UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





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





For the
quarterly period ended March 31, 2010





or





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





For the
transition period from ____ to _____





Commission
File Number: 0-19276





FUSHI
COPPERWELD, INC.





(Exact
name of registrant as specified in its charter)





Nevada
              13-3140715(State
      or other jurisdiction of incorporation or
                organization)
              (I.R.S.
      Employer Identification
No.)





254
      Cotton Mill
      Road
              
              TYG
      Center Tower B, Suite 2601Fayetteville,
      Tennessee 37334 USA
              
              Dongsanhuan
      Bei Lu, Bing 2Beijing,
      PRC 100027





(Address
of principal executive offices) (Zip Code)





+1.931433.0460(Registrant’s telephone
number, including area code)









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





Indicate
by check 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: Yesx  No ̈





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





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





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





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





As of
May 5, 2010 the registrant had 37,254,877 shares of common stock
outstanding.





TABLE OF CONTENTS





PAGEPART
      I. FINANCIAL INFORMATIONItem
      1. Financial StatementsConsolidated
      Balance Sheets as of March 31, 2010 (Unaudited) and December 31,
      2009
                      1Consolidated
      Statements of Income and Other Comprehensive Income for the Three Months
      Ended March 31, 2010 and 2009 (Unaudited)
                      2Consolidated
      Statements of Cash Flows for the Three Months Ended March 31, 2010 and
      2009 (Unaudited)
                      3Consolidated
      Statement of Stockholders’ Equity for the Three Months Ended March 31,
      2010 (Unaudited) and the Year Ended December 31, 2009
                      4Notes
      to Consolidated Financial Statements
                      5Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                      51Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
                      64Item
      4. Controls and Procedures
                      65PART
      II. OTHER INFORMATIONItem
      1. Legal Proceedings
                      65Item
      1A. Risk Factors
                      65Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                      66Item
      3. Defaults Upon Revolving Line of Credit
                      66Item
      4. Other Information
                      66Item
      5. Exhibits
                      66Signatures
                      67





PART I. FINANCIAL
INFORMATION





Item 1.
Financial Statements




FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 AS OF
MARCH 31, 2010 AND DECEMBER 31, 2009
 
 March 31,
                                                                2010
                                                              
                                                              December 31,2009UnauditedASSETSCURRENT
      ASSETS:Cash
                                                              
                                                              $
                                                              78,536,226
                                                              
                                                              
                                                              $
                                                              60,597,849Accounts
      receivable, trade, net of allowance of bad debt of $1,024,684 as of March
      31, 2010 and December 31, 2009
                                                              
                                                              
                                                              56,966,163
                                                              
                                                              
                                                              
                                                              67,284,600Inventories
                                                              
                                                              
                                                              17,589,604
                                                              
                                                              
                                                              
                                                              10,875,782Notes
      receivables
                                                              
                                                              
                                                              196,222
                                                              
                                                              
                                                              
                                                              122,972Other
      receivables and prepaid expenses
                                                              
                                                              
                                                              1,285,661
                                                              
                                                              
                                                              
                                                              1,137,566Advances
      to suppliers
                                                              
                                                              
                                                              20,438,121
                                                              
                                                              
                                                              
                                                              8,582,346Deposit
      in derivative hedge
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              1,000,000Total
      current assets
                                                              
                                                              
                                                              175,011,997
                                                              
                                                              
                                                              
                                                              149,601,115PLANT
      AND EQUIPMENT, net
                                                              
                                                              
                                                              125,677,015
                                                              
                                                              
                                                              
                                                              117,385,566OTHER
      ASSETS:Advances
      to suppliers, non-current
                                                              
                                                              
                                                              970,356
                                                              
                                                              
                                                              
                                                              1,356,404Notes
      receivables, non-current
                                                              
                                                              
                                                              679,106
                                                              
                                                              
                                                              
                                                              699,106Intangible
      asset, net of accumulated amortization
                                                              
                                                              
                                                              13,495,302
                                                              
                                                              
                                                              
                                                              11,924,056Deferred
      loan expense, net
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              2,045,349Deferred
      tax assets
                                                              
                                                              
                                                              15,168,955
                                                              
                                                              
                                                              
                                                              11,722,469Total
      other assets
                                                              
                                                              
                                                              30,313,719
                                                              
                                                              
                                                              
                                                              27,747,384Total
      assets
                                                              
                                                              $
                                                              331,002,731
                                                              
                                                              
                                                              $
                                                              294,734,065LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIES:Accounts
      payable, trade
                                                              
                                                              $
                                                              6,224,215
                                                              
                                                              
                                                              $
                                                              4,002,773Notes
      payable, current
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              10,000,000Revolver
      line of credit
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              4,033,783Other
      payables and accrued liabilities
                                                              
                                                              
                                                              3,328,446
                                                              
                                                              
                                                              
                                                              3,928,374Derivative
      instrument settlement payable, net
                                                              
                                                              
                                                              5,650,000
                                                              
                                                              
                                                              
                                                              -Taxes
      payable
                                                              
                                                              
                                                              2,209,696
                                                              
                                                              
                                                              
                                                              2,599,055Cross
      currency hedge payable
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              436,702Obligation
      under capital lease, current
                                                              
                                                              
                                                              74,030
                                                              
                                                              
                                                              
                                                              71,503Total
      current liabilities
                                                              
                                                              
                                                              17,486,387
                                                              
                                                              
                                                              
                                                              25,072,190LONG-TERM
      LIABILITIES:Notes
      payable, non-current
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              25,000,000Obligation
      under capital lease, non-current
                                                              
                                                              
                                                              132,517
                                                              
                                                              
                                                              
                                                              153,626Fair
      value of derivative instrument
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              7,532,527Total
      long-term liabilities
                                                              
                                                              
                                                              132,517
                                                              
                                                              
                                                              
                                                              32,686,153Total
      liabilities
                                                              
                                                              
                                                              17,618,904
                                                              
                                                              
                                                              
                                                              57,758,343COMMITMENTS
      AND CONTINGENCIES
                                                              
                                                              
                                                              5,075,000SHAREHOLDERS’
      EQUITY:Preferred
      stock, $0.001 par value, 5,000,000 shares authorized, none issued or
      outstanding as of March 31, 2010 and December 31, 2009
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -Common
      stock, $0.006 par value, 100,000,000 shares authorized, March 31, 2010:
      37,248,672 shares issued and outstanding; December 31, 2009: 29,772,780
      shares issued and outstanding
                                                              
                                                              
                                                              223,493
                                                              
                                                              
                                                              
                                                              178,638Additional
      paid in capital
                                                              
                                                              
                                                              162,050,378
                                                              
                                                              
                                                              
                                                              105,540,676Statutory
      reserves
                                                              
                                                              
                                                              17,566,294
                                                              
                                                              
                                                              
                                                              16,282,793Retained
      earnings
                                                              
                                                              
                                                              103,371,007
                                                              
                                                              
                                                              
                                                              97,283,748Accumulated
      other comprehensive income
                                                              
                                                              
                                                              25,097,655
                                                              
                                                              
                                                              
                                                              17,689,867Total
      shareholders’ equity
                                                              
                                                              
                                                              308,308,827
                                                              
                                                              
                                                              
                                                              236,975,722Total
      liabilities and shareholders’ equity
                                                              
                                                              $
                                                              331,002,731
                                                              
                                                              
                                                              $
                                                              294,734,065
 
 The
accompanying notes are an integral part of these consolidated
statements.
  - 1
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME (LOSS)
 FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
 (UNAUDITED)
  2010
                        
                        
                        2009REVENUES
                        
                        $
                        59,549,842
                        
                        
                        $
                        35,256,536COST
      OF GOODS SOLD
                        
                        
                        41,728,576
                        
                        
                        
                        26,317,161GROSS
      PROFIT
                        
                        
                        17,821,266
                        
                        
                        
                        8,939,375OPERATING
      EXPENSESSelling
      expenses
                        
                        
                        1,251,962
                        
                        
                        
                        1,202,147General
      and administrative expenses
                        
                        
                        3,757,874
                        
                        
                        
                        3,070,242Total
      operating expenses
                        
                        
                        5,009,836
                        
                        
                        
                        4,272,389INCOME
      FROM OPERATIONS
                        
                        
                        12,811,430
                        
                        
                        
                        4,666,986OTHER
      INCOME (EXPENSE)Interest
      income
                        
                        
                        192,790
                        
                        
                        
                        83,617Interest
      expense
                        
                        
                        (508,482)
                        
                        
                        
                        (1,470,868)Bargain
      purchase gain
                        
                        
                        3,305,013
                        
                        
                        
                        -Loss
      on cross currency hedge
                        
                        
                        (753,666)
                        
                        
                        
                        (166,410)Loss
      on derivative instrument settlement
                        
                        
                        (6,650,000)
                        
                        
                        
                        -Loss
      on debt extinguishment
                        
                        
                        (2,395,778)
                        
                        
                        
                        -Change
      in fair value of derivative liability - warrants
                        
                        
                        -
                        
                        
                        
                        (63,238)Change
      in fair value of derivative liability - conversion option
                        
                        
                        -
                        
                        
                        
                        (539,037)Other
      expense, net
                        
                        
                        (141,072)
                        
                        
                        
                        (106,349)Total
      other expense, net
                        
                        
                        (6,951,195)
                        
                        
                        
                        (2,262,285)INCOME
      BEFORE INCOME TAXES
                        
                        
                        5,860,235
                        
                        
                        
                        2,404,701BENEFIT
      FOR INCOME TAXES
                        
                        
                        1,510,525
                        
                        
                        
                        696,216NET
      INCOME
                        
                        
                        7,370,760
                        
                        
                        
                        3,100,917OTHER
      COMPREHENSIVE INCOME (LOSS)Foreign
      currency translation adjustment
                        
                        
                        (124,739)
                        
                        
                        
                        (393,908)Change
      in fair value of derivative instrument
                        
                        
                        882,527
                        
                        
                        
                        (2,762,129)Reclassification
      of change in cash flow hedge to earnings
                        
                        
                        6,650,000
                        
                        
                        
                        -COMPREHENSIVE
      INCOME (LOSS)
                        
                        $
                        14,778,548
                        
                        
                        $
                        (55,120)EARNINGS
      PER SHARE:Basic
                        
                        $
                        0.21
                        
                        
                        $
                        0.11Diluted
                        
                        $
                        0.21
                        
                        
                        $
                        0.11WEIGHTED
      AVERAGE SHARES:Basic
                        
                        
                        34,673,692
                        
                        
                        
                        27,563,478Diluted
                        
                        
                        35,309,847
                        
                        
                        
                        27,695,464
 
 The
accompanying notes are an integral part of these consolidated
statements.
  - 2
-
  FUSHI
COPPERWELD, INC.  AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
 (UNAUDITED)
  2010
                  
                  
                  2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                  
                  $
                  7,370,760
                  
                  
                  $
                  3,100,917Adjustments
      to reconcile net income provided by (used in) operating
      activities:Deferred
      tax
                  
                  
                  (3,446,486
                  )
                  
                  
                  (1,626,528
                  )Recovery
      of bad debt
                  
                  
                  -
                  
                  
                  
                  (33,391
                  )Reserve
      for inventories
                  
                  
                  61,000
                  
                  
                  
                  -Write-off
      of non-current advances to suppliers
                  
                  
                  525,445
                  
                  
                  
                  -Depreciation
                  
                  
                  2,762,749
                  
                  
                  
                  2,097,208Amortization
      of intangible assets
                  
                  
                  122,487
                  
                  
                  
                  119,076Amortization
      of loan commission
                  
                  
                  249,571
                  
                  
                  
                  272,450Amortization
      of stock compensation expense
                  
                  
                  193,057
                  
                  
                  
                  590,868Loss
      on cross currency hedge
                  
                  
                  753,666
                  
                  
                  
                  166,410Loss
      on derivative instrument settlement
                  
                  
                  6,650,000
                  
                  
                  
                  -Loss
      on debt extinguishment
                  
                  
                  2,395,778
                  
                  
                  
                  -Change
      in fair value of derivative liability - conversion option
                  
                  
                  -
                  
                  
                  
                  539,037Change
      in fair value of derivative liability - warrants
                  
                  
                  -
                  
                  
                  
                  63,238Bargain
      purchase gain
                  
                  
                  (3,305,013
                  )
                  
                  
                  -Change
      in operating assets and liabilitiesAccounts
      receivable
                  
                  
                  12,546,261
                  
                  
                  
                  5,377,902Inventories
                  
                  
                  (5,335,454
                  )
                  
                  
                  (12,585,925
                  )Other
      receivables and prepayments
                  
                  
                  (162,514
                  )
                  
                  
                  (168,913
                  )Notes
      receivables
                  
                  
                  (53,235
                  )
                  
                  
                  73,884Advances
      to suppliers – current
                  
                  
                  (11,388,801
                  )
                  
                  
                  5,880,363Accounts
      payable
                  
                  
                  126,673
                  
                  
                  
                  (1,814,721
                  )Other
      payables and accrued liabilities
                  
                  
                  (1,670,908
                  )
                  
                  
                  (2,094,857
                  )Taxes
      payable
                  
                  
                  (506,088
                  )
                  
                  
                  (975,566
                  )Net
      cash provided by (used in) operating activities
                  
                  
                  7,888,948
                  
                  
                  
                  (1,018,548
                  )CASH
      FLOWS FROM INVESTING ACTIVITIES:Payment
      for purchase of Jinchuan
                  
                  
                  (5,075,000
                  )
                  
                  
                  -Cash
      acquired from acquisition of Jinchuan
                  
                  
                  859,264
                  
                  
                  
                  -Payments
      on cross currency hedge payable
                  
                  
                  (1,190,368
                  )
                  
                  
                  (114,580
                  )Purchases
      of property and equipment
                  
                  
                  (1,262,493
                  )
                  
                  
                  (715,104
                  )Net
      of payments on prepayment of equipment
                  
                  
                  -
                  
                  
                  
                  (4,715,293
                  )Net
      cash used in investing activities
                  
                  
                  (6,668,597
                  )
                  
                  
                  (5,544,977
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      payments on revolver line of credit
                  
                  
                  (9,513
                  )
                  
                  
                  (586,809
                  )Payoff
      of revolver line of credit
                  
                  
                  (4,024,270
                  )
                  
                  
                  -Payments
      on short-term bank loans
                  
                  
                  -
                  
                  
                  
                  (17,553,600
                  )Payment
      on capital lease obligation
                  
                  
                  (18,582
                  )
                  
                  
                  -Payment
      of high yield notes payable
                  
                  
                  (35,600,000
                  )
                  
                  
                  -Proceeds
      on issuance of common stock and warrants
                  
                  
                  56,361,500
                  
                  
                  
                  1,920,000Net
      cash provided by (used in) financing activities
                  
                  
                  16,709,135
                  
                  
                  
                  (16,220,409
                  )EFFECT
      OF EXCHANGE RATE ON CASH
                  
                  
                  8,891
                  
                  
                  
                  (110,978
                  )INCREASE
      IN CASH
                  
                  
                  17,938,377
                  
                  
                  
                  (22,894,912
                  )CASH,
      beginning of period
                  
                  
                  60,597,849
                  
                  
                  
                  65,611,770CASH,
      end of period
                  
                  $
                  78,536,226
                  
                  
                  $
                  42,716,858Supplemental
      cash flow disclosures:Interest
      paid
                  
                  $
                  1,395,799
                  
                  
                  $
                  1,950,860Income
      tax paid
                  
                  $
                  1,802,931
                  
                  
                  $
                  1,002,178
 
 The
accompanying notes are an integral part of these consolidated
statements.
  - 3
-
 
 FUSHI
COPPERWELD, INC AND SUBSIDIARIES
 CONSOLIDATED
STATEMENT OF SHAREHOLDERS' EQUITY
  Common Stock
                                                
                                                
                                                
                                                
                                                
                                                CommonShares Outstanding
                                                
                                                
                                                Shares In Escrow
                                                
                                                
                                                Additional
                                                
                                                
                                                Stock
                                                
                                                
                                                Retained Earnings
                                                
                                                
                                                AccumulatedNumber of
                                                  Shares
                                                
                                                
                                                Par
                                                  Value
                                                
                                                
                                                Number
                                                  of Shares
                                                
                                                
                                                Par
                                                  Value
                                                
                                                
                                                Paid In
                                                  Capital
                                                
                                                
                                                Subscription
                                                  Receivable
                                                
                                                
                                                Statutory
                                                  Reserves
                                                
                                                
                                                Unrestricted
                                                  Earnings
                                                
                                                
                                                Comprehensive
                                                  Income (Loss)
                                                
                                                
                                                TotalsBalance,
      December 31, 2008, as previously reported
                                                
                                                
                                                27,399,034
                                                
                                                
                                                
                                                164,395
                                                
                                                
                                                
                                                100,000
                                                
                                                
                                                
                                                600
                                                
                                                
                                                
                                                91,172,890
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                12,316,147
                                                
                                                
                                                
                                                78,613,158
                                                
                                                
                                                
                                                20,712,502
                                                
                                                
                                                
                                                202,979,692Cumulative
      effect of reclassification of conversion option
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (1,357,150
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                (1,357,150
                                                )Balance,
      January 1, 2009, as adjusted
                                                
                                                
                                                27,399,034
                                                
                                                
                                                
                                                164,395
                                                
                                                
                                                
                                                100,000
                                                
                                                
                                                
                                                600
                                                
                                                
                                                
                                                91,172,890
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                12,316,147
                                                
                                                
                                                
                                                77,256,008
                                                
                                                
                                                
                                                20,712,502
                                                
                                                
                                                
                                                201,622,542Shares
      issued for cash @ $4.80
                                                
                                                
                                                400,000
                                                
                                                
                                                
                                                2,400
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                1,706,157
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                1,708,557Stock
      compensation expense
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                590,868
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                590,868Net
      income
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                3,100,917
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                3,100,917Adjustment
      to statutory reserve
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                682,228
                                                
                                                
                                                
                                                (682,228
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                -Change
      in fair value of derivative instrument
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (2,762,129
                                                )
                                                
                                                
                                                (2,762,129
                                                )Foreign
      currency translation loss
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (393,908
                                                )
                                                
                                                
                                                (393,908
                                                )Balance,
      March 31, 2009, unaudited
                                                
                                                
                                                27,799,034
                                                
                                                
                                                
                                                166,795
                                                
                                                
                                                
                                                100,000
                                                
                                                
                                                
                                                600
                                                
                                                
                                                
                                                93,469,915
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                12,998,375
                                                
                                                
                                                
                                                79,674,697
                                                
                                                
                                                
                                                17,556,465
                                                
                                                
                                                
                                                203,866,847Shares
      issued for Convertible notes extinguishment @ $9.08
                                                
                                                
                                                440,529
                                                
                                                
                                                
                                                2,643
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                3,997,357
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                4,000,000Shares
      placed in escrow (subscription receivable)
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                2,200,000
                                                
                                                
                                                
                                                13,200
                                                
                                                
                                                
                                                6,249,481
                                                
                                                
                                                
                                                (6,262,681
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                -Shares
      removed from escrow as payment of liability
                                                
                                                
                                                1,470,752
                                                
                                                
                                                
                                                8,825
                                                
                                                
                                                
                                                (1,470,752
                                                )
                                                
                                                
                                                (8,825
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                6,262,681
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                6,262,681Shares
      cancelled from escrow
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (829,248
                                                )
                                                
                                                
                                                (4,975
                                                )
                                                
                                                
                                                4,975
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                -Transfer
      balance of derivative liabilities of warrant to APIC due to amendments of
      warrant agreements
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                963,557
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                963,557Exercise
      of warrants for cash @ $3.1064
                                                
                                                
                                                52,352
                                                
                                                
                                                
                                                314
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                166,312
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                166,626Exercise
      of stock option
                                                
                                                
                                                5,262
                                                
                                                
                                                
                                                32
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (32
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                -Stock
      compensation expense
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                689,140
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                689,140Correction
      of 2007 warrant exercise calculation error
                                                
                                                
                                                4,851
                                                
                                                
                                                
                                                29
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (29
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                -Net
      income
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                20,893,469
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                20,893,469Adjustment
      to statutory reserve
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                3,284,418
                                                
                                                
                                                
                                                (3,284,418
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                -Change
      in fair value of derivative instrument
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (393,322
                                                )
                                                
                                                
                                                (393,322
                                                )Foreign
      currency translation gain
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                526,724
                                                
                                                
                                                
                                                526,724Balance,
      December 31, 2009
                                                
                                                
                                                29,772,780
                                                
                                                
                                                $
                                                178,638
                                                
                                                
                                                
                                                -
                                                
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                105,540,676
                                                
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                16,282,793
                                                
                                                
                                                $
                                                97,283,748
                                                
                                                
                                                $
                                                17,689,867
                                                
                                                
                                                $
                                                236,975,722Shares
      issued for cash @ $8.00
                                                
                                                
                                                7,475,000
                                                
                                                
                                                
                                                44,850
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                56,316,650
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                56,361,500Exercise
      of stock option
                                                
                                                
                                                892
                                                
                                                
                                                
                                                5
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (5
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                -Stock
      compensation expense
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                193,057
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                193,057Net
      income
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                7,370,760
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                7,370,760Adjustment
      to statutory reserve
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                1,283,501
                                                
                                                
                                                
                                                (1,283,501
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                -Change
      in fair value of derivative instrument
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                882,527
                                                
                                                
                                                
                                                882,527Reclassification
      of change in fair value of derivative instrument to
    earnings
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                6,650,000
                                                
                                                
                                                
                                                6,650,000Foreign
      currency translation gain
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (124,739
                                                )
                                                
                                                
                                                (124,739
                                                )Balance,
      March 31, 2010, unaudited
                                                
                                                
                                                37,248,672
                                                
                                                
                                                $
                                                223,493
                                                
                                                
                                                
                                                -
                                                
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                162,050,378
                                                
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                17,566,294
                                                
                                                
                                                $
                                                103,371,007
                                                
                                                
                                                $
                                                25,097,655
                                                
                                                
                                                $
                                                308,308,827
 The
accompanying notes are an integral part of these consolidated
statements.




