
            )
            
            
            97.0
            
            
            
            (181,981,027
            )
            
            
            95.9Gross
      profit
            
            
            7,019,793
            
            
            
            3.0
            
            
            
            7,812,593
            
            
            
            4.1General
      and administrative expenses
            
            
            (1,085,430
            )
            
            
            0.5
            
            
            
            (518,249
            )
            
            
            0.3Income
      from operations
            
            
            5,934,363
            
            
            
            2.5
            
            
            
            7,294,344
            
            
            
            3.8Income
      before income tax
            
            
            5,608,560
            
            
            
            2.4
            
            
            
            7,220,815
            
            
            
            3.8Income
      tax expense
            
            
            (1,501,211
            )
            
            
            0.6
            
            
            
            (1,805,204
            )
            
            
            1.0Net
      income
            
            
            4,107,349
            
            
            
            1.8
            
            
            
            5,415,611
            
            
            
            2.9Other
      comprehensive income
            
            
            147,963
            
            
            
            0.1
            
            
            
            25,382
            
            
            
            *Comprehensive
      income
            
            $
            4,225,312
            
            
            
            1.8
            
            
            
            5,440,993
            
            
            
            2.9




* less
than 0.1%




Net Revenues. Net revenues
consists of revenue from the sale of steel wire and scrap metal.  Our
net revenues increased to $234.38 million in the six months ended June 30, 2010
from $189.79 million in the same period in 2009, representing a 23.5% increase.
This increase was mainly due to the period over period  increase of
14.4% in average steel wire prices.




Cost of Sales. Our cost of
sales increased $45.38 million to $227.36 million in the six months ended June
30, 2010, from $181.98 million in the same period in 2009. The cost of goods
sold as a percentage of total revenues increased from 95.9% to 97% primarily due
to an increase in the average price of steel billet by 16.5% during the
period.




Gross Profit and Gross
Margin. Our gross profit decreased $0.79 million to $7.02 million in the
six months ended June 30, 2010 from $7.81 million in the same period in 2009.
Gross margin declined from 4.1% for the six months ended June 30, 2009 to 3% for
the six months ended June 30, 2010. The decrease in gross margin was primarily
due to an increase in the price of steel billet.




General and Administrative Expenses.Our general and administrative expenses increased $0.58 million to $1.10
million in the six months ended June 30, 2010, from $0.52 million in the same
period in 2009. The majority of the increase is due to the stock based
compensation in connection with a stock option granted to an executive with the
amount of $0.4 million. In addition, during the period we prepaid land use taxes
for the full year in the amount of approximately $31,600, as compared to $15,600
during the corresponding 2009 period. Other general and administrative expenses
increased due to increased payments for insurances and for expenses related to
becoming a publicly traded company.




Income Before Income Taxes.Our income before income taxes decreased to $5.60 million in the six
months ended June 30, 2010 from $7.22 million in the same period in 2009. This
decrease was due to a decrease in our gross profit as discussed
above.




Income Tax.Income tax
decreased to $1.50 million in the six months ended June 30, 2010 from $1.81
million in the same period in 2009 as we had lower taxable income.




Net Income. In the six months
ended June 30, 2010, we generated net income of $4.11 million, compared to $5.41
million in the same period in 2009. This decrease was primarily attributable to
the factors discussed above.




Liquidity and Capital Resources




At June
30, 2010, we had cash and cash equivalents of $592,938, consisting primarily of
cash on hand and demand deposits. The following table provides detailed
information about our net cash flows for the six months ended June 30, 2010. To
date, we have financed our operations primarily through cash flows from equity
contributions by our shareholders.




