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: September 30, 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 November 12, 2009 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
Months Ended September 30, 2009
 
 TABLE
OF CONTENTS
 
 PART
      IFINANCIAL
      INFORMATIONItem
      1.
                Financial
      Statements
                2Item
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                21Item
      3.
                Quantitative
      and Qualitative Disclosures About Market Risk
                35Item
      4.
                Controls
      and Procedures
                36PART
      IIOTHER
      INFORMATIONItem
      1.
                Legal
      Proceedings
                36Item 1A.
                Risk
      Factors
                36Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                36Item
      3.
                Defaults
      Upon Senior Securities
                36Item
      4.
                Submission
      of Matters to a Vote of Security Holders
                36Item
      5.
                Other
      Information
                36Item
      6.
                Exhibits
                36
  
  PART
I
 FINANCIAL
INFORMATION
  ITEM
      1.
              FINANCIAL
      STATEMENTS.
 
 CHINA
PRECISION STEEL, INC.
 INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
  Contents
                    
                    Page(s)Consolidated
      Balance Sheets as of September 30, 2009 (unaudited) and June 30,
      2009
                    
                    3Consolidated
      Statements of Operations and Comprehensive Income for the three months
      ended September 30, 2009 and 2008 (unaudited)
                    
                    4Consolidated
      Statements of Stockholders’ Equity for the three months ended September
      30, 2009 and 2008 (unaudited)
                    
                    5Consolidated
      Statements of Cash Flows for the three months ended September 30, 2009 and
      2008 (unaudited)
                    
                    6Notes
      to the Consolidated Financial Statements (unaudited)
                    
                    7-20
  2
  China
Precision Steel, Inc. and Subsidiaries
 Consolidated
Balance Sheets
 
 Notes
                  
                  
                  September 30,
                    2009
                  
                  
                  June 30,
                    2009(Unaudited)AssetsCurrent
      assetsCash
      and cash equivalents
                  
                  
                  
                  
                  $
                  13,703,411
                  
                  
                  $
                  13,649,587Accounts
      receivableTrade,
      net of allowances of $905,997 and $830,127 at September 30 and June 30,
      2009, respectively
                  
                  
                  5
                  
                  
                  
                  26,880,457
                  
                  
                  
                  25,140,834Bills
      receivable
                  
                  
                  
                  
                  
                  
                  3,662,306
                  
                  
                  
                  6,131,143Other
                  
                  
                  
                  
                  
                  
                  852,157
                  
                  
                  
                  881,153Inventories
                  
                  
                  6
                  
                  
                  
                  19,472,547
                  
                  
                  
                  16,275,070Prepaid
      expenses
                  
                  
                  
                  
                  
                  
                  59,694
                  
                  
                  
                  75,917Advances
      to suppliers, net of allowance of $1,632,609 and $1,631,557 at September
      30 and June 30, 2009, respectively
                  
                  
                  7
                  
                  
                  
                  21,168,976
                  
                  
                  
                  21,878,047Total
      current assets
                  
                  
                  
                  
                  
                  
                  85,799,548
                  
                  
                  
                  84,031,751Property,
      plant and equipmentProperty,
      plant and equipment, net
                  
                  
                  8
                  
                  
                  
                  45,779,653
                  
                  
                  
                  46,812,484Deposits
      for building, plant and machinery
                  
                  
                  
                  
                  
                  
                  2,197,384
                  
                  
                  
                  8,348,496Construction-in-progress
                  
                  
                  9
                  
                  
                  
                  29,728,022
                  
                  
                  
                  22,245,17377,705,059
                  
                  
                  
                  77,406,153Intangible
      assets, net
                  
                  
                  10
                  
                  
                  
                  1,862,531
                  
                  
                  
                  1,871,211Goodwill
                  
                  
                  
                  
                  
                  
                  99,999
                  
                  
                  
                  99,999Total
      assets
                  
                  
                  
                  
                  
                  $
                  165,467,137
                  
                  
                  $
                  163,409,114Liabilities
      and Stockholders' EquityCurrent
      liabilitiesShort-term
      loans
                  
                  
                  11
                  
                  
                  $
                  25,799,602
                  
                  
                  $
                  22,489,031Accounts
      payable and accrued liabilities
                  
                  
                  
                  
                  
                  
                  9,298,447
                  
                  
                  
                  7,144,242Advances
      from customers
                  
                  
                  12
                  
                  
                  
                  2,176,492
                  
                  
                  
                  1,742,944Other
      taxes payables
                  
                  
                  
                  
                  
                  
                  3,007,286
                  
                  
                  
                  6,650,668Current
      income taxes payable
                  
                  
                  
                  
                  
                  
                  4,781,847
                  
                  
                  
                  4,778,767Total
      current liabilities
                  
                  
                  
                  
                  
                  
                  45,063,674
                  
                  
                  
                  42,805,652Stockholders'
      equity:Preferred
      stock: $0.001 per value, 8,000,000 shares authorized, no shares
      outstanding at September 30 and June 30, 2009,
respectively
                  
                  
                  13Common
      stock: $0.001 par value, 62,000,000 shares authorized, 46,562,955 and
      46,562,955 issued and outstanding September 30 and June 30, 2009,
      respectively
                  
                  
                  13
                  
                  
                  
                  46,563
                  
                  
                  
                  46,563Additional
      paid-in capital
                  
                  
                  13
                  
                  
                  
                  75,642,383
                  
                  
                  
                  75,642,383Accumulated
      other comprehensive income
                  
                  
                  
                  
                  
                  
                  9,806,697
                  
                  
                  
                  9,731,505Retained
      earnings
                  
                  
                  
                  
                  
                  
                  34,907,820
                  
                  
                  
                  35,183,011Total
      stockholders' equity
                  
                  
                  
                  
                  
                  
                  120,403,463
                  
                  
                  
                  120,603,462Total
      liabilities and stockholders' equity
                  
                  
                  
                  
                  
                  $
                  165,467,137
                  
                  
                  $
                  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 Months Ended September 30, 2009 and 2008
 (Unaudited)
 
 Notes
                  
                  
                  2009
                  
                  
                  2008RevenuesSales
      revenues
                  
                  
                  
                  
                  $
                  17,041,989
                  
                  
                  $
                  25,350,419Cost
      of goods sold
                  
                  
                  
                  
                  
                  16,338,630
                  
                  
                  
                  21,397,761Gross
      profit
                  
                  
                  
                  
                  
                  703,359
                  
                  
                  
                  3,952,658Operating
      expensesSelling
      expenses
                  
                  
                  
                  
                  
                  31,809
                  
                  
                  
                  211,298Administrative
      expenses
                  
                  
                  
                  
                  
                  578,698
                  
                  
                  
                  462,100Allowance
      for bad and doubtful debts
                  
                  
                  
                  
                  
                  117,117
                  
                  
                  
                  -Depreciation
      and amortization expense
                  
                  
                  
                  
                  
                  43,738
                  
                  
                  
                  26,203Total
      operating expenses
                  
                  
                  
                  
                  
                  771,362
                  
                  
                  
                  699,601(Loss)/income
      from operations
                  
                  
                  
                  
                  
                  (68,003
                  )
                  
                  
                  3,253,057Other
      income/(expense)Other
      revenues
                  
                  
                  