- 4
-




FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2010
 (Unaudited)
 
 Note
1 - Organization and Line of Business
  Fushi
Copperweld, Inc (“Fushi”), a Nevada corporation, is the holding company of Fushi
Holdings, Inc. (“Fushi Holdings”). Fushi Holding, a Delaware corporation,
is a holding company of Fushi International (Dalian) Bimetallic Cable Co., Ltd
(“Fushi International”), which is organized under the laws of the People’s
Republic of China (“PRC”). Fushi International is engaged in the manufacturing
and sale of bimetallic wire products. Dalian Fushi Bimetallic Manufacturing
Co., Ltd (“Dalian Fushi”), a limited liability company organized under the laws
of the PRC, is a variable interest entity through a contractual relationship
(Note 2).
 On
October 29, 2007, Fushi acquired Copperweld Bimetallics, LLC, (“Copperweld”), a
limited liability company registered in the state of Delaware, which is the
parent company of Copperweld Bimetallics UK, Ltd. (“Copperweld UK”), a private
company registered in the United Kingdom. Copperweld is a bimetallic sales and
manufacturing operation headquartered in Fayetteville, Tennessee. Copperweld UK
is a manufacturing, distribution and customer service facility located in
Telford, England.
 
 On
February 5, 2010, Fushi International acquired Dalian Jinchuan Electric Cable
Co., Ltd. (“Jinchuan”), a leading low and medium voltage power cable
manufacturer organized under the laws of the PRC.
 
 Fushi,
Fushi Holdings, Fushi International, Dalian Fushi, Jinchuan, Copperweld and
Copperweld UK are hereinafter referred to as “the Company.”
 
 The
Company is in the business of developing, designing, manufacturing, marketing
and distributing bimetallic wire products, principally copper-clad aluminum and
copper-clad steel. The Company’s products are primarily focused on serving
end-user applications in the telecommunication, electrical utility, and
transportation markets. The Company’s products are sold in North America,
Europe, North Africa, the Middle East, and the PRC.
  - 5
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2010
 (Unaudited)
 
 Note
2 – Summary of Significant Accounting Policies
 
 Basis of
presentation
 
 Management
has included all adjustments, consisting only of normal recurring adjustments,
considered necessary to give a fair presentation of operating results for the
periods presented. Interim results are not necessarily indicative of results for
a full year. The information included in this Form 10-Q should be read
in conjunction with information included in the 2009 annual report filed on Form
10-K.
 
 Principles of
consolidation
 
 The
accompanying consolidated financial statements include the financial statements
of its wholly owned subsidiaries and its 100% VIE. All significant inter-company
transactions and balances have been eliminated in consolidation.
 
 In
accordance with the interpretation of Generally Accepted Accounting Principles
(GAAP), variable interest entities (VIEs) are generally entities that lack
sufficient equity to finance their activities without additional financial
support from other parties or whose equity holders lack adequate decision making
ability.  All VIEs with which the Company is involved must be
evaluated to determine the primary beneficiary of the risks and rewards of the
VIE. The primary beneficiary is required to consolidate the VIE for
financial reporting purposes.
 
 Fushi
International owns 0% of Dalian Fushi Bimetallic Manufacturing Co., Ltd (Dalian
Fushi); however, pursuant to the Entrusted Management Agreement, Voting Proxy
Agreement and the Share Pledge Agreement (collectively, “Restructuring
Agreements”) reached by Fushi International, Dalian Fushi and its registered
shareholders in 2005, Fushi International has full control over Dalian
Fushi’s remaining operations and financial affairs as a result. Fushi
International is the primary beneficiary of Dalian Fushi, thus Dalian Fushi is a
100% VIE of Fushi International, which means 100% voting rights and 100%
Financial Obligation to Fushi International. Thus, Dalian Fushi is considered a
VIE and is consolidated within the financial statements.
  - 6
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2010
 (Unaudited)
 
 Use of
estimates
  The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. For example, the Company estimates the fair value
of its derivative instrument. Actual results could differ from those
estimates.
 
 Revenue
recognition
  Sales
revenue is recognized at the date of shipment to customers when a formal
arrangement exists, the price is fixed or determinable, the delivery is
completed, no other significant obligations of the Company exist and
collectability is reasonably assured. Payments received before all of the
relevant criteria for revenue recognition are recorded as customer
deposits. The Company does not establish reserve funds for potential
customer claims because, historically, it has not experienced significant
customer complaints or returns.
 
 Shipping and handling
costs
 
 Shipping
and handling costs related to costs of goods sold are included in selling costs
which totaled $658,296 and$553,645
for the three months ended March 31, 2010 and 2009, respectively.
 
 Foreign currency translationand other
comprehensive income
 
 The
reporting and functional currency of the Company is the US dollar (USD). The
subsidiaries, in China, use the local currency Renminbi (RMB) to conduct
business. The subsidiary in the UK conducts business in British
Pounds.
 
 For the
subsidiaries whose functional currencies are other than the USD, all assets and
liabilities accounts were translated at the exchange rate on the balance sheet
date; stockholder’s equity is translated at the historical rates and items in
the consolidated statements of operations and consolidated cash flow statements
are translated at the average rate in each applicable period. Translation
adjustments resulting from this process are included in accumulated other
comprehensive income in the consolidated statement of shareholders’ equity. The
resulting translation gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than the functional
currency are included in the results of operations as incurred.
  - 7
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2010
 (Unaudited)
 
 The
balance sheet amounts with the exception of equity at March 31, 2010 were
translated at 6.826 RMB and £0.659 to $1.00 USD, respectively. The balance sheet
amounts with the exception of equity at December 31, 2009 were translated
at 6.826 RMB and £0.619 to $1.00, respectively. The average translation rates
applied to income and cash flow statement amounts for three months ended March
31, 2010 were 6.827 RMB and £0.642 to $1.00, respectively.  The
average translation rates applied to income and cash flow statement amounts for
three months ended March 31, 2009 were 6.836 RMB and £0.697 to $1.00,
respectively.
 
 Cash
flows from the Company’s operations are calculated based upon the local
currencies. As a result, amounts related to assets and liabilities reported on
the consolidated statements of cash flows will not necessarily agree with
changes in the corresponding balances on the consolidated balance
sheets.
 
 Cash and concentration of
risk
 
 The
Company considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash equivalents, for cash
flow statement purposes. Cash includes cash on hand and demand deposits in
accounts maintained with state owned banks within the PRC and with banks in the
UK and the United States (“US”).
 
 Certain
financial instruments, which subject the Company to concentration of credit
risk, consist of cash. The Company maintains balances at financial institutions
which, from time to time, may exceed deposit insurance limits for the banks
located in the US and UK. Balances at financial institutions or state owned
banks within the PRC are not covered by insurance. As of March 31, 2010 and
December 31, 2009, the Company had deposits in excess of federally insured
limits totaling $78,048,245 and $60,231,401, respectively. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
significant risks on its cash in bank accounts.
  - 8
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2010
 (Unaudited)
 
 Parts of
the Company’s operations are carried out in the PRC and UK. Accordingly, the
Company’s business, financial condition and results of operations may be
influenced by the political, economic and legal environments in the two
countries, and by the general state of the two countries’ economy. The Company’s
operations in the two countries are subject to specific considerations and
significant risks not typically associated with companies in the US. These
include risks associated with, among others, the political, economic and legal
environments and foreign currency exchange. The Company’s results may be
adversely affected by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.
 
 Additional product sales
information
 
 The
Company has expanded its geographic sales area from the Chinese domestic market
to the international market. The following chart shows that the PRC market
remains the largest single market for the Company while approximately 23% and
28% of sales were spread across international markets during the first quarter
of 2010 and 2009, respectively.
 
 March 31, 2010
                  
                  
                  March 31, 2009(Unaudited)
                  
                  
                  (Unaudited)China
                  
                  $
                  45,693,565
                  
                  
                  $
                  25,541,567USA
                  
                  
                  10,024,017
                  
                  
                  
                  7,306,836Europe
                  
                  
                  2,189,236
                  
                  
                  
                  1,478,246Other
      countries
                  
                  
                  1,643,024
                  
                  
                  
                  929,887Total
      sales
                  
                  $
                  59,549,842
                  
                  
                  $
                  35,256,536
  Major customers and
suppliers
 
 Ten major
customers accounted for 28% and 24% of sales for the three months ended March
31, 2010 and 2009, respectively. Total receivables balance due from the top ten
customers at March 31, 2010 and December 31, 2009 amounted to $17,250,479 and
$18,484,819, respectively.
  - 9
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2010
 (Unaudited)
 
 Five
major suppliers provided approximately 72.6% and 83.5% of the Company’s raw
materials for the three months ended March 31, 2010 and 2009,
respectively.
 
 At March
31, 2010, our advances to the major five suppliers were $19,365,135, all of
which was current. At December 31, 2009, our advances to the major five
suppliers were $6,816,228, all of which was current.
 
 Accounts receivablesand allowance
for doubtful accounts
 
 During
the normal course of business, the Company extends unsecured credit to its
customers. Management regularly reviews aging of receivables and changes in
payment trends by its customers, and records a reserve when they believe
collection of amounts due are at risk. Accounts considered uncollectible are
written off through a charge to the valuation allowance. As of March 31, 2010
and December 31, 2009, management concluded its allowance for bad debts was
sufficient.
 
 Inventories
  Inventories
are stated at the lower of cost or market using a weighted average method.
Inventories consist of raw materials, work in process, finished goods and
packing materials. Raw materials consist of prefabricated copper, aluminum and
steel used in production. The cost of finished goods includes direct costs of
raw materials as well as direct labor used in production. Indirect production
costs such as utilities and indirect labor related to production such as
assembling, shipping and handling for raw material costs are also included in
the cost of inventories.
 
 The
Company reviews its inventories regularly for possible obsolete goods and
establishes reserves when determined necessary.
  - 10
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2010
 (Unaudited)
 
 Derivative
instrument
 
 Effective
January 1, 2009, the Company began disclosing qualitative disclosures about
objectives and strategies for using derivatives and quantitative disclosures
about the fair value of and gains and losses on derivative instruments. The
Company used a cross currency hedge, a derivative financial instrument, to hedge
the risk of rising interest rates on its variable interest rate debt. This type
of derivative financial instrument is known as a cash flow hedge.
 
 At the
inception of the transaction, the Company documented the relationship between
hedging instruments and hedged items, as well as its risk management objective
and the strategy for undertaking various hedge transactions. This process
includes linking all derivatives designated to specific firm commitments of
forecast transactions. The Company also documents its assessment, both at
inception and on an ongoing basis, of whether the derivative financial
instruments that are used in hedging transactions are highly effective in
offsetting changes in fair values or cash flows of hedged items. Any
portion deemed ineffective is recorded in earnings with the effective portion
reflected in accumulated other comprehensive. Changes in the fair values of
derivative financial instruments accounted for as cash flow hedges to the extent
they qualify for hedge accounting, are recorded in accumulated other
comprehensive income.
 
 During
the current quarter, the derivative financial instrument, with an outstanding
USD notional amount of $30,000,000 and an outstanding CNY notional amount of
233,175,000 was terminated at a price of $6,650,000. See Note 12 for
additional information related to the instrument.
 
 Financial
instruments
 
 The
Company analyzes all financial instruments with features of both liabilities and
equity under GAAP requirements. The convertible note issued in 2007 did not
require bifurcation or result in liability accounting. However, with the
adoption of amended GAAP requirements in first quarter of 2009, the embedded
conversion feature was bifurcated from its host instrument and accounted for
separately as a derivative liability. Additionally, the Company analyzes
registration rights agreements associated with any equity instruments issued to
determine if penalties triggered for late filing should be
accrued.
  - 11
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2010
 (Unaudited)
 
 The
Company adopted Fair Value Measurements on January 1, 2008 which defines fair
value and establishes a three-level valuation hierarchy for disclosures of fair
value measurement. Receivables, payables, notes, loans, and derivatives all meet
the definition of financial instruments. The carrying amounts reported in the
balance sheets for accounts receivable, notes receivable, accounts payable,
other payables, and short term bank loans qualify as financial instruments
are a reasonable estimate of fair value because of the short period of time
between the origination and their expected realization and, if applicable, the
stated interest rate is equivalent to interest rates currently
available.  The three levels are defined as follows:
 
 ·
              Level
      1 inputs to the valuation methodology are quoted prices (unadjusted) for
      identical assets or liabilities in active
  markets.
 ·
              Level
      2 inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the assets or liability, either directly or indirectly, for
      substantially the full term of the financial
  instruments.
 ·
              Level
      3 inputs to the valuation methodology are unobservable and significant to
      the fair value.
 
 As of
March 31, 2010, the Company did not identify any assets or liabilities that are
required to be presented on the balance sheet at fair value.
 
 Derivative
liability
 
 Using the
criteria under GAAP, a contract is designated as an asset or a liability
and is carried at fair value on a company’s balance sheet, with any changes in
fair value recorded in a company’s results of operations.  The Company
then determines which options, warrants and embedded features require liability
accounting and records the fair value as a derivative liability. The changes in
the values of these instruments are shown in the accompanying consolidated
statements of income and other comprehensive income as “change in fair value of
derivative liability – warrants” or “conversion
option” and  “loss on cross currency hedge.”
  - 12
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2010
 (Unaudited)
 
 Prior to
January 1, 2009, the conversion option embedded in the Company’s $5,000,000
convertible notes was not separately accounted for as a derivative instrument
liability.  However, effective January 1, 2009, the conversion option
met the criteria of a derivative instrument liability because it required that
the conversion price be adjusted in certain circumstances that do not meet the
“fixed-for-fixed’ criteria in that issue.  As a result, the Company
was required to separately account for the embedded conversion option as a
derivative instrument liability, carried at fair value and marked-to-market each
period, with changes in the fair value each period charged or credited to
income.
 
 The
cumulative effect of this change in accounting principle of $1,357,150 has been
recognized as a reduction of the opening balance of retained earnings as January
1, 2009.  That cumulative effect adjustment is the difference between
the amounts previously recognized in the Company’s consolidated balance sheet as
of December 31, 2008 and the amounts that would have been recognized if the
Convertible Notes had been accounted for as a derivative instrument liability
from the issuance date.
 
 The
company repurchased all convertible notes during the third quarter of 2009.
Thus, for the three months ended March 31, 2010 and 2009, the Company recognized
a loss in the change in fair value of derivative liability – conversion option
in the amounts of $0 and $539,037, respectively.
 
 For the
three months ended March 31, 2010 and 2009, the Company recognized a loss in the
change in fair value of derivative liability – warrants in the amounts of $0 and
$63,238, respectively.
 
 Stock-based
compensation
 
 The
Company records and reports stock-based compensation by measuring the cost of
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. That cost is recognized over the period
during which services are received. Stock compensation for stock granted to
non-employees is determined as the fair value of the consideration received or
the fair value of equity instruments issued, whichever is more reliably
measured.
  - 13
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2010
 (Unaudited)
 
 Plant and equipment,
net
  Plant and
equipment are stated at cost. When the asset property and equipment is retired
or otherwise disposed of, the related cost and accumulated depreciation are
removed from the respective accounts, and any gain or loss is included in
operations. Depreciation of property and equipment is provided using the
straight-line method for substantially all assets with estimated lives as
follows:
 
 Estimated Useful LifeBuildings
      and improvements
                
                20-39.5
      yearsMachinery
      and equipment
                
                7-15
      yearsOffice
      furniture and equipment
                
                3-5
      yearsTransportation
      equipment
                
                3-5
      years
 
 Construction
in progress represents the costs incurred in connection with the construction of
buildings or new additions to the Company’s plant facilities. Costs classified
to construction in progress include all cost of obtaining the asset and bringing
it to the location and condition necessary for its intended use. No depreciation
is provided for construction in progress until such time as the assets are
completed and are placed into service. Interest incurred during construction is
capitalized into construction in progress. All other interest is expensed
as incurred.  Total interest capitalized for the three months ended
March 31, 2010 and March 31, 2009 amounted to $0 and $1,350,
respectively.
 
 If a cost
does not extend an assets useful life, increase its productivity, improve its
operating efficiency or add additional production capacity, the cost is regarded
as repairs and maintenance and recognized as an expense as incurred; if it does,
the cost is regarded as major renewals and betterments and
capitalized.  For the three months ended March 31, 2010 and 2009,
there were no amounts expended for major renewals and betterments that were
capitalized.
 
 Repairs
and maintenance expense for the three months ended March 31, 2010 and 2009
amounted to $286,664, and $131,010, respectively.
  - 14
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2010
 (Unaudited)
 
 Long-lived
assets
 
 The
Company evaluates the carrying value of long-lived assets each reporting period.
When estimated cash flows generated by those assets are less than the carrying
amounts of the asset, the Company recognizes an impairment loss. Based on its
review, the Company believes that, as of March 31, 2010 and December 31, 2009,
there were no impairments of its long-lived assets.
 
 Intangible
assets
 
 Land use
rights – Land in the PRC is government owned. As a result, the government
grants land use rights. The Company amortizes land use rights on a straight line
basis over the 50 year life.
 
 Patents –
Patents are stated at cost, less accumulated amortization. The Company amortizes
patents on a straight line basis over 7-15 years.
 
 The
Company evaluates intangible assets for impairment at least annually and more
often whenever events or changes in circumstances indicate that the carrying
value may not be recoverable from its estimated future cash flows.
Recoverability of intangible assets, other long-lived assets, and goodwill is
measured by comparing their net book value to the related projected undiscounted
cash flows from these assets, considering a number of factors including past
operating results, budgets, economic projections, market trends and product
development cycles. If the net book value of the asset exceeds the related
undiscounted cash flows, the asset is considered impaired, and a second test is
performed to measure the amount of impairment loss. Based on its review, the
Company believes that, as of March 31, 2010 and December 31, 2009, there was no
impairment of intangible assets.
 
 Research and
development
 
 Research
and development expenses include salaries, consultant fees, supplies and
materials, as well as costs related to other overhead such as facilities,
utilities and other departmental expenses. The costs the Company incurs with
respect to internally developed technology and engineering services are
included in research and development expenses as incurred as they do not
directly relate to any particular licensee, license agreement or license
fees.
  - 15
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2010
 (Unaudited)
 
 Research
and development costs are recorded in general and administrative expenses.
Research and development costs were $5,314 and $76,552 for the three months
ended March 31, 2010 and 2009, respectively.
 
 Earnings pershare
 
 The
Company reports earnings per share and presents both 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. For the three months ended March
31, 2010 and 2009, the Company properly excluded options, warrants and
convertible notes with anti-dilutive effects from the diluted earnings per share
calculation.
 