The
following table sets forth a summary of our cash flows for the periods
indicated:




17




Cash
Flows


(all
amounts in U.S. dollars)




Six Months
      EndedJune 30,2010
            
            
            2009Net
      cash provided by (used in) operating activities
            
            $
            (38,940,605
            )
            
            
            58,027,582Net
      cash used in investing activities
            
            
            (3,615,208
            )
            
            
            (54,117,194
            )Net
      cash provided by (used in) financing activities
            
            
            43,009,101
            
            
            
            (4,205,353
            )Effect
      of exchange rate changes on cash
            
            
            23,110
            
            
            
            (880
            )Net
      increase (decrease) in cash and cash equivalents
            
            
            476,398
            
            
            
            (295,845
            )Cash
      and cash equivalents at beginning of the quarter
            
            
            116,540
            
            
            
            363,903Cash
      and cash equivalents at end of the quarter
            
            
            592,938
            
            
            
            68,058




Operating
activities




Net cash
used in operating activities was $38.94 million for the six months ended June
30, 2010, as compared to net cash provided by operating activities of $58.03
million for the same period in 2009. The decrease in net cash provided by
operating activities was due to increases in advances to suppliers




Investing
activities




Net cash
used in investing activities for the six months ended June 30, 2010 was $3.62
million, as compared to net cash used in investing activities of $54.12 million
during the same period of 2009. This decrease in cash used in investing
activities was mainly due to repayment of a loan by a related
party.




Financing
activities




Net cash
provided by financing activities for the six months ended June 30, 2010 was
$43.01 million, as compared to net cash in the amount of $4.21 million used in
financing activities during the same period of 2009.  The cash inflow
in financing activities for the six months ended June 30, 2010 mainly consisted
of repayment of a loan by a related party.




We
believe that our cash on hand and cash flows from operations will meet our
present cash needs, but we may require additional cash resources to implement
our expansion through the acquisition of additional facilities. If our own
financial resources are insufficient to satisfy our capital requirements, we may
seek to sell additional equity or debt securities or obtain additional credit
facilities. The sale of additional equity securities could result in dilution to
our stockholders. The incurrence of indebtedness would result in increased debt
service obligations and could require us to agree to operating and financial
covenants that would restrict our operations. Financing may not be available in
amounts or on terms acceptable to us, if at all. Any failure by us to raise
additional funds on terms favorable to us, or at all, could limit our ability to
expand our business operations and could harm our overall business prospects. On
July 20, 2010, we have filed a registration statement with the SEC in order to
be able to issue additional common stock at a proposed maximum offer price of 20
million U.S. Dollars for the purpose of expanding our business through
acquisitions and to better meet our working capital needs.




Inflation




Inflation
and changing prices have not had a material effect on our business and we do not
expect that inflation or changing prices will materially affect our business in
the foreseeable future. However, our management will closely monitor price
changes in the steel industry and continually maintain effective cost control in
operations.




Off Balance Sheet
Arrangements




We do not
have any off balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity or capital
expenditures or capital resources that is material to an investor in our
securities.




Seasonality




Our
operating results and operating cash flows have not historically been subject to
seasonal variations, however, the first quarter is usually the slowest quarter
because fewer projects are undertaken during and around the Chinese spring
festival.




18




Significant Accounting
Policies




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States (“U.S. GAAP”) requires our management to
make assumptions, estimates and judgments that affect the amounts reported,
including the notes thereto, and related disclosures of commitments and
contingencies, if any. We have identified certain accounting policies that are
significant to the preparation of our financial statements. These accounting
policies are important for an understanding of our financial condition and
results of operation. Critical accounting policies are those that are most
important to the portrayal of our financial conditions and results of operations
and require management’s difficult, subjective, or complex judgment, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain and may change in subsequent periods. Certain accounting
estimates are particularly sensitive because of their significance to financial
statements and because of the possibility that future events affecting the
estimate may differ significantly from management’s current judgments. We
believe the following critical accounting policies involve the most significant
estimates and judgments used in the preparation of our financial
statements:




Revenue
Recognition




Retail
sales are recognized at the point of sale to customers, are recorded net of
estimated returns, and exclude VAT. Wholesales to contracted customers are
recognized as revenue at the time the product is shipped and title passes to the
customer FOB shipping point.




Use of
Estimates




The
preparation of consolidated financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the consolidated financial statements and the amount
of revenues and expenses during the reporting periods.  Management
makes these estimates using the best information available at the time the
estimates are made.  However, actual results could differ materially
from those results




Accounts
Receivable




Accounts
receivable consists of unpaid balances due from wholesale customers. Such
balances generally are cleared in the subsequent month when the wholesale
customers place another order. We do not provide an allowance for doubtful
accounts because we have not experienced any credit losses in collecting these
amounts from whole-sale customers.