                  
                  
                  19,922
                  
                  
                  
                  120,703Interest
      and finance costs
                  
                  
                  
                  
                  
                  (228,343
                  )
                  
                  
                  (327,405
                  )Total
      other expense, net
                  
                  
                  
                  
                  
                  (208,421
                  )
                  
                  
                  (206,702
                  )Net
      (loss)/income from operations  before income tax
                  
                  
                  
                  
                  
                  (276,424
                  )
                  
                  
                  3,046,355Provision
      for/(benefit from) income tax
                  
                  
                  15Current
                  
                  
                  
                  
                  
                  
                  (1,233
                  )
                  
                  
                  170,621Deferred
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      income tax (benefit)/expense
                  
                  
                  
                  
                  
                  
                  (1,233
                  )
                  
                  
                  170,621Net
      (loss)/income
                  
                  
                  
                  
                  
                  $
                  (275,191
                  )
                  
                  $
                  2,875,734Basic
      (loss)/earnings per share
                  
                  
                  
                  
                  
                  $
                  (0.01
                  )
                  
                  $
                  0.06Basic
      weighted average shares outstanding
                  
                  
                  
                  
                  
                  
                  46,562,955
                  
                  
                  
                  46,556,107Diluted
      (loss)/earnings per share
                  
                  
                  
                  
                  
                  $
                  (0.01
                  )
                  
                  $
                  0.06Diluted
      weighted average shares outstanding
                  
                  
                  
                  
                  
                  
                  46,562,955
                  
                  
                  
                  46,692,711The
      Components of comprehensive income/(loss):Net
      (loss)/income
                  
                  
                  
                  
                  
                  $
                  (275,191
                  )
                  
                  $
                  2,875,734Foreign
      currency translation adjustment
                  
                  
                  
                  
                  
                  
                  75,192
                  
                  
                  
                  72,519Comprehensive
      (loss)/income
                  
                  
                  
                  
                  
                  $
                  (199,999
                  )
                  
                  $
                  2,948,253
 
 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 Three Months Ended September 30,
2009
 
 Share
                                    
                                    
                                    Amount
                                    
                                    
                                    Additional
                                      Paid-in
                                      Capital
                                    
                                    
                                    Accumulated
                                      Other
                                      Comprehensive
                                      Income
                                    
                                    
                                    Retained
                                      Earnings
                                    
                                    
                                    Total
                                      Stockholders’
                                      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
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    75,192
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    75,192Net
      income
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (275,191
                                    )
                                    
                                    
                                    (275,191
                                    )Balance
      at September 30, 2009 (unaudited)
                                    
                                    
                                    46,562,955
                                    
                                    
                                    $
                                    46,563
                                    
                                    
                                    $
                                    75,642,383
                                    
                                    
                                    $
                                    9,806,697
                                    
                                    
                                    $
                                    34,907,820
                                    
                                    
                                    $
                                    120,403,463
  5
  China
Precision Steel, Inc. and Subsidiaries
 Consolidated
Statements of Cash Flows
 For
the Three Months Ended September 30, 2009 and 2008
 (Unaudited)
 
 2009
                      
                      
                      2008Cash
      flows from operating activitiesNet
      (loss)/income
                      
                      $
                      (275,191
                      )
                      
                      $
                      2,875,734Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDepreciation
      and amortization
                      
                      
                      1,210,759
                      
                      
                      
                      843,290Allowance
      for bad and doubtful debts
                      
                      
                      117,117
                      
                      
                      
                      -Impairment
      of inventories
                      
                      
                      42,534
                      
                      
                      
                      -Net
      changes in assets and liabilities:Accounts
      receivable, net
                      
                      
                      661,741
                      
                      
                      
                      (5,622,477
                      )Inventories
                      
                      
                      (3,229,520
                      )
                      
                      
                      (325,089
                      )Prepaid
      expenses
                      
                      
                      16,231
                      
                      
                      
                      -Advances
      to suppliers
                      
                      
                      723,173
                      
                      
                      
                      1,974,708Accounts
      payable and accrued expenses
                      
                      
                      2,149,699
                      
                      
                      
                      885,734Advances
      from customers
                      
                      
                      432,425
                      
                      
                      
                      (3,295,867
                      )Other
      taxes payable
                      
                      
                      (2,151,427
                      )
                      
                      
                      1,582,948Net
      cash used in operating activities
                      
                      
                      (302,459
                      )
                      
                      
                      (1,081,019
                      )Cash
      flows from investing activitiesDeposit
      for building, plant and machinery
                      
                      
                      (2,197,384
                      )
                      
                      
                      -Purchase
      of property, plant and equipment including construction in
      progress
                      
                      
                      (749,049
                      )
                      
                      
                      (7,263,898
                      )Net
      cash used in investing activities
                      
                      
                      (2,946,433
                      )
                      
                      
                      (7,263,898
                      )Cash
      flows from financing activitiesExercise
      of common stock warrants
                      
                      
                      -
                      
                      
                      
                      269,985Short-term
      loan proceeds
                      
                      
                      3,735,552
                      
                      
                      
                      -Repayments
      of short-term loans
                      
                      
                      (439,477
                      )
                      
                      
                      (87,611
                      )Net
      cash provided by financing activities
                      
                      
                      3,296,075
                      
                      
                      
                      182,374Effect
      of exchange rate
                      
                      
                      6,641
                      
                      
                      
                      (79,224
                      )Net
      increase/(decrease) in cash
                      
                      
                      53,824
                      
                      
                      
                      (8,241,767
                      )Cash
      and cash equivalents, beginning of period
                      
                      
                      13,649,587
                      
                      
                      
                      18,568,842Cash
      and cash equivalents, end of period
                      
                      $
                      13,703,411
                      
                      
                      $
                      10,327,075
 
 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 September 30 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 September 30 and
June 30, 2009 and for the periods ended September 30, 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 three months ended September 30,
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
September 30, 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 September 30 and June 30, 2009, the Company had $905,997 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 September 30, 2009 and 2008 were $117,117 and
nil, 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.
  8
  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.
 
 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.
 
 Intangible Assets and
Amortization – 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.
 
 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 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 September 30 and June 30, 2009, the
Company had allowances of advances to suppliers of $1,632,609 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 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.
 
 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, 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 of Long-Lived Assets -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 indicate the carrying value of the asset may not be
recoverable. An impairment loss is recognized when the carrying amount of a
long-lived asset or asset group is not recoverable (when carrying amount exceeds
the gross, undiscounted cash flows from use and disposition) and is measured as
the excess of the carrying amount over the asset’s (or asset group’s) fair
value.
 
 Capitalized Interest - 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 periods ended September 30, 2009 and 2008, the Company
capitalized $123,551 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.
 
 Contingent Liabilities and Contingent
Assets - 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.
 
 Advances from
Customers -
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.
 
 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.
 
 Functional Currency and Translating
Financial Statements– The consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America. 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.
 
 Foreign Currencies - The
Company’s principal country of operations is the PRC. The financial position and
results of operations of the Company are determined using the local currency
(“Renminbi” or “Yuan”) as the functional currency. Transactions not conducted in
Renminbi are translated into Renminbi at the exchange rates prevailing at the
times of such transactions. The results of operations denominated in foreign
currencies are translated at the average rate of exchange during the reporting
period. Assets and liabilities denominated in foreign currencies at the balance
sheet date are translated at the market rate of exchange ruling at that date.
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.
 
