UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10−Q


(Mark
One)




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




For the
quarterly period ended: December 31, 2009




 ̈
            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: 000-23039




CHINA PRECISION STEEL,
INC.


(Exact
Name of Registrant as Specified in Its Charter)





Delaware
                      
                      14-1623047(State
      or other jurisdiction of incorporation
                        or
      organization)
                      
                      (I.R.S.
      Employer Identification
No.)





18th
Floor, Teda Building


87 Wing Lok Street, Sheungwan, Hong
Kong


People’s
Republic of China


(Address
of principal executive offices, Zip Code)




852-2543-2290


(Registrant’s
telephone number, including area code)




_____________________________________________________


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





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes  x  No   ̈





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





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





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





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





The
number of shares outstanding of each of the issuer’s classes of common stock, as
of February 10, 2010 is as follows:





Class
      of Securities
              
              Shares
      OutstandingCommon
      Stock, $0.001 par value
              
              46,562,955








CHINA
PRECISION STEEL, INC.




Quarterly
Report on FORM 10-Q


Three and Six
Months Ended December 31, 2009







TABLE
OF CONTENTS





PART IFINANCIAL INFORMATIONItem 1.
                            Financial Statements
                            2Item 2.
                            Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
                            22Item 3.
                            Quantitative and Qualitative Disclosures About
      Market Risk
                            40Item 4.
                            Controls and Procedures
                            40PART IIOTHER INFORMATIONItem 1.
                            Legal Proceedings
                            40Item 1A.
                            Risk Factors
                            40Item 2.
                            Unregistered Sales of Equity Securities and Use of
      Proceeds
                            40Item 3.
                            Defaults Upon Senior
    Securities
                            40Item 4.
                            Submission of Matters to a Vote of Security
      Holders
                            40Item 5.
                            Other Information
                            41Item 6.
                            Exhibits
                            41







PART
I


FINANCIAL
INFORMATION




ITEM
      1.
            FINANCIAL
      STATEMENTS.




CHINA
PRECISION STEEL, INC.


INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS


FOR
THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2009 AND 2008




Contents
                
                Page(s)Consolidated
      Balance Sheets as of December 31, 2009 (unaudited) and June 30,
      2009
                
                3Consolidated
      Statements of Operations and Comprehensive Income for the three and six
      months ended December 31, 2009 and 2008 (unaudited)
                
                4Consolidated
      Statements of Stockholders’ Equity for the six months ended December 31,
      2009 and 2008 (unaudited)
                
                5Consolidated
      Statements of Cash Flows for the six months ended December 31, 2009 and
      2008 (unaudited)
                
                6Notes
      to the Consolidated Financial Statements (unaudited)
                
                7-21




2




China
Precision Steel, Inc. and Subsidiaries


Consolidated
Balance Sheets




(Unaudited)December
      31,
                                    
                                    
                                    June
      30,Notes
                                    
                                    2009
                                    
                                    
                                    2009AssetsCurrent
      assetsCash
      and cash equivalents
                                    
                                    
                                    $
                                    12,752,288
                                    
                                    
                                    $
                                    13,649,587Accounts
      receivableTrade,
      net of allowances of $1,006,973 and $830,127at
      December 31 and June 30, 2009, respectively
                                    5
                                    
                                    
                                    23,524,856
                                    
                                    
                                    
                                    25,140,834Bills
      receivable
                                    
                                    
                                    
                                    317,391
                                    
                                    
                                    
                                    6,131,143Other
                                    
                                    
                                    
                                    920,274
                                    
                                    
                                    
                                    881,153Inventories
                                    6
                                    
                                    
                                    25,149,536
                                    
                                    
                                    
                                    16,275,070Prepaid
      expenses
                                    
                                    
                                    
                                    161,427
                                    
                                    
                                    
                                    75,917Advances
      to suppliers, net of allowance of $1,632,442 and$1,631,557
      at December 31 and June 30, 2009, respectively
                                    7
                                    
                                    
                                    22,491,830
                                    
                                    
                                    
                                    21,878,047Total
      current assets
                                    
                                    
                                    
                                    85,317,602
                                    
                                    
                                    
                                    84,031,751Property,
      plant and equipmentProperty,
      plant and equipment, net
                                    8
                                    
                                    
                                    72,880,841
                                    
                                    
                                    
                                    46,812,484Deposits
      for building, plant and machinery
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    8,348,496Construction-in-progress
                                    9
                                    
                                    
                                    5,656,934
                                    
                                    
                                    
                                    22,245,17378,537,775
                                    
                                    
                                    
                                    77,406,153Intangible
      assets, net
                                    10
                                    
                                    
                                    1,852,015
                                    
                                    
                                    
                                    1,871,211Goodwill
                                    
                                    
                                    
                                    99,999
                                    
                                    
                                    
                                    99,999Total
      assets
                                    
                                    
                                    $
                                    165,807,391
                                    
                                    
                                    $
                                    163,409,114Liabilities
      and Stockholders' EquityCurrent
      liabilitiesShort-term
      loans
                                    11
                                    
                                    $
                                    25,791,988
                                    
                                    
                                    $
                                    22,489,031Accounts
      payable and accrued liabilities
                                    
                                    
                                    
                                    6,346,626
                                    
                                    
                                    
                                    7,144,242Advances
      from customers
                                    12
                                    
                                    
                                    2,786,380
                                    
                                    
                                    
                                    1,742,944Other
      taxes payables
                                    
                                    
                                    
                                    2,921,706
                                    
                                    
                                    
                                    6,650,668Current
      income taxes payable
                                    
                                    
                                    
                                    4,978,877
                                    
                                    
                                    
                                    4,778,767Total
      current liabilities
                                    
                                    
                                    
                                    42,825,577
                                    
                                    
                                    
                                    42,805,652Stockholders'
      equity:Preferred
      stock: $0.001 per value, 8,000,000 sharesauthorized,
      no shares outstanding at December 31 andJune
      30, 2009, respectively
                                    13Common
      stock: $0.001 par value, 62,000,000 sharesauthorized,
      46,562,955 and 46,562,955 issued andoutstanding
      December 31 and June 30, 2009, respectively
                                    13
                                    
                                    
                                    46,563
                                    
                                    
                                    
                                    46,563Additional
      paid-in capital
                                    13
                                    
                                    
                                    75,642,383
                                    
                                    
                                    
                                    75,642,383Accumulated
      other comprehensive income
                                    
                                    
                                    
                                    9,795,611
                                    
                                    
                                    
                                    9,731,505Retained
      earnings
                                    
                                    
                                    
                                    37,497,257
                                    
                                    
                                    
                                    35,183,011Total
      stockholders' equity
                                    
                                    
                                    
                                    122,981,814
                                    
                                    
                                    
                                    120,603,462Total
      liabilities and stockholders' equity
                                    
                                    
                                    $
                                    165,807,391
                                    
                                    
                                    $
                                    163,409,114




The
accompanying notes are an integral part of these consolidated financial
statements.




3




China
Precision Steel, Inc. and Subsidiaries


Consolidated
Statements of Operations


For
the Three and Six Months Ended December 31, 2009 and 2008


(Unaudited)





Three
      Months Ended
                        
                        
                        Six
      Months EndedDecember
      31,
                        
                        
                        December
      31,
                        
                        
                        December
      31,
                        
                        
                        December
      31,Notes
                        
                        2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008RevenuesSales
      revenues
                        
                        
                        $
                        27,013,838
                        
                        
                        $
                        17,573,959
                        
                        
                        $
                        44,055,827
                        
                        
                        $
                        42,924,378Cost
      of goods sold
                        
                        
                        
                        23,377,883
                        
                        
                        
                        14,122,622
                        
                        
                        
                        39,716,513
                        
                        
                        
                        35,520,383Gross
      profit
                        
                        
                        
                        3,635,955
                        
                        
                        
                        3,451,337
                        
                        
                        
                        4,339,314
                        
                        
                        
                        7,403,995Operating
      expensesSelling
      expenses
                        
                        
                        
                        70,605
                        
                        
                        
                        1,122,532
                        
                        
                        
                        102,414
                        
                        
                        
                        1,333,830Administrative
      expenses
                        
                        
                        
                        654,041
                        
                        
                        
                        578,105
                        
                        
                        
                        1,232,739
                        
                        
                        
                        1,040,205Allowance
      for bad and doubtful debts
                        
                        
                        
                        101,067
                        
                        
                        
                        3,829,462
                        
                        
                        
                        218,184
                        
                        
                        
                        3,829,462Depreciation
      and amortization expense
                        
                        
                        
                        36,755
                        
                        
                        
                        33,318
                        
                        
                        
                        80,493
                        
                        
                        
                        59,521Total
      operating expenses
                        
                        
                        
                        862,468
                        
                        
                        
                        5,563,417
                        
                        
                        
                        1,633,830
                        
                        
                        
                        6,263,018Income/(loss)
      from operations
                        
                        
                        
                        2,773,487
                        
                        
                        
                        (2,112,080
                        )
                        
                        
                        2,705,484
                        
                        
                        
                        1,140,977Other
      income/(expense)Other
      revenues
                        
                        
                        
                        91,041
                        
                        
                        
                        138,998
                        
                        
                        
                        110,963
                        
                        
                        
                        259,701Interest
      and finance costs
                        
                        
                        
                        (275,091
                        )
                        
                        
                        (320,777
                        )
                        
                        
                        (503,434
                        )
                        
                        
                        (648,182
                        )Total
      other (expense)
                        
                        
                        
                        (184,050
                        )
                        
                        
                        (181,779
                        )
                        
                        
                        (392,471
                        )
                        
                        
                        (388,481
                        )Net
      income/(loss) from operations  before income tax
                        
                        
                        
                        2,589,437
                        
                        
                        
                        (2,293,859
                        )
                        
                        
                        2,313,013
                        
                        
                        
                        752,496Provision
      for/(benefit from) income tax
                        15Current
                        
                        
                        
                        -
                        
                        
                        
                        (318,878
                        )
                        
                        
                        (1,233
                        )
                        
                        
                        (148,257
                        )Deferred
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Total
      income tax (benefit)
                        
                        
                        
                        -
                        
                        
                        
                        (318,878
                        )
                        
                        
                        (1,233
                        )
                        
                        
                        (148,257
                        )Net
      income/(loss)
                        
                        
                        $
                        2,589,437
                        
                        
                        $
                        (1,974,981
                        )
                        
                        $
                        2,314,246
                        
                        
                        $
                        900,753Basic
      earnings/(loss) per share
                        
                        
                        $
                        0.06
                        
                        
                        $
                        (0.04
                        )
                        
                        $
                        0.05
                        
                        
                        $
                        0.02Basic
      weighted average shares outstanding
                        
                        
                        
                        46,562,955
                        
                        
                        
                        46,562,955
                        
                        
                        
                        46,562,955
                        
                        
                        
                        46,559,531Diluted
      earnings/(loss) per share
                        
                        
                        $
                        0.06
                        
                        
                        $
                        (0.04
                        )
                        
                        $
                        0.05
                        
                        
                        $
                        0.02Diluted
      weighted average shares outstanding
                        
                        
                        
                        46,562,955
                        
                        
                        
                        46,562,955
                        
                        
                        
                        46,562,955
                        
                        
                        
                        46,566,423The
      Components of comprehensive income/(loss):Net
      income/(loss)
                        
                        
                        $
                        2,589,437
                        
                        
                        $
                        (1,974,981
                        )
                        
                        $
                        2,314,246
                        
                        
                        $
                        900,753Foreign
      currency translation adjustment
                        
                        
                        
                        (11,086
                        )
                        
                        
                        677,905
                        
                        
                        
                        64,106
                        
                        
                        
                        750,424Comprehensive
      income/(loss)
                        
                        
                        $
                        2,578,351
                        
                        
                        $
                        (1,297,076
                        )
                        
                        $
                        2,378,352
                        
                        
                        $
                        1,651,177





The
accompanying notes are an integral part of these consolidated financial
statements.




4




China
Precision Steel, Inc. and Subsidiaries


Consolidated
Statements of Changes in Stockholders' Equity


For
the Year Ended June 30, 2009 and the Six Months Ended December 31,
2009




AccumulatedAdditional
                
                
                Other
                
                
                
                
                
                TotalOrdinary Shares
                
                
                Paid-in
                
                
                Comprehensive
                
                
                Retained
                
                
                Stockholders'Share
                
                
                Amount
                
                
                Capital
                
                
                Income
                
                
                Earnings
                
                
                EquityBalance
      at June 30, 2008
                
                
                46,472,953
                
                
                $
                46,473
                
                
                $
                75,372,488
                
                
                $
                9,295,658
                
                
                $
                35,591,349
                
                
                $
                120,305,968Transfer
      agent adjustment
                
                
                2
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Exercise
      of warrants
                
                
                90,000
                
                
                
                90
                
                
                
                269,895
                
                
                
                -
                
                
                
                -
                
                
                
                269,985Foreign
      currency translation  adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                435,847
                
                
                
                -
                
                
                
                435,847Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (408,338
                )
                
                
                (408,338
                )Balance
      at June 30, 2009
                
                
                46,562,955
                
                
                
                46,563
                
                
                
                75,642,383
                
                
                
                9,731,505
                
                
                
                35,183,011
                
                
                
                120,603,462Foreign
      currency translation adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                64,106
                
                
                
                -
                
                
                
                64,106Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,314,246
                
                
                
                2,314,246Balance
      at December 31, 2009 (unaudited)
                
                
                46,562,955
                
                
                $
                46,563
                
                
                $
                75,642,383
                
                
                $
                9,795,611
                
                
                $
                37,497,257
                
                
                $
                122,981,814


5




China
Precision Steel, Inc. and Subsidiaries


Consolidated
Statements of Cash Flows


For
the Six Months Ended December 31, 2009 and 2008


(Unaudited)




2009
                
                
                2008Cash
      flows from operating activitiesNet
      income
                
                $
                2,314,246
                
                
                $
                900,753Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDepreciation
      and amortization
                
                
                2,181,380
                
                
                
                1,825,544Allowance
      for bad and doubtful debts
                
                
                218,184
                
                
                
                3,829,462Inventory
      impairment
                
                
                42,534
                
                
                
                -Net
      changes in assets and liabilities:Accounts
      receivable, net
                
                
                7,189,783
                
                
                
                3,801,518Inventories
                
                
                (8,908,192
                )
                
                
                (461,094
                )Prepaid
      expenses
                
                
                (85,504
                )
                
                
                (50,382
                )Advances
      to suppliers
                
                
                (601,926
                )
                
                
                2,890,245Accounts
      payable and accrued expenses
                
                
                (801,406
                )
                
                
                (147,831
                )Advances
      from customers
                
                
                1,042,492
                
                
                
                (3,006,670
                )Other
      taxes payable
                
                
                (2,236,478
                )
                
                
                (426,823
                )Current
      income taxes
                
                
                197,520
                
                
                
                (491,584
                )Net
      cash provided by operating activities
                
                
                552,633
                
                
                
                8,663,138Cash
      flows from investing activitiesPurchase
      of property, plant and equipment including construction in
      progress
                
                
                (4,746,139
                )
                
                
                (12,954,497
                )Net
      cash (used in) investing activities
                
                
                (4,746,139
                )
                
                
                (12,954,497
                )Cash
      flows from financing activitiesExercise
      of common stock warrants
                
                
                -
                
                
                
                269,985Short-term
      loan proceeds
                
                
                3,735,169
                
                
                
                -Repayments
      of short-term loans
                
                
                (444,400
                )
                
                
                (87,690
                )Net
      cash provided by financing activities
                
                
                3,290,769
                
                
                
                182,295Effect
      of exchange rate
                
                
                5,438
                
                
                
                303,887Net
      (decrease) in cash
                
                
                (897,299
                )
                
                
                (3,805,177
                )Cash
      and cash equivalents, beginning of period
                
                
                13,649,587
                
                
                
                18,568,842Cash
      and cash equivalents, end of period
                
                $
                12,752,288
                
                
                $
                14,763,665





The
accompanying notes are an integral part of these consolidated financial
statements.


6




China
Precision Steel, Inc. and Subsidiaries


Notes
to the Consolidated Financial Statements


(Unaudited)





1.   Description
of Business




On
December 28, 2006, China Precision Steel, Inc. (the “Company” or “we”), under
our former name, OraLabs Holding Corp., issued 25,363,002 shares of common stock
in exchange for 100% of the registered capital of Partner Success Holdings
Limited (“PSHL”), a British Virgin Islands Business Company, pursuant to a Stock
Exchange Agreement, dated March 31, 2006. Subsequent to the closing of that
transaction, on December 28, 2006, the Company redeemed 3,629,350 shares of its
common stock in exchange for all of the common stock of OraLabs, Inc., a
wholly-owned operating subsidiary. The Company issued 100,000 shares of its
common stock to OraLabs, Inc. in exchange for $450,690, and received additional
cash payments in the aggregate amount of $108,107 in payment of an estimated
$558,797 tax liability to be incurred by the Company in connection with the
spinoff of OraLabs, Inc. and the supplemental payment received. The Company then
changed its name to China Precision Steel, Inc.




These
transactions were treated for financial reporting purposes as a
recapitalization, with prior OraLabs, Inc. operating activities reflected on the
statements of operations as income (loss) from discontinued operations. The
$558,797 estimated tax liability incurred in connection with the spinoff of
OraLabs, Inc. was treated as a transaction cost for financial reporting purposes
and was treated as a reduction in additional paid in capital to the extent of
the additional cash received which was also $558,797.





PSHL,
registered on April 30, 2002 in the Territory of the British Virgin Islands, had
registered capital of $50,000 as of December 31 and June 30, 2009. It has three
wholly-owned subsidiaries, Shanghai Chengtong Precision Strip Company Limited
(“Chengtong”), Shanghai Tuorong Precision Strip Company Limited (“Tuorong”), and
Blessford International Limited (“Blessford International”).





Chengtong
was registered on July 2, 2002 in Shanghai, the People’s Republic of China (the
“PRC”), with a registered capital of $3,220,000 and a defined period of
existence of 50 years from July 2, 2002 to July 1, 2052. Chengtong was
classified as a Sino-foreign joint venture enterprise with limited liability. On
August 22, 2005, the authorized registered capital of Chengtong was increased to
$15,220,000 and on December 11, 2007, it was further increased to $42,440,000.
Pursuant to document issued by the District Council to Xuhang Town Council on
June 28, 2004, the equity transfers from China Chengtong Metal Group Limited and
Eastreal Holdings Company Limited to PSHL were approved and the transformation
of Chengtong from a Sino-foreign joint investment enterprise to a wholly foreign
owned enterprise (WFOE) was granted.