Impairment of Long-Lived
Assets




We
account for impairment of property and equipment and amortizable intangible
assets in accordance with ASC 360, “Accounting for Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of”, which requires us to evaluate a
long-lived asset for recoverability when there is event or circumstance that
indicate the carrying value of the asset may not be recoverable. An impairment
loss is recognized when the carrying amount of a long-lived asset or asset group
is not recoverable (when carrying amount exceeds the gross, undiscounted cash
flows from use and disposition) and is measured as the excess of the carrying
amount over the asset’s (or asset group’s) fair value. There was no impairment
of long-lived assets for the three month periods ended June 30, 2010 and 2009 or
the years ended December 31, 2009 or 2008.




Inventories




Merchandise
inventories are stated at the lower of cost or market. Cost is determined on a
weighted average basis and includes all expenditures incurred in bringing the
goods to the point of sale and putting them in a salable condition. In assessing
the ultimate realization of inventories, the management makes judgments as to
future demand requirements compared to current or committed inventory levels.
Our reserve requirements generally increase as our projected demand requirements
or decrease due to market conditions and product life cycle changes. We estimate
the demand requirements based on market conditions, forecasts prepared by
customers, sales contracts and orders in hand.




In
addition, we estimate net realizable value based on intended use, current market
value and inventory ageing analyses. We write down inventories for estimated
obsolescence or unmarketable inventory equal to the difference between the cost
of inventories and their estimated market value based upon assumptions about
future demand and market conditions.




Comprehensive
Income




We have
adopted the provisions of ASC 220 “Reporting Comprehensive Income,” which
establishes standards for the reporting and display of comprehensive income, its
components and accumulated balances in a full set of general purpose financial
statements.




19




ASC 220
defines comprehensive income as comprised of net income and all changes to the
statements of stockholders’ equity, except those due to investments by
stockholders, changes in paid-in capital and distributions to stockholders,
including adjustments to minimum pension liabilities, accumulated foreign
currency translation, and unrealized gains or losses on marketable securities.
Our other comprehensive income arose from the effect of foreign currency
translation adjustments.




Foreign Currency
Translation/Transactions





The
reporting currency of the Company is the U.S. dollar. The functional currency of
the Company's PRC subsidiaries is the RMB.  Assets and liabilities of
non-U.S. subsidiaries that operate in a local currency environment, where that
local currency is the functional currency, are translated into U.S. dollars at
exchange rates in effect at the balance sheet date; with the resulting
translation adjustments directly recorded to a separate component of accumulated
other comprehensive income.  Income and expense accounts are
translated at average exchange rates during the year.  Gains and
losses from foreign currency transactions are recorded in other income (loss),
net.  The functional currency is the local currency for all non-U.S.
subsidiaries.




The
balance sheet amounts at June 30, 2010, with the exception of shareholders'
equity, were translated at the exchange rate of 6.8086 RMB to the U.S. $1.00
compared to the exchange rate of 6.8376 RMB to the U.S. $1.00 at December 31,
2009.  The equity accounts were stated at their historical exchange
rates.  The average translation rates applied to the income and cash
flow statement amounts for the six months ended June 30, 2010 and 2009 was
6.83476 RMB and 6.84329 RMB to the U.S. $1.00, respectively.




Translation
adjustments resulting from this process are included in "accumulated other
comprehensive income" in the consolidated statement of stockholders’ equity and
were $954,781 and $806,818 as of June 30, 2010 and December 31, 2009,
respectively.




Recent Accounting
Pronouncements




In
December 2007, the FASB issued SFAS No. 141R (now included in ASC 805),
“Business Combinations” which establishes principles and requirements for how
the acquirer of a business recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed and any
non-controlling interest in the acquiree. The statement also provides guidance
for recognizing and measuring the goodwill acquired in the business combination
and for disclosure to enable evaluation of the nature and financial effects of
the business combination. We adopted this standard as of January 1, 2009 and do
not expect it to have an impact on our financial statements.