 Income
taxes
 
 The
provision for income taxes consists of taxes currently due plus deferred taxes.
The recognition of deferred income tax liabilities and assets for the estimated
future tax effects is attributable to temporary differences and operating loss
and tax credit carryforwards. A deferred tax liability or asset attributable to
temporary differences is accounted for using the balance sheet liability method
in respect of temporary differences between income tax basis and financial
reporting basis of assets and liabilities. Deferred tax expense or benefit
is the change during the year in deferred tax liabilities and
assets.  Deferred taxes are determined separately for each tax-paying
component (an individual entity or group of entities that is consolidated
for tax purposes) in each tax jurisdiction. Deferred tax liability or asset is
calculated at the tax rates that are expected to apply to the period when the
asset is realized or the liability is settled. Deferred tax is charged or
credited in the income statement, except when it is related to items
credited or charged directly to equity, in which case the deferred tax is also
dealt with in equity. Deferred tax assets and liabilities are offset when they
relate to income taxes levied by the same taxation authority and the Company
intends to settle its current tax assets and liabilities on a net basis.
Deferred tax assets are reduced by a valuation allowance if, based on the weight
of available evidence, it is more likely than not (a likelihood of more than 50
percent) that some portion or all of the deferred tax assets will not be
realized.
  - 16
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2010
 (Unaudited)
 
 The
evaluation of a tax position is a two-step process. The first step is to
determine whether it is more-likely-than-not that a tax position will be
sustained upon examination, including the resolution of any related appeals or
litigation based on the technical merits of that position. The second step is to
measure a tax position that meets the more-likely-than-not threshold to
determine the amount of benefit to be recognized in the financial statements. A
tax position is measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement. Tax positions that
previously failed to meet the more-likely-than-not recognition threshold should
be recognized in the first subsequent period in which the threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not
criteria should be de-recognized in the first subsequent financial reporting
period in which the threshold is no longer met. GAAP also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosures and transition.
 
 Value-added
tax
 
 Sales
revenue represents the invoiced value of goods, net of a value-added tax
(“VAT”). All of the Company’s products that are produced and sold in the PRC are
subject to a Chinese VAT at a rate of 17% of the gross sales price. All of the
Company’s products that are manufactured and sold in the UK are subject to a UK
VAT at a rate of 17.5% of the gross sales price. This VAT may be offset by VAT
paid by the Company on raw materials and other materials included in the cost of
producing their finished product. The Company recorded VAT payable and VAT
receivable net of payments in the consolidated financial statements. The VAT tax
return is filed offsetting the payables against the
receivables.
  - 17
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2010
 (Unaudited)
 
 Segmentreporting
 
 The
Company uses a “management approach” model for segment reporting. The management
approach model is based on the way a company’s management organizes segments
within the company for making operating decisions and assessing performance. The
Company has determined that it has two reportable segments, China and US (See
Note 20).
 
 Recently issued
accounting
pronouncements
 
 In May
2009, the FASB an accounting standard 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. The standard also requires entities to disclose the date
through which subsequent events were evaluated as well as the
rationale for why that date was selected. The standard is effective for
interim and annual periods ending after June 15, 2009, and accordingly, the
Company adopted this Standard during the second quarter of 2009. The standard
requires that public entities evaluate subsequent events through the date
that the financial statements are issued.
 
 In June
2009, the FASB issued an accounting standard amending the accounting and
disclosure requirements for transfers of financial assets. This accounting
standard requires greater transparency and additional disclosures for transfers
of financial assets and the entity’s continuing involvement with them and
changes the requirements for derecognizing financial assets. In addition, it
eliminates the concept of a qualifying special-purpose entity (“QSPE”). This
accounting standard is effective for financial statements issued for
fiscal years beginning after November 15, 2009. The adoption of this
standard did not have a material impact on the Company’s consolidated financial
statements.
  - 18
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2010
 (Unaudited)
 
 In June
2009, the FASB also issued an accounting standard amending the accounting and
disclosure requirements for the consolidation of VIEs. The elimination of the
concept of a QSPE, as discussed above, removes the exception from applying the
consolidation guidance within this accounting standard. Further, this
accounting standard requires a company to perform a qualitative analysis when
determining whether or not it must consolidate a VIE. It also requires a
company to continuously reassess whether it must consolidate a VIE.
Additionally, it requires enhanced disclosures about a company’s
involvement with VIEs and any significant change in risk exposure due to that
involvement, as well as how its involvement with VIEs impacts the company’s
financial statements. Finally, a company will be required to disclose
significant judgments and assumptions used to determine whether or not
to consolidate a VIE. This accounting standard is effective for financial
statements issued for fiscal years beginning after November 15,
2009.  The adoption of this standard did not have a material impact on
the Company’s consolidated financial statements.
 
 In June
2009, the FASB issued an accounting standard which establishes the FASB
Accounting Standards CodificationTM (the “Codification”) as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with U.S. GAAP. The Codification does not change current U.S.
GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by
providing all the authoritative literature related to a particular topic in
one place. The Codification is effective for interim and annual periods ending
after September 15, 2009, and as of the effective date, all existing
accounting standard documents will be superseded. The Codification is effective
for the Company with all public filings as of the effective date referenced to
the Codification as the sole source of authoritative
literature.
 
 In August
2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring
liabilities at fair value. This ASU provides additional guidance clarifying the
measurement of liabilities at fair value in circumstances in which a quoted
price in an active market for the identical liability is not available; under
those circumstances, a reporting entity is required to measure fair value using
one or more of valuation techniques, as defined. This ASU is effective for the
first reporting period, including interim periods, beginning after the issuance
of this ASU. The adoption of this ASU did not have a material impact on the
Company’s consolidated financial statements.
  - 19
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2010
 (Unaudited)
 
 In
October 2009, the FASB issued an ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other
financing.  This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to
additional paid-in capital. Further, loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs, at which time the loaned shares would be included in the basic and
diluted earnings-per-share calculation.  This ASU is effective for
fiscal years beginning on or after December 15, 2009, and interim periods within
those fiscal years for arrangements outstanding as of the beginning of those
fiscal years. The adoption of this ASU did not have a material impact on the
Company’s consolidated financial statements.
 
 In
December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of
Financial Assets. This Accounting Standards Update amends the FASB Accounting
Standards Codification for the issuance of FASB Statement No. 166, Accounting
for Transfers of Financial Assets—an amendment of FASB Statement No. 140.The
amendments in this Accounting Standards Update improve financial reporting by
eliminating the exceptions for qualifying special-purpose entities from the
consolidation guidance and the exception that permitted sale accounting for
certain mortgage securitizations when a transferor has not
surrendered control over the transferred financial assets. In addition, the
amendments require enhanced disclosures about the risks that a transferor
continues to be exposed to because of its continuing involvement in transferred
financial assets. Comparability and consistency in accounting for transferred
financial assets will also be improved through clarifications of the
requirements for isolation and limitations on portions of financial assets that
are eligible for sale accounting. This ASU is effective for fiscal years
beginning after November 15, 2009, and interim periods within those fiscal
years.  The adoption of this ASU did not have a material impact on the
Company’s consolidated financial statements.
  - 20
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2010
 (Unaudited)
 
 In
December, 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities. This Accounting
Standards Update amends the FASB Accounting Standards Codification for the
issuance of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R).
The amendments in this Accounting Standards Update replace the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which reporting entity has the
power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will be more
effective for identifying which reporting entity has a controlling financial
interest in a variable interest entity. The amendments in this Update also
require additional disclosures about a reporting entity’s involvement in
variable interest entities, which will enhance the information provided to users
of financial statements. This ASU is effective for fiscal years beginning
on or after November 15, 2009, and interim periods within those fiscal years.
 The adoption of this ASU did not have a material impact on the Company’s
consolidated financial statements.
  In
January 2010, FASB issued ASU No. 2010-01, Accounting for Distributions to
Shareholders with Components of Stock and Cash. The amendments in this Update
clarify that the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a potential limitation on the total
amount of cash that all shareholders can elect to receive in the aggregate is
considered a share issuance that is reflected in EPS prospectively and is not a
stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings
Per Share). The amendments in this update are effective for interim and
annual periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. The adoption of this ASU did not have a material impact on
its consolidated financial statements.
 
 In
January 2010, FASB issued ASU No. 2010-02 – Accounting and Reporting for
Decreases in Ownership of a Subsidiary – a Scope Clarification. The amendments
in this Update affect accounting and reporting by an entity that experiences a
decrease in ownership in a subsidiary that is a business or nonprofit activity.
The amendments also affect accounting and reporting by an entity that exchanges
a group of assets that constitutes a business or nonprofit activity for an
equity interest in another entity.  The amendments in this update are
effective beginning in the period that an entity adopts SFAS No. 160,
“Non-controlling Interests in Consolidated Financial Statements – An Amendment
of ARB No. 51.” If an entity has previously adopted SFAS No. 160 as of the date
the amendments in this update are included in the Accounting Standards
Codification, the amendments in this update are effective beginning in the first
interim or annual reporting period ending on or after December 15, 2009. The
amendments in this update should be applied retrospectively to the first period
that an entity adopted SFAS No. 160. The adoption of this ASU did not have a
material impact on the Company’s consolidated financial
statements.
  - 21
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2010
 (Unaudited)
 
 In
January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair
Value Measurements. This update provides amendments to Subtopic 820-10 that
requires new disclosure as follows: 1) Transfers in and out of Levels 1 and
2.  A reporting entity should disclose separately the amounts of
significant transfers in and out of Level 1 and Level 2 fair value measurements
and describe the reasons for the transfers.  2)  Activity in
Level 3 fair value measurements.  In the reconciliation for fair value
measurements using significant unobservable inputs (Level 3), a reporting entity
should present separately information about purchases, sales, issuances, and
settlements (that is, on a gross basis rather than as one net number). This
update provides amendments to Subtopic 820-10 that clarifies existing
disclosures as follows: 1) Level of disaggregation. A reporting entity
should provide fair value measurement disclosures for each class of assets and
liabilities. A class is often a subset of assets or liabilities within a line
item in the statement of financial position. A reporting entity needs to use
judgment in determining the appropriate classes of assets and liabilities.
2) Disclosures about inputs and valuation techniques. A reporting entity
should provide disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair value measurements.
Those disclosures are required for fair value measurements that fall in either
Level 2 or Level 3. The new disclosures and clarifications of existing
disclosures are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. The
Company is currently evaluating the impact of this ASU; however, the Company
does not expect the adoption of this ASU to have a material impact on its
consolidated financial statements.
  - 22
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2010
 (Unaudited)
 
 In
February 2010, the FASB issued Accounting Standards Update 2010-09, “Subsequent
Events (Topic 855): Amendments to Certain Recognition and Disclosure
Requirements,” or ASU 2010-09. ASU 2010-09 primarily rescinds the requirement
that, for listed companies, financial statements clearly disclose the date
through which subsequent events have been evaluated. Subsequent events must
still be evaluated through the date of financial statement issuance; however,
the disclosure requirement has been removed to avoid conflicts with other SEC
guidelines. ASU 2010-09 was effective immediately upon issuance and was adopted
in February 2010. The adoption of ASU 2010-09 did not have a material impact on
our consolidated financial statements.
 
 Reclassification
 
 Certain
reclassifications have been made to the 2009 consolidated financial statements
to conform to the 2010 consolidated financial statement presentation. These
reclassifications had no effect on net income or cash flows as previously
reported.
 
 Note–3
- Accounts receivable
 
 Accounts
receivable consisted of the following:
 
 March 31, 2010
                    
                    
                    December 31, 2009(Unaudited)Trade
      accounts receivable
                    
                    $
                    57,990,847
                    
                    
                    $
                    68,309,284Allowance
      for bad debts
                    
                    
                    (1,024,684
                    )
                    
                    
                    (1,024,684
                    )Trade
      accounts receivable, net
                    
                    $
                    56,966,163
                    
                    
                    $
                    67,284,600
 
 The
following table consists of allowance for doubtful accounts:
 
 Allowance
      for doubtful accounts at December 31, 2008
                  
                  $
                  318,529Recovery
      of bad debt
                  
                  
                  (33,391
                  )Accounts
      receivable write off
                  
                  
                  -Effect
      of foreign currency translation
                  
                  
                  5,200Allowance
      for doubtful accounts at March 31, 2009 (Unaudited)
                  
                  
                  290,338Additional
      reserves
                  
                  
                  739,216Accounts
      receivable write off
                  
                  
                  -Effect
      of foreign currency translation
                  
                  
                  (4,870
                  )Allowance
      for doubtful accounts at December 31, 2009
                  
                  
                  1,024,684Additional
      reserves
                  
                  
                  -Accounts
      receivable write off
                  
                  
                  -Effect
      of foreign currency translation
                  
                  
                  -Allowance
      for doubtful accounts at March 31, 2010 (Unaudited)
                  
                  $
                  1,024,684
  - 23
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2010
 (Unaudited)
 
 Note–4
- Inventories
 
 Inventories
consisted of the following:
 
 March 31, 2010
                        
                        
                        December 31, 2009(Unaudited)Raw
      materials
                        
                        $
                        9,361,606
                        
                        
                        $
                        5,137,002Work
      in process
                        
                        
                        3,042,451
                        
                        
                        
                        2,777,890Finished
      goods
                        
                        
                        5,292,936
                        
                        
                        
                        3,007,279Totals
                        
                        
                        17,696,993
                        
                        
                        
                        10,922,171Less
      allowance for obsolete inventory
                        
                        
                        (107,389
                        )
                        
                        
                        (46,389
                        )Totals
                        
                        $
                        17,589,604
                        
                        
                        $
                        10,875,782
 
 The
following table consists of allowance for obsolete inventory:
 
 Allowance
      for obsolete inventory at December 31, 2008
                  
                  $
                  160,487Additional
      reserves
                  
                  
                  -Recovery
      of reserve
                  
                  
                  (46,776
                  )Effect
      of foreign currency translation
                  
                  
                  -Allowance
      for obsolete inventory at March 31, 2009 (Unaudited)
                  
                  
                  113,711Additional
      reserves
                  
                  
                  -Reserves
      write off
                  
                  
                  (67,322
                  )Effect
      of foreign currency translation
                  
                  
                  -Allowance
      for obsolete inventory at December 31, 2009
                  
                  
                  46,389Additional
      reserves
                  
                  
                  61,000Recovery
      of reserve
                  
                  
                  -Effect
      of foreign currency translation
                  
                  
                  -Allowance
      for obsolete inventory at March 31, 2010 (Unaudited)
                  
                  $
                  107,389
 
  - 24
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2010
 (Unaudited)
 
 Note–5
- Plant and equipment
 
 Plant and
equipment consisted of the following:
 
 March
      31, 2010
                    
                    
                    December
      31, 2009(Unaudited)Land
                    
                    $
                    100,726
                    
                    
                    $
                    100,726Buildings
      and improvements
                    
                    
                    67,585,553
                    
                    
                    
                    43,665,594Transportation
      equipment
                    
                    
                    4,177,943
                    
                    
                    
                    4,177,943Machinery
      and equipment
                    
                    
                    77,640,893
                    
                    
                    
                    74,463,717Office
      furniture
                    
                    
                    1,259,249
                    
                    
                    
                    1,172,121Construction
      in progress
                    
                    
                    6,101,868
                    
                    
                    
                    19,449,384Totals
                    
                    
                    156,866,232
                    
                    
                    
                    143,029,485Less
      accumulated depreciation
                    
                    
                    (31,189,217
                    )
                    
                    
                    (25,643,919
                    )Totals
                    
                    $
                    125,677,015
                    
                    
                    $
                    117,385,566
 
 Construction
in progress at March 31, 2010, consisted of the following:
 
 No.
                                  Project
      Description
                                  
                                  March 31,
                                    2010
                                  
                                  Commencement
                                    Date
                                  
                                  Expected
                                    completion
                                    date1
                                  Manufacturing
      machinery and equipment for CCA/CCS (Multiple)
                                  
                                  $
                                  3,245,052
                                  
                                  Dec
      2007
                                  
                                  Jun,
      20102
                                  Manufacturing
      machinery and equipment for CCA/CCS (Multiple)
                                  
                                  
                                  2,766,237
                                  
                                  Dec
      2009
                                  
                                  Mar,
      20113
                                  Manufacturing
      machinery and equipment for CCA
                                  
                                  
                                  90,579
                                  
                                  Oct
      2009
                                  
                                  Sep,
      2010Total
                                  
                                  $
                                  6,101,868
 
 Project
No. 1 “Manufacturing Machinery and Equipment for CCA/CCS” is related to CCA and
CCS production lines and ancillary equipment located in Dalian, China. The
estimated cost to complete Project No.1 as of March 31, 2010 is approximately
$0.4 million.
 
 Project
No. 2 “Manufacturing Machinery and Equipment for CCA/CCS” is primarily related
to ancillary equipment relocated to Dalian, China in December 2009. The
estimated cost to complete Project No.2 as of March 31, 2010 is approximately
$0.3 million.
  - 25
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2010
 (Unaudited)
  Construction
in progress as of December 31, 2009 consisted of the following:
 
 No.
                      Project Description
                      
                      December 31,
                        2009
                      
                      Commencement
                        Date
                      
                      Expected
                        completion date1
                      Manufacturing
      machinery and equipment for CCA/CCS (Multiple)
                      
                      $
                      4,276,753
                      
                      Dec
      2007
                      
                      Mar,
      20102
                      Corporation
      administration office building
                      
                      
                      13,144,394
                      
                      May
      2003
                      
                      Dec,
      20103
                      Manufacture
      building (Dalian)
                      
                      
                      630,389
                      
                      Jan
      2008
                      
                      Jun,
      20104
                      Manufacturing
      machinery and equipment for CCA/CCS (Multiple)
                      
                      
                      1,322,848
                      
                      Dec
      2009
                      
                      Mar,
      20115
                      Manufacturing
      machinery and equipment for CCA
                      
                      
                      75,000
                      
                      Oct
      2009
                      
                      Mar,
      2010Total
                      
                      $
                      19,449,384
 
 Project
No 2. Corporate Administration Office Building represents Tower B of our
corporate office building located at our Dalian facility was completed by March
2010.
 
 Project
No 3. Manufacturing Building located at our Dalian facility was completed by
March 2010.
 
 The
change in plant and equipment is as follows:
 
 Plant and equipmentBalance
      as of December 31, 2009
                    
                    $
                    143,029,485Acquired
      through acquisition of Jinchuan
                    
                    
                    12,798,265Acquired
      through cash payment
                    
                    
                    408,436Acquired
      from advanced payments
                    
                    
                    858,021Acquired
      from accounts payable
                    
                    
                    974Fixed
      assets transferred from CIP
                    
                    
                    13,771,961CIP
      transferred to fixed assets
                    
                    
                    (13,771,961
                    )VAT
      claimed on purchase of capital assets
                    
                    
                    (124,811
                    )FX
      rate effect
                    
                    
                    (104,138
                    )Balance
      as of March 31, 2010 (Unaudited)
                    
                    $
                    156,866,232
  - 26
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2010
 (Unaudited)
 
 Depreciation
expense for the years ended March 31, 2010 and 2009 amounted to $2,762,749 and
$2,097,208, respectively.
 
 Note
6 – Advances to suppliers
 
 Advances
to suppliers are monies deposited or advanced to outside vendors for future
inventory and equipment purchases. Most of the Company’s vendors require a
certain amount of money to be deposited with them as a guarantee that the
Company will receive their purchase on a timely basis.
 
 Advances
to suppliers consisted of the following:
 
 March 31,2010
                    
                    
                    December 31, 2009(Unaudited)Advances
      for inventories – current
                    
                    $
                    20,438,121
                    
                    
                    $
                    8,582,346Advances
      for equipment – non current
                    
                    
                    970,356
                    
                    
                    
                    1,356,404Total
      advances to suppliers
                    
                    $
                    21,408,477
                    
                    
                    $
                    9,938,750
 
 Note
7 – Intangible assets
 
 Intangible
assets consist of land use rights and patents. Intangible assets consisted of
the following:
 
 March 31, 2010
                      
                      
                      December 31, 2009(Unaudited)Patents
                      
                      $
                      1,754,270
                      
                      
                      $
                      1,754,270Land
      use rights
                      
                      
                      14,343,380
                      
                      
                      
                      12,472,131Total:
                      
                      
                      16,097,650
                      
                      
                      
                      14,226,401Less:
      accumulated amortization
                      
                      
                      (2,602,348
                      )
                      
                      
                      (2,302,345
                      )Intangible
      assets, net
                      
                      $
                      13,495,302
                      
                      
                      $
                      11,924,056
 
 Amortization
expense for the years ended March 31, 2010 and 2009 amounted to $122,487 and
$119,076, respectively.
 