In the
year ended June 30, 2007, we added three indirect subsidiaries to our corporate
structure. On April 9, 2007, we purchased Tuorong through PSHL. The sole
activity of Tuorong is the ownership of land use rights with respect to
facilities utilized by Chengtong. On April 10, 2007, PSHL purchased the entire
equity interest in Blessford International, a British Virgin Islands company,
for a cash consideration of $100,000. Blessford International does not conduct
any business, but it owns a single subsidiary, Shanghai Blessford Alloy Company
Limited (“Shanghai Blessford”), that is a wholly-foreign owned enterprise with
limited liability. Shanghai Blessford was registered on February 24, 2006 in
Shanghai, the PRC, with a registered capital of $12,000,000 and a defined period
of existence of 50 years from February 24, 2006 to February 23, 2056. On May 27,
2008, the authorized registered capital was increased to $22,000,000. We intend
to hold Blessford International as a shell subsidiary. As used herein, the
“Group” refers to the Company, PSHL, Chengtong, Tuorong, Blessford International
and Shanghai Blessford on a consolidated basis.





The
Company’s principal activities are conducted through its two operating
subsidiaries, Chengtong and Shanghai Blessford. Chengtong and Shanghai Blessford
are niche precision steel processing companies principally engaged in the
manufacture and sale of cold-rolled and hot-rolled precision steel products and
plates for downstream applications in the automobile industry (components and
spare parts), kitchen tools and functional parts of electrical appliances. Raw
materials, hot-rolled de-scaled (pickled) steel coils, will go through certain
cold reduction processing procedures to give steel rolls and plates in different
cuts and thickness for deliveries in accordance with customers’ specifications.
Specialty precision steel offers specific control of thickness, shape, width,
surface finish and other special quality features that compliment the emerging
need for highly engineered end use applications. Precision steel pertains to the
precision of measurements and tolerances of the above factors, especially
thickness tolerance.





7




2.    
Basis of Preparation of Financial Statements




The
financial statements have been prepared in order to present the consolidated
financial position and consolidated results of operations in accordance with
accounting principles generally accepted in the United States of America (“US
GAAP”) and are expressed in terms of US dollars (“USD”) (see Note 3 “Foreign
Currencies” below).





The
accompanying unaudited consolidated financial statements as of December 31 and
June 30, 2009 and for the periods ended December 31, 2009 and 2008 have been
prepared in accordance with US GAAP and with the instructions to Form 10-Q and
Regulation S-X applicable to smaller reporting companies. In the opinion of
management, these unaudited consolidated financial statements include all
adjustments considered necessary to make the financial statements not
misleading. The results of operations for the six months ended December 31, 2009
are not necessarily indicative of the results to be expected for the full year
ending June 30, 2010.




3.  Summary of Significant Accounting
Policies





The
following is a summary of significant accounting policies:





Accounting Standards Codifications -In June 2009, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Codifications (“ASC”) 105 “Generally Accepted
Accounting Principles”. This section designates ASC as the source of
authoritative U.S. GAAP.  ASC 105 is effective for interim or fiscal
periods ending after September 15, 2009.  We have used the new
guidelines and numbering system when referring to GAAP in our quarter ended
December 31, 2009. The adoption of ASC 105 did not have a material impact
on our financial position, results of operation or cash flows.





Cash and Cash Equivalents -TheCompany
considers all highly liquid debt instruments purchased with a maturity period of
three months or less to be cash equivalents. The carrying amounts reported in
the accompanying consolidated balance sheets for cash and cash equivalents
approximate their fair value.





Accounts Receivable – Credit
periods vary substantially across industries, segments, types and size of
companies in the PRC where we operate our business. Because of the niche
products that we process, our customers are usually also niche players in their
own respective segment, who then sell their products to end product
manufacturers. The business cycle is relatively long, as well as the credit
periods. The Company offers credit to its customers for periods of 60 days, 90
days, 120 days and 180 days. We generally offer the longer credit terms to
longstanding recurring customers with good payment histories and sizable
operations.  Accounts receivable are recorded at the time revenue is
recognized and is stated net of allowance for doubtful accounts.




Allowance for Doubtful Accounts -The Company maintains an allowance for doubtful accounts based on its
assessment of the collectability of the accounts receivable. Management
determines the collectability of outstanding accounts by maintaining regular
communication with such customers and obtaining confirmation of their intent to
fulfill their obligations to the Company. Management also considers past
collection experience, our relationship with customers and the impact of current
economic conditions on our industry and market. However, we note that the
continuation or intensification of the current global economic crisis may have
negative consequences on the business operations of our customers and adversely
impact their ability to meet their financial obligations.  To reserve
for potentially uncollectible accounts receivable, management has made a 50%
provision for all accounts receivable that are over 180 days past due and full
provision for all accounts receivable over 1 year past due.  From time
to time, we will review these credit periods, along with our collection
experience and the other factors discussed above, to evaluate the adequacy of
our allowance for doubtful accounts, and to make changes to the allowance, if
necessary.  If our actual collection experience or other conditions
change, revisions to our allowances may be required, including a further
provision which could adversely affect our operating income, or write back of
provision when estimated uncollectible accounts are actually
collected.  At December 31 and June 30, 2009, the Company had
$1,006,973 and $830,127 of allowances for doubtful accounts,
respectively.





Bad debts
are written off for past due balances over two years or when it becomes known to
management that such amount is uncollectible.  Provision for bad debts
recognized for the three months ended December 31, 2009 and 2008 were $101,067
and $3,829,462, respectively. The current period charge reflects a provision for
doubtful accounts based on our policy described above. Our management is
continually working to ensure that any known uncollectible amounts are
immediately written off as bad debt against outstanding balances.




Inventories-Inventories are stated
at the lower of cost or market. Cost is determined using the weighted average
method. Market value represents the estimated selling price in the ordinary
course of business less the estimated costs necessary to complete the
sale.


8




Cost of
inventories comprises all costs of purchases, costs of conversion and other
costs incurred in bringing the inventories to their present location and
condition. Costs of conversion of inventories include fixed and variable
production overheads, taking into account the stage of completion.




IntangibleAssetsandAmortization– Intangible assets
represent land use rights in the PRC acquired by the Company and are stated at
cost less amortization. Amortization of land-use rights is calculated on the
straight-line method, based on the period over which the right is granted by the
relevant authorities in the PRC.




AdvancestoSuppliers-In order to insure a
steady supply of raw materials, the Company is required from time to time to
make cash advances to its suppliers when placing purchase orders, for a
guaranteed minimum delivery quantity at future times when raw materials are
required. The advance is seen as a deposit to suppliers and guarantees our
access to raw materials during periods of shortages and market volatility, and
is therefore considered an important component of our
operations.  Contracted raw materials are priced at prevailing market
rates agreed by us with the suppliers prior to each delivery date. Advances to
suppliers are shown net of an allowance which represents potentially
unrecoverable cash advances at each balance sheet date. Such allowances are
based on an analysis of past raw materials receipt experience and the
credibility of each supplier according to its size and background. In general,
we don’t provide allowances against advances paid to those PRC state-owned
companies as there is minimal risk of default. Our allowances for advances to
suppliers are subjective critical estimates that have a direct impact on
reported net earnings, and are reviewed quarterly at a minimum to reflect
changes from our historic raw materials receipt experience and to ensure the
appropriateness of the allowance in light of the circumstances present at the
time of the review.  It is reasonably possible that the Company’s
estimate of the allowance will change, such as in the case when the Company
becomes aware of a supplier’s inability to deliver the contracted raw materials
or meet its financial obligations. As of December 31 and June 30, 2009, the
Company had allowances of advances to suppliers of $1,632,442 and $1,631,557,
respectively.




Allowances
for advances to suppliers are written off when all efforts to collect the
materials or recover the cash advances have been unsuccessful, or when it has
become known to the management that there is no intention by the suppliers to
deliver the contracted raw materials or refund the cash advances. To date we
have not written off any advances to suppliers.




Property, Plantand Equipment-Property, plant and
equipment are stated at cost less accumulated depreciation. The cost of an asset
comprises its purchase price and any directly attributable costs of bringing the
asset to its present working condition and location for its intended
use.




Depreciation
is computed on a straight-line basis over the estimated useful lives of the
related assets for financial reporting purposes. The estimated useful lives for
significant property, plant and equipment are as follows:





Plant
      and machinery
              10
      yearsBuildings
              10
      yearsMotor
      vehicles
              5
      yearsOffice
      equipment
              5
      to 10 years




Repairs
and maintenance costs are normally charged to the statement of operations in the
year in which they are incurred. In situations where it can be clearly
demonstrated that the expenditure has resulted in an increase in the future
economic benefits expected to be obtained from the use of the asset, the
expenditure is capitalized as an additional cost of the asset.




Impairment ofLong-LivedAssets-The Company accounts for
impairment of property, plant and equipment and amortizable intangible assets in
accordance with ASC 360, which requires the Company to evaluate a long-lived
asset for recoverability when there is an event or circumstance that indicates
the carrying value of the asset may not be recoverable. An impairment loss is
recognized when the carrying amount of a long-lived asset or asset group is not
recoverable (when carrying amount exceeds the gross, undiscounted cash flows
from use and disposition) and is measured as the excess of the carrying amount
over the asset’s (or asset group’s) fair value.




CapitalizedInterest-The Company capitalizes
interest cost on borrowings incurred during the new construction or upgrade of
qualified assets. Capitalized interest is added to the cost of the underlying
assets and is amortized over the useful lives of the assets. During the six
months ended December 31, 2009 and 2008, the Company capitalized $260,690
and nil, respectively, of interest to construction-in-progress.


9




Construction-in-Progress- Plant and production
lines currently under development are accounted for as construction-in-progress.
Construction-in-progress is recorded at acquisition cost, including land use
rights cost, development expenditure, professional fees and the interest
expenses capitalized during the course of construction for the purpose of
financing the project. Upon completion and readiness for use of the project, the
cost of construction-in-progress is to be transferred to property, plant and
equipment.




ContingentLiabilitiesandContingentAssets -A contingent liability
is a possible obligation that arises from past events and whose existence will
only be confirmed by the occurrence or non-occurrence of one or more uncertain
future events not wholly within the control of the Company. It can also be a
present obligation arising from past events that is not recognized because it is
not probable that outflow of economic resources will be required or the amount
of obligation cannot be measured reliably.




A
contingent liability is not recognized but is disclosed in the notes to the
financial statements. When a change in the probability of an outflow occurs so
that outflow is probable, the contingency is then recognized as a
provision.




A
contingent asset is a possible asset that arises from past events and whose
existence will be confirmed only by the occurrence or non-occurrence of one or
more uncertain events not wholly within the control of the Company.




Contingent
assets are not recognized but are disclosed in the notes to the financial
statements when an inflow of economic benefits is probable. When inflow is
virtually certain, an asset is recognized.




AdvancesfromCustomers-Revenue from the sale of
goods or services is recognized at the time that goods are delivered or services
are rendered. Receipts in advance for goods to be delivered or services to be
rendered in a subsequent period are carried forward as deferred
revenue.




RevenueRecognition-Revenue from the sale of
goods and services is recognized on the transfer of risks and rewards of
ownership, which generally coincides with the time when the goods are delivered
to customers and the title has passed and services have been rendered. Revenue
is reported net of all VAT taxes. Other income is recognized when it is
earned.




FunctionalCurrencyandTranslatingFinancialStatements– The Company’s
principal country of operations is the PRC. Our functional currency is Chinese
Renminbi; however, the accompanying consolidated financial statements have been
expressed in United States Dollars (“USD”). The consolidated balance sheets have
been translated into USD at the exchange rates prevailing at each balance sheet
date. The consolidated statements of operations and cash flows have been
translated using the weighted-average exchange rates prevailing during the
periods of each statement. The registered equity capital denominated in the
functional currency is translated at the historical rate of exchange at the time
of capital contribution. All translation adjustments resulting from the
translation of the financial statements into the reporting currency are dealt
with as other comprehensive income in stockholders’ equity.





AccumulatedOtherComprehensiveIncome– Accumulated other
comprehensive income represents the change in equity of the Company during the
periods presented from foreign currency translation adjustments.




Taxation-Taxation on overseas profits
has been calculated on the estimated assessable profits for the year at the
rates of taxation prevailing in the country in which the Company
operates.




UnitedStates




China
Precision Steel, Inc. is subject to United States federal income tax at
graduated rates up to 34%. No provision for current income taxes in the United
States has been made as China Precision Steel, Inc. had no taxable income for
the six months ended December 31, 2009 and 2008.




BVI




PSHL and
Blessford International were incorporated in the British Virgin Islands and,
under the current laws of the British Virgin Islands, are not subject to income
taxes.




10





PRC




Provision
for the PRC enterprise income tax is calculated at the prevailing rate based on
the estimated assessable profits less available tax relief for losses brought
forward.The Company does not
accrue United States’ taxes on unremitted earnings from foreign operations as it
is the Company’s intention to invest these earnings in the foreign operations
indefinitely.




Enterprise
income tax




On March
16, 2007, the National People’s Congress of China passed The Enterprise Income
Tax Law (the “New EIT Law”), and on December 6, 2007, the State Council of China
passed the Implementing Rules for the EIT Law (“Implementing Rules”) which took
effect on January 1, 2008. The New EIT Law and Implementing Rules impose a
unified enterprise income tax (“EIT”) of 25% on all domestic-invested
enterprises and foreign invested entities (“FIEs”), unless they qualify under
certain limited exceptions. Therefore, nearly all FIEs are subject to the new
tax rate alongside other domestic businesses rather than benefiting from the old
FIE tax laws, and its associated preferential tax treatments, beginning January
1, 2008.




Despite
these changes, the EIT Law gives the FIEs established before March 16, 2007
(“Old FIEs”) a five-year grandfather period during which they can continue to
enjoy their existing preferential tax treatments, commonly referred to as “tax
holidays”, until these holidays expire. As Old FIEs, Chengtong’s tax holiday of
a 50% reduction in the 25% statutory rates had expired on December 31, 2008 and
is currently subject to the 25% statutory rates since January 1, 2009; Shanghai
Blessford’s full tax exemption from the enterprise income tax has expired on
December 31, 2009, and is adjusted to a 50% reduction for the three subsequent
years expiring on December 31, 2012. Subsequent to the expiry of their tax
holidays, Chengtong and Shanghai Blessford will be subject to enterprise income
taxes at 25% or the then prevailing statutory rates. The discontinuation of any
such special or preferential tax treatment or other incentives would have an
adverse effect on any organization’s business, fiscal condition and current
operations in the PRC.




While
current income tax in our consolidated group accounts is provided in accordance
with US GAAP and based on income recognized for our financial year ending June
30, actual income tax payments are based on the assessment of taxable income by
local tax authority in the PRC where our operating subsidiaries are located and
our tax year ends December 31. In the case where the income tax assessed by the
local tax authority is different from the amount we have provided in our
consolidated group accounts, there will be an impact on our future operating
results.




Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets, including tax loss and credit carry forwards, and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Deferred income tax expense represents the change during the period in the
deferred tax assets and deferred tax liabilities. The components of the deferred
tax assets and liabilities are individually classified as current and
non-current based on their characteristics. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be
realized.




Effective
January 1, 2007, the Company adopted the provisions of the ASC Topic No. 740
“Accounting for Income Taxes” and “Accounting for Uncertainty in Income Taxes –
an interpretation of FASB Statement No. 109” (“ASC 740”). ASC 740 requires the
recognition of tax benefits or expenses based on the estimated future tax
effects of temporary differences between the financial statement and tax bases
of its assets and liabilities. Deferred tax assets and liabilities primarily
relate to tax basis differences on unrealized gains on corporate equities,
stock-based compensation, amortization periods of certain intangible assets and
differences between the financial statement and tax bases of assets
acquired.




The
Company recognizes that virtually all tax positions in the PRC are not free of
some degree of uncertainty due to tax law and policy changes by the State.
However, the Company cannot reasonably quantify political risk factors and thus
must depend on guidance issued by current State officials.





Based on
all known facts and circumstances and current tax law, the Company believes that
the total amount of unrecognized tax benefits as of December 31, 2009 is not
material to its results of operations, financial condition or cash flows. The
Company also believes that the total amount of unrecognized tax benefits as of
December 31, 2009, if recognized, would not have a material effect on its
effective tax rate. The Company further believes that there are no tax positions
for which it is reasonably possible, based on current Chinese tax law and
policy, that the unrecognized tax benefits will significantly increase or
decrease over the next 12 months producing, individually or in the aggregate, a
material effect on the Company’s results of operations, financial condition or
cash flows.


11




Value
added tax




The
Provisional Regulations of the People’s Republic of China Concerning Value Added
Tax promulgated by the State Council came into effect on January 1, 1994. Under
these regulations and the Implementing Rules of the Provisional Regulations of
the People’s Republic of China Concerning Value Added Tax, value added tax is
imposed on goods sold in or imported into the PRC and on processing, repair and
replacement services provided within the PRC.





Value
added tax payable in the PRC is charged on an aggregated basis at a rate of 13%
or 17% (depending on the type of goods involved) on the full price collected for
the goods sold or, in the case of taxable services provided, at a rate of 17% on
the charges for the taxable services provided, but excluding, in respect of both
goods and services, any amount paid in respect of value added tax included in
the price or charges, and less any deductible value added tax already paid by
the taxpayer on purchases of goods and services in the same financial
year.





The
revised People’s Republic of China Tentative Regulations on Value Added Tax
became effective on January 1, 2009 with the issuance of Order of the State
Council No. 538. With the implementation of this VAT reform, input VAT
associated with the purchase of fixed assets is now deductible against output
VAT.




Retirement BenefitCosts- According to the PRC
pension regulations, Chengtong and Shanghai Blessford contribute to a defined
contribution retirement scheme organized by the municipal government in the
province in which Chengtong and Shanghai Blessford were registered and all
qualified employees are eligible to participate in the scheme. Contributions to
the scheme are calculated at 23.5% of the employees’ salaries above a fixed
threshold amount and the employees contribute 2% to 8%, while Chengtong and
Shanghai Blessford contribute the balance contribution of 15.5%% to 21.5%. The
Group has no other material obligation for the payment of retirement benefits
beyond the annual contributions under this scheme.




For the
six months ended December 31, 2009 and 2008, the Company’s pension cost charged
to the statements of operations under the plan amounted to $80,263 and $160,885, respectively, all of
which have been paid to the National Social Security Fund.




FairValueofFinancialInstruments-The carrying amounts of
certain financial instruments, including cash, accounts receivable, other
receivables, accounts payable, accrued expenses, and other payables approximate
their fair values as at December 31 and June 30, 2009 because of the relatively
short-term maturity of these instruments.  For short-term loans, the
carrying amount is assumed to approximate fair value based on the current rates
at which the Group could borrow funds with similar remaining
maturities.




UseofEstimates -The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.