In
December 2007, the FASB issued SFAS No. 160 (now ASC 810-10), "Non-controlling
Interests in Consolidated Financial Statements, an amendment of ARB No. 51.” ASC
810-10 introduces significant changes in the accounting and reporting for
business acquisitions and non-controlling interest in a subsidiary. ASC 810-10
also changes the accounting and reporting for the deconsolidation of a
subsidiary. Companies are required to adopt the new standard for fiscal years
beginning after January 1, 2009. We adopted this standard effectively January 1,
2009 and the adoption of this ASC did not have a material impact on the
company’s consolidated financial statements.




Effective
July 1, 2008, we adopted SFAS No. 157 (now ASC 820), “Fair Value Measurements,”
which provides guidance on how to measure assets and liabilities that use fair
value. ASC 820 applies whenever another US GAAP standard requires (or permits)
measurement of assets or liabilities at fair value, but does not expand the use
of fair value to any new circumstances. We also adopted FASB Staff Position
("FSP") No. FAS 157-2, which allows us to partially defer the adoption of ASC
820. This FSP defers the effective date of ASC 820 for nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually), to
fiscal years beginning after November 15, 2008, and interim periods within those
fiscal years. Nonfinancial assets and nonfinancial liabilities include all
assets and liabilities other than those meeting the definition of a financial
asset or financial liability as defined in paragraph 6 of Statement No. 159,
“The Fair Value Option for Financial Assets and Financial Liabilities.” The
adoption of ASC 820 had no impact on our financial statements.




In May
2009, the FASB issued SFAS No. 165 (now ASC 855), “Subsequent Events,” which
provides guidance to establish general standards of accounting for and
disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. ASC 855 also
requires entities to disclose the date through which subsequent events were
evaluated as well as the rationale for why that date was selected. This
disclosure should alert all users of financial statements that an entity has not
evaluated subsequent events after that date in the set of financial statements
being presented. ASC 855 is effective for interim and annual periods ending
after June 15, 2009. The adoption of ASC 855 did not have a material impact on
our financial position, results of operations or cash flows.




In June
2009, the FASB issued Update No. 2009-01 (ASU 2009-01), “Generally Accepted
Accounting Principles.” ASU 2009-01 establishes “The FASB Accounting Standards
Codification”, or Codification, which became the source of authoritative GAAP
recognized by the FASB to be applied by nongovernmental entities. On the
effective date, the Codification superseded all then-existing non-SEC accounting
and reporting standards. All other non-grandfathered non-SEC accounting
literature not included in the Codification will become non-authoritative. ASU
2009-01 is effective for interim and annual periods ending after September 15,
2009. We will adopt the provisions of ASU 2009-01 for the period ended September
30, 2009. There will be no impact on our operating results, financial position
or cash flows as a result of adoption.




We do not
expect the adoption of any other recently issued accounting pronouncements to
have a significant impact on our results of operations, financial position or
cash flows.




20




Item
3. Quantitative and Qualitative Disclosures About Market Risks




Quantitative
and Qualitative Disclosures about Market Risk




We have
exposure to several types of market risk: changes in foreign currency exchange
rates, interest rates and commodity prices. We neither hold nor issue financial
instruments for trading purposes nor do we make use of derivative instruments to
hedge the risks discussed below. The following sections provide quantitative
information on our exposure to market risks. Our use of sensitivity analyses are
inherently limited in estimating actual losses in fair value that can occur from
changes in market conditions.




Foreign Currency
Exchange Rates




All of
our revenues are collected in and substantially all of our expenses are paid in
Chinese RMB. We face foreign currency rate translation risks when our results
are translated to U.S. dollars. The registered equity capital denominated in the
functional currency is translated at the historical rate of exchange at the time
of capital contribution.