 Estimated
amortization expense for each of the years ended is as follows:
  - 27
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2010
 (Unaudited)
 
 March 31,
                      
                      Amount2011
                      
                      $
                      516,2762012
                      
                      
                      515,9962013
                      
                      
                      466,5862014
                      
                      
                      372,2952014
                      
                      
                      372,295Thereafter
                      
                      
                      11,251,854
 
 Note
8 - Prepaid taxes, taxes payable and deferred tax asset
 
 Prepaid
taxes and taxes payable consisted of the following:
 
 March 31, 2010
                      
                      
                      December 31,2009(Unaudited)Income
      tax
                      
                      $
                      2,020,166
                      
                      
                      $
                      1,796,019VAT
      provision
                      
                      
                      53,720
                      
                      
                      
                      769,025Others
                      
                      
                      135,810
                      
                      
                      
                      34,011Total
      taxes payable
                      
                      $
                      2,209,696
                      
                      
                      $
                      2,599,055
 
 Income tax
 
 China
income tax
 
 Beginning
January 1, 2008, the new Chinese Enterprise Income Tax (“EIT”) law replaced the
former income tax laws for Domestic Enterprises (“DEs”) and Foreign Invested
Enterprises (“FIEs”). The new standard EIT rate of 25% replaced the 33% rate
previously applicable to both DEs and FIEs. The two years tax exemption, three
years 50% tax reduction tax holiday for production-oriented FIEs, was
eliminated. However, the new EIT Law permits companies to continue to enjoy
their former preferential tax treatments until such treatments expire in
accordance with their current terms.
 
 The
Company’s wholly owned subsidiary, Fushi International, is a foreign limited
liability company and is located in the old town of an inshore open city. Under
the former Income Tax Laws of PRC, the Company qualified to use 24% income tax
rate and has a 50% income tax reduction for the years ending December 31, 2008,
2009 and 2010. Under the new EIT law effected in 2008, the company uses a 25%
income tax rate and continues to enjoy the former 50% income tax reduction
for the years ending December 31, 2008, 2009 and 2010. The applicable corporate
income tax rate in 2010 is 12.5%.
  - 28
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2010
 (Unaudited)
  Dalian
Fushi and Jinchuan were incorporated in the PRC and are subject to PRC income
tax of 25%.
 
 The
provision for China income tax for the three months ended March 31, 2010 and
2009 was $1,935,961 and $930,311, respectively.
 
 US
income tax
 
 The
Company is also subject to the United States federal income tax at a tax rate of
34%. Fushi, Fushi Holdings and Copperweld Bimetallics, LLC were incorporated in
the United States and consolidated have incurred net operating losses for income
tax purposes since inception. The net operating loss carry forwards for United
States income taxes may be available to reduce future years’ taxable income.
These carryforwards will expire in varying amounts in the years 2025 to
2030 if not utilized.
 
 UK
income tax
 
 Copperweld
UK is organized as a United Kingdom private company and subject to 20% to 28%
statutory taxes on its taxable income. Copperweld UK had no material income
or loss from operations in the first three months in year 2010 and 2009, so
no provision for income tax was made during these periods.
 
 The provision
(benefit) for income taxes consisted of the following:
 
 March 31, 2010
                      
                      
                      March 31, 2009(Unaudited)
                      
                      
                      (Unaudited)Provision
      for China income taxes
                      
                      $
                      (1,935,961
                      )
                      
                      $
                      (930,311
                      )Deferred
      income taxes
                      
                      
                      3,446,486
                      
                      
                      
                      1,626,527Benefit
      for income taxes
                      
                      $
                      1,510,525
                      
                      
                      $
                      696,216
  - 29
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31,
2010
 (Unaudited)
 
 The
following table reconciles the US statutory rates to the Company’s effective tax
rate for the years ended March 31, 2010 and 2009:
 
 March 31,
                      2010
                    
                    
                    March 31,
                      2009(Unaudited)
                    
                    
                    (Unaudited)U.S.
      Statutory rates on foreign income
                    
                    
                    34.0
                    %
                    
                    
                    34.0
                    %Foreign
      income not recognized in U.S.
                    
                    
                    (34.0
                    )
                    
                    
                    (34.0
                    )China
      income taxes
                    
                    
                    25.0
                    
                    
                    
                    25.0China
      income tax exemption
                    
                    
                    (12.5
                    )
                    
                    
                    (13.0
                    )Deferred
      tax recognized from NOL
                    
                    
                    (34.0
                    )
                    
                    
                    (34.0
                    )Other
      item (a)
                    
                    
                    (4.3
                    )
                    
                    
                    (7.0
                    )Effective
      income tax rate
                    
                    
                    (25.8
                    )
      %
                    
                    
                    (29.0
                    )
      %
 
 a)
              The
      (4.3)% and (7.0)% represents the approximate amounts of $272,000 and
      $163,000 of income that are not subject to income tax for the three months
      ended March 31, 2010 and 2009,
respectively.
 
 The
estimated tax savings from the tax exemptions for the three months ended March
31, 2010, amounted to $1,767,608. The net effect on earnings per share had the
income tax been applied would decrease basic earnings per share from $0.21 to
$0.16 and diluted earnings per share from $0.21 to $0.16.
 
 The
estimated tax savings from the tax exemptions for the three months ended March
31, 2009, amounted to $1,007,837. The net effect on earnings per share had the
income tax been applied would decrease basic earnings per share from $0.11 to
$0.08 and diluted earnings per share from $0.11 to $0.08.
 
 The
Company has cumulative undistributed earnings from foreign subsidiaries of
approximately $138 million and $127 million as of March 31, 2010 and December 31
2009, respectively, included in the consolidated retained earnings and will
continue to be indefinitely reinvested in international
operations.  Accordingly, no provision has been made for US deferred
taxes related to future repatriation of these earnings, nor is it practicable to
estimate the amount of income taxes that would have to be provided if we
concluded that such earnings will be remitted in the future.
  - 30
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2010
 (Unaudited)
 
 Deferred tax
assets
 
 The
Company recognizes deferred income tax liabilities and assets for the estimated
future tax effects attributable to temporary differences, operating loss
carryforwards and tax credit carryforwards. Deferred tax liability or asset
attributable to temporary differences is accounted for using the balance sheet
liability method in respect to temporary differences between income tax basis
and financial reporting basis of assets and liabilities.
 
 The
      deferred tax activity consisted of the following:Deferred
      tax assets at December 31, 2008
                  
                  $
                  7,804,027Additions
      to deferred tax assets
                  
                  
                  3,918,442Deferred
      tax assets at December 31, 2009
                  
                  $
                  11,722,469Additions
      to deferred tax assets
                  
                  
                  3,446,486Deferred
      tax assets at March 31, 2010 (unaudited)
                  
                  $
                  15,168,955
 
 A
valuation allowance is required against deferred tax assets if, based on the
weight of available evidence, it is more-likely-than-not that some or all of the
deferred tax assets will not be realized. Management believes that the
realization of the benefits can be used by their US operating subsidiary in
future periods because expectations are that Copperweld US will have taxable
income in future periods. US companies must generate a total of $44.6 million of
taxable net income (including the recovery of time difference) by years
2025 to 2030 (the recovery of time difference is not subject to those years) in
order to recover the deferred tax asset balance.
 
 Value added
tax
 
 VAT on
sales and VAT on purchases in China entities amounted to $8,094,570 and
$6,154,094 for the three months ended March 31, 2010, and $4,477,366 and
$7,115,089 for the three months ended March 31, 2009, respectively.
 
 VAT on
sales and VAT on purchases in Copperweld UK amounted to $62,612 and $95,809 for
the three months ended March 31, 2010, and $28,182 and $57,538 for the three
months ended March 31, 2009, respectively.
  - 31
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2010
 (Unaudited)
 
 Sales and
purchases are recorded net of VAT collected and paid as the Company acts as an
agent for the government. VAT taxes are not impacted by the income tax
holiday.
 
 Note–9
- Revolving credit lines
 
 Revolving
credit linesconsisted of the
following:
 
 Name of lender
                    
                    March 31,
                      2010
                    
                    
                    December 31,
                      2009(Unaudited)Wells
      Fargo Bank revolving credit line
                    
                    $
                    -
                    
                    
                    $
                    4,033,783Total
                    
                    $
                    -
                    
                    
                    $
                    4,033,783
 
 Revolving line of credit–Copperweld
US
 
 Copperweld
maintained a revolving line of credit with Wells Fargo Bank (the “Lender”) under
a Financing Agreement dated April 5, 2007, as amended (the “Financing
Agreement”). On February 2, 2010, the Company paid off its entire obligation on
the revolving line of credit to Wells Fargo in the amount totaling $4,024,270
and closed the line.
 
 The
annual interest rate was equal to the daily three month LIBOR rate (0.25%) plus
six percent under Forbearance Agreement before the line was paid off and
closed.
 
 Revolving line of credit–Copperweld
UK
 
 Copperweld
UK maintains an invoice discounting credit facility with a limit of
approximately $1,073,000 (or ₤750,000). The facility provides cash advances of
85% of approved sales ledger and is secured by trade accounts receivable of
Copperweld UK. The facility has a life minimum of 36 month periods and shall be
automatically renewed every year thereafter based on an annual review conducted
by the financing institute. Copperweld UK is required to maintain a projected
turnover each 12 month period and a minimum net worth of ₤750,000 at all times
if the credit facility has an outstanding balance. The facility had no balance
outstanding as of March 31, 2010 and December 31, 2009.
  - 32
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2010
 (Unaudited)
 
 Total
interest expense on the revolving credit line for the three months ended March
31, 2010 and 2009 amounted to $23,328 and $90,775, respectively.
 
 Note
10 – Notes payable
 
 Notes
payable consisted of the following:
 March 31, 2010
                                
                                
                                December 31, 2009(Unaudited)Guaranteed
      senior secured floating rate notes (“HY Notes”)
                                
                                
                                -
                                
                                
                                
                                35,000,000Less
      current portion
                                
                                
                                -
                                
                                
                                
                                10,000,000Total
      notes payable, noncurrent
                                
                                $
                                -
                                
                                
                                $
                                25,000,000
 
 On
January 24, 2007, the Company and Citadel Equity Fund Ltd ("Citadel") entered a
Notes Purchase Agreement.  In this transaction, Citadel
purchased   $40 million principal amount (less 3% Notes discount
and 4% commission for proceeds of $37,200,000) of guaranteed senior secured
floating rate notes (“HY Notes”) due between July 2009 to January 2012 and a $20
million principal amount (less 4% commission for proceeds of $19,200,000) of the
Company’s 3% senior secured convertible notes (“Convertible Notes”) due January
2012, which are convertible into shares of the Company's common stock at an
initial conversion price of $7.00 per share.
 
 Convertible
Notes of $15 million were converted at the option of the holder into the
Company’s 2,142,857 shares of common stock at an initial conversion price of $7
per share on January 8, 2008; the remaining $5 million of the Convertible
Notes was repurchased by the Company on August 13, 2009 and thus $3,842,935gain on
debt extinguishment was recognized during third quarter of 2009.
 
 The HY
notes bear interest at LIBOR + 7% and changes to LIBOR + 5.6% permanently upon
successful completion of Qualifying IPO within eighteen months from January 24,
2007.  The HY Notes are guaranteed on a senior secured basis, by all
of the Company’s wholly-owned existing and future domestic subsidiaries.
  - 33
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2010
 (Unaudited)
 
 On
February 26, 2010, the Company entered into a Notes Purchase Agreement with the
holders (the “Holders”) of the Company’s originally issued HY Notes that are due
during the year 2012, whereby the Company would repurchase the HY Notes from
each holder for a purchase price in cash equal to $30,600,000 (102% of the
outstanding principal amount) plus $165,644 (accrued and unpaid interest on the
Notes to the Purchase Date). The aggregate purchase price for all of the HY
Notes was $30,765,644 which was paid to note Holders on February 26,
2010.
 
 Thus, on
February 26, 2010, the company recognized a $2,395,778 loss on debt
extinguishment, which includes the write off of deferred commissions on long
term notes that amounted to $1,795,778 and the additional purchase price paid to
HY notes holder other than principal and interest in the amount of
$600,000.
 
 Amortization
of commission costs for the three months ended March 31, 2010 and 2009 amounted
to $160,000 and $ 262,497, respectively. Interest on long term notes, for the
three months ended March 31, 2010, and 2009 amounted to $318,492, and
$1,112,190, respectively. Both amortized commission and interest on long term
notes are recorded as interest expense.
 
 Note
11 – Capital lease
 
 In July
2009, the Company entered into a non-cancellable capital lease agreement for
lighting equipment installed in one of its plant facilities. The lease has a
three year term and contains a bargain purchase option of $1.00 at the end of
the term. The lease requires monthly payments of $8,414.
 
 The
following is an analysis of the leased property which is combined into Plant and
Equipment, net, on the consolidated balance sheet.
 
 March 31, 2010
                    
                    
                    December 31, 2009Plant
      facility
                    
                    $
                    266,598
                    
                    
                    $
                    266,598Less:
      accumulated depreciation
                    
                    
                    (15,552
                    )
                    
                    
                    (8,887
                    )Net
      leased plant facility
                    
                    $
                    251,046
                    
                    
                    $
                    257,711
  - 34
-
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2010
 (Unaudited)
 The
following is a schedule of future minimum lease payments under the capital lease
together with the present value of the net minimum lease payment as of March 31,
2010.
 
 Year ending March 31,
                      
                      Minimum lease
                        Payment2011
                      
                      $
                      92,5612012
                      
                      
                      100,976Thereafter
                      
                      
                      42,073Total
      minimum lease payments
                      
                      
                      235,610Less:
      interest *1
                      
                      
                      (29,063
                      )Present
      value of net minimum lease payments *2
                      
                      $
                      206,547
 
 *1.
Amount necessary to reduce minimum lease payments to present value calculated at
the rate implicit in the lease at the inception of the leases.
 
 *2. The
present value of the minimum lease payments is reflected in the balance sheet as
current and non-current obligations under capital lease of $74,030 and $132,517,
respectively.
 
 Interest
expense related to capital leases amounted to $6,662 and $0 for the three months
ended March 31, 2010 and 2009, respectively.
 
 Note
12 – Derivative instrument
 
 The
Company's operations are exposed to a variety of global market risks, including
the effect of changing interest rates and foreign currency exchange rates. This
exposure is managed, in part, with the use of financial derivatives. The Company
uses financial derivatives only to hedge exposures in the ordinary course of
business and does not invest in derivative instruments for speculative
purposes.
  - 35
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2010
 (Unaudited)
 
 On April
10, 2007, effective January 24, 2007, the Company entered into a cross currency
swap transaction (the SWAP) with Merrill Lynch Capital Services, Inc. (“MLCS”)
on the $40 million HY notes which converts the USD based variable interest
rate of initially LIBOR + 7% per annum and LIBOR + 5.6% per annum after a
qualified step-down to an 8.3% per annum RMB fixed interest rate. The Swap
requires semi-annual payment in arrears on July 24 and January 24 and matures on
the earlier of (1) cash settlement defined as early termination; or (2) January
24, 2012, at which point the Swap requires an exchange of RMB and USD based
principals. Under the terms of the cross currency swap, the Company receives
variable interest rate payments in USD and makes fixed interest
rate payments in RMB with settlement netted in USD, thereby creating the
equivalent of fixed-rate debt. MLCS requires the Company to deposit $1,000,000
with them to secure the agreement. In July, 2008, the Company placed the
$1,000,000 deposit with MLCS to secure the agreement.
 
 Effective
March 31, 2010 (the termination date), the SWAP, with an outstanding USD
notional amount of $30,000,000 and an outstanding CNY notional amount of
233,175,000 was unwound with a premium payment price of $6,650,000 to
MLCS.
  On March
31, 2010, the $1,000,000 deposit with MLCS to secure the agreement was released
to MLCS as partial payment of the $6,650,000 payment price, thus left $5,650,000
payables to MLCS as of March 31, 2010 and the remaining $5,650,000 payment was
made to Merrill Lynch on April 6, 2010.
 
 Changes
in the fair values of derivative instruments accounted for as cash flow hedges
to the extent they qualify for hedge accounting, are recorded in accumulated
other comprehensive income.  For the three months ended March 31, 2010
and 2009, gain of $882,527 and loss of $2,762,129 was recorded on the derivative
instrument, respectively, in other comprehensive income.
 
 On March
31, 2010, $6,650,000 was transferred from the accumulated other comprehensive
loss into earnings as a loss from termination of the SWAP.  There were
no amounts recorded in the consolidated statements of income in relation to
ineffectiveness of this interest SWAP prior to unwinding of the
transaction.
 
 During
the three months ended March 31, 2010, the Company paid $1,190,368 as
hedging payment related to the cross currency hedge payable. The Company
recognized $753,666 of loss from derivative transactions as cash flow hedge
during the quarter prior to the repayment. During the three months ended
March 31, 2009, the Company paid $114,580 as hedging payment related to the
cross currency hedge payable and recognized $166,410 of loss related to
derivative transactions as cash flow hedge.
  - 36
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2010
 (Unaudited)
 
 Changes
of cross currency hedge are as follows:
 
 Cross
      currency hedge payable balance at December 31, 2009
                      
                      $
                      436,702Proceeds
      from cross currency hedge
                      
                      
                      -Payments
      for cross currency hedge
                      
                      
                      (1,190,368
                      )Loss
      on cross currency hedge
                      
                      
                      753,666Cross
      currency hedge payable balance at March 31, 2010
    (Unaudited)
                      
                      $
                      -
 
 Note
13 - Earnings per share
 
 The
following is information of net income per share:
 
 March31,2010
                  
                  
                  March31,2009(Unaudited)
                  
                  
                  (Unaudited)Net
      income for basic and diluted earnings per share
                  
                  $
                  7,370,760
                  
                  
                  $
                  3,100,917Weighted
      average shares used in basic computation
                  
                  
                  34,673,692
                  
                  
                  
                  27,563,478Dilutive
      effect of warrants, options and convertible note
                  
                  
                  636,155
                  
                  
                  
                  131,986Weighted
      average shares used in diluted  computation
                  
                  
                  35,309,847
                  
                  
                  
                  27,695,464Earnings
      per shareBasic
                  
                  $
                  0.21
                  
                  
                  $
                  0.11Diluted
                  
                  $
                  0.21
                  
                  
                  $
                  0.11
 
 Shares
excluded from the calculation of diluted earnings per share:
 
 Date
                          issued/
                          granted
                        
                        Nature
                        
                        Excise price
                        
                        
                        Shares excluded
                          for year diluted
                          EPS calculation
                        
                        Reason for
                          exclusion11/31/2007
                        
                        Warrants
                        
                        $
                        16.80
                        
                        
                        
                        100,000
                        
                        Anti-dilutive05/21/2007
      to 11/13/2007
                        
                        Options
                        
                        $
                        11.75-20.94
                        
                        
                        
                        553,333
                        
                        Anti-dilutive04/10/2008
      to 6/25/2008
                        
                        Options
                        
                        $
                        15.04-23.25
                        
                        
                        
                        144,000
                        
                        Anti-dilutive
  - 37
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2010
 (Unaudited)
 
 Note
14 - Stockholders' Equity
 
 During
year of 2010, the following activities were recorded:
 
 On
February 1, 2010, the Company closed an offering of 7,475,000 shares of its
common stock at a public offering price of $8.00 per share, which included
public offering of 6,500,000 shares andthe
sale of 975,000 shares of its common stock as a result of the exercise of the
over-allotment option by the Company’s underwriter.  The gross
proceeds received were $59.8 million. The Company received net proceeds of
approximately $56.4 million from the offering, after deducting underwriting
discounts.
 