4.  Concentrations
of Business and Credit Risk




The
Company’s list of customers whose purchases from us were 10% or more of total
sales during the six months ended December 31, 2009 and 2008 is as
follows:





Customers
                  
                  2009
                  
                  
                  % to
                    sales
                  
                  
                  2008
                  
                  
                  % to
                    salesShanghai
      Changshuo Steel Company, Ltd
                  
                  
                  8,473,414
                  
                  
                  
                  19
                  
                  
                  
                  4,555,411
                  
                  
                  
                  11Shanghai
      Shengdejia Metal Products Co., Ltd
                  
                  
                  6,465,502
                  
                  
                  
                  15
                  
                  
                  
                  -
                  *
                  
                  
                  -
                  *Salzgitter
      Mannesmann International GMBH
                  
                  
                  -
                  *
                  
                  
                  -
                  *
                  
                  
                  13,651,071
                  
                  
                  
                  32




12




The
Company’s list of suppliers whose sales to us exceeded 10% of our total
purchases during the six months ended December 31, 2009 and 2008 is as
follows:




Suppliers
                    
                    2009
                    
                    
                    % to
                      purchases
                    
                    
                    2008
                    
                    
                    % to
                      purchasesDachang
      Huizu Baosheng Steel Products Co., Ltd.
                    
                    
                    9,952,219
                    
                    
                    
                    23
                    
                    
                    
                    -
                    *
                    
                    
                    -
                    *Guangzhou
      Zhujiang Steel Co., Ltd.
                    
                    
                    7,973,946
                    
                    
                    
                    19
                    
                    
                    
                    -
                    *
                    
                    
                    -
                    *Wuxi
      Hangda Trading Co., Ltd.
                    
                    
                    7,363,868
                    
                    
                    
                    17
                    
                    
                    
                    -
                    *
                    
                    
                    -
                    *BaoSteel
      Steel Products Trading Co. Ltd.
                    
                    
                    -
                    *
                    
                    
                    -
                    *
                    
                    
                    10,756,193
                    
                    
                    
                    35Shanghai
      Pinyun Steel Co., Ltd.
                    
                    
                    -
                    *
                    
                    
                    -
                    *
                    
                    
                    6,877,828
                    
                    
                    
                    22





Our
management continues to take appropriate actions to perform ongoing business and
credit reviews of our customers to reduce our exposure to new and recurring
customers who have been deemed to pose a high credit risk to our business based
on their commercial credit reports, our collection history, and our perception
of the risk posed by their geographic location. We have halted all our direct
sales to customers located in the Philippines as we consider the associated
credit risk to be relatively high. Based on publicly available reports, such as
that issued by A.M. Best, there is a high risk that financial volatility may
erupt in that country due to inadequate reporting standards, a weak banking
system or asset markets and/or poor regulatory structure. We expect to resume
such exports when conditions improve.




5.  Accounts
Receivable




The
Company provides credit in the normal course of business. The Company performs
ongoing credit evaluations of its domestic and international customers and
clients and maintains allowances for bad and doubtful accounts based on factors
surrounding the credit risk of specific customers and clients, historical
trends, and other information. Trade accounts receivable, net totaled
$23,524,856 and $25,140,834 as of December 31 and June 30, 2009,
respectively.




From time
to time, accounts receivable are reviewed for changes from the historic
collection experience to ensure the appropriateness of the allowances. These
estimates had been relatively accurate in the past and there was no need to
revise such estimates. However, we will review such estimates more frequently
when needed, and make revisions if necessary. The continuation or
intensification of the current global economic crisis and turmoil in the global
financial markets may have negative consequences for the business operations of
our customers and adversely impact their ability to meet their obligations to
us. A significant change in our collection experience, deterioration in the
aging of receivables and collection difficulties could require that we increase
our estimate of the allowance for doubtful accounts. Any such additional bad
debt charges could materially and adversely affect our future operating
results.




6.  Inventories





The
Company was required under GAAP to write down the value of its inventory to its
net realizable value (average selling price less reasonable costs to convert the
inventory into completed form) in the amount of $42,529 for the six months ended
December 31, 2009.




As of
December 31 and June 30, 2009, inventories consisted of the
following:





At cost:
                    
                    December 31,
                      2009
                    
                    
                    June 30,
                      2009Raw
      materials
                    
                    $
                    16,250,018
                    
                    
                    $
                    8,846,663Work
      in progress
                    
                    
                    4,556,219
                    
                    
                    
                    2,818,832Finished
      goods
                    
                    
                    1,697,662
                    
                    
                    
                    2,191,341Consumable
      items
                    
                    
                    2,688,166
                    
                    
                    
                    2,418,23425,192,065
                    
                    
                    
                    16,275,070Less:
      impairment
                    
                    
                    (42,529
                    )
                    
                    
                    -$
                    25,149,536
                    
                    
                    $
                    16,275,070




Costs of
finished goods include direct labor, direct materials, and production overhead
before the goods are ready for sale.





Consumable
items represent parts used in our cold rolling mills and other equipment that
need to be replaced from time to time when necessary to ensure optimal operating
results, such as bearings and rollers.





Inventories
amounting to $7,814,015 were pledged for short-term loans totaling $25,791,988
as of December 31, 2009.




13





7.  Advances
to Suppliers




Cash
advances are shown net of allowances of $1,632,442 and $1,631,557 as of December
31 and June 30, 2009, respectively.




The
majority of our advances to suppliers greater than 180 days as of December 31,
2009 is attributable to our advances to a single supplier, a subsidiary of a
state-owned company in the PRC. We believe that advances paid to state-owned
companies are ultimately collectible because they are backed by the full faith
and credit of the PRC government. As such, we generally do not provide
allowances against such advances.




8.  Property,
Plant and Equipment





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





December31,
                      2009
                    
                    
                    June 30,
                      2009Plant
      and machinery
                    
                    $
                    61,505,494
                    
                    
                    $
                    33,331,681Buildings
                    
                    
                    21,818,038
                    
                    
                    
                    21,806,219Motor
      vehicles
                    
                    
                    562,186
                    
                    
                    
                    534,652Office
      equipment
                    
                    
                    426,747
                    
                    
                    
                    404,69584,312,465
                    
                    
                    
                    56,077,247Less:
      Accumulated depreciation
                    
                    
                    (11,431,624
                    )
                    
                    
                    (9,264,763
                    )$
                    72,880,841
                    
                    
                    $
                    46,812,484




Depreciation
expense related to manufacturing is included as a component of cost of goods
sold. During the three and six months ended December 31, 2009, depreciation
totaling $662,517 and $1,396,252, respectively, was included as a component of
cost of goods sold (2008: $806,621and $1,526,548, respectively).




Plant and
machinery and buildings amounting to $42,708,827 (June 30, 2009: $55,137,900)
were pledged for short-term loans totaling $25,791,988.




9.  Construction-In-Progress




As of
December
31 and June 30, 2009, construction-in-progress consisted of the following:





December31,
                      2009
                    
                    
                    June 30,
                      2009Construction
      costs
                    
                    $
                    5,656,934
                    
                    
                    $
                    22,245,173




Construction-in-progress
represents construction and installations of annealing furnaces and other cold
rolling related equipment.




10.  Intangible
Assets




Land use
right amounting to $1,852,015 (June 30, 2009: $1,861,093) were pledged for
short-term loans totaling $25,791,988.




The
Company acquired land use rights in August 2004 and December 2006 that both
expire in December 2056. The land use rights are amortized over a fifty-year
term. An amortization amount of approximately $39,000 is to be recorded each
year for the remaining lease period.




Amortizable
intangible assets of the Company are reviewed when there are triggering events
to determine whether their carrying value has become impaired, in conformity
with ASC 360. The Company also re-evaluates the periods of amortization to
determine whether subsequent events and circumstances warrant revised estimates
of useful lives.





14




11.  Short-Term
Loans





Short-term
loans consisted of the following:





December31,
                    2009
                  
                  
                  June 30,
                    2009Bank
      loan agreement dated July 7, 2009, due July 31, 2010 with an interest rate
      of the Singapore Interbank Offered Rate (“SIBOR”) plus 3% (3.10% at
      December 31, 2009) (Note 8)
                  
                  
                  5,300,000
                  
                  
                  
                  5,300,000Bank
      loan agreement dated July 7, 2009, due July 31, 2010 with an interest rate
      at 115% of the standard market rate set by the People’s Bank of China for
      Renminbi loans (6.11% at December 31, 2009) (Note 8)
                  
                  
                  2,475,290
                  
                  
                  
                  2,915,238Bank
      loan agreement dated July 7, 2009, due July 31, 2010 with an interest rate
      at 115% of the standard market rate set by the People’s Bank of China for
      Renminbi loans (6.11% at December 31, 2009) (Note 6 and 8)
                  
                  
                  18,016,698
                  
                  
                  
                  14,273,793$
                  25,791,988
                  
                  
                  $
                  22,489,031




The above
bank loans outstanding as at December 31, 2009 carry an interest rate of 1.15
times of the standard market rate set by the People's Bank of China for Renminbi
loans and at SIBOR plus 3% for USD loans, due on July 31, 2010, and are secured
by inventories, land use rights, buildings and plant and machinery, and
guaranteed by PSHL and our Chairman and CEO, Mr. Wo Hing Li. In addition,
pursuant to a bank loan agreement entered into between the Company and
Raiffeisen Zentralbank Österreich AG ("RZB"), Mr. Li undertakes to maintain a
shareholding percentage in the Company of not less than 33.4% unless otherwise
agreed to with RZB.





The
weighted-average interest rate on short-term loans as of December 31 and June
30, 2009 was 5.49% and 5.52%, respectively.





12. Advances from
Customers





Advances
from customers represent advance cash receipts from new customers and for which
goods have not been delivered or services have not been rendered as of the
balance sheets dates. Advances from customers for goods to be delivered or
services to be rendered in the subsequent period are carried forward as deferred
revenue.





13.  Equity





Pursuant
to Section 5.1 of the Stock Purchase Agreement, the Company agreed to reserve
for issuance to investors in the private placement an aggregate of 2,000,000
shares of Common Stock if the Company’s net income for the fiscal year ended
June 30, 2007 was less than US$10.4 million, as set forth in the Company’s
audited financial statements as filed with the SEC in the Company’s Annual
Report on Form 10-K for that fiscal year. As the Company’s net income as set
forth in its audited financial statements for the year ended June 30, 2007 was
less than US$10.4 million, the Company was required to issue the 2,000,000
shares of Common Stock to such investors. Such issuance was effected on October
15, 2007. No additional consideration was received by the Company in connection
with this issuance of shares of Common Stock.





In
conjunction with the audit of the Group’s financial statements for the year
ended June 30, 2007, certain post-closing adjustments were made for Tuorong. In
light of such adjustments and consistent with the purposes and intentions of the
Debt Reduction Agreement, dated February 13, 2007, as amended on February 20,
2007, it was determined that 771,060 shares of the Company’s Common Stock issued
to directors pursuant to the Debt Reduction Agreement would be required to be
cancelled in order to eliminate the $2,590,763 reflected on the June 30, 2007
audited financial statements as amounts due from directors. Such cancellation
was effected on November 8, 2007.





Pursuant
to the Subscription Agreement dated November 1, 2007 (the “Subscription
Agreement”), on November 6, 2007, the Company agreed to issue and sell in a
registered direct offering (the “Offering”) an aggregate of 7,100,000 shares of
its common stock at a price of $6.75 per share (the “Purchase Price”) and an
aggregate of 1,420,000 warrants to purchase shares of its Common Stock
(“Warrants” and, together with the Common Stock, the “Securities”). The Warrants
have an exercise price of $8.45 per share. The Warrants were not be exercised
prior to May 6, 2008. The Securities are registered under the Securities Act of
1933, as amended (the “Act”), pursuant to the Company’s existing effective shelf
Registration Statement on Form S-3. In connection with the offer and sale of the
Securities, the Company filed on November 1, 2007, a Registration Statement on
Form S-3 pursuant to Rule 462(b) promulgated under the Act to register an
additional $10 million of its securities relating to its shelf Registration
Statement.


15





The
Company closed the Offering on November 6, 2007 (the “Closing Date”). The net
proceeds of the offering were approximately $44 million, after deducting
underwriting commissions and discounts and other fees and expenses relating to
the offering. The warrants were valued at $5.3 million and the net proceeds were
recorded to additional paid-in capital. The intended usage of the net proceeds
was for repayment of certain bank debt, capital expenditure, and general
corporate purposes. During the year ended June 30, 2008, long-term bank loans of
$13,042,159 were paid off, and a progress payment of $7,016,729 was made in
relation to the construction of the third cold rolling mill. During the year
ended June 30, 2009, we invested an additional $13,423,016 in construction in
progress and property, production plants and equipment in relation to the third
cold rolling mill and expansion of the Shanghai Blessford production
facilities.





On the
Closing Date, pursuant to a Placement Agency Agreement entered into between the
Company and Roth Capital Partners LLC on October 31, 2007, Roth Capital received
an amount in cash equal to 7.0% of the gross proceeds of the Offering and
warrants to purchase an amount of Common Stock equal to 3.0% of the total number
of shares of Common Stock sold in the Offering (the “Placement Warrants”), or
225,600 shares of Common Stock valued at $887,504, and this amount was recorded
as syndication fees offsetting additional paid-in capital. Such Placement
Warrants have an exercise price per share of 120% of the closing price per share
of the Company’s Common Stock on the Closing Date, or $7.38, and were not
exercisable prior to May 6, 2008. Thereafter, the Placement Warrants are
exercisable at any time until the third anniversary of the date of
issue.




14.  Stock
Warrants





In
connection with a Stock Purchase Agreement dated February 16, 2007 for the
Company’s private placement offerings (the “Private Placement”), on February 22,
2007, the Company issued warrants to the placement agents to purchase an
aggregate of 1,300,059 shares of Common Stock as partial compensation for
services rendered in connection with the Private Placement valued at $2,770,349.
The value of the warrants was considered syndication fees and was recorded to
additional paid-in capital. 851,667 of these warrants have been exercised during
the year ended June 30, 2008.





On
February 22, 2007, the Company issued warrants to purchase up to 100,000 shares
of Common Stock to the Company's then investor relations consultants valued at
$447,993. The value of these was considered syndication fees in association with
the Private Placement and was recorded to additional paid-in
capital.





On
November 6, 2007, in connection with the Subscription Agreement, the Company
issued to certain institutional accredited investors warrants to purchase
1,420,000 shares of Common Stock valued at $5,374,748, and Roth Capital
Partners, LLC, as placement agent, received warrants to purchase 225,600 shares
of Common Stock valued at $887,504. These amounts were recorded as syndication
fees offsetting additional paid-in capital.




Information
with respect to stock warrants outstanding is as follows:





Exercise
                        Price
                      
                      
                      Outstanding
                        June 30, 2009
                      
                      
                      Granted
                      
                      
                      Expired or
                        Exercised
                      
                      
                      Outstanding
                        December 31,
                        2009
                      
                      Expiration Date$
                      3.60
                      
                      
                      
                      100,000
                      
                      
                      
                      -0-
                      
                      
                      
                      -0-
                      
                      
                      
                      100,000
                      
                      February
      22, 2010$
                      7.38
                      
                      
                      
                      225,600
                      
                      
                      
                      -0-
                      
                      
                      
                      -0-
                      
                      
                      
                      225,600
                      
                      November
      5, 2010$
                      3.00
                      
                      
                      
                      358,392
                      
                      
                      
                      -0-
                      
                      
                      
                      -0-
                      
                      
                      
                      358,392
                      
                      February
      22, 2011$
                      8.45
                      
                      
                      
                      1,420,000
                      
                      
                      
                      -0-
                      
                      
                      
                      -0-
                      
                      
                      
                      1,420,000
                      
                      May
      5,
2013





15.  Income
Taxes





For PRC
enterprise income tax reporting purposes, the Company is required to compute a
10% salvage value when computing depreciation expense and add back the allowance
for doubtful debts. For financial reporting purposes, the Company does not take
into account a 10% salvage value when computing depreciation
expenses.




16




The tax
holiday resulted in tax savings as follows:





Six months ended
                    December 31,2009
                  
                  
                  2008Tax
      savings
                  
                  $
                  675,840
                  
                  
                  $
                  411,977Benefit
      per shareBasic
                  
                  $
                  0.01
                  
                  
                  $
                  0.01Diluted
                  
                  $
                  0.01
                  
                  
                  $
                  0.01




Significant
components of the Group’s deferred tax assets as of December 31 and June 30,
2009 are as follows:





Deferred tax assets:
                    
                    December 31,
                      2009
                    
                    
                    June 30,
                      2009Net
      operating loss carried forward
                    
                    $
                    1,911,287
                    
                    
                    $
                    1,823,487Temporary
      differences resulting from allowances
                    
                    
                    1,905,901
                    
                    
                    
                    1,850,921Total
      deferred income tax assets
                    
                    $
                    3,817,188
                    
                    
                    $
                    3,674,408Valuation
      allowance
                    
                    
                    (3,817,188
                    )
                    
                    
                    (3,674,408
                    )$
                    —
                    
                    
                    $
                    —




The
Company has not recognized a deferred tax liability in respect of the
undistributed earnings of its foreign subsidiaries of approximately $14,636,382
as of December 31, 2009 because the Company currently plans to reinvest those
unremitted earnings such that the remittance of the undistributed earnings of
those foreign subsidiaries to the Company will be postponed indefinitely. A
deferred tax liability will be recognized when the Company no longer plans to
permanently reinvest undistributed earnings.





A
reconciliation of the provision for income taxes with amounts determined by the
U.S. federal income tax rate to income tax expense per books is as
follows.




Six months ended December 31,2009
                    
                    
                    2008Computed
      tax (benefit)/expense at the federal statutory rate of 34%
                    
                    $
                    786,843
                    
                    
                    $
                    255,849Adjustments
      for PRC entities taxed at different rates
                    
                    
                    (252,963
                    )
                    
                    
                    (106,772
                    )Valuation
      allowance
                    
                    
                    142,289
                    
                    
                    
                    (32,867
                    )Income
      not subject to tax
                    
                    
                    (329
                    )
                    
                    
                    147,510Overprovision
      in prior year
                    
                    
                    (1,233
                    )
                    
                    
                    -Benefit
      of tax holiday
                    
                    
                    (675,840
                    )
                    
                    
                    (411,977
                    )Income
      tax (benefit) per books
                    
                    $
                    (1,233
                    )
                    
                    $
                    (148,257
                    )





Income
tax expense consists of:




Six months ended December 31,2009
                    
                    
                    2008Income
      tax (benefit) for the year - PRC
                    
                    $
                    (1,233
                    )
                    
                    $
                    (148,257
                    )Deferred
      income tax benefit – PRC
                    
                    
                    -
                    
                    
                    
                    -Income
      tax (benefit) per books
                    
                    $
                    (1,233
                    )
                    
                    $
                    (148,257
                    )





16.  Earnings/(loss)
Per Share





ASC
260-10 requires a reconciliation of the numerator and denominator of the basic
and diluted earnings/(loss) per share (EPS) computations.




17





For the
three and six months ended December 31, 2009, warrants to purchase 358,392
shares of common stock at an exercise price of $3.00; 100,000 shares at an
exercise price of $3.60; 1,420,000 shares at an exercise price of $8.45 and
225,600 shares at an exercise price of $7.38 were not included as their effect
would have been anti-dilutive, however, these securities could potentially
dilute basic earnings per share in the future.