The
Chinese RMB was relatively stable against the U.S. dollar at approximately 8.28
RMB to the $1.00 U.S. dollar until July 21, 2005 when the Chinese currency
regime was altered resulting in a 2.1% revaluation versus the U.S. dollar. This
move initially had the effect of pegging the exchange rate of the RMB at 8.11
RMB per U.S. dollar. Now the RMB exchange rate is no longer linked to the U.S.
dollar but rather to a basket of currencies with a 0.3% margin of fluctuation
resulting in further appreciation of the RMB against the U.S. dollar. Since June
30, 2009,  the exchange rate has remained stable at 6.8307 RMB to 1.00
U.S. dollar until June 30, 2010 when the Chinese Central Bank allowed a further
appreciation of the RMB by 0.43% to 6.798 RMB to 1.00 U.S.
dollar.  There remains international pressure on the Chinese
government to adopt an even more flexible currency policy and The exchange rate
of RMB is subject to changes in China’s government policies which are, to a
large extent, dependent on the economic and political development both
internationally and locally and the demand and supply of RMB in the domestic
market. There can be no assurance that such exchange rate will continue to
remain stable in the future amongst the volatility of currencies, globalization
and the unstable economies in recent years. Since (i) our income and profit are
denominated in RMB, and (ii) the payment of dividends, if any, will be in U.S.
dollars, any decrease in the value of the RMB against other foreign currencies
would adversely affect the value of the shares and dividends payable to
shareholders, in foreign currency terms.




Commodity
Prices




We are
generally exposed to commodity price swings. Although there is no guaranteed
correlation, steel wire prices generally fluctuate with steel prices, but the
differential between market prices of steel billet and steel wire also
fluctuates. Although we generally hold inventory for the duration of our 24-hour
production cycle, sudden changes in the market price of steel and wire may
directly impact the valuation of inventory and goods in progress, which
influences earnings. So long as the market price differential between billets
and wire does not shrink disproportionally, rising steel prices generally work
in our favor as inventory purchased at lower prices would appreciate in such a
scenario, resulting in additional profits when the wire is sold.




Item
4. Controls and Procedures




Evaluation
of Disclosure Controls and Procedures




The
Company's management is responsible for establishing and maintaining a system of
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
under the Exchange Act of 1943, as amended) that is designed to ensure that
information required to be disclosed by the Company in the reports that the
Company files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Commission's
rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by an issuer in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the issuer's management,
including its principal executive officer or officers and principal financial
officer or officers, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure. Based upon their
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that as of June 30, 2010 our disclosure controls and procedures were
effective.




Changes
in Internal Control over Financial Reporting:




There
were no changes in our internal control over financial reporting, other than
those stated above, during our most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.




21




Inherent
Limitations of Internal Controls




Our
management, including our CEO and CFO, does not expect that our disclosure
controls and procedures or our internal controls will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of a simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls 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. Over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.




PART
II OTHER INFORMATION




Item
1. Legal Proceedings




None




Item
1A. Risk Factors




There have been no material changes to the risk
factors previously disclosed in the Company’s Current Report on Form 8-K, as
filed with the United States Securities and Exchange Commission on March 26,
2010.




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




On June
30, 2010, the Company effected a 1-for-125 reverse split of its outstanding
common stock, after which shares of the Company’s Series A Preferred Stock
automatically converted into shares of common stock on the basis of one share of
Series A Preferred Stock for 985 shares of common stock. This resulted in the
automatic conversion of the 10,000 outstanding shares of Series A Preferred
Stock into 9,850,000 shares of common stock, constituting 98.5% of the Company’s
outstanding common stock. The shares of common stock issued upon conversion of
the Series A Preferred Stock were issued in reliance upon the exemption from
registration provided by Section 3(a) of the Securities Act of
1933.





Item
3. Defaults Upon Senior Securities




None




Item
5. Other Information




None




Item
6.




31.1
              Certifications
      pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act
      of 1934, as amended, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
              Certifications
      pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act
      of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-
      Oxley Act of 2002.32.1
              Certifications pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2
              Certifications
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of
2002.





22




SIGNATURES





In
accordance with the requirements of the Exchange Act, the registrant caused this
Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned,
thereunto duly authorized.





Date:
August 13, 2010





Longhai
      Steel, Inc./s/ Chaojun
      WangChaojun
      WangChief Executive
      Officer/s/ Dr.
      Eberhard KornotzkiDr.
      Eberhard KornotzkiChief
      Financial Officer
                                          (Principal
      Financial and Accounting
Officer)




23