 Accumulated Other Comprehensive
Income – 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.
 
 United
States
 
 China
Precision Steel, Inc. is subject to United States federal income tax at a tax
rate of 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 three months
ended September 30, 2009 and 2008.
  10
  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.
 
 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 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
Chengtong will be subject to the 25% statutory rates from January 1, 2009
onward, Shanghai Blessford is currently enjoying a full tax exemption from the
enterprise income tax that will expire on December 31, 2009, and is entitled 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 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.
  11
  Based on
all known facts and circumstances and current tax law, the Company believes that
the total amount of unrecognized tax benefits as of September 30, 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
September 30, 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.
 
 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 Benefit Costs -
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
three months ended September 30, 2009 and 2008, the Company’s pension cost
charged to the statements of operations under the plan amounted to $82,666 and
$97,399, respectively, all
of which have been paid to the National Social Security Fund.
 
 Fair Value of Financial Instruments -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 September 30 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.
 
 Use of Estimates - 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 periods ended September 30, 2009 and 2008 is as
follows:
 
 Customers
                  
                  2009
                  
                  
                  % to
                    Sales
                  
                  
                  2008
                  
                  
                  % to
                    SalesShanghai
      Changshuo Steel Company, Ltd
                  
                  
                  3,848,354
                  
                  
                  
                  23
                  
                  
                  
                  3,414,685
                  
                  
                  
                  13Shaoxing
      Wancheng Metal Plate Co., Ltd.
                  
                  
                  1,768,383
                  
                  
                  
                  10
                  
                  
                  
                  -
                  *
                  
                  
                  -
                  *Zhangjiagang
      Gangxing Innovative Construction Material Co., Ltd.
                  
                  
                  1,735,287
                  
                  
                  
                  10
                  
                  
                  
                  -
                  *
                  
                  
                  -
                  *Shanghai
      Bayou Industrial Co. Ltd
                  
                  
                  -
                  *
                  
                  
                  -
                  *
                  
                  
                  2,961,211
                  
                  
                  
                  12
  12
  The
Company’s list of suppliers whose sales to us exceeded 10% of our total
purchases during the periods ended September 30, 2009 and 2008 is as
follows:
 
 Suppliers
                  
                  2009
                  
                  
                  % to
                    Purchasers
                  
                  
                  2008
                  
                  
                  % to
                    PurchasersGuangzhou
      Zhujiang Steel Co., Ltd.
                  
                  
                  4,679,267
                  
                  
                  
                  31
                  
                  
                  
                  -
                  *
                  
                  
                  -
                  *Wuxi
      Hangda Trading Co., Ltd.
                  
                  
                  2,876,549
                  
                  
                  
                  19
                  
                  
                  
                  -
                  *
                  
                  
                  -
                  *BaoSteel
      Steel Products Trading Co. Ltd
                  
                  
                  2,654,920
                  
                  
                  
                  17
                  
                  
                  
                  7,571,158
                  
                  
                  
                  40Shanghai
      Pinyun Steel Co., Limited
                  
                  
                  -
                  *
                  
                  
                  -
                  *
                  
                  
                  3,630,582
                  
                  
                  
                  19
 
 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 recently 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
$26,880,457and
$25,140,834 as of September 30 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 $42,534 for the period
ended September 30, 2009.
 
 As of
September 30 and June 30, 2009, inventories consisted of the
following:
 
 At cost:
                  
                  September 30,
                    2009
                  
                  
                  June 30,
                    2009Raw materials
                  
                  $
                  12,927,343
                  
                  
                  $
                  8,846,663Work
      in progress
                  
                  
                  307,227
                  
                  
                  
                  2,818,832Finished
      goods
                  
                  
                  3,666,030
                  
                  
                  
                  2,191,341Consumable
      items
                  
                  
                  2,571,947
                  
                  
                  
                  2,418,234$
                  19,472,547
                  
                  
                  $
                  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.
  13
  Inventories
amounting to $6,505,761 were pledged for short-term loans totaling $25,799,602
as of September 30, 2009.
 
 7.  Advances
to Suppliers
 
 Cash
advances are shown net of allowances of $1,632,609 and $1,631,557 as of
September 30 and June 30, 2009, respectively.
 
 The
majority of our advances to suppliers greater than 180 days as of September 30,
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:
 
 September 30,
                    2009
                  
                  
                  June 30,
                    2009Plant
      and machinery
                  
                  $
                  33,491,833
                  
                  
                  $
                  33,331,681Buildings
                  
                  
                  21,820,275
                  
                  
                  
                  21,806,219Motor
      vehicles
                  
                  
                  534,996
                  
                  
                  
                  534,652Office
      equipment
                  
                  
                  404,954
                  
                  
                  
                  404,69556,252,058
                  
                  
                  
                  56,077,247Less:
      Accumulated depreciation
                  
                  
                  (10,472,405
                  )
                  
                  
                  (9,264,763
                  )$
                  45,779,653
                  
                  
                  $
                  46,812,484
 
 Depreciation
expense related to manufacturing is included as a component of cost of goods
sold. During the periods ended September 30, 2009 and 2008, depreciation
totaling $733,899and
$757,461, respectively, was included as a component of cost of goods
sold.
 
 Plant and
machinery and buildings amounting to $45,222,599 (June 30, 2009: $55,137,900)
were pledged for short-term loans totaling $25,799,602.
  9.  Construction-In-Progress
 
 As of
September 30 and June 30, 2009, construction-in-progress consisted of the
following:
 
 September 30,
                    2009
                  
                  
                  June 30,
                    2009Construction
      costs
                  
                  $
                  29,728,022
                  
                  
                  $
                  22,245,173
 
 Construction-in-progress
represents construction and installations of a cold-rolling mill and annealing
furnaces.
 
 10.  Intangible
Assets
 
 Land use
right amounting to $1,970,083(June 30,
2009: $1,861,093) were pledged for short-term loans totaling
$25,799,602.
 
 The
Company acquired land use rights in August 2004 and December 2006 for 50 years
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:
 
 September 30,
                    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% (3.3% at
      September 30, 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 September 30, 2009) (Note 8)
                  
                  
                  2,481,056
                  
                  
                  
                  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 September 30, 2009) (Note 8)
                  
                  
                  18,018,546
                  
                  
                  
                  14,273,793$
                  25,799,602
                  
                  
                  $
                  22,489,031
 
 The above
bank loans outstanding as at September 30, 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 September 30 and June
30, 2009 was 5.53% 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 (defined below), 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.
  15
  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 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 exercisable 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.
 