 Warrants
 
 The
following is a summary of the outstanding and exercisable warrant balance as of
March 31, 2010:
 
 Exercise
                      Price
                    
                    Number
                    
                    
                    Average
                      RemainingLife
                      (years)$3.11
                    
                    
                    279,772
                    
                    
                    
                    1.75$16.80
                    
                    
                    100,000
                    
                    
                    
                    1.65$5.25
                    
                    
                    100,000
                    
                    
                    
                    0.29$5.50
                    
                    
                    100,000
                    
                    
                    
                    0.29$6.00
                    
                    
                    100,000
                    
                    
                    
                    0.79679,772
                    
                    
                    
                    1.17
 
 The
following is a summary of the warrant activity:
  - 38
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2010
 (Unaudited)
 
 Number of
                              Warrants
                              Outstanding
                            
                            
                            Weighted
                              -Average
                              Exercise
                              Price
                            
                            Average
                              Remaining
                              Contractual
                              LifeBalance,
      at December 31, 2008
                            
                            
                            432,124
                            
                            
                            $
                            6.28
                            
                            2.92
      yearsGranted
                            
                            
                            300,000
                            
                            
                            $
                            5.58Forfeited
                            
                            
                            -Exercised
                            
                            
                            -Balance,
      at March 31, 2009 (unaudited)
                            
                            
                            732,124
                            
                            
                            $
                            5.99
                            
                            2.05
      yearsGranted
                            
                            
                            -Forfeited
                            
                            
                            -Exercised
                            
                            
                            (52,352
                            )
                            
                            $
                            3.11Balance,
      at December 31, 2009
                            
                            
                            679,772
                            
                            
                            $
                            6.22
                            
                            1.24
      yearsGranted
                            
                            
                            -Forfeited
                            
                            
                            -Exercised
                            
                            
                            -Balance,
      at March 31, 2010 (unaudited)
                            
                            
                            679,772
                            
                            
                            $
                            6.22
                            
                            1.17
      years
 
 Note
15 – Stock based compensation
  2007 Incentive
Plan
  On
October 24, 2007, the Board of Directors approved the adoption of the Fushi
Copperweld, Inc. 2007 Stock Incentive Plan (the “2007 Plan”).   The
majority of the options awarded under the 2007 Plan vest in two years from the
grant date and the majority of the options granted expire in 3 years. 
Under the 2007 Plan, the Company granted share options and restricted stock to
all executives, directors and employees as summarized in below two
tables:
  Grant
                                Year
                              
                              
                              Granted
                                Options
                                (Shares)
                              
                              
                              Forfeited and expired
                                Option
                                (Shares)
                              
                              
                              Exercise Price
                                Option
                                ($)2007
                              
                              
                              
                              335,000
                              
                              
                              
                              190,000
                              
                              
                              $16.44-$20.942008
                              
                              
                              
                              151,000
                              
                              
                              
                              7,000
                              
                              
                              $15.04-$23.252009
                              
                              
                              
                              688,000
                              
                              
                              
                              149,300
                              
                              
                              $4.95-$7.932010
                              
                              
                              
                              156,530
                              
                              
                              
                              14,000
                              
                              
                              $8.61Total
                              
                              
                              
                              1,330,530
                              
                              
                              
                              360,300
   - 39
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2010
 (Unaudited)
 
 Grant
                      Year
                    
                    Granted
                      Restricted Stock
                      (Shares)
                    
                    
                    Forfeited and
                      expired
                      Restricted Stock
                      (Shares)
                    
                    
                    Vested
                      Restricted stock
                      (Shares)
                    
                    
                    Grant date Fair
                      market value
                      ($)2009
                    
                    
                    50,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    8.082010
                    
                    
                    51,000
                    
                    
                    
                    -
                    
                    
                    
                    12,750
                    
                    
                    $
                    8.61Total
                    
                    
                    101,000
                    
                    
                    
                    -
                    
                    
                    
                    12,750
 
 The fair
value of each restricted stock award is estimated on the date of grant using the
fair market value of the Company’s common stock, which is the closing price on
the stock market.
 
 The fair
value of each option award is estimated on the date of grant using the
Black-Scholes model using the following weighted-average
assumptions:
 
 Yearended,
                                  2010
                                
                                Yearended,
                                  2009
                                
                                Yearended
                                  2008
                                
                                Yearended
                                  2007Risk-free
      interest rate(1)
                                
                                0.87%
                                
                                0.78%-2.2%
                                
                                1.84%-2.82%
                                
                                3.54%-4.57%Expected
      dividend yield(2)
                                
                                -
                                
                                -
                                
                                -
                                
                                -Expected
      option life(3)
                                
                                2
      Years
                                
                                2-5
      Years
                                
                                0.5-2
      Years
                                
                                2
      YearsExpected
      stock price volatility(4)
                                
                                60%
                                
                                60%
                                
                                50%
                                
                                50%Weighted
      average fair value of options granted
                                
                                $2.88
                                
                                $2.77
                                
                                $4.57
                                
                                $4.08
 
 (1)
              Risk-free
      interest rate–
      Risk-free interest rate is based on US Treasury zero-coupon issues with
      maturity terms similar to the expected term on the expected life of the
      option. An increase in the risk-free interest rate will increase
      compensation expense.
 
 (2)
              Expected
      dividend yield– The
      dividend yield was estimated by the Company based on its expected dividend
      policy over the expected term of the options. The Company has no plans to
      pay any dividend in the foreseeable future. Therefore, the Company
      considers the dividend yield to be
zero.
 
 (3)
              Expected
      option life–
      Because the Company has no historical share option exercise experience to
      estimate future exercise patterns, the expected life was determined using
      the simplified method as these awards meet the definition of
      “plain-vanilla” options under the rules prescribed by Staff Accounting
      Bulletin No. 107. An increase in expected life will increase compensation
      expense.
  - 40
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2010
 (Unaudited)
 
 (4)
              Expected
      stock price volatility– This is a measure of the amount
      by which a price has fluctuated or is expected to fluctuate. As a
      forward-looking measure, the Company uses implied volatility of Company’s
      225 days call options with strike price of $5.00 on March 7, 2009 (source:
      Morningstar.com), adjusted by the 2-year historical volatility of the
      Company’s stock as well as 2-year historical volatilities of the Company’s
      comparable public companies, to calculate the expected stock price
      volatility. An increase in the expected volatility will increase
      compensation expense.
 
 Stock
compensation expense is recognized based on awards expected to vest.  The
forfeitures are estimated at the time of grant and revised in subsequent periods
pursuant to actual forfeitures, if it differs from those estimates.
  The
Company recognized $193,057 and $590,868 of share-based compensation expense in
general and administrative expenses for the three months ended March 31, 2010
and 2009, respectively.
  As of
March 31, 2010 and 2009, the total compensation cost related to stock options
not yet recognized was $1,225,734 and $756,062 and will be recognized over the
weighted average life of 0.9 years and 0.4 years, respectively. At March 31,
2010 and 2009 the total compensation cost related to restricted stock not yet
recognized was $733,333 and $0 and will be recognized over the weighted average
life of 3 years and 0 years, respectively.
 
 As of
March 31, 2010, the 782,333 executive options, 240,000 director options and
341,480 employee options outstanding had fair values of approximately
$3,042,692, $912,761 and $942,686, respectively.
  - 41
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2010
 (Unaudited)
 
 The
following is a summary of all stock option activity including the 2007
incentive plan:
 
 Number of
                              Options
                              Outstanding
                            
                            
                            Weighted
                              -Average
                              Exercise
                              Price
                            
                            
                            Aggregate
                              Intrinsic
                              ValueBalance,
      December 31, 2008
                            
                            
                            1,067,333
                            
                            
                            $
                            14.9
                            
                            
                            
                            -Granted
                            
                            
                            388,000
                            
                            
                            $
                            4.95
                            
                            
                            
                            -Forfeited
                            
                            
                            (36,000
                            )
                            
                            $
                            4.95
                            
                            
                            
                            -Exercised
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Balance,
      March 31, 2009 (unaudited)
                            
                            
                            1,419,333
                            
                            
                            $
                            12.41
                            
                            
                            
                            -Granted
                            
                            
                            300,000
                            
                            
                            $
                            6.19
                            
                            
                            
                            -Forfeited
                            
                            
                            (13,050
                            )
                            
                            $
                            4.95
                            
                            
                            
                            -Expired
                            
                            
                            (95,000
                            )
                            
                            $
                            17.19
                            
                            
                            
                            -Exercised
                            
                            
                            (13,000
                            )
                            
                            $
                            4.95
                            
                            
                            
                            -Balance,
      December 31, 2009
                            
                            
                            1,598,283
                            
                            
                            $
                            11.38
                            
                            
                            $
                            2,383,162Granted
                            
                            
                            156,530
                            
                            
                            $
                            8.61
                            
                            
                            
                            -Forfeited
                            
                            
                            (114,250
                            )
                            
                            $
                            7.65
                            
                            
                            
                            -Expired
                            
                            
                            (275,000
                            )
                            
                            $
                            12.30
                            
                            
                            
                            -Exercised
                            
                            
                            (1,750
                            )
                            
                            $
                            4.95
                            
                            
                            
                            -Balance,
      March 31, 2010 (unaudited)
                            
                            
                            1,363,813
                            
                            
                            $
                            11.19
                            
                            
                            $
                            3,061,170
 
 Following
is a summary of the status of options outstanding at March 31,
2010:
   Outstanding Option
                    
                    Exercisable OptionsExercise
                      Price
                    
                    Number
                    
                    Average
                      Remaining
                      Contractual
                      Life
                    
                    Average
                      Exercise
                      Price
                    
                    
                    Number
                    
                    
                    Weighted
                      Average
                      Exercise
                      Price$12.30
                    
                    
                    133,333
                    
                    2.14
      years
                    
                    $
                    12.30
                    
                    
                    
                    133,333
                    
                    
                    $
                    12.30$11.75
                    
                    
                    150,000
                    
                    2.26
      years
                    
                    $
                    11.75
                    
                    
                    
                    150,000
                    
                    
                    $
                    11.75$13.70
                    
                    
                    125,000
                    
                    1.49
      years
                    
                    $
                    13.70
                    
                    
                    
                    125,000
                    
                    
                    $
                    13.70$16.44
      to 20.94
                    
                    
                    135,000
                    
                    1.87
      years
                    
                    $
                    18.69
                    
                    
                    
                    135,000
                    
                    
                    $
                    18.69$16.36
                    
                    
                    10,000
                    
                    1.62
      years
                    
                    $
                    16.36
                    
                    
                    
                    10,000
                    
                    
                    $
                    16.36$23.25
                    
                    
                    77,000
                    
                    1.75
      years
                    
                    $
                    23.25
                    
                    
                    
                    77,000
                    
                    
                    $
                    23.25$15.04
                    
                    
                    17,000
                    
                    2.03
      years
                    
                    $
                    15.04
                    
                    
                    
                    17,000
                    
                    
                    $
                    15.04$20.04
                    
                    
                    50,000
                    
                    3.14
      years
                    
                    $
                    20.04
                    
                    
                    
                    45,309
                    
                    
                    $
                    20.04$4.95
                    
                    
                    323,950
                    
                    2.75
      years
                    
                    $
                    4.95
                    
                    
                    
                    323,950
                    
                    
                    $
                    4.95$7.93
                    
                    
                    200,000
                    
                    9.62
      years
                    
                    $
                    7.93
                    
                    
                    
                    -
                    
                    
                    $
                    7.93$8.61
                    
                    
                    142,530
                    
                    6.75
      years
                    
                    $
                    8.61
                    
                    
                    
                    19,566
                    
                    
                    $
                    8.61Total
                    
                    
                    1,363,813
                    
                    
                    
                    
                    
                    
                    
                    
                    1,036,158
 
 Note
16 - Statutory reserves
 
 The laws
and regulations of the PRC require that before a Sino-foreign cooperative joint
venture enterprise distributes profits to its partners, it must first satisfy
all tax liabilities, provide for losses in previous years, and make allocations
in proportions determined at the discretion of the board of directors, after the
statutory reserve.
  - 42
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2010
 (Unaudited)
 
 Surplus reserve
fund
 
 The
Company is required to transfer 10% of its China entities net income, as
determined in accordance with the PRC accounting rules and regulations to a
statutory surplus reserve fund until such reserve balance reaches 50% of the
Company’s China entities registered capital. As of March 31, 2010, the Company’s
China entities have total registered capital of approximately $116.5 million
(RMB 795.4 million). As of March 31, 2010 and December 31, 2009, the Company had
statutory reserves amounting to $17,566,294 and $16,282,793, respectively. The
Company’s China entities are required to contribute an additional $39.3 million
from future earnings if the company’s China facility has net income for future
years.
 
 The
transfer to this reserve must be made before distribution of any dividend to
shareholders. The Company’s China entities will transfer at year end 10% of its
year’s net income determined in accordance with PRC accounting rules and
regulations.
 
 The
surplus reserve fund is non-distributable other than during liquidation and can
be used to fund previous years’ losses, if any, and may be utilized for business
expansion or converted into share capital by issuing new shares to existing
shareholders in proportion to their shareholding or by increasing the par value
of the shares currently held by them, provided that the remaining reserve
balance after such issue is not less than 50% of the registered
capital.
 
 Note
17 – Employee pension
 
 The
Company’s employee pension for China employees generally includes two parts: the
first to be paid by the Company is 20% of the employee’s actual salary in the
prior year. The other part, paid by the employee, is 8% of the actual salary.
The Company made $39,387 and $31,991 in contributions of employment benefits for
China employees in the three months ended March 31, 2010 and 2009,
respectively.
 
 US
employees are provided a 401(k) plan.  US employees are eligible for the
defined contribution plan after three-months of full-time employment. 
Employee deferrals and company matching are 100% vested immediately upon
eligibility. The Company made $0 and $30,540 in contributions of employment
benefits for US employees for the three months ended March 31, 2010 and 2009,
respectively. As of June 1, 2009, the Company no longer matches employee
contributions for US employees.
  - 43
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2010
 (Unaudited)
 
 Copperweld
UK operates a defined contribution pension scheme for employees. All UK
employees are eligible to join the pension on satisfactory completion of their
trial period, which is typically three months. UK employees can contribute as
much as they like subject to current UK laws, but the company will match only
the first 2.5% of gross pay in the current year. The assets of the scheme are
held separately from those of the company. The annual contributions payable are
charged to expense. The company made $2,185 and $2,778 in contributions of
employment benefits for UK employees in three months ended March 31, 2010 and
2009, respectively.
 
 Note
18 - Commitments and contingencies
 
 Please
refer to Note 19 – Business combinations for contingent consideration related to
the acquisition of Jinchuan.
 
 Note
19 – Business combination
 
 The
Company adopted ASC 805-10, “Business Combinations,” which requires an acquiring
entity to recognize all the assets acquired and liabilities assumed in a
transaction at the acquisition-date to be measured at fair value.
 
 On
January 21, 2010, the Company’s PRC subsidiary, Fushi International (Dalian)
Bimetallic Cable Co., Ltd. (“Fushi International”) had entered into an agreement
(“Acquisition Agreement”) to purchase 100% of the equity interest of Dalian
Jinchuan Electric Cable Co., Ltd. (“Jinchuan”), a Chinese manufacturer of
electric wire and electric cables, from Jinchuan’s
shareholders.
  - 44
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2010
 (Unaudited)
 
 The
acquisition of Jinchuan was part of the Company's strategic expansion into the
power cable industry, as well as the execution of its strategy of expanding its
downstream processing capabilities through vertical integration. The acquisition
allows the Company to expand into Northeastern China.  The Jinchuan
brand of low- and medium-voltage power cable is well known and respected among
customers in Northeastern China and other industry participants. The acquisition
allows the Company to access the growing power market through Jinchuan's broad
sales network, existing customer relationships, research and development
program, manufacturing equipment and facilities in Dalian, and the experience
and relationships of its management team.
 
 The total
acquisition price of Jinchuan agreed upon by the Company and former shareholders
of Jinchuan amounted to a total aggregate contingent purchase price of $10.15
million, payable in cash.  The purchase price was determined to be
paid in two equal installments of $5,075,000.  The installments were
agreed upon to be paid as follows:
 
 (1) The
initial installment was determined to be paid upon the closing of the
acquisition, which was anticipated to be 30 days after the execution of the
agreement.
 
 (2) The
determination of the second installment is based upon contingent financial
performance of Jinchuan during the fiscal year ended December 31,
2010.  If certain net income targets are achieved by Jinchuan for the
fiscal year ended 2010, as confirmed by an audit to be performed by the
Company’s auditors, the remaining balance of the purchase price shall be paid to
Jinchuan shareholders.  If Jinchuan fails to achieve a certain net
income target for 2010, the balance of the purchase price payable shall be
reduced proportionally at the rate of 2.91 times the p/e ratio of the audited
net income for 2010.
 
 On
February 5, 2010 (“the acquisition-date”), Fushi International completed the
acquisition of Jinchuan.
 
 The
acquisition-date fair value of the total consideration transferred was
$10,150,000, which comprised of:
 
 (1) Cash
payment in the amount of $5,075,000 paid on the acquisition date as the first
installment of the purchase price and
  - 45
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2010
 (Unaudited)
 
 (2)
A liability due to former Jinchuan shareholders in the amount of $5,075,000 as a
contingent consideration arrangement.
 
 The
contingent consideration arrangement requires Fushi International to pay the
former Jinchuan shareholders an amount equal to 2.91 times the audited net
income of 2010 as full purchase price up to a maximum amount of $10.15 million.
Considering $5,075,000 first installment was paid on acquisition date, the
potential undiscounted amount of all future payments that Fushi International
could be required to pay under the contingent consideration arrangement is
between $0 to $5,075,000. The fair value of the contingent consideration
arrangement of $5,075,000 was estimated by applying the income approach. That
measure is based on significant inputs determined by management that are not
observable in the market, which ASC Topic 820 refers to as Level 3 inputs. Key
assumptions include (a) the combined impact of upgrading plans of national power
grid systems in PRC and the synergies from acquisition of Jinchuan will enhance
Jinchuan’s revenue by 21% compared with 2009 and (b) the synergies from
acquisition of Jinchuan will further reduce Jinchuan’s cost by 2% compared with
2009.  As of March 31, 2010 and through the issuance of these consolidated
financial statements, management believed that Jinchuan was able to meet such
net income target for 2010 to recognize the full amount of the contigent
consideration.
 
 No
material acquisition-related costs were incurred and recognized in the Company’s
income statement for the three months ended March 31, 2010.
 
 On
February 5, 2010 (the acquisition-date), the fair value of the assets acquired
and liabilities assumed of the transaction are listed below:
 
 Book Value
                      
                      
                      Fair ValueCurrent
      assets
                      
                      $
                      4,739,337
                      
                      
                      $
                      4,739,337Property,
      plant and equipment, net
                      
                      
                      5,982,992
                      
                      
                      
                      10,000,111Land
      use right
                      
                      
                      799,522
                      
                      
                      
                      1,693,759Total
      assets
                      
                      
                      11,521,851
                      
                      
                      
                      16,433,207Total
      liabilities
                      
                      
                      2,977,257
                      
                      
                      
                      2,977,257Net
      assets
                      
                      $
                      8,544,594
                      
                      
                      $
                      13,455,950
  - 46
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2010
 (Unaudited)
 
 The fair
value of the acquired assets of Jinchuan is based on an independent appraisal
report issued by Liaoning Hongxing Appraisal, LLC. Dalian, China.  The
appraiser conducted an on-site visit, inspected each item, conducted market
research and investigation, followed some asset evaluation policies and
regulations issued by the Chinese government, and provided an evaluation report.
The fair value of Jinchuan’s net assets pursuant to the independent appraisals
was $13,455,950, which exceeds the fair value of the consideration transferred
$10,150,000 by $3,305,013 ($937 related effect of foreign currency translation),
thus resulting in a bargain purchase gain recognized by the Company related to
this acquisition. The gain is presented as bargain purchase gain (a separate
line item) in the consolidated statements of income and other comprehensive
income for the three months ended March 31, 2010.
 
 The
results of operations of the acquired company are included in the consolidated
statement of income since Feburary 5, 2010 (the acquisition date) to the end of
the quarter. Jinchuan’s revenue amounted to $4,265,977 and net income amounted
to $461,751 which was included in the consolidated statements of income and
other comprehensive income for the quarter ended March 31, 2010.
 
 Supplemental
Pro Forma
 
 The
following unaudited pro forma consolidated condensed income statements for the
three months ended March 31, 2010 and 2009, were prepared under generally
accepted accounting principles as if the acquisition of Jinchuan had occurred on
January 1, 2009. The pro forma information may not be indicative of the results
that actually would have occurred if the acquisition had been in effect from and
on the dates indicated.
 
 For the three
                      months ended
                      March 31, 2010
                    
                    
                    For the three
                      months ended
                      March 31, 2009(Unaudited)
                    
                    
                    (Unaudited)Sales
                    
                    $
                    61,560,191
                    
                    
                    $
                    39,427,807Cost
      of Goods Sold
                    
                    
                    43,326,407
                    
                    
                    
                    29,679,300Gross
      Profit
                    
                    
                    18,233,784
                    
                    
                    
                    9,748,507Operating
      Expenses
                    
                    
                    5,057,911
                    
                    
                    
                    4,416,733Income
      from Operations
                    
                    
                    13,175,873
                    
                    
                    
                    5,331,774Other
      Expense, net
                    
                    
                    (6,959,160
                    )
                    
                    
                    (2,262,285
                    )Income
      before Income Tax
                    
                    
                    6,216,713
                    
                    
                    
                    3,069,489Income
      tax benefit
                    
                    
                    (1,419,895
                    )
                    
                    
                    (530,019
                    )Net
      Income
                    
                    $
                    7,636,608
                    
                    
                    $
                    3,599,508
  - 47
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2010
 (Unaudited)
 
 Note
20 - Segment Information
 
 Pursuant
to the “Disclosures about Segments of an Enterprise and Related Information”
from GAAP, which establishes standards for reporting information about operating
segments. Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and
assess performance. The Company’s chief operating decision makers have been
identified as the Chief Executive Officer and Chief Financial Officer. The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies.
 