For the
six months ended December 31, 2008, dilutive shares include outstanding warrants
to purchase 358,392 shares of common stock at an exercise price of $3.00 and
warrants to purchase 100,000 shares at an exercise price of $3.60; 1,420,000
shares at an exercise price of $8.45 and 225,600 shares at an exercise price of
$7.38 were not included as their effect would have been anti-dilutive, however,
these securities could potentially dilute basic earnings per share in the
future.





For the
three months ended December 31, 2008, warrants to purchase 358,392 shares of
common stock at an exercise price of $3.00; 100,000 shares at an exercise price
of $3.60; 1,420,000 shares at an exercise price of $8.45 and 225,600 shares at
an exercise price of $7.38 were not included as their effect would have been
anti-dilutive, however, these securities could potentially dilute basic earnings
per share in the future.





The
following reconciles the components of the EPS computation:





Income
                          
                          
                          Shares
                          
                          
                          Per Share(Numerator)
                          
                          
                          (Denominator)
                          
                          
                          AmountFor
      the three months ended December 31, 2009:Net
      income
                          
                          $
                          2,589,437Basic
      EPS income available to common shareholders
                          
                          $
                          2,589,437
                          
                          
                          
                          46,562,955
                          
                          
                          $
                          0.06Effect
      of dilutive securities:
                          
                          
                          
                          
                          
                          
                          -Diluted
      EPS income available to common shareholders
                          
                          $
                          2,589,437
                          
                          
                          
                          46,562,955
                          
                          
                          $
                          0.06For
      the three months ended December 31, 2008:Net
      loss
                          
                          $
                          (1,974,981
                          )Basic
      EPS (loss) available to common shareholders
                          
                          $
                          (1,974,981
                          )
                          
                          
                          46,562,955
                          
                          
                          $
                          (0.04
                          )Effect
      of dilutive securities:
                          
                          
                          
                          
                          
                          
                          -Diluted
      EPS (loss) available to common shareholders
                          
                          $
                          (1,974,981
                          )
                          
                          
                          46,562,955
                          
                          
                          $
                          (0.04
                          )




Income
                        
                        
                        Shares
                        
                        
                        Per Share(Numerator)
                        
                        
                        (Denominator)
                        
                        
                        AmountFor
      the six months ended December 31, 2009:Net
      income
                        
                        $
                        2,314,246Basic
      EPS income available to common shareholders
                        
                        $
                        2,314,246
                        
                        
                        
                        46,562,955
                        
                        
                        $
                        0.05Effect
      of dilutive securities:
                        
                        
                        
                        
                        
                        
                        -Diluted
      EPS income available to common shareholders
                        
                        $
                        2,314,246
                        
                        
                        
                        46,562,955
                        
                        
                        $
                        0.05For
      the six months ended December 31, 2008:Net
      income
                        
                        $
                        900,753Basic
      EPS income available to common shareholders
                        
                        $
                        900,753
                        
                        
                        
                        46,559,531
                        
                        
                        $
                        0.02Effect
      of dilutive securities:Warrants
                        
                        
                        
                        
                        
                        
                        6,892Diluted
      EPS income available to common shareholders
                        
                        $
                        900,753
                        
                        
                        
                        46,566,423
                        
                        
                        $
                        0.02





17.  Capital
Commitments





As of
December 31, 2009, the Company had contractual commitments of $916,069 (June 30,
2009: $2,496,669) for the construction of a cold rolling mill.





18.  Impairment





We
determine impairment of long-lived assets, including property, plant and
equipment and amortizable intangible assets, by measuring the estimated
undiscounted future cash flows generated by these assets, comparing the result
to the assets’ carrying values and adjust the assets to the lower of its
carrying value or fair value and charging current operations for the measured
impairment. The determination of the undiscounted future cash flows and fair
value of these assets are subject to significant judgment.


18





The
recent decline in market cap and stock price has triggered an impairment test
under ASC 360, an impairment test was performed for the quarter ended December
31, 2009 and no impairment charges were recognized for the relevant period. As
of December 31, 2009, the Company expects these assets to be fully recoverable
based on the result of the impairment test. Goodwill amounting to $99,999
as at December 31, 2009 was considered immaterial and not tested for impairment
in accordance with ASC 350.





19.  Impact
of Recent Accounting Pronouncements





In
December 2007, the FASB issued guidance now codified as FASB ASC 805, “Business
Combinations” (“ASC 805”). ASC 805 will change the accounting for business
combinations. Under ASC 805, an acquiring entity will be required to recognize
all the assets acquired and liabilities assumed in a transaction at the
acquisition-date fair value with limited exceptions. ASC 805 will change the
accounting treatment and disclosure for certain specific items in a business
combination. ASC 805 applies prospectively to business combinations for which
the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. ASC 805 will impact the Company
in the event of any future acquisition.





In
December 2007, the FASB issued guidance now codified as ASC 810,
“Non-controlling Interests in Consolidated Financial Statements—an amendment of
Accounting Research Bulletin No. 51”. ASC 810 establishes new accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. ASC 810 is effective for fiscal years beginning
on or after December 15, 2008. The Company does not believe that ASC 810 will
have a material impact on its consolidated financial statements.





In April
2008, the FASB issued guidance now codified as ASC 350-30, “Determination of the
Useful Life of Intangible Assets” (“ASC 350-30”), which amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under ASC 350,
“Goodwill and Other Intangible Assets” (“ASC 350”).  The intent of
this guidance is to improve the consistency between the useful life of a
recognized intangible asset under ASC 350 and the period of expected cash flows
used to measure the fair value of the asset under ASC 805, “Business
Combinations,” and other U.S. generally accepted accounting
principles.  This guidance is effective for fiscal years beginning
after December 15, 2008 (the Company’s fiscal year 2010), and interim periods
within those fiscal years.  The Company does not believe the adoption
of ASC 350-30 will have a material impact on the Company’s consolidated
financial position, results of operations and cash flows.





In May
2008, the FASB issued guidance now codified as ASC 944-20, “Accounting for
Financial Guarantee Insurance Contracts” (“ASC 944-20”). The new standard
clarifies how FASB Statement No. 60, now codified as ASC 944-20, “Accounting and
Reporting by Insurance Enterprises”, applies to financial guarantee insurance
contracts issued by insurance enterprises, including the recognition and
measurement of premium revenue and claim liabilities. It also requires expanded
disclosures about financial guarantee insurance contracts. ASC 944-20 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and all interim periods within those fiscal years, except for
disclosures about the insurance enterprise’s risk-management activities, which
are effective the first period (including interim periods) beginning after May
23, 2008. Except for the required disclosures, earlier application is not
permitted. The standard is not applicable to this Company.





In
October 2008, the FASB issued guidance now codified as ASC 820-10, “Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active” (“ASC 820-10”). This guidance clarifies the application of FASB
Statement No. 157, now codified as ASC 820-10, “Fair Value Measurements”, in a
market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. ASC 820-10 was effective upon
issuance. The adoption of ASC 820-10 will not impact our consolidated financial
statements in any material respect.





In
December 2008, the FASB issued guidance now codified as ASC 715-20-65,
“Employers’ Disclosures about Postretirement Benefit Plan Assets, an amendment
of FASB Statement No. 132” (revised 2003), now codified as ASC 715-20-65. It
provides guidance on an employer’s disclosures about plan assets, including: how
investment allocation decisions are made and factors that are pertinent to an
understanding of investment policies and strategies; the major categories of
plan assets; the inputs and valuation techniques used to measure the fair value
of plan assets; the effect of fair value measurements using significant
unobservable inputs (level 3) on changes in plan assets for the period, and
significant concentrations of risks within plan assets. ASC 715-20-65 is
effective for fiscal years ending after December 15, 2009. We are currently
assessing the potential impact that adoption of this standard may have on our
financial statements.


19





In April
2009, the FASB issued guidance now codified as ASC 825, “Interim Disclosures
about Fair Value of Financial Instruments”. It requires the fair value for all
financial instruments within the scope of SFAS No. 107, now codified as ASC 825,
“Disclosures about Fair Value of Financial Instruments”, to be disclosed in the
interim periods as well as in annual financial statements.  This
standard is effective for the quarter ending after June 15, 2009. The adoption
of ASC 825 will not impact our consolidated financial statements in any material
respect.





In April
2009, the FASB issued guidance now codified as ASC 820-10, “Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly”. It
clarifies the objective and method of fair value measurement even when there has
been a significant decrease in market activity for the asset being measured.
This standard is effective for the quarter ending after June 15, 2009. The
adoption of ASC 825 will not impact our consolidated financial statements in any
material respect.





In April
2009, the FASB issued guidance now codified as ASC 320, “Recognition and
Presentation of Other-Than-Temporary Impairments”. The objective of an
other-than-temporary impairment analysis under existing U.S. GAAP is to
determine whether the holder of an investment in a debt or equity security for
which changes in fair value are not regularly recognized in earnings (such as
securities classified as held-to-maturity or available-for-sale) should
recognize a loss in earnings when the investment is impaired. An investment is
impaired if the fair value of the investment is less than its amortized cost
basis. This guidance amends the other-than-temporary impairment guidance in U.S.
GAAP for debt securities to make the guidance more operational and to improve
the presentation and disclosure of other-than-temporary impairments on debt and
equity securities in the financial statements. This guidance does not amend
existing recognition and measurement guidance related to other-than-temporary
impairments of equity securities. We are currently assessing the potential
impact that adoption of this standard may have on our financial
statements.





In June
2009, the FASB issued guidance now codified as ASC 810, “Amendments to FASB
Interpretation No. 46(R)” (“ASC 810”), which amends FASB Interpretation No. 46
(revised December 2003), now codified as ASC 810-10, to address the elimination
of the concept of a qualifying special purpose entity. ASC 810 also replaces the
quantitative-based risks and rewards calculation for determining which
enterprise has a controlling financial interest in a variable interest entity
with an approach focused on identifying which enterprise has the power to direct
the activities of a variable interest entity and the obligation to absorb losses
of the entity or the right to receive benefits from the entity. Additionally,
ASC 810 provides more timely and useful information about an enterprise’s
involvement with a variable interest entity. ASC 810 will become effective in
July 2010. The Company is currently evaluating whether this standard will have
an impact on the Company consolidated financial statements.





In August
2009, the FASB issued Accounting Standards Update No. 2009-05, “Measuring
Liabilities at Fair Value” (“ASU 2009-05”). ASU 2009-05 amends ASC 820, “Fair
Value Measurements” (“ASC 820”). Specifically, ASU 2009-05 provides
clarification that in circumstances in which a quoted price in an active market
for the identical liability is not available, a reporting entity is required to
measure fair value using one or more of the following methods: 1) a valuation
technique that uses a) the quoted price of the identical liability when traded
as an asset or b) quoted prices for similar liabilities or similar liabilities
when traded as assets and/or 2) a valuation technique that is consistent with
the principles of ASC 820 (e.g. an income approach or market approach). ASU
2009-05 also clarifies that when estimating the fair value of a liability, a
reporting entity is not required to adjust to include inputs relating to the
existence of transfer restrictions on that liability. The adoption of this
standard did not have an impact on the Company’s financial position or results
of operations.





In
October 2009, the FASB issued ASU No. 2009-13 on ASC 605, “Revenue Recognition”
(“ASC 605”), regarding multiple-deliverable revenue arrangements. This ASU
provides amendments to the existing criteria for separating consideration in
multiple-deliverable arrangements.  The amendments establish a selling
price hierarchy for determining the selling price of a deliverable, eliminate
the residual method of allocation of arrangement consideration to all
deliverables and require the use of the relative selling price method in
allocation of arrangement consideration to all deliverables, require the
determination of the best estimate of a selling price in a consistent manner,
and significantly expand the disclosures related to the multiple-deliverable
revenue arrangements. The amendments will be effective in fiscal years beginning
on or after June 15, 2010, and early adoption is permitted. We are currently
evaluating the impact on our financial statements of adopting these amendments
to ASC 605 and cannot estimate the impact of adoption at this time.





In
October 2009, the FASB issued ASU No. 2009-15, “Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other Financing”
(“ASU 2009-15”).  ASU 2009-15 amends ASC 470, “Debt with Conversion
and Other Options” (“ASC 470”), and ASC 260, “Earnings Per Share” (“ASC
260”).  Specifically, ASU 2009-15 requires companies to mark stock
loan agreements at fair value and recognize the cost of the agreements by
reducing the amount of additional paid-in capital on their financial
statements.  The amendments will be effective for fiscal years
beginning on or after December 15, 2009.  We are currently evaluating
the impact on our financial statements of adopting the amendments in ASU 2009-15
and cannot estimate the impact of adoption at this time.


20





In
December 2009. the FASB issued ASU 2009-17, “Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities” (“ASU
2009-17”).  ASU 2009-17 are the amendments to ASC 810,
“Consolidation”, which are the result of FASB Statement No. 167, “Amendments to
FASB Interpretation No. 46(R)”.  That statement was issued by the FASB
in June 2009.  Amends the variable-interest entity guidance in ASC 810
to clarify the accounting treatment for legal entities in which equity investors
do not have sufficient equity at risk for the entity to finance its activities
without financial support. ASU 2009-17 is effective at
the start of the first fiscal year beginning after November 15, 2009. The
Company is currently evaluating whether this standard will have an impact on the
Company consolidated financial statements.





In
January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and
Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements”
(“ASU 2010-06”).  ASU 2010-06 requires reporting entities to provide
information about movements of assets among Levels 1 and 2 of the three-tier
fair value hierarchy established by ASC 820.  The guidance is
effective for any fiscal year that begins after December 15, 2010 and should be
used for quarterly and annual filings.  We are currently evaluating
the impact on our financial statements of adopting the amendments in ASU 2010-06
and cannot estimate the impact of adoption at this time.





20.
Subsequent Events





On
January 29, 2010, Shanghai Blessford has entered into a Senior Loan Agreement
with DEG-Deutsche Investitions-Und Entwicklungsgesellschaft Mbh (“DEG”) for a
loan amount up to $18,000,000 at an annual interest rate of 4.5% above the
six-month USD LIBOR rate. The loan is to be repaid half annually over five years
starting on December 15, 2011 and secured on a mortgage of the new cold rolling
line and annealing furnaces at Shanghai Blessford’s facilities.





Management
has evaluated subsequent events from January 1, 2010 to February 12, 2010, the
date which our financial statements have been issued and were available to be
issued, and has concluded that other than disclosed above, no material
subsequent events have occurred since December 31, 2009 that required
recognition or disclosure in our current period financial statements. Subsequent
events that may occur after February 12, 2010 have not been
evaluated.


21


ITEM
2.             MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.





Special
Note Regarding Forward Looking Statements





This
quarterly report contains forward-looking statements relating to us that are
based on the beliefs of our management as well as assumptions made by, and
information currently available to, our management. When used in this Report,
the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and
similar expressions, as they relate to us or our management, are intended to
identify forward-looking statements. These statements reflect management’s
current view of us concerning future events and are subject to certain risks,
uncertainties and assumptions, including among many others: plans to expand our
exports outside of China; plans to increase our production capacity and the
anticipated dates that such facilities may commence operations; our ability to
obtain additional funding for our continuing operations and to fund our
expansion; our ability to meet our financial projections for any financial year;
our ability to retain our key executives and to hire additional senior
management; continued growth of the Chinese economy and industries demanding our
products; our ability to produce and sell cold-rolled precision steel products
at high margins; our ability to secure at acceptable prices the raw materials we
need to produce our products; political changes in China that may impact our
ability to produce and sell our products in our target markets; general business
conditions and competitive factors, including pricing pressures and product
development; changes in our relationships with customers and suppliers; and
other risks and uncertainties. Should any of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described in this Report as anticipated,
estimated or expected. We undertake no obligation to publicly release any
revisions to the forward-looking statements after the date of this document. You
should carefully review the risk factors described in other documents we file
from time to time with the U.S. Securities and Exchange Commission, including
our Annual Report on Form 10-K for our fiscal year ended June 30,
2009.





The
following discussion should be read in conjunction with our unaudited
consolidated financial statements and the related notes that appear in
Part I, Item 1, “Financial Statements,” of this quarterly report. Our
unaudited consolidated financial statements are stated in United States Dollars
and are prepared in accordance with United States Generally Accepted Accounting
Principles. The following discussion and analysis covers the Company’s
consolidated financial condition at December 31, 2009 (unaudited) and
June 30, 2009, the end of its prior fiscal year, and its unaudited
consolidated results of operation for the three and six month periods ended
December 31, 2009 and 2008.





Use
of Terms





Except as
otherwise indicated by the context, all references in this Quarterly Report to
(i) the “Group,” the “Company,” “we,” “us” or “our” are to China Precision
Steel, Inc., a Delaware corporation, and its direct and indirect subsidiaries;
(ii) “PSHL” are to our subsidiary Partner Success Holdings Limited, a BVI
company; (iii) “Blessford International” are to PSHL’s subsidiary Blessford
International Limited, a BVI company; (iv) “Shanghai Blessford” are to Blessford
International’s subsidiary Shanghai Blessford Alloy Company Limited, a PRC
company; (v) “Chengtong” are to PSHL’s subsidiary Shanghai Chengtong Precision
Strip Company Limited, a PRC company; (vi) “Tuorong” are to PSHL’s subsidiary
Shanghai Tuorong Precision Strip Company Limited, a PRC company; (vii) “SEC” are
to the United States Securities and Exchange Commission; (viii) “Securities Act”
are to the Securities Act of 1933, as amended; (ix) “Exchange Act” are to the
Securities Exchange Act of 1934, as amended; (x) “RMB” are to Renminbi, the
legal currency of China; (xi) “U.S. dollar,” “USD,” “US$” and “$” are to the
legal currency of the United States; (xii) “China,” “Chinese” and “PRC” are to
the People’s Republic of China; and (xiii) “BVI” are to the British Virgin
Islands.





Overview
of Our Business





We are a
niche and high value-added steel processing company principally engaged in the
manufacture and sale of high precision cold-rolled steel products, in the
provision of heat treatment and in the cutting and slitting of medium and
high-carbon hot-rolled steel strips. We use commodity steel to create a high
value-added specialty premium steel. Specialty precision steel pertains to the
precision of measurements and tolerances of thickness, shape, width, surface
finish and other special quality features of highly-engineered end-use
applications.





We
produce and sell precision ultra-thin and high strength cold-rolled steel
products ranging from 7.5 mm to 0.03 mm. We also provide heat treatment and
cutting and slitting of medium and high-carbon hot-rolled steel strips not
exceeding 7.5 mm thickness. Our process puts hot-rolled de-scaled (pickled)
steel coils through a cold-rolling mill, utilizing our patented systems and high
technology reduction processing procedures, to make steel coils and sheets in
customized thicknesses according to customer specifications. Currently, our
specialty precision products are mainly used in the manufacture of automobile
parts and components, steel roofing, plane friction discs, appliances, food
packaging materials, saw blades, textile needles, and
microelectronics.