 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 (“Roth Capital”) 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 offering (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 Offering, 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, 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:
 
 ExercisePrice
                                        
                                        
                                        Outstanding
                                          June 30, 2009
                                        
                                        
                                        Granted
                                        
                                        
                                        Expired or
                                          Exercised
                                        
                                        
                                        Outstanding
                                          September 30, 2009
                                        
                                        Expiration Date$
                                        3.00
                                        
                                        
                                        
                                        358,392
                                        
                                        
                                        
                                        -0-
                                        
                                        
                                        
                                        -0-
                                        
                                        
                                        
                                        358,392
                                        
                                        February 22, 2011$
                                        3.60
                                        
                                        
                                        
                                        100,000
                                        
                                        
                                        
                                        -0-
                                        
                                        
                                        
                                        -0-
                                        
                                        
                                        
                                        100,000
                                        
                                        February 22, 2010$
                                        8.45
                                        
                                        
                                        
                                        1,420,000
                                        
                                        
                                        
                                        -0-
                                        
                                        
                                        
                                        -0-
                                        
                                        
                                        
                                        1,420,000
                                        
                                        May 5, 2013$
                                        7.38
                                        
                                        
                                        
                                        225,600
                                        
                                        
                                        
                                        -0-
                                        
                                        
                                        
                                        -0-
                                        
                                        
                                        
                                        225,600
                                        
                                        November 5, 2010
 
 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:
 
 Three months ended
                    September 30,2009
                  
                  
                  2008Tax
      savings
                  
                  $
                  197,198
                  
                  
                  $
                  645,170Benefit
      per shareBasic
                  
                  $
                  0.00
                  
                  
                  $
                  0.01Diluted
                  
                  $
                  0.00
                  
                  
                  $
                  0.01
 
 Significant
components of the Group’s deferred tax assets as of September 30 and June 30,
2009 are as follows:
 
 Deferred tax assets:
                  
                  September 30,
                    2009
                  
                  
                  June 30,
                    2009Net
      operating loss carried forward
                  
                  $
                  2,082,076
                  
                  
                  $
                  1,823,487Temporary
      differences resulting from allowances
                  
                  
                  1,880,173
                  
                  
                  
                  1,850,921Total
      deferred income tax assets
                  
                  $
                  3,962,249
                  
                  
                  $
                  3,674,408Valuation
      allowance
                  
                  
                  (3,962,249
                  )
                  
                  
                  (3,674,408$
                  -
                  
                  
                  $
                  -
 
 The
Company has not recognized a deferred tax liability in respect of the
undistributed earnings of its foreign subsidiaries of approximately
US$11,767,719 as of September 30, 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.
 
 Three months ended September 30,2009
                    
                    
                    2008Computed tax at
      the federal statutory rate of 34%
                    
                    $
                    (93,565
                    )
                    
                    $
                    1,035,761Adjustments
      for PRC entities taxed at different rates
                    
                    
                    3,023
                    
                    
                    
                    (290,468
                    )Valuation
      allowance
                    
                    
                    287,874
                    
                    
                    
                    61,561Income
      not subject to tax
                    
                    
                    (134
                    )
                    
                    
                    -Overprovision
      in prior year
                    
                    
                    (1,233
                    )
                    
                    
                    8,937Benefit
      of tax holiday
                    
                    
                    (197,198
                    )
                    
                    
                    (645,170
                    )Income
      tax (benefit)/expense per books
                    
                    $
                    (1,233
                    )
                    
                    $
                    170,621
 
 Income
tax expense consists of:
 
 Three months ended September 30,2009
                    
                    
                    2008Income
      tax (benefit)/expense for the year - PRC
                    
                    $
                    (1,233
                    )
                    
                    $
                    170,621
 
 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 months ended September 30, 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 three months ended September 30, 2008, dilutive
shares include outstanding warrants to purchase 358,392 shares of common stock
at an exercise price of $3.00 and 100,000 shares at an exercise price of $3.60.
Warrants to purchase 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
                    (Numerator)
                  
                  
                  Shares
                    (Denominator)
                  
                  
                  Per Share
                    AmountFor
      the three months ended September 30, 2009:Net
      loss
                  
                  $
                  (275,191
                  )Basic
      EPS (loss)/income available to common shareholders
                  
                  $
                  (275,191
                  )
                  
                  
                  46,562,955
                  
                  
                  $
                  (0.01
                  )Effect
      of dilutive securities:
                  
                  
                  
                  
                  
                  
                  -Diluted
      EPS (loss)/income available to common shareholders
                  
                  $
                  (275,191
                  )
                  
                  
                  46,562,955
                  
                  
                  $
                  (0.01
                  )For
      the three months ended September 30, 2008:Net
      income
                  
                  $
                  2,875,734Basic
      EPS income available to common shareholders
                  
                  $
                  2,875,734
                  
                  
                  
                  46,556,107
                  
                  
                  $
                  0.06Effect
      of dilutive securities:Warrants
                  
                  
                  
                  
                  
                  
                  136,604Diluted
      EPS income available to common shareholders
                  
                  $
                  2,875,734
                  
                  
                  
                  46,692,711
                  
                  
                  $
                  0.06
 
 17.  Capital
Commitments
 
 As of
September 30, 2009, the Company had contractual commitments of $916,162 (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.
 
 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 September
30, 2009 and no impairment charges were recognized for the relevant period. As
of September 30, 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 September 30, 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.
  18
  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 105, “The Hierarchy of
Generally Accepted Accounting Principles" (“ASC 105”).  This statement
identifies the sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial statements of
non-governmental entities that are presented in conformity with US GAAP. The
provisions of ASC 105 become effective 60 days following the SEC's approval of
the amendment to AU Section 411, "The Meaning of Presents Fairly in Conformity
with Generally Accepted Accounting Principles" by the Public Company Accounting
Oversight Board.  The adoption of this statement is not expected to
have a material effect on the Company’s future reported financial position or
results of operations.
 
 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, “FairValueMeasurements”, 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.
 
 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.  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 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. 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 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
June 2009, the FASB issued guidance now codified as ASC 105, “The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles” (“ASC 105”). ASC 105 will become the single source of
authoritative nongovernmental GAAP, superseding existing FASB, American
Institute of Certified Public Accountants (AICPA), EITF, and related accounting
literature. ASC 105 reorganizes the thousands of GAAP pronouncements into
roughly 90 accounting topics and displays them using a consistent structure.
Also included is relevant SEC guidance organized using the same topical
structure in separate sections. ASC 105 will be effective for financial
statements issued for reporting periods that end after September 15, 2009.
This will have an impact on the Company’s financial statement disclosures since
all future references to authoritative accounting literature will be referenced
in accordance with ASC 105.
 
 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.
 
 20.
Subsequent Events
 
 Management
has evaluated subsequent events from October 1, 2009 to November 16, 2009, the
date which our financial statements have been issued and were available to be
issued, and has concluded that no material subsequent events have occurred since
September 30, 2009 that required recognition or disclosure in our current period
financial statements. Subsequent events that may occur after November 16, 2009
have not been evaluated.
  20


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 September 30, 2009 (unaudited) and
June 30, 2009, the end of its prior fiscal year, and its unaudited
consolidated results of operation for the three month periods ended September
30, 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.





Where
You Can Find Additional Information





We file
annual, quarterly and other reports, proxy statements and other information with
the SEC. You may obtain and copy any document we file with the SEC at the SEC’s
public reference room at 100 F Street, NE, Room 1580, Washington, D.C. 20549.
You may obtain information on the operation of the SEC’s public reference
facilities by calling the SEC at 1-800-SEC-0330. You can request copies of these
documents, upon payment of a duplicating fee, by writing to the SEC at its
principal office at 100 F Street, NE, Room 1580, Washington, D.C. 20549-1004.
The SEC maintains an Internet website at http://www.sec.gov
that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. Our SEC filings,
including exhibits filed therewith, are accessible through the Internet at that
website. You may also request a copy of our SEC filings, at no cost to you, by
writing or telephoning us at: China Precision Steel, Inc., Room B, 18th Floor,
Teda Building, 87 Wing Lok Street, Sheungwan, Hong Kong, People’s Republic of
China, attention Corporate Secretary, telephone 852-2543-2290. We will not send
exhibits to the documents, unless the exhibits are specifically requested and
you pay our fee for duplication and delivery.