 For the
years ended March 31, 2010 and 2009, the Company has two reportable segments:
China and US. We analyze our worldwide operations based on two geographic
reportable segments: 1) “P.R.C.” which consists of our facility Located in
Dalian, Liaoning, the People’s Republic of China (PRC) and 2) ”US” which
consists of our Fayetteville, Tennessee, (USA), and Telford, England, (UK)
facilities. The China segment, through the Dalian and Jinchuan
manufacturing facility, is engaged in developing, designing, manufacturing,
marketing and distributing copper cladded bi-metallic engineered conductor
products, principally copper-clad aluminum (CCA) and primarily services the
Asia-Pacific region, and specifically the PRC market.
 
 The US
segment, consisting of two manufacturing facilities, one in Fayetteville,
Tennessee, USA and a second in Telford, England, are engaged in developing,
designing, manufacturing, marketing and distributing copper-cladded bimetallic
engineered conductor products, principally CCA and copper-clad steel
(CCS) and primarily services the North and South American, European, Middle
Eastern and North African markets. Due to the size of the UK operations,
the Company combined it with the US operation as one segment.
 
 The below
table illustrates the composition of the UK operations:
 
 For the three months
                              ended March 31, 2010
                            
                            
                            For the three months
                              ended March 31, 2009Revenue
                            
                            $
                            1,150,303
                            
                            
                            $
                            696,720Net
      income (loss)
                            
                            
                            32,442
                            
                            
                            
                            (29,256
                            )
  - 48
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2010
 (Unaudited)
  March 31, 2010
                        
                        
                        December 31, 2009Assets
                        
                        $
                        2,877,783
                        
                        
                        $
                        2,673,254
  The
Company evaluates segment performance and allocates resources based on segment
gross profit and segment operating income. Segment operating income represents
income from continuing operations before interest income, interest expense,
other income (expense), other financial costs and income tax.
 
 Corporate
operating expenses are primarily stock-based compensation, professional fees and
outside service expenses.
 
 Analysis
of reportable segments (management information):
 
 For
      the three months ended March 31, 2010PRC
                          
                          
                          US
                          
                          
                          Corporate
                          
                          
                          Eliminations
                          
                          
                          TotalRevenues
                          
                          $
                          47,364,786
                          
                          
                          $
                          13,306,004
                          
                          
                          $
                          -
                          
                          
                          $
                          (1,120,948
                          )
                          
                          $
                          59,549,842Gross
      Profit
                          
                          
                          16,014,292
                          
                          
                          
                          1,806,974
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          17,821,266Selling,
      general and administrative expenses
                          
                          
                          2,670,260
                          
                          
                          
                          1,336,866
                          
                          
                          
                          1,002,710
                          
                          
                          
                          -
                          
                          
                          
                          5,009,836Operating
      income (loss)
                          
                          
                          13,344,032
                          
                          
                          
                          470,108
                          
                          
                          
                          (1,002,710
                          )
                          
                          
                          -
                          
                          
                          
                          12,811,430Capital
      expenditures
                          
                          
                          1,246,914
                          
                          
                          
                          15,579
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,262,493Depreciation
      expense (Included in cost of goods sold and Operating
    expense)
                          
                          $
                          2,274,307
                          
                          
                          $
                          488,442
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          2,762,749
  - 49
-
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2010
 (Unaudited)
 
 For
      the three months ended March 31, 2009PRC
                          
                          
                          US
                          
                          
                          Corporate
                          
                          
                          Eliminations
                          
                          
                          TotalRevenues
                          
                          $
                          26,337,445
                          
                          
                          $
                          8,770,228
                          
                          
                          $
                          -
                          
                          
                          $
                          148,863
                          
                          
                          $
                          35,256,536Gross
      Profit
                          
                          
                          8,659,235
                          
                          
                          
                          280,140
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          8,939,375Selling,
      general and administrative expenses
                          
                          
                          1,663,817
                          
                          
                          
                          1,596,048
                          
                          
                          
                          1,012,524
                          
                          
                          
                          -
                          
                          
                          
                          4,272,389Operating
      income (loss)
                          
                          
                          6,995,418
                          
                          
                          
                          (1,315,908
                          )
                          
                          
                          (1,012,524
                          )
                          
                          
                          -
                          
                          
                          
                          4,666,986Capital
      expenditures
                          
                          
                          5,253,033
                          
                          
                          
                          177,364
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          5,430,397Depreciation
      expense (Included in cost of goods sold and Operating
    expense)
                          
                          $
                          1,733,885
                          
                          
                          $
                          363,323
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          2,097,208
 
 PRC
                        
                        
                        US
                        
                        
                        Corporate
                        
                        
                        TotalAs
      of March 31, 2010Property,
      plant and equipment, net
                        
                        $
                        114,065,392
                        
                        
                        $
                        11,611,623
                        
                        
                        $
                        -
                        
                        
                        $
                        125,677,015Total
      assets
                        
                        $
                        278,344,510
                        
                        
                        $
                        28,467,340
                        
                        
                        $
                        24,190,881
                        
                        
                        $
                        331,002,731As
      of December 31, 2009Property,
      plant and equipment, net
                        
                        $
                        105,190,257
                        
                        
                        $
                        12,195,309
                        
                        
                        $
                        -
                        
                        
                        $
                        117,385,566Total
      assets
                        
                        $
                        254,054,799
                        
                        
                        $
                        25,902,180
                        
                        
                        $
                        14,777,086
                        
                        
                        $
                        294,734,065
 
 Note
21 – Supplemental information for cash flow statement
 
 The
Company acquired Jinchuan on Feburary 5, 2010 with first payment amounting to
$5,075,000 paid on the same date and a contingent liability that amounted to
$5,075,000 to former Jinchuan shareholders. See Note 19 – Business Combination
for detail.
 
 Note
22 – Subsequent Events
  As
detailed in Note 12, the Company paid off the remaining SWAP unwind price
amounting to $5,650,000 to Merrill Lynch on April 6, 2010.
  - 50
-




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





The
following discussion of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements and the notes
to those financial statements appearing elsewhere in this Form
10-Q.





Certain
statements in this Report constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, Section 21E of the
Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements include statements, which involve risks
and uncertainties, regarding, among other things, (a) our projected sales,
profitability, and cash flows, (b) our growth strategies, (c) anticipated trends
in our industries, (d) our future financing plans, and (e) our anticipated needs
for, and use of, working capital. They are generally identifiable by use of the
words “may,” “will,” “should,” “anticipate,” “estimate,” “plan,” “potential,”
“project,” “continuing,” “ongoing,” “expects,” “management believes,” “we
believe,” “we intend,” or the negative of these words or other variations on
these words or comparable terminology. Actual events or results may differ
materially from those discussed in forward-looking statements as a result of
various factors, including, without limitation, the risks outlined under “Risk
Factors” in our Annual Report on Form 10-K and matters described in this report
generally. In light of these risks and uncertainties, there can be no assurance
that the forward-looking statements contained in this filing will in fact occur.
You should not place undue reliance on these forward-looking
statements.





The
forward-looking statements speak only as of the date on which they are made,
and, except to the extent required by federal securities laws, we undertake no
obligation to update any forward-looking statement to reflect events or
circumstances after the date on which the statement is made or to reflect the
occurrence of unanticipated events.




The
"Company", "we," "us," "our," and the "Registrant" refer to (i) Fushi
Copperweld, Inc., (ii) Fushi Holdings, Inc., (iii) Fushi International (Dalian)
Bimetallic Cable Co., Ltd. (formerly Dalian Diversified Product Inspections
Bimetallic Cable, Co., Ltd.) (“Fushi International (Dalian)”), (iv) Dalian
Jinchuan Power Cable Co., Ltd. (“Jinchuan”); (v) Dalian Fushi Bimetallic
Wire Manufacturing, Co., Ltd. (“Dalian Fushi”), (vi) Copperweld Holdings, LLC,
(vii) Copperweld Bimetallic, LLC (“Copperweld”) and (viii) Copperweld
Bimetallics UK, LLC. Unless the context otherwise requires, all references to
(i)  “PRC” and “China” are to the People’s Republic of China;
(ii) “U.S. dollar,” “$” and “US$” are to United States dollars; (iii) “RMB” are
to Yuan Renminbi of China; (iv) “Securities Act” are to the Securities Act of
1933, as amended; and (v) “Exchange Act” are to the Securities Exchange Act of
1934, as amended.





Overview





We
believe we are one of the world’s largest producer, based on manufacturing
capacity, and a leading innovator of bimetallic wire products, principally
copper-clad aluminum (CCA) and copper-clad steel (CCS) products. Our products
are primarily used within the telecommunications, electrical utility, and
transportation industries, and are sold as conductor components within the
broadband wire and cable market, and finished products in the electrical utility
and transportation markets.  Our products significantly reduce the
amount of copper required to manufacture a conductor, and since copper is
expensive; we significantly reduce conductor cost through the addition of an
aluminum or steel core.  CCA and CCS conductors are generally used in
substitution of solid copper conductors where either cost savings or specific
electrical and/or physical attributes are either required or
desired.  In the first fiscal quarter of 2010, our products were sold
to over 500 customers in 25 countries. We market our products under the
trademarked names of “Copperweld®” and “FushiTM,” and sell either directly to
cable manufacturers or through distributors or sales agents to
end-users.





Although
we are engaged in one line of business, as a result of the differing markets
primarily served by each of our manufacturing facilities and significant
differences in the operating results among each of our facilities, starting with
the second fiscal quarter of 2009, we began to analyze our worldwide operations
based on two geographic reportable segments: 1) “PRC” which consists of our
facilities located in Dalian, Liaoning, the People’s Republic of China (PRC) and
2) “US” which consists of our Fayetteville, Tennessee, (USA), and Telford,
England, (UK) facilities. We have combined our U.S. and U.K. operations as one
segment since the UK is a subsidiary of the US operating company and is under
the direction of our U.S. segment manager.  Further, the nature of our
products, services and production processes at our U.S. and U.K. facilities,
along with the customer base, methods to distribute products and services are
nearly identical.


- 51
-


We
believe we have a strong market position in all markets in which we compete due
to the quality of our products, geographic and customer diversity and our
ability to deliver superior products while operating as a low cost
provider.  As a result, we believe we are now one of the leading
producers of bimetallic wire products in the world and are one of the market
leaders in North America, Europe, North Africa, the Middle East and the People’s
Republic of China.  We continue to expand within current and
developing markets and create shareholder value by:





·
            Investing
      in organic and inorganic growth in both infrastructure-based and
      fast-growing markets;


·
            Focusing
      on new, higher-margin products, applications and markets through
      investment into new machinery and research and
  development;


·
            Improving
      business processes throughout the Company by focusing on key performance
      indicators and operational
excellence;


·
            Strategically
      hiring and developing  talent, to improve the effectiveness of
      our performance management processes;
and


·
            Protecting
      and enhancing the Fushi Copperweld
brand.





To
accomplish these goals, we are focused on continuously improving operational
efficiency in areas we view to be vital: quality, delivery, cost and innovation.
We also take an opportunistic approach to achieving our goals, and thus, we seek
acquisitions of businesses which facilitate overall growth and cash flows of the
Company.





We
manufacture, market and distribute bimetallic conductors (two-metal
conductors).  These bimetallic conductors are primarily CCA and
CCS.  Both CCA and CCS are either aluminum or steel cores, surrounded
by an outer layer of pure copper, resulting in a composite bimetallic conductor.
The copper sheath, through our processing methods, is metallurgically “bonded”
to the core metal.  The amount of copper-metal used in cladding the
core-metal varies widely, and is based on customers’ needs.  However,
bimetallic conductors, compared to solid copper conductors, can reduce the
amount of copper used by as much as 90% by volume, or 73% by weight which
is a considerable cost savings to the company and our customers.  For
many applications, bimetallic conductors offer significant advantages over
copper wire.  End-user manufacturers in the industry have increasingly
pursued and considered alternative technologies such as bimetallics due to
performance and economic considerations.  Relative to traditional copper
conductors, bimetallic conductors offer greater value to a variety of customers.
 Because of the benefits of bimetallic conductors, we believe there are
substantial opportunities to capture increased market share in applications that
have historically been dominated by solid copper wire.





We
believe our engineered bimetallic conductor products offer end-users greater
value-performance than “solid” copper conductors.  Our bimetallic
conductors combine the efficiency of copper with the lightweight qualities of
aluminum (CCA), or the ruggedness and strength of steel
(CCS).   Bimetallic conductors offer favorable cost
characteristics, weight savings (CCA), increased flexibility and
end-product ease-of-handling (CCA), increased tensile strength (CCS), improved
corrosion characteristics and decreased theft risk.  Conductivity can
be customized, by changing the percentage of copper, to fit many applications.
The physical and electrical attributes of our bimetallic products provide our
customers cost savings beyond their intrinsic pricing advantages.





We
believe our proprietary manufacturing technology allows us to produce superior
products compared to other manufacturers and creates a significant barrier to
entry.  Manufacturing copper-clad products involves bonding copper tape to
an aluminum or steel core rod, drawing the clad product to a finished diameter
and heat treating (annealing) as necessary depending on customer specifications.
Our proprietary cladding process differentiates us in terms of manufacturing
capabilities, offering superior product quality.  Our developmental
capabilities support the ongoing evolution of our current
products.  We are continuously working toward new technologies and
products that we expect will improve the performance and capabilities of our
bimetallic products thereby allowing us to enter new markets.


- 52
-


While the
pricing volatility of our raw materials, especially copper, is a primary cause
of cost variations in our products, changes in raw material costs do not
materially affect our dollar earnings on a per pound basis. Although an increase
in the price of raw materials may serve to reduce our gross margins as a
percentage of net sales, likewise, a decline in raw material prices may increase
our gross margin as a percentage of net sales. We generally pass the cost of
price changes in our raw materials to our customers rather than the percentage
changes. We establish prices for our products based on market factors and our
cost to produce our products. Typically, we set a base price for our products
for our customers with an understanding that as prices of raw materials change,
primarily for copper but also for aluminum and steel, we will pass the change
through to our customers. Therefore, when prices of raw material increase, our
prices to our customers increase and the amount of our total net sales increases
while the dollar amount of our gross margin remains relatively
stable.  As a result, the impact on earnings per share from volatile
raw material prices is minimal, although there are timing delays of varying
lengths depending upon volatility of metals prices, the type of product,
competitive conditions and particular customer arrangements.





Factors
driving and affecting operating results include raw material prices, product and
price competition, economic conditions in various geographic regions, foreign
currency exchange rates, interest rates, changes in technology, fluctuations in
customer demand, variations in the mix of products, production capacity and
utilization, working capital sufficiency, availability of credit and general
market liquidity, patent and intellectual property issues, litigation results
and legal and regulatory developments, and our ability to accurately forecast
sales demand and calibrate manufacturing to such demand, manage volatile raw
material costs, develop, manufacture and successfully market new and enhanced
products and product lines, control operating costs, and attract,
motivate and retain key personnel to manage our operational, financial and
management information systems.





Highlights
for the three months ended March 31, 2010 include:





·
            GAAP
      net income increased 137.7% to $7.4M or $0.21 per diluted share compared
      to the three months ended March 31, 2009, adjusted net income increased
      148.3% to $10.2M or $0.29 per diluted
share;


·
            Metric
      tons of volume shipped from our PRC segment increased 13.3% compared
      to the first quarter of 2009;


·
            Closed
      acquisition of Dalian Jinchuan Power
Cable;


·
            Operating
      income margin increased 830 basis points from 13.2% to 21.5% of
      revenues;


·
            Returned
      to profitability at Fayetteville facility; generated approximately $0.3
      million of net income; and


·
            Generated $7.9 million of cash
      flow from operations in the quarter compared to a deficit $1.0
      millionin the same
      period of 2009.





Current
Business Environment and Outlook for the remainder of 2010





With
respect to the overall business trends for the remainder of 2010 and beyond,
statistics showed that the global economy has been making a gradual recovery
since the second half of 2009.  China, a market from which we have
generated most of our revenue and growth, saw its GDP growth in the first
quarter of 2010 jump by 11.9% compared with the same period of last year, and
the GDP growth in the full year 2009 increased by 8.7% compared with that of
2008.





Furthermore,
we think the following macro-level trends will positively impact our business
and offer us opportunities to preserve profitability and capture new business
despite global economic conditions:





·
            3G
      in China and continued growth in demand for CCA-based telecommunication
      products;


·
            Government
      stimulus packages focused on infrastructure: high-speed railways,
      transmission and distribution and power grid build
  out;


·
            Continued
      strength of the grounding wire
market;


·
            Worldwide
      underlying long-term growth trends in the electric utility and
      infrastructure markets;


·
            Continuing
      demand for cost effective, energy saving
  alternatives.


- 53
-


In order
to capture the growth opportunities, we will focus on driving profitability by
continuing to streamline our organizational structure and business procedures,
increasing operational efficiency and optimizing operating processes, while
managing production costs and operating expenses.





In
addition, we are seeking to continue to develop the high potential utility and
transportation markets, to enhance productivity and to expand our sales of
higher margin products.  We view the market for CCA and CCS wires and
cables within the utilities market to be worldwide. We continue to educate
the PRC market on the benefits of CCS for the utilities market. With our recent
announcement that 8,200 metric tons of CCS production is now online at our PRC
facility, we are eager to begin targeting this market more aggressively.
Furthermore, we believe the acquisition of Jinchuan will accelerate our
expansion into the power cable industry by allowing us to provide our products
to the early adopters, both suppliers and customers, more quickly.





Meanwhile,
we are also working to strengthen sales management and customer relations. We
will seek to consolidate our relationships with our best customers, stop or
suspend selling to customers that pose significant credit risk, and develop new
customers cautiously.  In addition, as part of our ongoing efforts to
reduce total operating costs, we continuously improve our ability to efficiently
utilize existing and new manufacturing capacity to manage expansion and growth.
We believe that effectively utilized manufacturing assets, economy of scale
generated, will help offset high raw material prices and dilute overhead over
time, thus improving profitability.





We
actively seek to identify and promptly respond to key economic and industry
trends in order to capitalize on expanding niche markets for our products, and
possibly entering into new markets both down and up stream, in order to achieve
better returns.  We have the resources, technology, working capital and
capacity to meet growing market demands.  Over the long-term, we believe
that we are well positioned to benefit from the growth opportunities in China
and throughout the world.





Results
of Operations





The
following table sets forth, for the periods indicated, statement of operations
data in millions of dollars:





Three Months EndedMarch
      31,
                
                
                March
      31,
                
                
                Change2010
                
                
                2009
                
                
                %Revenues
                
                
                59.5
                
                
                
                35.3
                
                
                
                68.9
                %Gross
      Profit
                
                
                17.8
                
                
                
                8.9
                
                
                
                99.4
                %Selling,
      general and administrative expenses
                
                
                5.0
                
                
                
                4.3
                
                
                
                16.3
                %Operating
      Income
                
                
                12.8
                
                
                
                4.7
                
                
                
                172.3
                %Income
      Before Taxes
                
                
                5.9
                
                
                
                2.4
                
                
                
                145.8
                %Benefit
      for income taxes
                
                
                1.5
                
                
                
                0.7
                
                
                
                114.3
                %Net
      Income
                
                
                7.4
                
                
                
                3.1
                
                
                
                137.7
                %





Comparison
of the Three Months Ended March 31, 2010 and March 31, 2009:





Net
Sales





The
following tables set forth net sales in millions and metric tons (MT) sold of
copper-clad products by each of our reporting segments on a combined
basis:


- 54
-





Net SalesThree Months Ended March
      31,2010
                  
                  
                  2009Amount
                  
                  
                  % of
      Net
                    Sales
                  
                  
                  Amount
                  
                  
                  % of Net
                    Sales
                  
                  
                  Dollar
                    Change
                  
                  
                  % ChangePRC
                  
                  $
                  46.2
                  
                  
                  
                  77.6
                  %
                  
                  $
                  26.4
                  
                  
                  
                  74.8
                  %
                  
                  $
                  19.8
                  
                  
                  
                  75.0
                  %US
                  
                  $
                  13.3
                  
                  
                  
                  22.4
                  %
                  
                  $
                  8.9
                  
                  
                  
                  25.2
                  %
                  
                  $
                  4.4
                  
                  
                  
                  49.4
                  %Total
      net sales
                  
                  $
                  59.5
                  
                  
                  
                  100.0
                  %
                  
                  $
                  35.3
                  
                  
                  
                  100.0
                  %
                  
                  $
                  24.2
                  
                  
                  
                  68.9
                  %





Metric Tons SoldThree Months Ended March
      31,2010
                  
                  
                  2009MT
                  
                  
                  % of MT
                    Sales
                  
                  
                  MT
                  
                  
                  % of MT
                    Sales
                  
                  
                  Tonnage
                    Change
                  
                  
                  % ChangePRC
      *
                  
                  
                  6,669
                  
                  
                  
                  73.3
                  %
                  
                  
                  5,886
                  
                  
                  
                  73.7
                  %
                  
                  
                  783
                  
                  
                  
                  13.3
                  %US
                  
                  
                  2,431
                  
                  
                  
                  26.7
                  %
                  
                  
                  2,096
                  
                  
                  
                  26.3
                  %
                  
                  
                  335
                  
                  
                  
                  16.0
                  %Total
      sales volume
                  
                  
                  9,100
                  
                  
                  
                  100.0
                  %
                  
                  
                  7,982
                  
                  
                  
                  100.0
                  %
                  
                  
                  1,118
                  
                  
                  
                  14.0
                  %





*
Not including volume contributed by the Jinchuan acquisition which is
measured by meters.