22





We
conduct our operations principally in the PRC through our wholly-owned operating
subsidiaries, Chengtong and Shanghai Blessford, which are wholly owned
subsidiaries of our direct subsidiary, PSHL. Our products are sold domestically
in the PRC as well as in overseas markets such as Thailand, Nigeria and
Ethiopia. We intend to further expand into additional overseas markets in
the future, subject to suitable market conditions and favorable regulatory
controls.





Second
Quarter Financial Performance Highlights





During
the second fiscal quarter of 2010, we saw robust growth in demand for our cold
rolled steel products as market sentiment gradually improved towards the end of
calendar year 2009, but at the same time we continued to see lower average
selling prices compared to same period a year ago. We have seen gradually
increasing demand and orders from existing customers, especially in the
low-carbon cold-rolled steel segment and the high-carbon cold-rolled steel
segment, due to favorable policies and government subsidies for the home
appliance industry and the auto industry, where our products in these two
segments are used in the manufacturing of certain components. However, despite
the positive growth we have seen during the current period, general industry
problems such as excess capacity, low industrial concentration and a lack of
access to natural resources that have long plagued China’s steel sector still
remain. Our two cold-rolling mills are currently operating at approximately
70% utilization rate due to reduced orders on hand. As of December 31, 2009, we
have completed the construction of our 3rd cold
rolling mill which will commence production during the third fiscal quarter of
2010.





During
the three months ended December 31, 2009, we sold a total of 35,588 tons of
products, an increase of 20,726 tons from 14,862 tons during the same period a
year ago, due to increase in demand in a gradually improving market. We believe
that such increase was mainly caused by increases in demand from the auto and
home appliance products due to government subsidies to encourage consumer
spending in these segments during the period ended December 31, 2009. Increased
volume and sales have led to a gross profit of $3,635,955 and a net profit of
$2,589,437 for the three months ended December 31, 2009.





Due to
the nature of our niche segment and high-end products, we have been able to keep
quality customers and negotiate new contracts with a total of 3 new customers
during the current period. Management continues to be in talks with potential
customers whose past orders we had been unable to fill due to full
capacity.  If these talks are successful, we could see additional
sales from a broadened customer base which would mitigate the impact of the
global slowdown on our business and results of operations. Total company backlog
as of December 31, 2009 was $23,907,238.





We also
continue to take appropriate actions to perform business and credit reviews of
customers and suppliers and reduce exposure by avoiding entry into contracts
with countries or customers with high credit risks. We strive to optimize our
product mix, prioritize higher margin products, and strengthen collection of
accounts receivable in the existing business environment with the goal to
maintain overall healthy sales volume, margins and cash positions. We believe
that there are high barriers to entry in the Chinese domestic precision
cold-rolled steel industry because of the level of technology expertise required
for operation. Although we expect a continuation of volatility in demand in both
domestic and international markets across all product segments, and adverse
impacts on our gross margins due to lower steel prices in the foreseeable
future, the medium to long term prospects of our niche remain highly optimistic.
We believe that our unique capabilities and know-how give us a competitive
advantage to grow sales and build a globally recognized brand as we continue to
carry out R&D and expand to new segments, customers and
markets.





The
following are some financial highlights for the second fiscal
quarter:





·
            Revenues:
      Our revenues were approximately $27.0 million for the second quarter, an
      increase of 53.7% from last year.





·
            Gross
      Margin: Gross margin was 13.5% for the second quarter, as compared
      to 19.6% last year.





·
            Income/(loss)
      from operations before tax: Income from operations before tax was
      approximately $2.6 million for the second quarter, as compared to loss
      from operations before tax of $2.3 million last
  year.





·
            Net
      Income/(loss): Net income was approximately $2.6 million for the
      second quarter, as compared to a net loss of approximately $2.0 million
      last year.


23





·
            Fully
      diluted Income/(loss) per share: Fully diluted income per share was
      $0.06 for the second quarter compared to a fully diluted loss per share of
      $0.04 last year.





Results
of Operations





The
following table sets forth key components of our results of operations for the
periods indicated, inUSDand
as a percentage of revenues.





Three Months Ended December 31,
                  
                  
                  Six Months Ended December 31,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Amount
                  
                  
                  %
      of
                    Revenues
                  
                  
                  Amount
                  
                  
                  %
      of
                    Revenues
                  
                  
                  Amount
                  
                  
                  %
      of
                    Revenues
                  
                  
                  Amount
                  
                  
                  %
      of
                    RevenuesRevenues
                  
                  $
                  27,013,838
                  
                  
                  
                  100.0
                  
                  
                  $
                  17,573,959
                  
                  
                  
                  100.0
                  
                  
                  $
                  44,055,827
                  
                  
                  
                  100.0
                  
                  
                  $
                  42,924,378
                  
                  
                  
                  100.0Cost
      of sales (including depreciation and amortization)
                  
                  
                  23,377,883
                  
                  
                  
                  86.5
                  
                  
                  
                  14,122,622
                  
                  
                  
                  80.4
                  
                  
                  
                  39,716,513
                  
                  
                  
                  90.2
                  
                  
                  
                  35,520,383
                  
                  
                  
                  82.8Gross
      profit
                  
                  
                  3,635,955
                  
                  
                  
                  13.5
                  
                  
                  
                  3,451,337
                  
                  
                  
                  19.6
                  
                  
                  
                  4,339,314
                  
                  
                  
                  9.8
                  
                  
                  
                  7,403,995
                  
                  
                  
                  17.2Selling
      and marketing expenses
                  
                  
                  70,605
                  
                  
                  
                  0.3
                  
                  
                  
                  1,122,532
                  
                  
                  
                  6.4
                  
                  
                  
                  102,414
                  
                  
                  
                  0.2
                  
                  
                  
                  1,333,830
                  
                  
                  
                  3.1Administrative
      expenses
                  
                  
                  654,041
                  
                  
                  
                  2.4
                  
                  
                  
                  578,105
                  
                  
                  
                  3.3
                  
                  
                  
                  1,232,739
                  
                  
                  
                  2.8
                  
                  
                  
                  1,040,205
                  
                  
                  
                  2.4Allowance
      for bad and doubtful debts
                  
                  
                  101,067
                  
                  
                  
                  0.4
                  
                  
                  
                  3,829,462
                  
                  
                  
                  21.8
                  
                  
                  
                  218,184
                  
                  
                  
                  0.5
                  
                  
                  
                  3,829,462
                  
                  
                  
                  8.9Depreciation
      and amortization expense
                  
                  
                  36,755
                  
                  
                  
                  0.1
                  
                  
                  
                  33,318
                  
                  
                  
                  0.2
                  
                  
                  
                  80,493
                  
                  
                  
                  0.2
                  
                  
                  
                  59,521
                  
                  
                  
                  0.1Total
      operating expenses
                  
                  
                  862,468
                  
                  
                  
                  3.2
                  
                  
                  
                  5,563,417
                  
                  
                  
                  31.7
                  
                  
                  
                  1,633,830
                  
                  
                  
                  3.7
                  
                  
                  
                  6,263,018
                  
                  
                  
                  14.6Income/(loss)
      from operations
                  
                  
                  2,773,487
                  
                  
                  
                  10.3
                  
                  
                  
                  (2,112,080
                  )
                  
                  
                  (12.0
                  )
                  
                  
                  2,705,484
                  
                  
                  
                  6.1
                  
                  
                  
                  1,140,977
                  
                  
                  
                  2.7Other
      revenues
                  
                  
                  91,041
                  
                  
                  
                  0.3
                  
                  
                  
                  138,998
                  
                  
                  
                  0.8
                  
                  
                  
                  110,963
                  
                  
                  
                  0.3
                  
                  
                  
                  259,701
                  
                  
                  
                  0.6Interest
      and finance costs
                  
                  
                  (275,091
                  )
                  
                  
                  (1.0
                  )
                  
                  
                  (320,777
                  )
                  
                  
                  (1.8
                  )
                  
                  
                  (503,434
                  )
                  
                  
                  (1.1
                  )
                  
                  
                  (648,182
                  )
                  
                  
                  (1.5
                  )Total
      other (expense)
                  
                  
                  (184,050
                  )
                  
                  
                  (0.7
                  )
                  
                  
                  (181,779
                  )
                  
                  
                  (1.0
                  )
                  
                  
                  (392,471
                  )
                  
                  
                  (0.9
                  )
                  
                  
                  (388,481
                  )
                  
                  
                  (0.9
                  )Income/(loss)
      before income taxes
                  
                  
                  2,589,437
                  
                  
                  
                  9.6
                  
                  
                  
                  (2,293,859
                  )
                  
                  
                  (13.1
                  )
                  
                  
                  2,313,013
                  
                  
                  
                  5.3
                  
                  
                  
                  752,496
                  
                  
                  
                  1.8Income
      tax (benefit)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (318,878
                  )
                  
                  
                  (0.2
                  )
                  
                  
                  (1,233
                  )
                  
                  <(0.1)
                  
                  
                  
                  (148,257
                  )
                  
                  
                  (0.3
                  )Net
      income/(loss)
                  
                  $
                  2,589,437
                  
                  
                  
                  9.6
                  
                  
                  $
                  (1,974,981
                  )
                  
                  
                  (11.0
                  )
                  
                  $
                  2,314,246
                  
                  
                  
                  5.3
                  
                  
                  $
                  900,753
                  
                  
                  
                  2.1Basic
      earnings/(loss) per share
                  
                  $
                  0.06
                  
                  
                  
                  
                  
                  
                  $
                  (0.04
                  )
                  
                  
                  
                  
                  
                  $
                  0.05
                  
                  
                  
                  
                  
                  
                  $
                  0.02Diluted
      earnings/(loss) per share
                  
                  $
                  0.06
                  
                  
                  
                  
                  
                  
                  $
                  (0.04
                  )
                  
                  
                  
                  
                  
                  $
                  0.05
                  
                  
                  
                  
                  
                  
                  $
                  0.02





Comparison of Three Months
Ended December 31, 2009 and December 31, 2008





Sales
Revenues





Sales
volume increased by 20,726 tons, or 139%, period-on-period to 35,588 tons for
the three months ended December 31, 2009 from 14,862 tons for the three months
ended December 31, 2008 and, as a result, sales revenues increased by
$9,439,879, or 54%, period-on-period to $27,013,838 for the three months ended
December 31, 2009 from $17,573,959 for the three months ended December 31, 2008.
The increase in sales revenues during the three months ended December 31, 2009
is mainly attributable to increase in demand for high-carbon cold-rolled
products used in automobile components production as well as increase in demand
for low-carbon cold-rolled products used in home appliances production both due
to favorable government policies and subsidies to encourage consumer
spending.




24





Sales by Product
Line





A
break-down of our sales by product line for the three months ended
December 31, 2009 and 2008 is as follows:





Three
      Months Ended December 31,2009
                          
                          
                          2008
                          
                          
                          Period-on-Product
      Category
                          
                          Quantity
                            (tons)
                          
                          
                          $
                            Amount
                          
                          
                          %
      of
                            Sales
                          
                          
                          Quantity
                            (tons)
                          
                          
                          $
                            Amount
                          
                          
                          %
      of
                            Sales
                          
                          
                          period
      Qty.
                            VarianceLow
      carbon hard rolled
                          
                          
                          4,453
                          
                          
                          
                          3,520,889
                          
                          
                          
                          13
                          
                          
                          
                          11,755
                          
                          
                          
                          13,238,537
                          
                          
                          
                          75
                          
                          
                          
                          (7,302
                          )Low
      carbon cold-rolled
                          
                          
                          16,627
                          
                          
                          
                          11,303,581
                          
                          
                          
                          42
                          
                          
                          
                          1,834
                          
                          
                          
                          2,107,484
                          
                          
                          
                          12
                          
                          
                          
                          14,793High-carbon
      hot-rolled
                          
                          
                          1,440
                          
                          
                          
                          1,236,831
                          
                          
                          
                          5
                          
                          
                          
                          861
                          
                          
                          
                          903,754
                          
                          
                          
                          5
                          
                          
                          
                          579High-carbon
      cold-rolled
                          
                          
                          7,167
                          
                          
                          
                          7,402,355
                          
                          
                          
                          27
                          
                          
                          
                          196
                          
                          
                          
                          168,782
                          
                          
                          
                          1
                          
                          
                          
                          6,971Subcontracting
      income
                          
                          
                          5,901
                          
                          
                          
                          3,256,866
                          
                          
                          
                          12
                          
                          
                          
                          216
                          
                          
                          
                          49,110
                          
                          
                          <1
                          
                          
                          
                          5,685Sales
      of scrap metal
                          
                          
                          -
                          
                          
                          
                          293,316
                          
                          
                          
                          1
                          
                          
                          
                          —
                          
                          
                          
                          1,106,292
                          
                          
                          
                          6
                          
                          
                          
                          -Total
                          
                          
                          35,588
                          
                          
                          
                          27,013,838
                          
                          
                          
                          100
                          
                          
                          
                          14,862
                          
                          
                          
                          17,573,959
                          
                          
                          
                          100
                          
                          
                          
                          20,726


There
were different trends of demand across various product categories during the
three months ended December 31, 2009. High-carbon cold-rolled steel products
accounted for 27% of the current sales mix at an average selling price of $1,033
per ton for the three months ended December 31, 2009, compared to 1% of the
sales mix at an average selling price per ton of $861 for the three months ended
December 31, 2008. The products in this category are mainly used in the
automobile industry and the increase in sales volume period-on-period was a
result of the Chinese government’s automobile stimulus policies. Low-carbon
cold-rolled steel products accounted for 42% of the current sales mix at an
average selling price of $680 per ton for the three months ended December 31,
2009, compared to 12% of the sales mix at an average selling price per ton of
$1,149 for the three months ended December 31, 2008. The robust increase in
demand in this category during the period was a direct result of increased
orders of steel used in the production of home appliances due to subsidies
granted by the Chinese government to encourage consumer spending. Low-carbon
hard-rolled steel products accounted for 13% of the current sales mix at an
average selling price of $791 per ton for the three months ended December 31,
2009, compared to 75% of the sales mix at an average selling price per ton of
$1,126 for the three months ended December 31, 2008, due to a sharp decrease in
demand and volatilities in pricing in the international market period-on-period,
as a result of the global slowdown and favorable currency movements for
competitors’ products.  Subcontracting income revenues increased to
$3,256,866, or 12%, of the sales mix for the three months ended December 31,
2009, as compared to $49,110, or less than 1%, of the sales mix for the three
months ended December 31, 2008.





Three Months Ended December
    31,2009
                
                
                2008
                
                
                VarianceAverage Selling Prices
                
                ($)
                
                
                ($)
                
                
                ($)
                
                
                (%)Low-carbon
      hard rolled
                
                
                791
                
                
                
                1,126
                
                
                
                (335
                )
                
                
                (30
                )Low-carbon
      cold-rolled
                
                
                680
                
                
                
                1,149
                
                
                
                (469
                )
                
                
                (41
                )High-carbon
      hot-rolled
                
                
                859
                
                
                
                1,050
                
                
                
                (191
                )
                
                
                (18
                )High-carbon
      cold-rolled
                
                
                1,033
                
                
                
                861
                
                
                
                172
                
                
                
                20Subcontracting
      income
                
                
                552
                
                
                
                227
                
                
                
                325
                
                
                
                143





The
average selling price per ton decreased to $759 for the three months ended
December 31, 2009, compared to the corresponding period in 2008 of $1,182,
representing a decrease of $423, or 36%, period-on-period. This decrease
was mainly due to decreases in general steel prices and therefore selling prices
due to volatilities in the industry. Other than for high-carbon cold rolled
steel products and subcontracting work, there were decreases in average selling
prices across all product categories during the period.





Sales Breakdown by Major
Customer





Three Months Ended December
    31,2009
                
                
                2008Customers
                
                $
                
                
                % of Sales
                
                
                $
                
                
                % of SalesShanghai
      Shengdejia Metal Products Co., Ltd.
                
                
                6,468,783
                
                
                
                24
                
                
                
                *
                
                
                
                *Shanghai
      Changshuo Stainless Steel Co., Ltd.
                
                
                4,626,449
                
                
                
                17
                
                
                
                1,140,227
                
                
                
                7Hangzhou
      Cogeneration Co., Ltd.
                
                
                1,906,610
                
                
                
                7
                
                
                
                *
                
                
                
                *Shaoxing
      Wancheng Metal Plate Co., Ltd.
                
                
                1,819,561
                
                
                
                7
                
                
                
                *
                
                
                
                *Marubeni-Itochu
      Steel Inc.
                
                
                1,126,107
                
                
                
                4
                
                
                
                1,626,006
                
                
                
                9Salzgitter
      Mannesmann International GMBH
                
                
                *
                
                
                
                *
                
                
                
                11,257,852
                
                
                
                64Zhangjiagang
      Gangxing Innovative Construction Material Co., Ltd.
                
                
                *
                
                
                
                *
                
                
                
                336,980
                
                
                
                2Coutinho
      and Ferrostaal GMBH
                
                
                *
                
                
                
                *
                
                
                
                351,887
                
                
                
                215,947,510
                
                
                
                59
                
                
                
                14,712,952
                
                
                
                84Others
                
                
                11,066,328
                
                
                
                41
                
                
                
                2,861,007
                
                
                
                16Total
                
                
                27,013,838
                
                
                
                100
                
                
                
                17,573,959
                
                
                
                100




*
Not major customers for the relevant periods


25





Sales
revenues generated from our top five major customers as a percentage of total
sales decreased to 59% for the three months ended December 31, 2009, compared to
84% for the three months ended December 31, 2008. Sales to three new major
customers, Shanghai Shengdejia Metal Products Co., Ltd., Hangzhou Cogeneration
Co., Ltd., and Shaoxing Wancheng Metal Plate Co, Ltd. accounted for 38% of our
sales revenues for the three months. The change in customer mix reflects
management’s continuous efforts in expanding our customer base and geographical
coverage during the course of the quarter.




Cost of Goods
Sold





Cost of sales increased by $9,255,261,
or 65.5%, period-on-period to $23,377,883 for the three months ended December
31, 2009, from $14,122,622 for the three months ended December 31, 2008. Cost of
sales represented 86.5% of sales revenues for the three months ended December
31, 2009, compared to 80.4% for the three months ended December 31, 2008.
Average cost per unit sold decreased to $657 for the three months ended December
31, 2009, compared to an average cost per unit sold of $950 for the three months
ended December 31, 2008,  representing an decrease of $293 per ton, or
30.9%, period-on-period.