21





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.




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.





First
Quarter Financial Performance Highlights





During
the first fiscal quarter of 2010, we continued to see slower demand and lower
steel prices compared to same period a year ago as a result of the impact of the
persisting global economic crisis. There were decreases in order and sales
volume over the three months ended September 30, 2009 as we are faced with
multiple challenges due to the global economic downturn. We have seen weaker
demand and reduced orders from existing customers, especially in the high-carbon
cold-rolled steel segment, which are mainly used in auto components
manufacturing, due to excess capacity and high inventory levels in the industry.
Excess capacity, low industrial concentration and a lack of access to natural
resources have long plagued China’s steel sector, and these problems have been
exacerbated by the impact of the global financial and economic
crisis.  Our two cold-rolling mills are now operating at approximately
70% utilization rate due to reduced orders on hand.





During
the period ended September 30, 2009, we sold a total of 22,293 tons of products,
a decrease of 1,923 tons from 24,216 tons during the same period a year ago, due
to slower demand and reduced orders on hand. We believe that such decrease was
mainly caused by decreases in product orders from auto components manufacturers
and from the Chinese auto industry that experienced weak demand and excess
capacity during the period ended September 30, 2009. Lower sales and high raw
material costs have led to a gross profit of $703,359 and a net loss of $275,191
for the period ended September 30, 2009.





The
RMB400 billion economic stimulus package formulated jointly by the Chinese
government’s National Development and Reform Commission and the Ministry of
Industry and Information Technology in November 2008 is now planned to focus
mainly on nine pillar industries, which include steel, automobiles,
shipbuilding, petrochemicals, light industry, textiles, non-ferrous metals,
machinery, and information technology, all with serious production surpluses in
the whole industrial system. Automobiles and steel sectors have been given
priority and are the two main industries out of the nine pillars for which the
government has specific support packages. On January 14, 2009, China’s State
Council approved a “rejuvenation plan” to support the steel industry, with the
immediate aim to deal with the effects of the global financial and economic
crisis and to also ease the industry’s long-term structural problems. The steel
industry plan includes eliminating obsolete capacity, speeding up innovation,
promoting alliances and mergers and cutting export tariffs. The government will
also subsidize loans of about RMB15 billion to encourage technological upgrading
and product rationalization to better meet demand.


22





Although
the series of measures adopted by the Chinese government to promote economic
growth have achieved some results, it is currently unclear whether and to what
extent the economic stimulus measures and other actions taken or contemplated by
the Chinese government and other governments throughout the world will mitigate
the effects of the crisis on the industries that affect our business. We expect
to continue to experience volatilities in demands in both domestic and
international markets in the foreseeable future. Furthermore, deteriorating
economic conditions, including business layoffs, downsizing, industry slowdowns
and other similar factors that affect our customers could have further negative
consequences on our business operations.  For the foreseeable future,
we expect a continuation of weak demand and volatility in both domestic and
international markets across all product segments, and significantly adverse
impacts on our gross margin due to a decrease in sales of our high margin high
carbon cold rolled steel used mainly in auto components
manufacturing.  However, 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 5 new customers during the 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 further
mitigate the impact of the current global slowdown on our business and results
of operations. Total company backlog as of September 30, 2009 was
$9,462,867.





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 continue to face volatilities in demand and overall
steel industry, the medium to long term prospects remain highly optimistic and
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 first quarter:





·
            Revenues:
      Our revenues were approximately $17 million for the first quarter, a
      decrease of 32.8% from last year.





·
            Gross
      Margin: Gross margin was 4.1% for the first quarter, as compared to
      15.6% in 2009.





·
            Income/(loss)
      from operations before tax: Loss from operations before tax was
      approximately $0.3 million for the first quarter, as compared to income
      from operations before tax of $3.0 million last
  year.





·
            Net
      Income/(loss): Net loss was approximately $0.3 million for the
      first quarter, a decrease of 105.5% from a net income of approximately
      $2.9 million last year.





·
            Fully
      diluted Income/(loss) per share: Fully diluted loss per share was
      $0.01 for the first quarter compared to a fully diluted earnings per share
      of $0.06 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.





Comparison of Three Months
Ended September 30, 2009 and September 30, 2008





Thee Months ended
                  September 30, 2009
                
                
                Thee Months ended
                  September 30, 2008Amount
                
                
                % of
                  Revenues
                
                
                Amount
                
                
                % of
                  RevenuesRevenues
                
                $
                17,041,989
                
                
                
                100.0
                
                
                $
                25,350,419
                
                
                
                100.0Cost
      of sales (including depreciation and amortization)
                
                
                16,338,630
                
                
                
                95.9
                
                
                
                21,397,761
                
                
                
                84.4Gross
      profit
                
                
                703,359
                
                
                
                4.1
                
                
                
                3,952,658
                
                
                
                15.6Selling
      and marketing expenses
                
                
                31,809
                
                
                
                0.2
                
                
                
                211,298
                
                
                
                0.8Administrative
      expenses
                
                
                578,698
                
                
                
                3.4
                
                
                
                462,100
                
                
                
                1.8Allowance
      for bad and doubtful debts
                
                
                117,117
                
                
                
                0.7
                
                
                
                -
                
                
                
                -Depreciation
      and amortization expense
                
                
                43,738
                
                
                
                0.3
                
                
                
                26,203
                
                
                
                0.1(Loss)/income
      from operations
                
                
                (68,003
                )
                
                
                (0.4
                )
                
                
                3,253,057
                
                
                
                12.8Total
      other expense, net
                
                
                (208,421
                )
                
                
                (1.2
                )
                
                
                (206,702
                )
                
                
                (0.8
                )Income
      taxes
                
                
                (1,233
                )
                
                
                (0.0
                )
                
                
                170,621
                
                
                
                0.7Net
      (loss)/income
                
                $
                (275,191
                )
                
                
                (1.6
                )
                
                $
                2,875,734
                
                
                
                11.3Basic
      earnings (loss) per share
                
                $
                (0.01
                )
                
                
                N/A
                
                
                $
                0.06
                
                
                
                N/ADiluted
      earnings (loss) per share
                
                $
                (0.01
                )
                
                
                N/A
                
                
                $
                0.06
                
                
                
                N/A


23





Sales
Revenues





Sales
volume decreased by 1,923 tons, or 7.9%, period-on-period to 22,293 tons for the
period ended September 30, 2009 from 24,216 tons for the period ended September
30, 2008 and, as a result, sales revenues decreased by $8,308,430, or 32.8%,
period-on-period to $17,041,989 for the period ended September 30, 2009 from
$25,350,419 for the period ended September 30, 2008. The decrease in sales
revenues is mainly attributable to a decrease in demand for high-carbon
cold-rolled products used in automobile components production due to the
slowdown of the automobile industry, as well as lower average sale prices during
the period ended September 30, 2009.