Net sales
were $59.5 million in the first quarter of 2010, compared to $35.3 million in
the same period of last year. The 68.9% increase in sales was primarily
attributable to (i) an increase in copper-clad sales volume of 14.0%; ii) the
inclusion of the Jinchuan acquisition which contributed $4.3 million in sales,
and iii) a 48.2% increase in the average selling price as a result of a rise in
the cost of our raw materials.  We generally pass the cost of price
changes in raw materials to customers when we set the base price for our
products. As raw material prices change, we pass through that change whether it
results in an increase or decrease in the base price of our
products.





The PRC
segment experienced an increase of 75.0% in net sales for the first quarter
ended March 31, 2010 compared to the similar period of 2009. The increase in PRC
net sales is due to a (i) 41.4% increase in average selling prices of CCA as a
result of higher acquisition costs of raw materials, (ii) a 13.3% increase in
sales volume, and (iii) the inclusion of Jinchuan. Historically, the first
quarter of the calendar year has been a slower quarter in light of the spring
festival in PRC. For the remainder of the year and beyond, we expect (i) demand
for our telecom based products to be positively affected by the continued
build-out of the homegrown 3G network in the PRC, and (ii) continued expansion
into the utility market due to government spending on infrastructure related
build-out and installation of CCS cladding capacity. In addition, the
acquisition of Jinchuan allowed us to process our products further downstream
and provide a strategic expansion into the utility market
sub-segment.





The US
segment experienced an increase of 49.4% in net sales for the first quarter of
2010 compared to the first quarter of 2009. The increase is primarily due to the
increase in the utilization rate in Fayetteville from 27.9% in the first quarter
of 2009 to 32.1% in the same period of 2010, and higher acquisition costs of raw
materials on a year-to-year basis.





Net
Sales by Industry





The
following table presents the breakdown of combined net sales in
millions by industry:




Net SalesThree Months Ended March
      31,2010
                  
                  
                  2009Amount
                  
                  
                  % of Net
                    Sales
                  
                  
                  Amount
                  
                  
                  % of Net
                    Sales
                  
                  
                  Dollar
                    Change
                  
                  
                  % ChangeTelecommunication
                  
                  $
                  25.1
                  
                  
                  
                  42.2
                  %
                  
                  $
                  14.3
                  
                  
                  
                  40.5
                  %
                  
                  
                  10.8
                  
                  
                  
                  75.5
                  %Utility
                  
                  
                  29.5
                  
                  
                  
                  49.6
                  %
                  
                  
                  18.9
                  
                  
                  
                  53.6
                  %
                  
                  
                  10.6
                  
                  
                  
                  56.1
                  %Transportation
                  
                  
                  0.6
                  
                  
                  
                  1.0
                  %
                  
                  
                  0.4
                  
                  
                  
                  1.1
                  %
                  
                  
                  0.2
                  
                  
                  
                  50.2
                  %Other
                  
                  
                  4.3
                  
                  
                  
                  7.2
                  %
                  
                  
                  1.7
                  
                  
                  
                  4.8
                  %
                  
                  
                  2.6
                  
                  
                  
                  152.9
                  %Total
      net sales
                  
                  $
                  59.5
                  
                  
                  
                  100.0
                  %
                  
                  $
                  35.3
                  
                  
                  
                  100.0
                  %
                  
                  
                  24.2
                  
                  
                  
                  68.9
                  %


- 55
-


The
following table presents the breakdown of metric tons (MT) of copper-clad
shipped to customers by industry:





Three Months Ended March
      31,2010
                      
                      
                      2009MT
                      
                      
                      % of MT
                        Sales
                      
                      
                      MT
                      
                      
                      % of MT
                        Sales
                      
                      
                      Tonnage
                        Change
                      
                      
                      % ChangeTelecommunication
                      
                      
                      4,351
                      
                      
                      
                      47.8
                      %
                      
                      
                      3,468
                      
                      
                      
                      43.4
                      %
                      
                      
                      883
                      
                      
                      
                      25.5
                      %Utility
      *
                      
                      
                      3,703
                      
                      
                      
                      40.7
                      %
                      
                      
                      4,026
                      
                      
                      
                      50.5
                      %
                      
                      
                      (323
                      )
                      
                      
                      -8.0
                      %Transportation
                      
                      
                      74
                      
                      
                      
                      0.8
                      %
                      
                      
                      61
                      
                      
                      
                      0.8
                      %
                      
                      
                      13
                      
                      
                      
                      21.3
                      %Other
                      
                      
                      972
                      
                      
                      
                      10.7
                      %
                      
                      
                      427
                      
                      
                      
                      5.3
                      %
                      
                      
                      545
                      
                      
                      
                      127.6
                      %Total
      sales volume
                      
                      
                      9,100
                      
                      
                      
                      100.0
                      %
                      
                      
                      7,982
                      
                      
                      
                      100.0
                      %
                      
                      
                      1,118
                      
                      
                      
                      14.0
                      %





*
Not including volume contributed by the Jinchuan acquisition which is
measured by meters.





During
the quarter ended March 31, 2010, our copper-clad sales to the telecommunication
markets increased by 883 metric tons, or 25.5%, compared to the same period in
2009, primarily due to continued strong demand for our CCA products in the PRC
as a result of the 3G build-out and strengthening of demand within markets
served by our US segment. With CCS capacity at our PRC facility now complete, as
we recently announced, we will be pursuing the telecommunications market
opportunity even more vigorously.





Utility
sales of copper-clad products in volume decreased by 323 metric tons, or 8.0%,
in the first quarter 2010 compared to the similar period in 2009, reflecting
fluctuating demand tied to the timing of government capital spending on
infrastructure related projects. This was partially offset by improving sales
within markets served by our US operations as a result of recovering economic
conditions. The 56.1% increase in net sales in dollar amount to the utility
markets was primarily attributable to higher average selling price and the
inclusion of the Jinchuan acquisition which contributed $4.3 million in sales.
The acquisition of Jinchuan allows us to process our products further downstream
and provides a strategic expansion into the utility market
sub-segment.





Capacity
and Output





The
following table summarizes installed cladding capacities and output for the
three month period ended March 31, 2010:





Three Months Ended March
      31, 2010PRC
      *
                  
                  
                  USCapacity
                    (MT)
                  
                  
                  Output
                    (MT)
                  
                  
                  Capacity
                    (MT)
                  
                  
                  Output
                    (MT)CCA
                  
                  
                  10,000
                  
                  
                  
                  7,039
                  
                  
                  
                  3,100
                  
                  
                  
                  794CCS
                  
                  
                  200
                  
                  
                  
                  12
                  
                  
                  
                  4,075
                  
                  
                  
                  1,606Total
                  
                  
                  10,200
                  
                  
                  
                  7,051
                  
                  
                  
                  7,175
                  
                  
                  
                  2,400




*
Not including the capacity and output of Jinchuan for power cable
production.





Product
Mix





The
following table summarizes the breakdown of metric tons shipped to
customers by product mix:


- 56
-





Metric Tons SoldThree Months Ended March
      31,2010
                  
                  
                  2009MT
                  
                  
                  % of MT
                    Sales
                  
                  
                  MT
                  
                  
                  % of MT
                    Sales
                  
                  
                  Tonnage
                    Change
                  
                  
                  % ChangeCCA
                  
                  
                  7,330
                  
                  
                  
                  80.5
                  %
                  
                  
                  6,323
                  
                  
                  
                  79.2
                  %
                  
                  
                  1,007
                  
                  
                  
                  15.9
                  %CCS
                  
                  
                  1,619
                  
                  
                  
                  17.8
                  %
                  
                  
                  1,585
                  
                  
                  
                  19.9
                  %
                  
                  
                  34
                  
                  
                  
                  2.1
                  %Others
      *
                  
                  
                  151
                  
                  
                  
                  1.7
                  %
                  
                  
                  74
                  
                  
                  
                  0.9
                  %
                  
                  
                  77
                  
                  
                  
                  104.1
                  %Total
      net sales
                  
                  
                  9,100
                  
                  
                  
                  100.0
                  %
                  
                  
                  7,982
                  
                  
                  
                  100.0
                  %
                  
                  
                  1,118
                  
                  
                  
                  14.0
                  %





*
Not including volume contributed by the Jinchuan acquisition which is
measured by meters.





The sales
of CCA in volume from our PRC segment increased by 12.1%, or 708 metric tons in
the first quarter of 2010 compared to the same period in 2009. The demand for
our CCA products in the PRC strengthened during the first quarter of 2010
compared to 2009 due to increased traction of domestic infrastructure projects
related to the stimulus package and 3G network build-out. The sales of CCA in
volume from our Fayetteville facility increased by 58.8%, or 290 metric tons in
the first quarter of 2010 compared to the same period in 2009. The increase is
primarily due to the extensive use of CCA within telecom in the U.S., European,
and South America markets and improving economic conditions in those
areas.





The sales
of CCS on a consolidated basis slightly increased by 2.1%, or 34 metric tons in
the first quarter of 2010 compared to the same period in 2009. We successfully
installed 8,200 MT of CCS cladding capacity at our Dalian facility within the
PRC segment at onset of the second quarter of 2010.





Gross
Profit and Gross Margin





Three Months Ended March
      31,
                  
                  
                  Change(in millions)
                  
                  2010
                  
                  
                  2009
                  
                  
                  Dollar
                  
                  
                  %Gross
      Margin
                  
                  $
                  17.8
                  
                  
                  $
                  8.9
                  
                  
                  $
                  8.9
                  
                  
                  
                  99.4
                  %Gross
      Margin
                  
                  
                  29.9
                  %
                  
                  
                  25.4
                  %
                  
                  
                  
                  
                  
                  
                  4.5
                  %





Gross
profit was $17.8 million in the quarter ended March 31, 2010 compared to $8.9
million in the same period of 2009, representing an increase of 99.4%.
This increase is primarily driven by $24.2 million increase in net sales
compared to the quarter ended March 31, 2009, higher gross margins, and
inclusion of Jinchuan. Gross margin increased from 25.4% to 29.9% due
primarily to improved product mix and higher capacity utilization
rates.





Selling
Expenses





Three Months Ended March
      31,
                  
                  
                  Change(in millions)
                  
                  2010
                  
                  
                  2009
                  
                  
                  Dollar
                  
                  
                  %Selling
      Expenses
                  
                  $
                  1.3
                  
                  
                  $
                  1.2
                  
                  
                  $
                  0.1
                  
                  
                  
                  8.3
                  %as
      a percentage of net sales
                  
                  
                  2.2
                  %
                  
                  
                  3.4
                  %
                  
                  
                  
                  
                  
                  
                  -1.2
                  %





Selling
expenses were $1.3 million in the quarter ended March 31, 2010 compared to
$1.2 million in the similar period in 2009, representing an increase of
8.3%. This increase is primarily due to increased efforts to penetrate the
electrical utility market. As a percentage of net sales, selling expenses
decreased from 3.4% in the first quarter of 2009 to 2.2% in the same period of
2010 as we benefited from the cost cutting initiatives
implemented.


- 57
-


General
and Administrative Expenses





Three Months Ended March 31,
                  
                  
                  Change(in millions)
                  
                  2010
                  
                  
                  2009
                  
                  
                  Dollar
                  
                  
                  %General
      and Administrative Expenses
                  
                  $
                  3.8
                  
                  
                  $
                  3.1
                  
                  
                  $
                  0.7
                  
                  
                  
                  22.6
                  %as
      a percentage of net sales
                  
                  
                  6.4
                  %
                  
                  
                  8.8
                  %
                  
                  
                  
                  
                  
                  
                  -2.4
                  %





General
and administrative (G&A) expenses were $3.8 million in the quarter
ended March 31, 2010 compared to $3.1 million in the same period in 2009,
representing an increase of 22.6%, or $0.7 million. This increase is
primarily due to increased revenues and additional G&A expenses from our
newly acquired Jinchuan facility. As a percentage of net sales, G&A expenses
decreased from 8.8% in the first quarter of 2009 to 6.4% in the same period of
2010 primarily due to increased revenues and increased operating
leverage.





Operating
Income





The
following table sets forth operating income by segment, in millions of
dollars:





Three Months Ended March31,2010
                  
                  
                  2009Amount
                  
                  
                  % of
                    Operating
                    income
                  
                  
                  Amount
                  
                  
                  % of
                    Operating
                    income
                  
                  
                  Dollar
                    Change
                  
                  
                  % ChangePRC
                  
                  $
                  13.3
                  
                  
                  
                  103.9
                  %
                  
                  $
                  7.0
                  
                  
                  
                  148.9
                  %
                  
                  $
                  6.3
                  
                  
                  
                  90.0%US
                  
                  $
                  0.5
                  
                  
                  
                  3.9
                  %
                  
                  $
                  (1.3
                  )
                  
                  
                  -27.7
                  %
                  
                  $
                  1.8
                  
                  
                  
                  -138.5%Corporate
                  
                  $
                  (1.0
                  )
                  
                  
                  -7.8
                  %
                  
                  $
                  (1.0
                  )
                  
                  
                  -21.2
                  %
                  
                  $
                  -
                  
                  
                  
                  -Total
      operating income
                  
                  $
                  12.8
                  
                  
                  
                  100.0
                  %
                  
                  $
                  4.7
                  
                  
                  
                  100.0
                  %
                  
                  $
                  8.1
                  
                  
                  
                  172.3%





Total
operating income was $12.8 million in the quarter ended March 31, 2010
compared to $4.7 million in the same period of 2009, representing
an increase of 172.3%, or $8.1 million. This increase is primarily due to a
significant increase of revenues and operating profit contributed by our PRC
segment of $15.7 million and $6.3 million, respectively. The operating income
within our US segment was $0.5 million compared with a deficit of $1.3 million
in the same period of last year due to increased revenues, cost savings
initiatives and higher capacity utilization.





Other
Income (Expense)





Interest
income (expenses)


Three Months Ended March 31,
                      
                      
                      Change(in millions)
                      
                      2010
                      
                      
                      2009
                      
                      
                      Dollar
                      
                      
                      %Interest
      Income
                      
                      $
                      0.2
                      
                      
                      $
                      0.1
                      
                      
                      $
                      0.1
                      
                      
                      
                      100.0
                      %Interest
      Expense
                      
                      $
                      (0.5
                      )
                      
                      $
                      (1.5
                      )
                      
                      $
                      1.0
                      
                      
                      
                      -66.7
                      %Net
      Interest Expense
                      
                      $
                      (0.3
                      )
                      
                      $
                      (1.4
                      )
                      
                      $
                      1.1
                      
                      
                      
                      -78.6
                      %as
      a percentage of net sales
                      
                      
                      -0.5
                      %
                      
                      
                      -4.0
                      %
                      
                      
                      
                      
                      
                      
                      3.5
                      %





Net
interest expense decreased to $0.3 million in the quarter ended March 31, 2010
from $1.4 million in the same period of 2009, while as a percentage of net
sales, net interest expense decreased to 0.5% of net sales from 4.0% of net
sales. This decrease is primarily the result of the repayment of PRC’s short
term bank loans in 2009 and repurchase and retirement of the Company’s Senior
Secured Convertible Notes and Senior Secured Floating Rate Notes Due 2012 in the
fourth quarter of 2009 and the first quarter of 2010,
respectively.


- 58
-


Tax





Three Months Ended March 31, 2010PRC
                
                
                US
                
                
                Parent Company
                
                
                ConsolidatedProfit
      (Loss) before income tax
                
                $
                13.5
                
                
                $
                0.4
                
                
                $
                (8.0
                )
                
                $
                5.9Income
      tax expense (credit)
                
                $
                1.9
                
                
                
                -
                
                
                
                (3.4
                )
                
                
                (1.5
                )Profit
      (loss) after income tax
                
                $
                11.6
                
                
                $
                0.4
                
                
                $
                (4.6
                )
                
                $
                7.4





Profit
before tax for PRC was $13.5 million in the three months ended March 31,
2010 with profits from the US segment before tax of $0.4 million. Loss at the
parent company level was $8.0 million primarily due to the unwinding of a cross
currency hedge, which resulted in a loss upon the debt extinguishment of the
high yield note and upon the derivative extinguishment, as well as professional
fees and outside service expenses. On a consolidated basis, profit before tax
was $5.9 million and we recognized a net of tax benefit of $1.5 million. The
effective tax rate on a consolidation basis for this quarter was a deficit of
25.8% due to the tax benefit associated with combined US entities’
loss.





Net
Income





Three Months Ended March 31,
                
                
                Change(in millions)
                
                2010
                
                
                2009
                
                
                Dollar
                
                
                %Net
      Income Before Taxes
                
                $
                5.9
                
                
                $
                2.4
                
                
                $
                3.5
                
                
                
                145.8
                %Benefit
      for Income Taxes
                
                $
                1.5
                
                
                $
                0.7
                
                
                $
                0.8
                
                
                
                114.3
                %Net
      Income After Taxes
                
                $
                7.4
                
                
                $
                3.1
                
                
                $
                4.3
                
                
                
                137.7
                %as
      a percentage of net sales
                
                
                12.4
                %
                
                
                8.8
                %
                
                
                
                
                
                
                3.6
                %




Net
income was $7.4 million in the quarter ended March 31, 2010 compared to
$3.1 million in the same period in 2009, representing an increase of
137.7%. As a percentage of net sales, net income increased from 8.8% in the
first quarter of 2009 to 12.4% in the same period of 2010 primarily due to
higher profitability.





Earnings
per Share





Three Months Ended March 312010
                  
                  
                  2009Unaudited
                  
                  
                  UnauditedNet
      Income for Basic Earnings Per Share
                  
                  $
                  7,370,760
                  
                  
                  $
                  3,100,917Basic
      Weighted Average Number of Shares
                  
                  
                  34,673,692
                  
                  
                  
                  27,563,478Net
      Income per Share – Basic
                  
                  $
                  0.21
                  
                  
                  $
                  0.11Net
      Income for Diluted Earnings Per Share
                  
                  $
                  7,370,760
                  
                  
                  $
                  3,100,917Diluted
      Weighted Average Number of Shares
                  
                  
                  35,309,847
                  
                  
                  
                  27,695,464Net
      Income per Share – Diluted
                  
                  $
                  0.21
                  
                  
                  $
                  0.11




Basic and
diluted earnings per share (EPS) for the quarter ended March 31, 2010, were
$0.21 and $0.21, respectively, compared to $0.11 and $0.11, respectively, for
the comparable period in 2009.


- 59
-





Selected
Balance Sheet Data at March 31, 2010 (unaudited) and the year ended December 31,
2009:





Selected Balance Sheet DataMarch31,2010,
                
                
                December 31, 2009
                
                
                Change(in millions)
                
                Unaudited
                
                
                
                
                
                Dollar
                
                
                %Cash
                
                $
                78.5
                
                
                $
                60.6
                
                
                $
                17.9
                
                
                
                29.5
                %Accounts
      Receivable, net
                
                $
                57.0
                
                
                $
                67.3
                
                
                $
                (10.3
                )
                
                
                -15.3
                %PP&E
                
                $
                125.7
                
                
                $
                117.4
                
                
                $
                8.3
                
                
                
                7.1
                %Total
      Assets
                
                $
                331.0
                
                
                $
                294.7
                
                
                $
                36.3
                
                
                
                12.3
                %Short
      Term Debt
                
                $
                6.2
                
                
                $
                14.0
                
                
                $
                (7.8
                )
                
                
                -55.7
                %Long
      Term Debt
                
                $
                -
                
                
                $
                25.0
                
                
                $
                (25.0
                )
                
                
                -100.0
                %Shareholders'
      Equity
                
                $
                308.3
                
                
                $
                236.9
                
                
                $
                71.4
                
                
                
                30.1
                %





Our
financial condition continues to improve as measured by an increase of 30.1% in
shareholders’ equity during the three months of 2010. Cash increased 29.5%
during the period primarily due to the net proceeds from our public offering
consummated in February 2010, and the strong sales, which were partially offset
by repayment of $25.0 million long term loans. Accounts receivable decreased
15.3% as a result of collection of long-time outstanding receivables. Short term
debt decreased by 55.7% primarily as a result of repayments of the current
portion of the high yield notes. Long term debt declined by $25.0 million
because we repurchased and cancelled the Senior Secured Floating Rate Notes Due
2012 in March, 2010.