Three Months Ended December
    31,2009
                
                
                2008
                
                
                Variance($)
                
                
                ($)
                
                
                ($)
                
                
                (%)Cost
      of goods sold-
      Raw materials
                
                
                20,501,079
                
                
                
                11,339,712
                
                
                
                9,161,367
                
                
                
                80.8-
      Direct labor
                
                
                161,579
                
                
                
                261,110
                
                
                
                (99,531
                )
                
                
                (38.1
                )-
      Manufacturing overhead
                
                
                2,715,225
                
                
                
                2,521,800
                
                
                
                193,425
                
                
                
                7.723,377,883
                
                
                
                14,122,622
                
                
                
                9,255,261
                
                
                
                65.5Cost
      per unit soldTotal
      units sold (tons)
                
                
                35,588
                
                
                
                14,862
                
                
                
                20,726
                
                
                
                139Average
      cost per unit sold ($/ton)
                
                
                657
                
                
                
                950
                
                
                
                (293
                )
                
                
                (30.9
                )





The
decrease in average per unit cost of sales is represented by the combined effect
of:





·
            a
      decrease in cost of raw materials per unit sold of $187, or 24.5%, from
      $763 for the three months ended December 31, 2008 compared to $576
      for the three months ended December 31,
2009;





·
            a
      decrease in direct labor per unit sold of $13, or 72.2%, from $18 for the
      three months ended December 31, 2008 compared to $5 for the three months
      ended December 31, 2009;





·
            a
      decrease in factory overhead per unit sold of $94, or 55.3%, from $170 for
      the three months ended December 31, 2008 compared to $76 for the three
      months ended December 31,
  2009.





The cost
of raw materials consumed increased by $9,161,367, or 80.8%, period-on-period,
to $20,501,079 for the three months ended December 31, 2009 from $11,339,712 for
the three months ended December 31, 2008. This increase was a direct result of
increased number of units sold offset by decrease in average raw material cost
per unit sold.





Direct
labor costs decreased by $99,531, or 38.1%, period-on-period, to $161,579 for
the three months ended December 31, 2009, from $261,110 for the three months
ended December 31, 2008. The decrease was a result of effective labor management
and decreased overtime payments during the period.




Manufacturing
overhead costs increased by $193,425, or 7.7%, period-on-period, to $2,715,225
for the three months ended December 31, 2009, from $2,521,800 for the three
months ended December 31, 2008. The increase was mainly attributable to the
combined effect of an increase in utilities of $328,409, or 67.6%,
period-on-period to $814,525 for the three months ended December 31, 2009, from
$486,116 for the three months ended December 31, 2008, and a decrease in low
consumables by $139,117, or 23.9%, period-on-period to $442,797 for the three
months ended December 31, 2009, from $581,914 for the three months ended
December 31, 2008.


26





Gross
Profit





Gross
profit in absolute terms increased by $184,618, or 5.3%, period-on-period, to
$3,635,955 for the three months ended December 31, 2009, from $3,451,337 for the
three months ended December 31, 2008, while gross profit margin decreased to
13.5% for the three months ended December 31, 2009, from 19.6% for the three
months ended December 31, 2008. The decrease in gross profit margin is mainly
attributable to a 35.8% period-on-period decrease in average selling prices,
offset by a decrease in average cost per unit sold of 30.9%
period-on-period.





Selling
Expenses





Selling
expenses decreased by $1,051,927, or 93.7%, period-on-period, to $70,605 for the
three months ended December 31, 2009 compared to the corresponding period in
2008 of $1,122,532. The decrease was a direct result of decreased export sales
period-on-period and therefore less selling commission costs
associated.





Administrative
Expenses





Administrative
expenses increased by $75,936, or 13.1%, period-on-period, to $654,041 for the
three months ended December 31, 2009 compared to $578,105 for the three months
ended December 31, 2008. This was chiefly due to an increase in salaries and
wages due to the increased average number of staff at the Group companies, as
well as an increase in stock and listing fees and travelling expenses during the
three months ended December 31, 2009.





Allowance for Bad
and Doubtful Debts





Allowance
for bad and doubtful debts decreased by $3,728,395, or 97.4%, period-on-period.
The prior period charge reflects a provision for uncollectible accounts
receivable amounting to $3,829,462 due to a dispute regarding a special
stainless steel product as disclosed in our Form 10-K filed for the financial
year ended June 30, 2009. Allowance recognized for the current period was in the
amount of $101,067 in accordance with our policy for allowance for bad and
doubtful debts set forth under the “Critical Accounting Policies and
Estimates” heading in this report.





Income/(loss)
from Operations





Income
from operations before income tax increased by $4,885,567, or 231.3%,
period-on-period to income of $2,773,487 for the three months ended December 31,
2009 from a loss of $2,112,080 for the three months ended December 31, 2008, as
a result of all the factors discussed above.





Other
Income





Our other
income decreased $47,957, or 34.5%, to $91,041 for the three months ended
December 31, 2009 from $138,998 for the three months ended December 31, 2008 due
to lower interest rates period-on-period.  As a percentage of
revenues, other income decreased to 0.3% for the three months ended December 31,
2009 from 0.8% for the three months ended December 31, 2008 due to higher
revenue and lower interest income during the current period. .





Interest
Expense





Total
interest expense decreased $45,686, or 14.2%, to $275,091 for the three months
ended December 31, 2009, from $320,777 for the three months ended December 31,
2008 due to a lower weighted average interest rate offset by increase in loan
balances period-on-period, as well as interest amounting to $137,140 being
capitalized to construction-in-progress for the period.





Income
Tax





For the
three months ended December 31, 2009, we recognized an income tax expense of
nil, compared to an income tax benefit of $318,878 for the three months ended
December 31, 2008 as Chengtong had tax losses carried forward from prior periods
and Shanghai Blessford was exempted from income tax as of December 31,
2009.


27





Net
Income/(loss)





Net
income increased by $4,564,418, or 231.1%, period-on-period, to a net income of
$2,589,437 for the three months ended December 31, 2009 from net loss of
$1,974,981 for the three months ended December 31, 2008. The increase in net
income is attributable to a combination of factors discussed above, including
increase in tons sold due to strengthening in demand offset by a decrease in
average selling prices due to lower steel prices.





Comparison of Six Months
Ended December 31, 2009 and December 31, 2008





Sales
Revenues





Sales
volume increased by 18,804 tons, or 48.1%, period-on-period to 57,881 tons for
the six months ended December 31, 2009 from 39,077 tons for the six months ended
December 31, 2008 and as a result, sales revenues increased by $1,131,449, or
2.6%, period-on-period to $44,055,827 for the six months ended December 31, 2009
from $42,924,378 for the six months ended December 31, 2008. The increase in
sales revenues period-on-period is mainly attributable to an increase in demand
for high-carbon cold-rolled products used in automobile components production as
well as increase in demand for low-carbon cold-rolled products used in home
appliances production both due to favorable government policies and subsidies to
encourage consumer spending.




Sales by Product
Line





A
break-down of our sales by product line for the six months ended December
31, 2009 and 2008 is as follows:





Six Months Ended December
    31,2009
                  
                  
                  2008
                  
                  
                  Period-on-Product Category
                  
                  Quantity
                    (tons)
                  
                  
                  $
                    Amount
                  
                  
                  % of
                    Sales
                  
                  
                  Quantity
                    (tons)
                  
                  
                  $
                    Amount
                  
                  
                  % of
                    Sales
                  
                  
                  period Qty.
                    VarianceLow
      carbon hard rolled
                  
                  
                  9,012
                  
                  
                  
                  6,584,452
                  
                  
                  
                  15.0
                  
                  
                  
                  15,376
                  
                  
                  
                  17,388,885
                  
                  
                  
                  40.5
                  
                  
                  
                  (6,364
                  )Low
      carbon cold-rolled
                  
                  
                  27,260
                  
                  
                  
                  17,660,685
                  
                  
                  
                  40.1
                  
                  
                  
                  12,642
                  
                  
                  
                  13,092,059
                  
                  
                  
                  30.5
                  
                  
                  
                  14,618High-carbon
      hot-rolled
                  
                  
                  3,422
                  
                  
                  
                  2,793,319
                  
                  
                  
                  6.3
                  
                  
                  
                  2,273
                  
                  
                  
                  2,822,122
                  
                  
                  
                  6.6
                  
                  
                  
                  1,149High-carbon
      cold-rolled
                  
                  
                  9,664
                  
                  
                  
                  11,721,415
                  
                  
                  
                  26.6
                  
                  
                  
                  2,795
                  
                  
                  
                  3,614,759
                  
                  
                  
                  8.4
                  
                  
                  
                  6,869Subcontracting
      income
                  
                  
                  8,523
                  
                  
                  
                  4,904,501
                  
                  
                  
                  11.1
                  
                  
                  
                  5,991
                  
                  
                  
                  4,728,603
                  
                  
                  
                  11.0
                  
                  
                  
                  2,532Sales
      of scrap metal
                  
                  
                  -
                  
                  
                  
                  391,455
                  
                  
                  
                  0.9
                  
                  
                  
                  —
                  
                  
                  
                  1,277,950
                  
                  
                  
                  3.0
                  
                  
                  
                  -Total
                  
                  
                  57,881
                  
                  
                  
                  44,055,827
                  
                  
                  
                  100
                  
                  
                  
                  39,077
                  
                  
                  
                  42,924,378
                  
                  
                  
                  100
                  
                  
                  
                  18,804





There
were different trends of demand across various product categories during the six
months ended December 31, 2009. High-carbon cold-rolled steel products accounted
for 26.6% of the current sales mix at an average selling price of $1,213 per ton
for the six months ended December 31, 2009, compared to 8.4% of the sales mix at
an average selling price per ton of $1,293 for the six months ended December 31,
2008. The products in this category are mainly used in the automobile industry
and the increase in sales volume period-on-period was a result of the Chinese
government’s automobile stimulus policies, which increased demand. Low-carbon
cold-rolled steel products accounted for 40.1% of the current sales mix at an
average selling price of $648 per ton for the six months ended December 31,
2009, compared to 30.5% of the sales mix at an average selling price per ton of
$1,036 for the six months ended December 31, 2008. The increase in demand in
this category during the period was a result of increased orders of steel used
in the production of home appliances due to subsidies granted by the Chinese
government to encourage consumer spending. Low-carbon hard-rolled steel products
accounted for 15.0% of the current sales mix at an average selling price of $731
per ton for the six months ended December 31, 2009, compared to 40.5% of the
sales mix at an average selling price per ton of $1,131 for the six months ended
December 31, 2008, due to a sharp decrease in demand and volatilities in pricing
in the international market period-on-period, as a result of the global slowdown
and favorable currency movements for competitors’
products.  Subcontracting income revenues was at a similar level of
$4,904,501, or 11.1% of the sales mix for the six months ended December 31, 2009
as compared to $4,728,603, or 11.0%, of the sales mix for the six months ended
December 31, 2008.





Six Months Ended December
    31,2009
                
                
                2008
                
                
                VarianceAverage Selling Prices
                
                ($)
                
                
                ($)
                
                
                ($)
                
                
                (%)Low-carbon
      hard rolled
                
                
                731
                
                
                
                1,131
                
                
                
                (400
                )
                
                
                (35.4
                )Low-carbon
      cold-rolled
                
                
                648
                
                
                
                1,036
                
                
                
                (388
                )
                
                
                (37.5
                )High-carbon
      hot-rolled
                
                
                816
                
                
                
                1,242
                
                
                
                (426
                )
                
                
                (34.3
                )High-carbon
      cold-rolled
                
                
                1,213
                
                
                
                1,293
                
                
                
                (80
                )
                
                
                (6.2
                )Subcontracting
      income
                
                
                575
                
                
                
                789
                
                
                
                (214
                )
                
                
                (27.1
                )




28





The
average selling price per ton decreased to $761 for the six months ended
December 31, 2009, compared to the corresponding period in 2008 of $1,098,
representing a decrease of $337, or 30.7%, period-on-period. This decrease
was mainly due to decreases in steel prices and therefore selling prices due to
volatilities in the industry. There were decreases in average selling prices
across all product categories during the period.





Sales Breakdown by Major
Customer





Six Months Ended December
    31,2009
                
                
                2008Customers
                
                $
                
                
                % of Sales
                
                
                $
                
                
                % of SalesShanghai
      Changshuo Stainless Steel Co., Ltd.
                
                
                8,473,414
                
                
                
                19
                
                
                
                4,555,411
                
                
                
                11Shanghai
      Shengdejia Metal Products Co., Ltd.
                
                
                6,465,502
                
                
                
                15
                
                
                
                *
                
                
                
                *Shaoxing
      Wancheng Metal Plate Co., Ltd.
                
                
                3,587,461
                
                
                
                8
                
                
                
                *
                
                
                
                *Zhangjiagang
      Gangxing Innovative Construction Material Co., Ltd.
                
                
                2,857,042
                
                
                
                6
                
                
                
                1,864,414
                
                
                
                4Hangzhou
      Cogeneration Co., Ltd.
                
                
                2,269,786
                
                
                
                5
                
                
                
                *
                
                
                
                *Salzgitter
      Mannesmann International GMBH
                
                
                *
                
                
                
                *
                
                
                
                13,651,071
                
                
                
                32Jiangsu
      Sumec International Trading Co., Ltd.
                
                
                *
                
                
                
                *
                
                
                
                3,217,647
                
                
                
                7Shanghai
      Bayou Industrial Co., Ltd.
                
                
                *
                
                
                
                *
                
                
                
                2,961,644
                
                
                
                723,653,205
                
                
                
                53
                
                
                
                26,250,187
                
                
                
                61Others
                
                
                20,402,622
                
                
                
                47
                
                
                
                16,674,191
                
                
                
                39Total
                
                
                44,055,827
                
                
                
                100
                
                
                
                42,924,378
                
                
                
                100




*
Not major customers for the relevant periods





Sales
revenues generated from our top five major customers as a percentage of total
sales decreased to 53% for the six months ended December 31, 2009, compared to
61% for the six months ended December 31, 2008. Sales to two new major
customers, Shaoxing Wancheng Metal Plate Co, Ltd. and Shanghai Shengdejia Metal
Products Co., Ltd., for the six months accounted for 23% of our sales revenues.
The change in customer mix reflects management’s continuous efforts in expanding
our customer base and geographical coverage during the course of the
quarter.




Cost of Goods
Sold





Cost of sales increased by $4,196,130,
or 11.8%, period-on-period to $39,716,513 for the six months ended December 31,
2009, from $35,520,383 for the six months ended December 31, 2008. Cost of sales
represented 90.2% of sales revenues for the six months ended December 31, 2009,
compared to 82.8% for the six months ended December 31, 2008. Average cost per
unit sold decreased to $686 for the six months ended December 31, 2009, compared
to an average cost per unit sold of $909 for the six months ended December 31,
2008, representing an decrease of $223 per ton, or 24.5%,
period-on-period.





Six Months Ended December
    31,2009
                
                
                2008
                
                
                Variance($)
                
                
                ($)
                
                
                ($)
                
                
                (%)Cost
      of goods sold-
      Raw materials
                
                
                34,807,381
                
                
                
                30,597,181
                
                
                
                4,210,200
                
                
                
                13.8-
      Direct labor
                
                
                212,473
                
                
                
                380,350
                
                
                
                (167,877
                )
                
                
                (44.1
                )-
      Manufacturing overhead
                
                
                4,696,659
                
                
                
                4,542,852
                
                
                
                153,807
                
                
                
                3.439,716,513
                
                
                
                35,520,383
                
                
                
                4,196,130
                
                
                
                11.8Cost
      per unit soldTotal
      units sold (tons)
                
                
                57,881
                
                
                
                39,077
                
                
                
                18,804
                
                
                
                48.1Average
      cost per unit sold ($/ton)
                
                
                686
                
                
                
                909
                
                
                
                (223
                )
                
                
                (25
                )





The
decrease in average per unit cost of sales is represented by the combined effect
of:


29





·
            a
      decrease in cost of raw materials per unit sold of $182, or 23.2%, from
      $783 for the six months ended December 31, 2008 compared to $601 for
      the six months ended December 31,
2009;





·
            a
      decrease in direct labor per unit sold of $6, or 60.0%, from $10 for the
      six months ended December 31, 2008 compared to $4 for the six months ended
      December 31, 2009;





·
            a
      decrease in factory overhead per unit sold of $35, or 30.2%, from $116 for
      the six months ended December 31, 2008 compared to $81 for the six months
      ended December 31,
2009.





The cost
of raw materials consumed increased by $4,210,200, or 13.8%, period-on-period,
to $34,807,381 for the six months ended December 31, 2009 from $30,597,181 for
the six months ended December 31, 2008. This increase was mainly due to increase
in total units sold offset by decrease in average raw material cost per unit
sold.





Direct
labor costs decreased by $167,877 or 44.1%, period-on-period, to $212,473 for
the six months ended December 31, 2009, from $380,350 for the six months ended
December 31, 2008. The decrease was due to effective labor management and thus a
decrease in direct labor cost per unit sold of $6.




Manufacturing
overhead costs increased by $153,807, or 3.4%, period-on-period, to $4,696,659
for the six months ended December 31, 2009, from $4,542,852 for the six months
ended December 31, 2008. The increase was mainly attributable to the combined
effect of an increase in packaging materials of $681,629, or 419.7%,
period-on-period to $844,027 for the six months ended December 31, 2009, from
$162,398 for the six months ended December 31, 2008 offset by a decrease in low
consumables by $525,421, or 42.5%, period-on-period to $709,565 for the six
months ended December 31, 2009, from $1,234,986 for the six months ended
December 31, 2008.





Gross
Profit





Gross
profit in absolute terms decreased by $3,064,681, or 41.4%, period-on-period, to
$4,339,314 for the six months ended December 31, 2009, from $7,403,995 for the
six months ended December 31, 2008, while gross profit margin decreased to 9.8%
for the six months ended December 31, 2009, from 17.2% for the six months ended
December 31, 2008. The decrease in gross profit margin is mainly attributable to
a 30.7% period-on-period decrease in average selling prices, offset by a
decrease in average cost per unit sold of 24.5% period-on-period.





Selling
Expenses





Selling
expenses decreased by $1,231,416, or 92.3%, period-on-period, to $102,414 for
the six months ended December 31, 2009 compared to the corresponding period in
2008 of $1,333,830. The decrease was mainly attributable to less selling
commission costs associated with largely reduced export sales
period-on-period.





Administrative
Expenses





Administrative
expenses increased by $192,534, or 18.5%, period-on-period, to $1,232,739 for
the six months ended December 31, 2009 compared to $1,040,205 for the six months
ended December 31, 2008. This was chiefly due to an increase in salaries and
wages due to the increased average number of staff at the Group companies, as
well as an increase in insurance, stock and listing fees and travelling expenses
during the six months ended December 31, 2009.





Allowance for Bad
and Doubtful Debts





Allowance
for bad and doubtful debts decreased by $3,611,278, or 94.3%, period-on-period.
The prior period charge reflects a provision for uncollectible accounts
receivable amounting to $3,829,462 due to a dispute regarding a special
stainless steel product as disclosed in our Form 10-K filed for the financial
year ended June 30, 2009. Allowance recognized for the current period was in the
amount of $218,184 in accordance with our policy for allowance for bad and
doubtful debts set forth under the “Critical Accounting Policies and
Estimates” heading in this report.


30





Income from
Operations





Income
from operations before income tax increased by $1,564,507, or 137.1%,
period-on-period to income of $2,705,484 for the six months ended December 31,
2009 from income of $1,140,977 for the six months ended December 31, 2008, as a
result of all the factors discussed above.