Sales by Product
Line





A
break-down of our sales by product line for the three months ended
September 30, 2009 and 2008 is as follows:





Three Months Ended September
      30,2009
                        
                        
                        2008
                        
                        
                        Period-on-Product
      Category
                        
                        Quantity
                          (tons)
                        
                        
                        $
                          Amount
                        
                        
                        % of
                          Sales
                        
                        
                        Quantity
      (tons)
                        
                        
                        $
                          Amount
                        
                        
                        % of
                          Sales
                        
                        
                        period
      Qty.VarianceLow
      carbon hard rolled
                        
                        
                        4,560
                        
                        
                        
                        3,064,585
                        
                        
                        
                        18
                        
                        
                        
                        3,621
                        
                        
                        
                        4,152,532
                        
                        
                        
                        16
                        
                        
                        
                        939
                        )Low
      carbon cold-rolled
                        
                        
                        10,633
                        
                        
                        
                        6,361,255
                        
                        
                        
                        37
                        
                        
                        
                        10,809
                        
                        
                        
                        10,983,414
                        
                        
                        
                        43
                        
                        
                        
                        (176
                        )High-carbon
      hot-rolled
                        
                        
                        1,981
                        
                        
                        
                        1,556,728
                        
                        
                        
                        9
                        
                        
                        
                        1,412
                        
                        
                        
                        1,918,278
                        
                        
                        
                        8
                        
                        
                        
                        569High-carbon
      cold-rolled
                        
                        
                        2,497
                        
                        
                        
                        4,321,739
                        
                        
                        
                        25
                        
                        
                        
                        2,600
                        
                        
                        
                        3,445,509
                        
                        
                        
                        14
                        
                        
                        
                        (103
                        )Subcontracting
      income
                        
                        
                        2,622
                        
                        
                        
                        1,648,876
                        
                        
                        
                        10
                        
                        
                        
                        5,774
                        
                        
                        
                        4,678,819
                        
                        
                        
                        18
                        
                        
                        
                        (3,152
                        )Sales
      of scrap metal
                        
                        
                        -
                        
                        
                        
                        88,806
                        
                        
                        
                        1
                        
                        
                        
                        -
                        
                        
                        
                        171,867
                        
                        
                        
                        1
                        
                        
                        
                        -Total
                        
                        
                        22,293
                        
                        
                        
                        17,041,989
                        
                        
                        
                        100
                        
                        
                        
                        24,216
                        
                        
                        
                        25,350,419
                        
                        
                        
                        100
                        
                        
                        
                        (1,923
                        )





There
were different trends of demand across various product categories during the
period ended September 30, 2009. High-carbon cold-rolled steel products
accounted for 25% of the current sales mix at an average selling price of $1,731
per ton for the period ended September 30, 2009, compared to 14% of the sales
mix at an average selling price per ton of $1,326 for the period ended September
30, 2008. The products in this category are mainly used in the automobile
industry and the decrease in sales volume period-on-period was less compared to
most other product categories as the Chinese government’s automobile stimulus
policies rolled out, which increased demand. Low-carbon cold-rolled steel
products accounted for 37% of the current sales mix at an average selling price
of $598 per ton for the period ended September 30, 2009, compared to 43% of the
sales mix at an average selling price per ton of $1,016 for the period ended
September 30, 2008. Low-carbon hard-rolled steel products accounted for 18% of
the current sales mix at an average selling price of $672 per ton for the period
ended September 30, 2009, compared to 16% of the sales mix at an average selling
price per ton of $1,147 for the period ended September 30,
2008.  Subcontracting income revenues decreased to $1,648,876, or 10%,
of the sales mix for the period ended September 30, 2009 as compared to
$4,678,819, or 18%, of the sales mix for the period ended September 30,
2008.





Three Months Ended September 30,2009
                
                
                2008
                
                
                VarianceAverage Selling Prices
                
                ($)
                
                
                ($)
                
                
                ($)
                
                
                (%)Low-carbon
      hard rolled
                
                
                672
                
                
                
                1,147
                
                
                
                (475
                )
                
                
                (41
                )Low-carbon
      cold-rolled
                
                
                598
                
                
                
                1,016
                
                
                
                (418
                )
                
                
                (41
                )High-carbon
      hot-rolled
                
                
                786
                
                
                
                1,358
                
                
                
                (572
                )
                
                
                (42
                )High-carbon
      cold-rolled
                
                
                1,731
                
                
                
                1,326
                
                
                
                405
                
                
                
                31Subcontracting
      income
                
                
                629
                
                
                
                810
                
                
                
                (181
                )
                
                
                (22
                )





The
average selling price per ton decreased to $764 for the period ended September
30, 2009, compared to the corresponding period in 2008 of $1,047, representing
a decrease of $283, or 27%, period-on-period. This decrease was mainly due
to decreases in steel prices and therefore selling prices due to volatilities in
the industry. Other than for high-carbon cold rolled steel products, there were
decreases in average selling prices across all product categories during the
period.


24





Sales Breakdown by Major
Customer





Three Months Ended September
      30,2009
                      
                      
                      2008Customers
                      
                      $
                      
                      
                      % of Sales
                      
                      
                      $
                      
                      
                      % of SalesShanghai
      Changshuo Stainless Steel Co., Ltd.
                      
                      
                      3,848,354
                      
                      
                      
                      23
                      
                      
                      
                      3,414,685
                      
                      
                      
                      13Shaoxing
      Wancheng Metal Plate Co., Ltd.
                      
                      
                      1,768,383
                      
                      
                      
                      10
                      
                      
                      
                      *
                      
                      
                      
                      *Zhangjiagang
      Gangxing Innovative Construction Material Co., Ltd.
                      
                      
                      1,735,287
                      
                      
                      
                      10
                      
                      
                      
                      1,527,211
                      
                      
                      
                      6Unimax
      & Far Corporation
                      
                      
                      1,069,184
                      
                      
                      
                      6
                      
                      
                      
                      *
                      
                      
                      
                      *SUMEC
      International Technology Co., Ltd.
                      
                      
                      1,046,660
                      
                      
                      
                      6
                      
                      
                      
                      *
                      
                      
                      
                      *Shanghai
      Bayou Industrial Co., Ltd.
                      
                      
                      *
                      
                      
                      
                      *
                      
                      
                      
                      2,961,211
                      
                      
                      
                      12Salzgitter
      Mannesmann International GMBH
                      
                      
                      *
                      
                      
                      
                      *
                      
                      
                      
                      2,392,869
                      
                      
                      
                      9Jiangsu
      Sumec International Trading Co., Ltd.
                      