Plant and
equipment consisted of the following:





March 31, 2010
                
                
                December 31, 2009(Unaudited)Land
                
                $
                100,726
                
                
                $
                100,726Buildings
      and improvements
                
                
                67,585,553
                
                
                
                43,665,594Transportation
      equipment
                
                
                4,177,943
                
                
                
                4,177,943Machinery
      and equipment
                
                
                77,640,893
                
                
                
                74,463,717Office
      furniture
                
                
                1,259,249
                
                
                
                1,172,121Construction
      in progress
                
                
                6,101,868
                
                
                
                19,449,384Totals
                
                
                156,866,232
                
                
                
                143,029,485Less
      accumulated depreciation
                
                
                (31,189,217
                )
                
                
                (25,643,919
                )Totals
                
                $
                125,677,015
                
                
                $
                117,385,566





Construction
in progress at March 31, 2010 consisted of the following:





March 31, 2010
                                
                                Commencement
                                
                                ExpectedNo.
                                
                                Project Description
                                
                                (Unaudited)
                                
                                Date
                                
                                completion date1
                                
                                Manufacturing
      machinery and equipment for CCA/CCS (Multiple)
                                
                                $
                                3,245,052
                                
                                Dec-07
                                
                                Jun-102
                                
                                Manufacturing
      machinery and equipment for CCA/CCS (Multiple)
                                
                                
                                2,766,237
                                
                                Dec-09
                                
                                Mar-113
                                
                                Manufacturing
      machinery and equipment for CCA
                                
                                
                                90,579
                                
                                Oct-09
                                
                                Sep-10Total
                                
                                $
                                6,101,868





Project
No. 1 “Manufacturing Machinery and Equipment for CCA/CCS” is related to CCA and
CCS production lines and ancillary equipment located in Dalian, China. The
estimated costs to complete Project No.1 as of March 31, 2010 are approximately
$0.4 million.


- 60
-





Project
No. 2 “Manufacturing Machinery and Equipment for CCA/CCS” is primarily related
to ancillary equipment relocated to Dalian, China in December 2009. The
estimated costs to complete Project No.2 as of March 31, 2010 are approximately
$0.3 million.





Construction
in progress as of December 31, 2009 consisted of the following:





No.
                                    
                                    Project description
                                    
                                    December 31,
                                      2009
                                    
                                    Commencement
                                      date
                                    
                                    Expected
                                      completion date1
                                    
                                    Manufacturing
      machinery and equipment for CCA/CCS (Multiple)
                                    
                                    $
                                    4,276,753
                                    
                                    Dec-07
                                    
                                    Mar-102
                                    
                                    Corporation
      administration office building
                                    
                                    
                                    13,144,394
                                    
                                    May-03
                                    
                                    Dec-103
                                    
                                    Manufacture
      building (PRC)
                                    
                                    
                                    630,389
                                    
                                    Jan-08
                                    
                                    Jun-104
                                    
                                    Manufacturing
      machinery and equipment for CCA/CCS (Multiple)
                                    
                                    
                                    1,322,848
                                    
                                    Dec-09
                                    
                                    Mar-115
                                    
                                    Manufacturing
      machinery and equipment for CCA
                                    
                                    
                                    75,000
                                    
                                    Oct-09
                                    
                                    Mar-10Total
                                    
                                    $
                                    19,449,384





Project
No 2. Corporate Administration Office Building represents Tower B of our
corporate office building located at our Dalian facility was completed by March
2010.





Project
No 3. Manufacturing Building located at our Dalian facility was completed by
March 2010.





LIQUIDITY
AND CAPITAL RESOURCES





We have
historically financed our operations and capital expenditures principally
through private placements of debt and equity, bank loans, and cash provided by
operations. Significant factors affecting our cash liquidity include (1) cash
provided by operating activities, (2) cash used for capital expenditures,
and (3) our available credit facilities and other borrowing arrangements. At
March 31, 2010, the majority of our liquid assets were held in RMB denominations
deposited in banks within the PRC. The PRC has strict rules for converting RMB
to other currencies and for movement of funds from the PRC to other countries.
Consequently, we used funds from our public offering in the first quarter to
recapitalize our non-PRC operations and plan on securing new working
capital lines for non-PRC operations as necessary as our sales increases
and our working capital needs grow.





Under PRC
Company Law and relevant rules and regulations, our PRC subsidiaries may pay
dividends only out of their retained earnings/net profit, if any, calculated
according to PRC accounting principles determined in accordance with PRC
accounting standards, and only after accumulated losses from preceding years
have been fully covered and the following appropriations have been
made:





a)
appropriations to the statutory surplus reserve equivalent to 10% of its net
profits less any accumulated losses, as determined under PRC GAAP; no further
appropriations to the statutory surplus reserve are required once this reserve
reaches an amount equal to 50% of its respective registered
capital;





b)
appropriations to a discretionary surplus reserve as approved by the
shareholders in shareholders' meeting.




As is
customary in the industry, we provide payment terms to most of our customers
that exceed terms that we receive from our suppliers. Therefore, the Company’s
liquidity needs have generally consisted of working capital necessary to finance
receivables and raw material inventory. Capital expenditures have historically
been necessary to expand the production capacity of the Company’s manufacturing
operations.





We
recognize revenue according to the shipment date to ensure that revenues are
recorded in the proper period. Every sales transaction has a formal written
customer order that identifies the price and quantities of the product and
payment terms.


- 61
-





In
summary, our cash flows were:





Three Months Ended March31,(in millions)
                
                2010
                
                
                2009Net
      cash provided by (used in) operating activities
                
                $
                7.9
                
                
                $
                (1.0
                )Net
      cash used in investing activities
                
                $
                (6.7
                )
                
                $
                (5.5
                )Net
      cash provided by (used in) financing activities
                
                $
                16.7
                
                
                $
                (16.2
                )Effect
      of exchange rate on cash
                
                $
                0.0
                
                
                $
                (0.1
                )Cash
      and cash equivalents at beginning of period
                
                $
                60.6
                
                
                $
                65.6Cash
      and cash equivalents at end of period
                
                $
                78.5
                
                
                $
                42.7




For the
three months ended March 31, 2010, net cash provided by operating activities was
$7.9 million, an increase of $8.9 million compared to the same period in 2009,
reflecting a significant improvement in operating cash flow year over
year.  The favorable change is primarily attributable to an increase
in net income of $4.2 million and a $12.5 million decrease in accounts
receivables, partially offset by an $11.4 million increase for advance to
suppliers.





For the
three months ended March 31, 2010, net cash used in investing activities was a
deficit of $6.7 million, and was primarily attributable to the $5.075 million of
acquisition costs associated with Jinchuan.





For the
three months ended March 31, 2010, net cash provided by financing activities was
of $16.7 million, which was primarily attributable to the net proceeds of $56.4
million from stock issuance in the quarter, partially offset by $35.6 million
payment to retire our Senior Secured Floating Rate Notes Due 2012.





At March
31, 2010, our cash balance was $78.5 million compared to $42.7 million at March
31, 2009 and $60.6 million at December 31, 2009.





Days
sales outstanding (DSO) has decreased from 117 days at December 31, 2009, to
95 days at March 31, 2010, while days payable outstanding (DPO) decreased
to 11 days as of March 31, 2010, from 20 days at December 31,
2009.





The
decrease in DSO is primarily attributable to increased efforts to step-up our
collection efforts. Meanwhile, we continued our policy on extending credit terms
to certain credible customers that have long-standing business relationships
with us in order to capture increased market share. We believe that our ability
to extend credit terms puts pressure on our smaller competitors whose limited
capital resources have become further strained due to the global economic crisis
and who are unable to make such adjustments for customers.  We write
off receivables specifically based on the facts we obtain about the customers’
ability to pay. The Company has established appropriate procedures to facilitate
collection.





Standard
Customer and Supplier Payment Terms (days) as below:





Year ended December 31, 2009
              
              Three months ended March31,2010Customer
      Payment Term
              
              Payment
      in advance up to 120 days
              
              Payment
      in advance up to 120 daysSupplier
      Payment Term
              
              Payment
      in advance up to 30 days
              
              Payment
      in advance up to 30 days


- 62
-


Aging
Analysis of accounts receivable:





March 31, 2010
                
                
                December 31, 2009(Unaudited)1-30
      days
                
                $
                21,688,608
                
                
                $
                19,055,52031-60
      days
                
                
                34,743,613
                
                
                
                17,199,48561-90
      days
                
                
                1,345,563
                
                
                
                15,029,89991-180
      days
                
                
                208,627
                
                
                
                12,776,229180-365
      days
                
                
                4,436
                
                
                
                4,027,988Over
      365 days
                
                
                -
                
                
                
                220,163Bad
      debts allowance
                
                
                (1,024,684)
                
                
                
                (1,024,684)Total
                
                $
                56,966,163
                
                
                $
                67,284,600





Inventory
turnover days increased from 25 days at December 31, 2009 to 31 days at March
31, 2010. Advance to supplier’s turnover days has increased from 24 days at
December 31, 2009, to 32 days at March 31, 2010. The Company’s principal raw
materials consist of aluminum and steel rods and copper strips. Changes in the
price of copper, which has an established history of volatility, directly affect
the prices of the Company’s products and influence the demand for products. The
Company’s decision to make advanced purchases of raw materials is mainly based
upon (1) the current and projected future market price of raw materials, (2) the
demand and supply situation in the raw materials market, and (3) the forecasted
demand of products. The increased investment in both inventory and advance to
suppliers during first quarter of 2010 was primarily due to the projected
increased demand of our products.





COMMITMENTS
AND CONTINGENCIES





Contractual
Obligations





Set out
below are our contractual obligations at March 31, 2010:





Contractual obligations
                    
                    Total
                    
                    
                    Payment due by
                      less than 1 year
                    
                    
                    2–3 years
                    
                    
                    4-5 years
                    
                    
                    More than 5
                      yearsContigent
      second installment payment for Jinchuan acquisition *
                    
                    $
                    5,075,000
                    
                    
                    $
                    5,075,000
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Capital
      lease obligation
                    
                    $
                    206,547
                    
                    
                    $
                    74,030
                    
                    
                    $
                    132,517
                    
                    
                    $
                    
                    
                    
                    $Total
                    
                    $
                    5,281,547
                    
                    
                    $
                    5,149,030
                    
                    
                    $
                    132,517
                    
                    
                    $
                    -
                    
                    
                    $
                    -





Assumption:





*
On January 21, 2010, the Company’s PRC subsidiary, Fushi International (Dalian)
Bimetallic Cable Co., Ltd. entered into an agreement to purchase 100% of the
equity interest of Dalian Jinchuan Electric Cable Co., Ltd. (“Jinchuan”), a
Chinese manufacturer of electric wire and electric cables, from Jinchuan’s
shareholders. The total purchase price for the acquisition will be $10.15
million in cash. The purchase price shall be paid in two equal installments of
$5,075,000. The initial installment was paid upon the closing of the
acquisition, February 5, 2010. If certain net income targets are achieved by
Jinchuan for the fiscal year ended 2010, as confirmed by an audit to be
performed by the Company’s auditors, the balance of the purchase price shall be
paid to the Jinchuan shareholders. If Jinchuan fails to achieve the net income
targets for 2010, the balance of the purchase price payable shall be reduced
proportionally at the rate of 2.91 times the p/e ratio of the audited net income
for 2010. The potential undiscounted amount of all future payments that Fushi
International could be required to pay under the contingent consideration
arrangement is between $0 to $5,075,000. The fair value of the contingent
consideration arrangement of $5,075,000 was estimated by applying the income
approach. That measure is based on significant inputs determined by management
that are not observable in the market, which ASC Topic 820 refers to as Level 3
inputs. Key assumptions include (a) the combined impact of upgrading plans of
national power grid systems in PRC and the synergies from acquisition of
Jinchuan will enhance Jinchuan’s revenue by 21% compared with 2009 and (b) the
synergies from acquisition of Jinchuan will further reduce Jinchuan’s cost by 2%
compared with 2009. As of March 31, 2010, and through the issuance of these
consolidated financial statements, management believed that Jinchuan was able to
meet such net income targets for 2010 to recognize the full amount of the
contingent conisderation.


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Legal
Proceedings





We know
of no material, existing or pending legal proceedings against us, nor are we
involved in any material proceeding or pending litigation. There are no
proceedings in which any of our directors, officers or affiliates, or any
registered or beneficial stockholder, is an adverse party or has a material
interest adverse to our company.





Off-Balance
Sheet Arrangements





We have
not engaged in any off-balance sheet transactions.




Critical
Accounting Policies





Please
refer to footnote Note 2 – Summary of Significant Accounting
Policies.





Recent
Accounting Pronouncements





Please
refer to footnote, Recently issued accounting pronouncements under Note 2 –
Summary of Significant Accounting Policies.





Item
3. Quantitative and Qualitative Disclosures about Market Risks





Commodity
Price Risk





Certain
raw materials used by us are subject to price volatility caused by supply
conditions, political and economic variables and other unpredictable factors.
The primary purpose of our commodity price management activities is to manage
the volatility associated with purchases of commodities in the normal course of
business. We do not speculate on commodity prices.





We are
primarily exposed to price risk related to our purchase of copper used in the
manufacturing of our products. Our copper price management strategy involves the
use of natural techniques, where possible, such as purchasing copper for future
delivery at fixed prices. We did not have any commodity price derivatives or
hedging arrangements outstanding at March 31, 2010, and did not employ any
commodity price derivatives during the three months ended March 31,
2010.




Foreign
Exchange Risk





While our
reporting currency is the US dollar, a substantial percentage of our revenues
and costs are denominated in RMB and a significant portion of our assets and
liabilities are denominated in RMB. As a result, we are exposed to foreign
exchange risk as our revenues and results of operations may be affected by
fluctuations in the exchange rate between the US Dollar and RMB. If the RMB
depreciates against the US Dollar, the value of our RMB revenues and assets as
expressed in our US Dollar consolidated financial statements will
decline.





The RMB
is currently freely convertible under the “current account”, which includes
dividends, trade and service-related foreign exchange transactions, but not
under the “capital account”, which includes foreign direct investment. On May
19, 2007, the People’s Bank of China announced a policy to expand the maximum
daily floating range of RMB trading prices against the U.S. dollar in the
inter-bank spot foreign exchange market from 0.3% to 0.5%. While the
international reactions to the RMB revaluation and widening of the RMB’s
daily trading band have generally been positive, with the increased
floating range of the RMB’s value against foreign currencies, the RMB may
appreciate or depreciate significantly in value against the U.S. dollar or other
foreign currencies in the long term, depending on the fluctuation of the basket
of currencies against which it is currently valued.





We
recognized a foreign currency translation loss adjustment of $124,739 and
$393,908 for the three months ended March 31, 2010 and 2009,
respectively.


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Credit
Risk





We have
not experienced significant credit risk, as most of our customers are long-term
customers with excellent payment records. We review our accounts receivable on a
regular basis to determine if the allowance for doubtful accounts is adequate at
each quarter-end. We have not seen any major customer’s accounts receivable
experienced any material write-off of accounts receivable in the
past.





Inflation
Risk





In recent
years, China has not experienced significant inflation, and thus inflation has
not had a material impact on our results of operations. According to the
National Bureau of Statistics of China (NBS) (www.stats.gov.cn), the change in
Consumer Price Index (CPI) in China was 4.7%, 5.9% and -0.7% in 2007, 2008 and
2009, respectively. Inflationary factors, such as increases in the cost of our
products and overhead costs, could impair our operating results. Although we do
not believe that inflation has had a material impact on our financial
position or results of operations to date, a high rate of inflation may have an
adverse effect on our ability to maintain current levels of gross margin and
selling, general and administrative expenses as a percentage of sales revenue if
the selling prices of our products do not increase with these increased
costs.





Item
4. Controls and Procedures





(a)
Evaluation of Disclosure Controls and Procedures





We
maintain disclosure controls and procedures (as such term is defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) that are designed to ensure that information
required to be disclosed in our reports filed pursuant to the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules, regulations and related forms, and that such information is
accumulated and communicated to our management, including our principal
executive officer and interim principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure.





Under the
supervision and with the participation of our management, including our
principal executive officer and interim principal financial officer, the Company
conducted an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this
report.   Based on this evaluation, our principal executive
officer and interim principal financial officer concluded that as of March 31,
2010, our disclosure controls and procedures were effective.





(b)
Changes in internal controls.





There
were no changes in our internal controls over financial reporting (as defined in
Rule 13a-15(f) and 15d-15(f) under the Exchange Act of 1934) during the three
months ended March 31, 2010 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.





PART
II.  OTHER INFORMATION





Item
1.  Legal Proceedings





None.





Item
1A. Risk Factors




The
following is an additional risk factor relating to our business
operations since the filing of our Annual Report on Form 10-K for the year ended
December 31, 2009.




There
may be unknown risks inherent in our acquisition of Jinchuan, which could have a
significant impact on our financial results.


There may
be risks associated with the acquisition of Jinchuan, though not expected or
anticipated, that may not yet be apparent.  For the first quarter of 2010,
Jinchuan contributed approximately 9% to net sales of our PRC segment.  Any
discovery of adverse information concerning Jinchuan since the acquisition,
depending upon the nature of such information, could have an adverse impact on
the growth opportunities in the utilities market, which we believe are
presented to us by Jinchuan’s business,  and the results of operations for
our PRC segment. While we are entitled to seek indemnification in certain
circumstances, successfully asserting indemnification or enforcing such
indemnification could be costly and time consuming or may not be successful at
all.
 - 65
-


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




On
February 1, 2010, we consummated a public offering of 7,475,000 shares of common
stock at a public offering price of $8.00 per share, which included the sale of
975,000 shares of common stock as a result of the exercise of the over-allotment
option. Aggregate gross proceeds were $59.8 million and we received net proceeds
of approximately $56.4 million from the offering, after deducting approximately
$3.4 million underwriting discounts.





During
the three months ended March 31, 2010, we used approximately $35.6 million of
the net proceeds to pay off our Senior Secured Floating Rate Notes Due 2012 (HY
notes), in the aggregate original principal amount of $40 million. We used
approximately $4.0 million to repay the outstanding balance on our revolving
credit line with Wells Fargo Bank, N.A. Further, from the net proceeds of the
above-mentioned offering, on April 6, 2010 we made payment of $5.7 million to
Merrill Lynch as part of the termination price to unwind the cross currency
interest rate swap which was related to the HY Notes as a hedging instrument.
The remaining net proceeds of the offering are currently being used for working
capital.




Item
3.  Defaults Upon Senior Securities




None.





Item
4.  Other Information





None.





Item
5.  Exhibits





Exhibit
                  No.
                
                Document Description31.1
                
                Certification
      of the Principal Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of
      the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002.31.2
                
                Certification
      of the Principal Accounting and Financial Officer pursuant to Rule
      13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.32.1
                
                Certification
      of the Principal Executive Officer and of the Principal Accounting and
      Financial Officer pursuant to 18 U.S.C. 1350 (Section 906 of the
      Sarbanes-Oxley Act of 2002).99.1
                
                Condensed
      Parent-Only Financial Statements of Fushi Copperweld, Inc. under Schedule
      I of Article 5-04 of Regulation
S-X.


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-





SIGNATURES





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




FUSHI
      COPPERWELD, INC.Date:
      May 7, 2010
                  By:
                  /s/ Wenbing Christopher
      WangName:
      Wenbing Christopher WangTitle:
      President and Interim Chief Financial Officer
                    (Interim
      Principal Accounting and Financial
Officer)


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-




Exhibit
Index





Exhibit
                  No.
                
                Document Description31.1
                
                Certification
      of the Principal Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of
      the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002.31.2
                
                Certification
      of the Principal Accounting and Financial Officer pursuant to Rule
      13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.32.1
                
                Certification
      of the Principal Executive Officer and of the Principal Accounting and
      Financial Officer pursuant to 18 U.S.C. 1350 (Section 906 of the
      Sarbanes-Oxley Act of 2002).99.1
                
                Condensed
      Parent-Only Financial Statements of Fushi Copperweld, Inc. under Schedule
      I of Article 5-04 of Regulation
S-X.




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-