Other
Income





Our other
income decreased $148,738, or 57.3%, to $110,963 for the six months ended
December 31, 2009 from $259,701 for the six months ended December 31,
2008.  As a percentage of revenues, other income decreased to 0.3% for
the six months ended December 31, 2009 from 0.6% for the six months ended
December 31, 2008. Such percentage decrease in other income was primarily due to
lower interest rates period-on-period.





Interest
Expense





Total
interest expense decreased $144,748, or 22.3%, to $503,434 for the six months
ended December 31, 2009, from $648,182 for the six months ended December 31,
2008 due to an increase in loan balances offset by a lower weighted average
interest rate period-on-period, as well as interest amounting to $260,690 being
capitalized to construction-in-progress for the period.





Income
Tax





For the
six months ended December 31, 2009, we recognized an income tax benefit of
$1,233, compared to $148,257 for the six months ended December 31, 2008. The
income tax benefit in the amount of $1,233 was carried forward from the three
months ended September 30, 2009. No additional income tax expenses were
recognized for the current period as Chengtong had tax losses carried forward
from prior periods and Shanghai Blessford was exempted from income taxes as of
December 31, 2009.





Net
Income





Net
income increased by $1,413,493, or 156.9%, period-on-period, to net income of
$2,314,246 for the six months ended December 31, 2009 compared to net income of
$900,753 for the six months ended December 31, 2008. The increase in net income
is attributable to a combination of factors discussed above, including an
increase in tons sold due to strengthening demand offset by a decrease in
average selling prices due to lower steel prices.





Liquidity
and Capital Resources




General





Our
business is capital intensive and requires substantial expenditures for, among
other things, the purchase and maintenance of plant and equipment used in our
operations. Our short-term and long-term liquidity needs arise primarily from
capital expenditures, working capital requirements and principal and interest
payments related to our outstanding indebtedness. We have met these liquidity
requirements with cash provided by operations, equity financing, and bank
debt. As of December 31, 2009, we had cash and cash equivalents of
approximately $13 million.





The
following table provides detailed information about our net cash flow for all
financial statement periods presented in this report:


CASH
FLOW


Six Months Ended December
    31,2009
                
                
                2008Net
      cash provided by operating activities
                
                $
                552,633
                
                
                $
                8,663,138Net
      cash (used in) investing activities
                
                
                (4,746,139
                )
                
                
                (12,954,497
                )Net
      cash provided by financing activities
                
                
                3,290,769
                
                
                
                182,295Net
      cash flow
                
                
                (897,299
                )
                
                
                (3,805,177
                )




31





Operating
Activities





Net cash
flows provided by operating activities for the six months ended December 31,
2009 was $552,633 as compared with $8,663,138 provided by operating activities
for the six months ended December 31, 2008, for a net decrease of $8,110,505.
This decrease was mainly due to increase in cash outflow for inventories of
$8,447,098, increase in cash outflow for advances to suppliers of $3,492,171 and
increase in cash outflow for other taxes payable of $1,809,655 resulting from
the payment of VAT offset by increase in cash inflow from accounts receivable of
$3,388,265 during the period ended December 31, 2009. The cash outflow for
inventories and advances to suppliers was in line with our revenue growth and
increased orders on hand during the six months ended December 31,
2009.





For the
six months ended December 31, 2009, sales revenues generated from the top five
major customers as a percentage of total sales decreased to 53% as compared to
61% for the six months ended December 31, 2008. The loss of all or portion of
the sales volume from a significant customer would have an adverse effect on our
operating cash flows. We note that the continuation or intensification of the
current worldwide economic crisis may have negative consequences on the business
operations of our customers and adversely impact their ability to meet their
financial obligations to us, resulting in unrecoverable losses on our accounts
receivable. We have been strengthening our collection activities and will
continue to closely monitor any changes in collection experience and the credit
ratings of our customers.  From time to time we will review credit
periods offered, along with our collection experience and the other relevant
factors, to evaluate the adequacy of our allowance for doubtful accounts, and to
make changes to the allowance, if necessary. Delays or non-payment of accounts
receivable would have an adverse effect on our operating cash
flows.




Investing
Activities





Our main
uses of cash for investing activities during the six months ended December 31,
2009 were for the purchase of property, plant and equipment related to the
addition of a new cold rolling mill and annealing furnaces at our Shanghai
Blessford facilities.  We believe these capital investments increase
our capacity, expand product line, improve product qualities and create
synergies with our existing production facilities, thereby creating
opportunities to grow sales, enter new markets and further strengthen our
leading position in the niche cold rolling segment that we operate
in.





Net cash
flows used in investing activities for the six months ended December 31, 2009
was $4,746,139 as compared with $12,954,497 for the six months ended December
31, 2008. Cash flows used in investing activities decreased as we worked towards
the completion of construction related to the new 1450mm cold rolling mill and
annealing furnaces and there was no additional material construction project
during the period.





As of
December 31, 2009, the Company had $916,069 in commitments for capital
expenditures for construction projects mentioned above. Management believes that
we currently have sufficient capital resources to meet these contractual
commitments. We have completed the installation of the new mill and expect to
complete trial production by February 2010. We also forecast lower capital
expenditures in the coming years as the Company has already completed most of
its major expansion plans and the majority of the construction costs relating to
our third cold rolling mill have been paid for as at December 31,
2009.





Financing
Activities




Net cash
flows provided by financing activities for the six months ended December 31,
2009 was $3,290,769 as compared to $182,295 for the six months ended December
31, 2008. During the six months ended December 31, 2009, the Company received
short-term loan proceeds of $3,735,169, which was partially offset by repayment
of short-term loans in the amount of $444,400.





On
December 30, 2008, we filed a universal shelf registration statement with the
SEC, which was declared effective on December 10, 2009. The shelf registration
will permit us to issue securities valued at up to an aggregate of $40 million.
Now that the registration statement is effective, we will have the flexibility
to issue registered securities, from time to time, in one or more separate
offerings or other transactions with the size, price and terms to be determined
at the time of issuance.  Although we do not have any commitments or
current intentions to sell securities under the registration statement, we
believe that it is prudent to have a shelf registration statement in place to
ensure financing flexibility should the need arise.




While we
currently generate sufficient operating cash flows to support our working
capital requirements, our working capital requirements and the cash flow
provided by future operating activities will vary from quarter to quarter, and
are dependent on factors such as volume of business and payment terms with our
customers. As such, we may need to rely on access to the financial markets to
provide us with significant discretionary funding capacity. However, the current
uncertainty arising out of domestic and global economic conditions, including
the recent disruption in credit markets, poses a risk to the economies in which
we operate and may adversely impact our potential sources of capital financing.
The general unavailability of credit could make capital financing more expensive
for us or impossible altogether.  Even if we are able to obtain
credit, the incurrence of indebtedness could result in increased debt service
obligations. Our inability to renew our current bank debt that is due in July
2010, and the unavailability of additional debt financing as a result of
economic pressures on the credit and equity markets could have a material
adverse effect on our business operations.


32





Current
Assets





Current
assets increased by $1,285,851, or 1.5%, period-on-period to $85,317,602 as of
December 31, 2009, from $84,031,751 as of June 30, 2009, principally as a result
of an increase in inventories of $8,874,466, or 54.5%, and advances to suppliers
of $613,783, or 2.8%, period-on-period, offset by a decrease in bills receivable
of $5,813,752, or 94.8%, period-on-period and accounts receivable of $1,615,978
or 6.4%, period-on-period.





Accounts
receivable, representing 27.6% of total current assets as of December 31, 2009,
is a significant asset of the Company. We offer credit to our customers in the
normal course of our business and accounts receivable is stated net of allowance
for doubtful accounts. Credit periods vary substantially across industries,
segments, types and size of companies in China where we operate our business.
Because of the niche products that we process, our customers are usually also
niche players in their own respective segment, who then sell their products to
the end product manufacturers. The business cycle is relatively long, as well as
the credit periods. The Company offers credit to its customers for periods of 60
days, 90 days, 120 days and 180 days. We generally offer the longer credit terms
to longstanding recurring customers with good payment histories and sizable
operations. From time to time we review these credit periods, along with our
collection experience and the other factors discussed above, to evaluate the
adequacy of our allowance for doubtful accounts, and to make changes to the
allowance, if necessary.  If our actual collection experience or other
conditions change, revisions to our allowances may be required, including a
further provision which could adversely affect our operating income, or write
back of provision when estimated uncollectible accounts are actually
collected.





Our
management determines the collectability of outstanding accounts by maintaining
quarterly communication with such customers and obtaining confirmation of their
intent to fulfill their obligations to the Company. In making this
determination, our management also considers past collection experience, our
relationship with customers and the impact of current economic conditions on our
industry and market. We note that the continuation or intensification of the
current global economic crisis may have negative consequences on the business
operations of our customers and adversely impact their ability to meet their
financial obligations. To reserve for potentially uncollectible accounts
receivable, for the period ended December 31, 2009, our management has made a
50% provision for all accounts receivable that are over 180 days past due and
full provision for all accounts receivable over one year past
due.  From time to time, we will review these credit periods, along
with our collection experience and the other factors discussed above, to
evaluate the adequacy of our allowance for doubtful accounts, and to make
changes to the allowance, if necessary. If our actual collection experience or
other conditions change, revisions to our allowances may be required, including
a further provision which could adversely affect our operating income, or write
back of provision when estimated uncollectible accounts are actually
collected.





The
following table reflects the aging of our accounts receivable based on due date
as of December 31, 2009 and June 30, 2009:





December 31,
2009





US$
                    
                    Total
                    
                    
                    Current
                    
                    
                    1 to 30
                      days
                    
                    
                    31 to
                      90 days
                    
                    
                    91 to 180
                      days
                    
                    
                    181 to 360
                      days
                    
                    
                    over
                      1 yearTOTAL
                    
                    
                    24,531,828
                    
                    
                    
                    13,558,568
                    
                    
                    
                    2,336,292
                    
                    
                    
                    2,313,955
                    
                    
                    
                    5,210,379
                    
                    
                    
                    209,989
                    
                    
                    
                    902,645%
                    
                    
                    100
                    
                    
                    
                    55
                    
                    
                    
                    10
                    
                    
                    
                    9
                    
                    
                    
                    21
                    
                    
                    
                    1
                    
                    
                    
                    4





June 30,
2009





US$
                    
                    Total
                    
                    
                    Current
                    
                    
                    1 to 30
                      days
                    
                    
                    31 to
                      90 days
                    
                    
                    91 to 180
                      days
                    
                    
                    181 to 360
                      days
                    
                    
                    over
                      1 yearTOTAL
                    
                    
                    25,970,961
                    
                    
                    
                    14,497,258
                    
                    
                    
                    405,769
                    
                    
                    
                    1,639,027
                    
                    
                    
                    7,061,774
                    
                    
                    
                    2,168,481
                    
                    
                    
                    198,652%
                    
                    
                    100
                    
                    
                    
                    56
                    
                    
                    
                    2
                    
                    
                    
                    6
                    
                    
                    
                    27
                    
                    
                    
                    8
                    
                    
                    
                    1




33





Management
continues to take appropriate actions to perform business and credit reviews of
any prospective customers (whether new or returning) to protect the Company from
any who might pose a high credit risk to our business based on their commercial
credit reports, our past collection history with them, and our perception of the
risk posed by their geographic location. For example, we have halted all our
sales transactions directly with customers in the Philippines as we consider the
associated credit risk to be relatively high. Based on publicly available
reports, such as that issued by A.M. Best, there is a high risk that financial
volatility may erupt in that country due to inadequate reporting standards, a
weak banking system or asset markets and/or poor regulatory structure. We expect
to resume such exports when conditions improve. Management is also of the
opinion that we do not currently have any high risk receivables on our
accounts.




Current
Liabilities





Current
liabilities increased by $19,925, or 0.05%, period-on-period, to $42,825,577 as
of December 31, 2009, from $42,805,652 as of June 30, 2009. The increase was
mainly attributable to an increase in short-term loans of $3,302,957, or 14.7%,
period-on-period, as well as an increase in advances from customers of
$1,043,436, or 59.9%, period-on-period, offset by a decrease in other taxes
payable of $3,728,962, or 56.1%, period-on-period.





As of
December 31, 2009, we had $25,791,988 in short-term loans. These short-term
loans were renewed in July 2009 for one year and will be due on July 31, 2010.
We expect to refinance such debt at its maturity, but we cannot assure you that
we will be able to do so on terms favorable to the Company or at
all.





Capital
Expenditures





During
the six months ended December 31, 2009, we invested $4,746,139 in purchases of
property, plant and equipment, and construction projects in relation to the new
cold-rolling mill and annealing furnaces.




Loan
Facilities





The
following table illustrates our credit facilities as of December 31, 2009,
providing the name of the lender, the amount of the facility, the date of
issuance and the maturity date:





Lender
                                    
                                    Date of
                                      Loan
                                    
                                    Maturity Date
                                    
                                    Duration
                                    
                                    Interest Rate
                                    
                                    Principal AmountRaiffeisen
                                      Zentralbank
      Österreich AG (“RZB”)
                                    
                                    July
      7, 2009
                                    
                                    July
      31, 2010
                                    
                                    1
      year
                                    
                                    USD:
      SIBOR + 3%;
                                      RMB:
      1.15 times of
                                      the
      PBOC rate
                                    
                                    $5,300,000;
                                      $2,475,290
                                      (RMB17,000,000)Raiffeisen
                                      Zentralbank
      Österreich AG
                                    
                                    July
      7, 2009
                                    
                                    July
      31, 2010
                                    
                                    1
      year
                                    
                                    1.15
      times of the
                                      PBOC
      rate
                                    
                                    $18,016,698
                                      (RMB123,000,000)Total
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    25,791,988





As of
December 31, 2009, we had $25,791,988 in short-term loans as illustrated in the
above table. The above loans carry an interest rate of 1.15 times of the
standard market rate set by the People’s Bank of China, or PBOC, for Renminbi
loans and at SIBOR plus 3% for USD loans, and are secured by land use rights,
buildings, plant and machineries, and guaranteed by PSHL and our Chairman, Mr.
Li Wo Hing.





We are
not aware of any existing issues that may lead to a withdrawal of these loans
that are due and renewable in July 2010. Our inability to renew, and the
unavailability of debt financing due to credit market conditions could have a
material adverse effect on our business operations.





We
believe that our currently available working capital and the credit facilities
referred to above should be adequate to sustain our operations at our current
levels and support our contractual commitments through the next twelve months.
However, our working capital requirements and the cash flow provided by future
operating activities vary from quarter to quarter, depending on the volume of
business during the period and payment terms with our customers. As we expect a
continuation of volatility in demand and steel prices in both domestic and
international markets in the foreseeable future,  our operating cash
flows might be significantly negatively impacted by reduced sales and margins.
Management has strengthened its sales and marketing activities, and continues to
be in talks with potential customers whose past orders we had been unable to
fill due to full capacity, which if successful, could result in additional sales
and mitigate the impact of the weakened demand and margins on our operating cash
flow. As of December 31, 2009, the Company also had $916,069 in contractual
commitments for capital expenditures related to the expansion of our production
facilities. As such, we may need to rely on access to the financial markets to
provide us with significant discretionary funding capacity. However, the current
uncertainty arising out of domestic and global economic conditions, including
the recent disruption in credit markets, poses a risk to the economies in which
we operate and may adversely impact our potential sources of capital financing.
The general unavailability of credit could make capital financing more expensive
for us or impossible altogether. Even if we are able to obtain credit, the
incurrence of indebtedness could result in increased debt service obligations
and could result in operating and financing covenants that could restrict our
present and future operations.


34





Obligations
under Material Contracts





Below is
a table setting forth our material contractual obligations as of December 31,
2009, short-term debt obligations include one year projected interest at
weighted average interest rate:





Payments Due by PeriodContractual obligations
                
                Total
                
                
                Fiscal
                  Year 2010
                
                
                Fiscal Years
                  2011-2012
                
                
                Fiscal Years
                  2012-2013
                
                
                Fiscal Year
                  2014 and
                  BeyondShort-Term
      Debt Obligations
                
                $
                27,207,968
                
                
                $
                27,207,968
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Construction
      Commitments
                
                
                916,069
                
                
                
                916,069
                
                
                
                -
                
                
                
                -
                
                
                
                -TOTAL
                
                $
                28,124,037
                
                
                $
                28,124,037
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -





Recent
Accounting Pronouncements





In
December 2007, the FASB issued guidance now codified as FASB ASC 805, “Business
Combinations” (“ASC 805”). ASC 805 will change the accounting for business
combinations. Under ASC 805, an acquiring entity will be required to recognize
all the assets acquired and liabilities assumed in a transaction at the
acquisition-date fair value with limited exceptions. ASC 805 will change the
accounting treatment and disclosure for certain specific items in a business
combination. ASC 805 applies prospectively to business combinations for which
the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. ASC 805 will impact the Company
in the event of any future acquisition.







In
December 2007, the FASB issued guidance now codified as ASC 810,
“Non-controlling Interests in Consolidated Financial Statements—an amendment of
Accounting Research Bulletin No. 51”. ASC 810 establishes new accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. ASC 810 is effective for fiscal years beginning
on or after December 15, 2008. The Company does not believe that ASC 810 will
have a material impact on its consolidated financial statements.





In April
2008, the FASB issued guidance now codified as ASC 350-30, “Determination of the
Useful Life of Intangible Assets” (“ASC 350-30”), which amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under ASC 350,
“Goodwill and Other Intangible Assets” (“ASC 350”).  The intent of
this guidance is to improve the consistency between the useful life of a
recognized intangible asset under ASC 350 and the period of expected cash flows
used to measure the fair value of the asset under ASC 805, “Business
Combinations,” and other U.S. generally accepted accounting
principles.  This guidance is effective for fiscal years beginning
after December 15, 2008 (the Company’s fiscal year 2010), and interim periods
within those fiscal years.  The Company does not believe the adoption
of ASC 350-30 will have a material impact on the Company’s consolidated
financial position, results of operations and cash flows.





In May
2008, the FASB issued guidance now codified as ASC 944-20, “Accounting for
Financial Guarantee Insurance Contracts” (“ASC 944-20”). The new standard
clarifies how FASB Statement No. 60, now codified as ASC 944-20, “Accounting and
Reporting by Insurance Enterprises”, applies to financial guarantee insurance
contracts issued by insurance enterprises, including the recognition and
measurement of premium revenue and claim liabilities. It also requires expanded
disclosures about financial guarantee insurance contracts. ASC 944-20 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and all interim periods within those fiscal years, except for
disclosures about the insurance enterprise’s risk-management activities, which
are effective the first period (including interim periods) beginning after May
23, 2008. Except for the required disclosures, earlier application is not
permitted. The standard is not applicable to this Company.





In
October 2008, the FASB issued guidance now codified as ASC 820-10, “Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active” (“ASC 820-10”). This guidance clarifies the application of FASB
Statement No. 157, now codified as ASC 820-10, “Fair Value Measurements”, in a
market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. ASC 820-10 was effective upon
issuance. The adoption of ASC 820-10 will not impact our consolidated financial
statements in any material respect.