                      
                      *
                      
                      
                      
                      *
                      
                      
                      
                      1,667,454
                      
                      
                      
                      79,467,868
                      
                      
                      
                      55
                      
                      
                      
                      11,963,430
                      
                      
                      
                      47Others
                      
                      
                      7,574,121
                      
                      
                      
                      45
                      
                      
                      
                      13,386,989
                      
                      
                      
                      53Total
                      
                      
                      17,041,989
                      
                      
                      
                      100
                      
                      
                      
                      25,350,419
                      
                      
                      
                      100




*
Not major customers for the relevant years





Sales
revenues generated from our top five major customers as a percentage of total
sales increased to 55% for the period ended September 30, 2009, compared to 47%
for the period ended September 30, 2008. Sales to three new major customers,
Shaoxing Wancheng Metal Plate Co, Ltd., Unimax and Far Corporation and SUMEC
International Technology Co., Ltd., for the three months accounted for 22% 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 decreased by $5,059,131,
or 23.6%, period-on-period to $16,338,630 for the period ended September 30,
2009, from $21,397,761 for the period ended September 30, 2008. Cost of sales
represented 95.8% of sales revenues for the period ended September 30, 2009
compared to 84.4% for the period ended September 30, 2008. Average cost per unit
sold decreased to $733 for the period ended September 30, 2009, compared to an
average cost per unit sold of $884 for the period ended September 30,
2008,  representing an decrease of $151 per ton, or 17%,
period-on-period.





Three Months Ended September
      30,2009
                
                
                2008
                
                
                Variance($)
                
                
                ($)
                
                
                ($)
                
                
                (%)Cost
      of goods sold-
      Raw materials
                
                
                14,305,303
                
                
                
                18,767,711
                
                
                
                (4,462,408
                )
                
                
                (24
                )-
      Direct labor
                
                
                97,832
                
                
                
                142,214
                
                
                
                (44,382
                )
                
                
                (31
                )-
      Manufacturing overhead
                
                
                1,935,495
                
                
                
                2,487,836
                
                
                
                (552,341
                )
                
                
                (22
                )16,338,630
                
                
                
                21,397,761
                
                
                
                (5,059,131
                )
                
                
                (24
                )Cost
      per unit soldTotal
      units sold (tons)
                
                
                22,293
                
                
                
                24,216
                
                
                
                (1,923
                )
                
                
                (8
                )Average
      cost per unit sold ($/ton)
                
                
                733
                
                
                
                884
                
                
                
                (151
                )
                
                
                (17
                )





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





·
            a
      decrease in cost of raw materials per unit sold of $133, or 17.2%, from
      $775 for the period ended September 30, 2008 compared to $642 for the
      period ended September 30, 2009;





·
            a
      decrease in direct labor per unit sold of $2, or 25.3%, from $6 for the
      period ended September 30, 2008 compared to $4 for the period ended
      September 30, 2009;





·
            a
      decrease in factory overhead per unit sold of $16, or 15.5%, from $103 for
      the period ended September 30, 2008 compared to $87 for the period ended
      September 30,
2009.


25





The cost
of raw materials consumed decreased by $4,462,408, or 23.8%, period-on-period,
to $14,305,303 for the period ended September 30, 2009 from $18,767,711 for the
period ended September 30, 2008. This decrease was mainly due to the decreases
in total units sold as well as the decrease in average raw material cost per
unit sold.





Direct
labor costs decreased by $44,382, or 31.2%, period-on-period, to $97,832 for the
period ended September 30, 2009, from $142,214 for the period ended September
30, 2008. The decrease was due to the decrease in total units sold during the
period and therefore less labor costs.




Manufacturing
overhead costs decreased by $552,341, or 22.2%, period-on-period, to $1,935,495
for the period ended September 30, 2009, from $2,487,836 for the period ended
September 30, 2008. The decrease was mainly attributable to the combined effect
of a decrease in utilities of $183,392, or 27.0%, period-on-period to $494,870
for the period ended September 30, 2009, from $678,262 for the period ended
September 30, 2008, and a decrease in low consumables by $416,174 or 60.7%,
period-on-period to $269,466 for the period ended September 30, 2009, from
$685,640 for the period ended September 30, 2008.





Gross
Profit





Gross
profit in absolute terms decreased by $3,249,299, or 82.2%, period-on-period, to
$703,359 for the period ended September 30, 2009, from $3,952,658 for the period
ended September 30, 2008, while gross profit margin decreased to 4.1% for the
period ended September 30, 2009, from 15.6% for the period ended September 30,
2008. The decrease in gross profit is mainly attributable to a 32.8%
period-on-period decrease in sales revenues, as well as a decrease in gross
margin which principally resulted from a decrease in average selling prices due
to the decrease in steel prices period-on-period.





Selling
Expenses





Selling
expenses decreased by $179,489, or 84.9%, period-on-period, to $31,809 for the
period ended September 30, 2009 compared to the corresponding period in 2008 of
$211,298. The decrease was mainly attributable to less selling commission costs
associated with export products period-on-period.





Administrative
Expenses





Administrative
expenses increased by $116,598, or 25.2%, period-on-period, to $578,698 for the
period ended September 30, 2009 compared to $462,100 for the period ended
September 30, 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 during the period ended September 30,
2009.





Allowance for Bad
and Doubtful Debts





Allowance
for bad and doubtful debts increased by $117,117, or 100.0%, period-on-period,
as a result of allowance recognized during the period in the amount of $117,117
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 decreased by $3,321,060, or 102.1%,
period-on-period to loss of $68,003 for the period ended September 30, 2009 from
income of $3,253,057 for the period ended September 30, 2008, as a result of all
the factors discussed above.





Other
Income





Our other
income decreased $100,781, or 83.5%, to $19,922 for the period ended September
30, 2009 from $120,703 for the period ended September 30, 2008.  As a
percentage of revenues, other income decreased to 0.1% for the period ended
September 30, 2009 from 0.5% for the period ended September 30, 2008. Such
percentage decrease in other income was primarily due to lower interest rates
period-on-period.


26





Interest
Expense





Total
interest expense decreased $99,062, or 30.3%, to $228,343 for the period ended
September 30, 2009, from $327,405 for the period ended September 30, 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 $123,551 being capitalized to
constuction-in-progress for the quarter.





Income
Tax





For the
period ended September 30, 2009, we recognized an income tax benefit of $1,233,
compared to an income tax expense of $170,621 for the period ended September 30,
2008. The decrease in taxes reflects a lower income from operations
period-on-period.





Net
Income/(loss)





Net
income decreased by $3,150,925, or 109.6%, period-on-period, to a net loss of
$275,191 for the period ended September 30, 2009 from net income of $2,875,734
for the period ended September 30, 2008. The decrease in net income is
attributable to a combination of factors discussed above, including a decrease
in tons sold due to weakened demand amid the current global economic downturn
and a decrease in average selling prices due to weak steel prices, which in turn
led to a decrease in sales revenue, lower gross margins period-on-period and a
net loss for the first quarter.





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 September 30, 2009, we had cash and cash equivalents of
approximately $13.6 million.





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




CASH
FLOW





Three Months Ended September
      30,2009
                
                
                2008Net
      cash used in operating activities
                
                $
                (302,459
                )
                
                $
                (1,081,019
                )Net
      cash used in investing activities
                
                
                (2,946,433
                )
                
                
                (7,263,898
                )Net
      cash provided by financing activities
                
                
                3,296,075
                
                
                
                182,374Net
      cash flow
                
                
                53,824
                
                
                
                (8,241,767
                )





Operating
Activities





Net cash
flows used in operating activities for the period ended September 30, 2009 was
$302,459 as compared with $1,081,019 used in operating activities for the period
ended September 30, 2008, for a net increase of $778,560. This increase was
mainly due to increase in cash inflow from accounts receivable in the amount of
$6,284,218, as compared with a cash outflow in the amount of $5,622,477 for
accounts receivable during the period ended September 30, 2008, offset by
increase in cash outflow for inventory in the amount of $2,904,432 and increase
in cash outflow from other taxes payable in the amount of $3,734,375 resulting
from payment of VAT related to the purchase of fixed assets during the period
ended September 30, 2009.