35





In
December 2008, the FASB issued guidance now codified as ASC 715-20-65,
“Employers’ Disclosures about Postretirement Benefit Plan Assets, an amendment
of FASB Statement No. 132” (revised 2003), now codified as ASC 715-20-65. It
provides guidance on an employer’s disclosures about plan assets, including: how
investment allocation decisions are made and factors that are pertinent to an
understanding of investment policies and strategies; the major categories of
plan assets; the inputs and valuation techniques used to measure the fair value
of plan assets; the effect of fair value measurements using significant
unobservable inputs (level 3) on changes in plan assets for the period, and
significant concentrations of risks within plan assets. ASC 715-20-65 is
effective for fiscal years ending after December 15, 2009. We are currently
assessing the potential impact that adoption of this standard may have on our
financial statements.





In April
2009, the FASB issued guidance now codified as ASC 825, “Interim Disclosures
about Fair Value of Financial Instruments”. It requires the fair value for all
financial instruments within the scope of SFAS No. 107, now codified as ASC 825,
“Disclosures about Fair Value of Financial Instruments”, to be disclosed in the
interim periods as well as in annual financial statements.  This
standard is effective for the quarter ending after June 15, 2009.  The
adoption of ASC 825 will not impact our consolidated financial statements in any
material respect.





In April
2009, the FASB issued guidance now codified as ASC 820-10, “Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly”. It
clarifies the objective and method of fair value measurement even when there has
been a significant decrease in market activity for the asset being measured.
This standard is effective for the quarter ending after June 15, 2009. The
adoption of ASC 825 will not impact our consolidated financial statements in any
material respect.





In April
2009, the FASB issued guidance now codified as ASC 320, “Recognition and
Presentation of Other-Than-Temporary Impairments”. The objective of an
other-than-temporary impairment analysis under existing U.S. GAAP is to
determine whether the holder of an investment in a debt or equity security for
which changes in fair value are not regularly recognized in earnings (such as
securities classified as held-to-maturity or available-for-sale) should
recognize a loss in earnings when the investment is impaired. An investment is
impaired if the fair value of the investment is less than its amortized cost
basis. This guidance amends the other-than-temporary impairment guidance in U.S.
GAAP for debt securities to make the guidance more operational and to improve
the presentation and disclosure of other-than-temporary impairments on debt and
equity securities in the financial statements. This guidance does not amend
existing recognition and measurement guidance related to other-than-temporary
impairments of equity securities. We are currently assessing the potential
impact that adoption of this standard may have on our financial
statements.





In June
2009, the FASB issued guidance now codified as ASC 810, “Amendments to FASB
Interpretation No. 46(R)” (“ASC 810”), which amends FASB Interpretation No. 46
(revised December 2003), now codified as ASC 810-10, to address the elimination
of the concept of a qualifying special purpose entity. ASC 810 also replaces the
quantitative-based risks and rewards calculation for determining which
enterprise has a controlling financial interest in a variable interest entity
with an approach focused on identifying which enterprise has the power to direct
the activities of a variable interest entity and the obligation to absorb losses
of the entity or the right to receive benefits from the entity. Additionally,
ASC 810 provides more timely and useful information about an enterprise’s
involvement with a variable interest entity. ASC 810 will become effective in
July 2010. The Company is currently evaluating whether this standard will have
an impact on the Company consolidated financial statements.





In August
2009, the FASB issued Accounting Standards Update No. 2009-05, “Measuring
Liabilities at Fair Value” (“ASU 2009-05”). ASU 2009-05 amends ASC 820, “Fair
Value Measurements” (“ASC 820”). Specifically, ASU 2009-05 provides
clarification that in circumstances in which a quoted price in an active market
for the identical liability is not available, a reporting entity is required to
measure fair value using one or more of the following methods: 1) a valuation
technique that uses a) the quoted price of the identical liability when traded
as an asset or b) quoted prices for similar liabilities or similar liabilities
when traded as assets and/or 2) a valuation technique that is consistent with
the principles of ASC 820 (e.g. an income approach or market approach). ASU
2009-05 also clarifies that when estimating the fair value of a liability, a
reporting entity is not required to adjust to include inputs relating to the
existence of transfer restrictions on that liability. The adoption of this
standard did not have an impact on the Company’s financial position or results
of operations.


36





In
October 2009, the FASB issued ASU No. 2009-13 on ASC 605, “Revenue Recognition”
(“ASC 605”), regarding multiple-deliverable revenue arrangements. This ASU
provides amendments to the existing criteria for separating consideration in
multiple-deliverable arrangements.  The amendments establish a selling
price hierarchy for determining the selling price of a deliverable, eliminate
the residual method of allocation of arrangement consideration to all
deliverables and require the use of the relative selling price method in
allocation of arrangement consideration to all deliverables, require the
determination of the best estimate of a selling price in a consistent manner,
and significantly expand the disclosures related to the multiple-deliverable
revenue arrangements. The amendments will be effective in fiscal years beginning
on or after June 15, 2010, and early adoption is permitted. We are currently
evaluating the impact on our financial statements of adopting these amendments
to ASC 605 and cannot estimate the impact of adoption at this time.





In
October 2009, the FASB issued ASU No. 2009-15, “Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other Financing”
(“ASU 2009-15”).  ASU 2009-15 amends ASC 470, “Debt with Conversion
and Other Options” (“ASC 470”), and ASC 260, “Earnings Per Share” (“ASC
260”).  Specifically, ASU 2009-15 requires companies to mark stock
loan agreements at fair value and recognize the cost of the agreements by
reducing the amount of additional paid-in capital on their financial
statements.  The amendments will be effective for fiscal years
beginning on or after December 15, 2009.  We are currently evaluating
the impact on our financial statements of adopting the amendments in ASU 2009-15
and cannot estimate the impact of adoption at this time.





In
December 2009. the FASB issued ASU 2009-17, “Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities” (“ASU
2009-17”).  ASU 2009-17 are the amendments to ASC 810,
“Consolidation”, which are the result of FASB Statement No. 167, “Amendments to
FASB Interpretation No. 46(R)”.  That statement was issued by the FASB
in June 2009.  Amends the variable-interest entity guidance in ASC 810
to clarify the accounting treatment for legal entities in which equity investors
do not have sufficient equity at risk for the entity to finance its activities
without financial support. ASU 2009-17 is effective at the start of the first
fiscal year beginning after November 15, 2009. The Company is currently
evaluating whether this standard will have an impact on the Company consolidated
financial statements.





In
January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and
Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements”
(“ASU 2010-06”).  ASU 2010-06 requires reporting entities to provide
information about movements of assets among Levels 1 and 2 of the three-tier
fair value hierarchy established by ASC 820.  The guidance is
effective for any fiscal year that begins after December 15, 2010 and should be
used for quarterly and annual filings.  We are currently evaluating
the impact on our financial statements of adopting the amendments in ASU 2010-06
and cannot estimate the impact of adoption at this time.





Critical
Accounting Policies and Estimates




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires our management to make
assumptions, estimates and judgments that affect the amounts reported in the
financial statements, including the notes thereto, and related disclosures of
commitments and contingencies, if any. We consider our critical accounting
policies to be those that require the more significant judgments and estimates
in the preparation of financial statements, including the
following:





Functional
Currency and Translating Financial Statements





The
Company’s principal country of operations is the PRC. Our functional currency is
Chinese Renminbi; however, the accompanying consolidated financial statements
have been expressed in USD. The consolidated balance sheets have been translated
into USD at the exchange rates prevailing at each balance sheet date. The
consolidated statements of operations and cash flows have been translated using
the weighted-average exchange rates prevailing during the periods of each
statement. The registered equity capital denominated in the functional currency
is translated at the historical rate of exchange at the time of capital
contribution. All translation adjustments resulting from the translation of the
financial statements into the reporting currency are dealt with as other
comprehensive income in stockholders’ equity.





Revenue
Recognition





Revenue
from the sale of goods and services is recognized on the transfer of risks and
rewards of ownership, which generally coincides with the time when the goods are
delivered to customers and the title has passed and services have been rendered.
Revenue is reported net of all VAT taxes. Other income is recognized when it is
earned.


37





Accounts
Receivable





Credit
periods vary substantially across industries, segments, types and size of
companies in China where we operate our business. Because of the niche products
that we process, our customers are usually also niche players in their own
respective segment, who then sell their products to end product manufacturers.
The business cycle is relatively long, as well as credit periods. The Company
offers credit to its customers for periods of 60 days, 90 days, 120 days and 180
days. We generally offer the longer credit terms to longstanding recurring
customers with good payment histories and sizable operations.





Accounts
receivable is recorded at the time revenue is recognized and is stated net of
allowance for doubtful accounts. The Company maintains an allowance for doubtful
accounts based on its assessment of the collectability of the accounts
receivable. Management determines the collectability of outstanding accounts by
maintaining regular communication with such customers and obtaining confirmation
of their intent to fulfill their obligations to the Company. Management also
considers past collection experience, our relationship with customers and the
impact of current economic conditions on our industry and market. However, we
note that the continuation or intensification of the current global economic
crisis may have negative consequences on the business operations of our
customers and adversely impact their ability to meet their financial
obligations. At December 31, 2009, approximately 13% of our accounts receivable
were past due over 180 days. To reserve for potentially uncollectible accounts
receivable, for the period ended December 31, 2009, our management has made a
50% provision for all accounts receivable that are over 180 days past due and
full provision for all accounts receivable over one year past due. From time to
time, we will review these credit periods, along with our collection experience
and the other factors discussed above, to evaluate the adequacy of our allowance
for doubtful accounts, and to make changes to the allowance, if necessary. If
our actual collection experience or other conditions change, revisions to our
allowances may be required, including a further provision which could adversely
affect our operating income, or write back of provision when estimated
uncollectible accounts are actually collected. At December 31 and June 30, 2009,
the Company had $1,006,973 and $830,127 of allowances for doubtful accounts,
respectively.





Bad debts
are written off for past due balances over two years or when it becomes known to
management that such amount is uncollectible. Provision for bad debts recognized
for the periods ended December 31, 2009 and 2008 were $218,184 and $3,829,462,
respectively. The current period charge reflects a provision for doubtful
accounts based on our policy described above. Our management is continually
working to ensure that any known uncollectible amounts are immediately written
off as bad debt against outstanding balances.





Advances
to Suppliers





In order
to insure a steady supply of raw materials, the Company is required from time to
time to make cash advances to its suppliers when placing purchase orders, for a
guaranteed minimum delivery quantity at future times when raw materials are
required. The advance is seen as a deposit to suppliers and guarantees our
access to raw materials during periods of shortages and market volatility, and
is therefore considered an important component of our operations. Contracted raw
materials are priced at prevailing market rates agreed by us with the suppliers
prior to each delivery date. Advances to suppliers are shown net of an allowance
which represents potentially unrecoverable cash advances at each balance sheet
date. Such allowances are based on an analysis of past raw materials receipt
experience and the credibility of each supplier according to its size and
background. In general, we don’t provide allowances against advances paid to
state owned companies as there is minimal risk of default. Our allowances for
advances to suppliers are subjective critical estimates that have a direct
impact on reported net earnings, and are reviewed quarterly at a minimum to
reflect changes from our historic raw material receipt experience and to ensure
the appropriateness of the allowance in light of the circumstances present at
the time of the review. It is reasonably possible that the Company’s estimate of
the allowance will change, such as in the case when the Company becomes aware of
a supplier’s inability to deliver the contracted raw materials or meet its
financial obligations. At December 31 and June 30, 2009, the Company had
allowances for advances to suppliers of $1,632,442 and $1,631,557,
respectively.





The
majority of our advances to suppliers of over 180 days is attributable to our
advances to a subsidiary of a state-owned company in China, whose risk of
default is minimal. At December 31, 2009, this supplier has confirmed to our
management that it is committed to delivering the contracted raw materials as
and when those are needed by the Company.





Allowances
for advances to suppliers are written off when all efforts to collect the
materials or recover the cash advances have been unsuccessful, or when it has
become known to the management that there is no intention for the suppliers to
deliver the contracted raw materials or refund the cash advances. To date we
have not written off any advances to suppliers.


38




Inventory





Inventory
is stated at the lower of cost or market. Cost is determined using the
weighted-average method. Market value represents the estimated selling price in
the ordinary course of business less the estimated costs necessary to complete
the sale.





Intangible
Assets





Intangible
assets represent land use rights in China acquired by the Company and are stated
at cost less amortization. Amortization of land-use rights is calculated on the
straight-line method, based on the period over which the right is granted by the
relevant authorities in China. The Company acquired land use rights in August
2004 and December 2006 that both expire in December 2056. The land use rights
are amortized over a fifty-year term. Intangible assets of the Company are
reviewed for impairment if there are triggering events, to determine whether
their carrying value has become impaired, in conformity with ASC 360. The
Company also re-evaluates the periods of amortization to determine whether
subsequent events and circumstances warrant revised estimates of useful lives.
An impairment test was performed as of December 31, 2009 and no impairment
charges were recognized for the relevant periods. As of December 31, 2009, the
Company expects these assets to be fully recoverable.





Property,
Plant and Equipment





Property,
plant and equipment are stated at cost less accumulated depreciation. The cost
of an asset comprises its purchase price and any directly attributable costs of
bringing the asset to its present working condition and location for its
intended use. Depreciation is computed on a straight-line basis over the
estimated useful lives of the related assets for financial reporting purposes.
The estimated useful lives for significant property and equipment are as
follows:




Buildings
                10
      yearsPlant
      and machinery
                10
      yearsMotor
      vehicles
                5
      yearsOffice
      equipment
                5
      to 10 years





Repairs
and maintenance costs are normally charged to the statement of operations in the
year in which they are incurred. In situations where it can be clearly
demonstrated that the expenditure has resulted in an increase in the future
economic benefits expected to be obtained from the use of the asset, the
expenditure is capitalized as an additional cost of the asset.





The
Company accounts for impairment of property, plant and equipment and amortizable
intangible assets in accordance with ASC 360, which requires the Company to
evaluate a long-lived asset for recoverability when there is an event or
circumstance that indicates the carrying value of the asset may not be
recoverable. We determine such impairment by measuring the estimated
undiscounted future cash flow generated by the assets, comparing the result to
the asset carrying value and adjusting the asset to the lower of its carrying
value or fair value and charging current operations for the measured impairment.
Where the recoverable amount of any property, plant and equipment is determined
to have declined below its carrying amount, the carrying amount is reduced to
reflect the decline in value. We performed an impairment test as of December 31,
2009, using a normal and a worse-case scenario, and assessed fair value based on
average tons sold, selling price per ton, gross margin, and other cash inflows
and outflows for the next ten years where our mills are expected to remain in
operation. No impairment charges were recognized for the relevant year.
Assumptions and estimates used in our impairment test provide the general
direction of major factors expected to affect our business and cash flows, and
are subject to risks and uncertainties such as changes in interest rates,
industry cyclicality, and factors surrounding the general Chinese and global
economies. Those estimates will be reassessed for their reasonableness at each
impairment test.





Other
Policies





Other
accounting policies used by the Company are set forth in the notes accompanying
our financial statements.





Seasonality





Our
operating results and operating cash flows historically have been subject to
seasonal variations. Our revenues are usually higher in the second half of the
year than in the first half of the year and the third quarter is usually the
slowest quarter because fewer projects are undertaken during and around the
Chinese New Year holidays.


39





Off-Balance
Sheet Arrangements





For the
period ended December 31, 2009, we did not have any off-balance sheet
arrangements.





ITEM
      3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.





Not
Applicable.





ITEM
      4.
            CONTROLS
      AND PROCEDURES.




Evaluation
of Disclosure Controls and Procedures




We
maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Exchange Act) that are designed to ensure that information that would be
required to be disclosed in Exchange Act reports is recorded, processed,
summarized and reported within the time period specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to our
management, including to our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
  As
required by Rule 13a-15 under the Exchange Act, our management, including our
Chief Executive Officer, Mr. Wo Hing Li, and Chief Financial Officer, Ms. Leada
Tak Tai Li, evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of December 31, 2009.  Based on our
assessment, Mr. Li and Ms. Li determined that, as of December 31, 2009, and as
of the date that the evaluation of the effectiveness of our disclosure controls
and procedures was completed, our disclosure controls and procedures were
effective to satisfy the objectives for which they are
intended.
  Changes
in Internal Control Over Financial Reporting
  There
were no changes in our internal control over financial reporting during the
period covered by this report that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.


PART
II


OTHER
INFORMATION





ITEM
      1.
            LEGAL
      PROCEEDINGS.




From time
to time, we may become involved in various lawsuits and legal proceedings, which
arise, in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these, or other matters, may
arise from time to time that may harm our business. We are currently not aware
of any such legal proceedings or claims that we believe will have a material
adverse affect on our business, financial condition or operating
results.




ITEM
      1A.
            RISK
      FACTORS.




Not
Applicable.





ITEM
      2.
            UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.





None.




ITEM
      3.
            DEFAULTS
      UPON SENIOR SECURITIES.





None.




ITEM
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS.





No
matters were submitted to a vote of security holders during the period covered
by this report, through the solicitation of proxies or
otherwise.


40


ITEM
      5.
            OTHER
      INFORMATION.





We have no information to disclose
that was required to be in a report on Form 8-K during the period covered by
this report, but was not reported. There have been no material changes to the
procedures by which security holders may recommend nominees to our board of
directors.




ITEM
      6.
            EXHIBITS.




The
following exhibits are filed as part of this report or incorporated by
reference:




Exhibit No.
                      
                      Description10.1
                      
                      Senior
      Loan Agreement, dated January 29, 2010, between Shanghai Blessford Alloy
      Co., Ltd. and DEG – Deutsche Investitions und Entwicklungsgessellschaft
      MBH.31.1
                      
                      Certifications
      of Principal Executive Officer filed pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
                      
                      Certifications
      of Principal Financial Officer filed pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
                      
                      Certifications
      of Principal Executive Officer furnished pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2
                      
                      Certifications
      of Principal Financial Officer furnished pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.


41


SIGNATURES





In accordance with Section 13 or 15(d)
of the Exchange Act, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.





Date:
      February 16, 2010
                CHINA
      PRECISION STEEL, INC.By:
                /s/
      Wo Hing LiWo
      Hing Li, Chief Executive Officer(Principal
      Executive Officer)




By:
            /s/ Leada Tak Tai
LiLeada
      Tak Tai Li, Chief Financial Officer(Principal
      Financial Officer and Principal
              Accounting
      Officer)


42


EXHIBIT
INDEX





Exhibit No.
                      
                      Description10.1
                      
                      Senior
      Loan Agreement, dated January 29, 2010, between Shanghai Blessford Alloy
      Co., Ltd. and DEG – Deutsche Investitions und Entwicklungsgessellschaft
      MBH.31.1
                      
                      Certifications
      of Principal Executive Officer filed pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
                      
                      Certifications
      of Principal Financial Officer filed pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
                      
                      Certifications
      of Principal Executive Officer furnished pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2
                      
                      Certifications
      of Principal Financial Officer furnished pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.


43