For the
period ended September 30, 2009, sales revenues generated from the top five
major customers as a percentage of total sales increased to 55% as compared to
47% for the period ended September 30, 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.


27





Investing
Activities





Our main
uses of cash for investing activities during the period ended September 30, 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 and improve product qualities, 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 period ended September 30, 2009 was
$2,946,433 as compared with $7,263,898 for the period ended September 30, 2008.
Cash flows used in investing activities decreased as the majority of the
construction costs related to the new 1450mm cold rolling mill and annealing
furnaces have been paid for in prior periods and there were no new construction
projects during the period.





As of
September 30, 2009, the Company had $916,162 in commitments for capital
expenditures for construction projects mentioned above. Management believes that
we currently have sufficient capital resources to meet these contractual
commitments and expect to complete the trial production of the new mill by end
of calendar 2009. We also forecast lower capital expenditures in the coming
years as by now the Company has completed most of its expansion plans and the
majority of the construction costs relating to our third cold rolling mill have
already been paid for as at September 30, 2009.





Financing
Activities




Net cash
flows provided by financing activities for the period ended September 30, 2009
was $3,296,075 as compared with $182,374 provided by financing activities for
the period ended September 30, 2008. During the period ended September 30, 2009,
the Company received short-term loan proceeds of $3,735,552, which was partially
offset by repayment of short-term loans in the amount of $439,477.





On
December 30, 2008, we filed a universal shelf registration statement with the
SEC. The shelf registration, when declared effective, will permit us to issue
securities valued at up to an aggregate of $40 million. Once 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.





Current
Assets





Current
assets increased by $1,767,797, or 2.1%, period-on-period to $85,799,548 as of
September 30, 2009, from $84,031,751 as of June 30, 2009, principally as a
result of a increase in accounts receivable of $1,739,623, or 6.9%,
period-on-period, as a result of slower collection during the period,
inventories by $3,197,477, or 19.6%, period-on-period, offset by a decrease in
bills receivable of $2,468,837, or 40.3%, period-on-period and advances to
suppliers of $709,071, or 3.2%.


28





Accounts
receivable, representing 31.3% of total current assets as of September 30, 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 September 30, 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 September 30 and June 30, 2009:





September 30,
2009





US$
                      
                      Total
                      
                      
                      Current
                      
                      
                      1 to 30
                        days
                      
                      
                      31 to
                        90 days
                      
                      
                      91 to 180
                        days
                      
                      
                      181 to 360
                        days
                      
                      
                      over
                        1 yearTOTAL
                      
                      
                      27,786,454
                      
                      
                      
                      21,907,454
                      
                      
                      
                      647,261
                      
                      
                      
                      289,433
                      
                      
                      
                      1,468,411
                      
                      
                      
                      1,844,460
                      
                      
                      
                      1,629,435%
                      
                      
                      100
                      
                      
                      
                      79
                      
                      
                      
                      2
                      
                      
                      
                      1
                      
                      
                      
                      5
                      
                      
                      
                      7
                      
                      
                      
                      6





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





Accounts
receivable over 180 days in the amount of $1,724,116 and over 1 year in the
amount of $786,753 as of September 30, 2009 have been collected as subsequent
settlement and therefore not considered in the provision for allowance for bad
and doubtful debts.




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 $2,258,022, or 5.3%, period-on-period, to $45,063,674
as of September 30, 2009, from $42,805,652 as of June 30, 2009. The increase was
mainly attributable to an increase in short-term loans of $3,310,571, or 14.7%,
period-on-period, as well as an increase in accounts payable of $2,154,205, or
30.2%, period-on-period, offset by a decrease in other taxes payable of
$3,643,382, or 54.8%, period-on-period.


29





As of
September 30, 2009, we had $25,799,602 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 period ended September 30, 2009, we invested $749,049 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 September 30, 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;
                            $2,481,056
                            (RMB17,000,000)Raiffeisen
                            Zentralbank
      Österreich AG
                          
                          July
      7, 2009
                          
                          July
      31, 2010
                          
                          1
      year
                          
                          1.15
      times of the
                            PBOC
      rate
                          
                          $18,018,546
                            (RMB123,000,000Total
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $25,799,602





As of
September 30, 2009, we had $25,799,602 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 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 weak demand and volatility in both domestic and international
markets in the foreseeable future, especially the higher margin low carbon cold
rolled exported products and the high carbon cold rolled products that are sold
to the auto industry, our operating cash flows might be significantly negatively
impacted by such 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 September 30,
2009, the Company also had $916,162 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.





Obligations
under Material Contracts





Below is
a table setting forth our material contractual obligations as of September 30,
2009:


30





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
                
                $
                27,226,310
                
                
                $
                27,226,310
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Construction
      Commitments
                
                $
                916,162
                
                
                $
                916,162
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -TOTAL
                
                $
                28,142,472
                
                
                $
                28,142,472
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -





Recent
Accounting Pronouncements





The
Financial Accounting Standards Board (“FASB”) recently issued the following
standards which the Company reviewed to determine the potential impact on our
financial statements upon adoption.





In
June 2009, the FASB issued authoritative guidance (the “Codification”),
which was launched on July 1, 2009 and became the single source of
authoritative nongovernmental GAAP, superseding existing FASB, AICPA, Emerging
Issues Task Force (“EITF”) and related literature.  The Codification
eliminates the GAAP hierarchy and establishes one level of authoritative
GAAP.  All other literature is considered
non-authoritative.  This Codification is effective for financial
statements issued for interim and annual periods ending after September 15,
2009.  The implementation of this guidance changed how we disclose
authoritative accounting pronouncements in the notes to our consolidated
financial statements.





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 105, “The Hierarchy of
Generally Accepted Accounting Principles" (“ASC 105”).  This statement
identifies the sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial statements of
non-governmental entities that are presented in conformity with US GAAP. The
provisions of ASC 105 become effective 60 days following the SEC's approval of
the amendment to AU Section 411, "The Meaning of Presents Fairly in Conformity
with Generally Accepted Accounting Principles" by the Public Company Accounting
Oversight Board.  The adoption of this statement is not expected to
have a material effect on the Company’s future reported financial position or
results of operations.





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 codidified 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.


31





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, “FairValueMeasurements”, 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.




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.  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 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. 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 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
June 2009, the FASB issued guidance now codified as ASC 105, “The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles” (“ASC 105”). ASC 105 will become the single source of
authoritative nongovernmental GAAP, superseding existing FASB, American
Institute of Certified Public Accountants (AICPA), EITF, and related accounting
literature. ASC 105 reorganizes the thousands of GAAP pronouncements into
roughly 90 accounting topics and displays them using a consistent structure.
Also included is relevant SEC guidance organized using the same topical
structure in separate sections. ASC 105 will be effective for financial
statements issued for reporting periods that end after September 15, 2009.
This will have an impact on the Company’s financial statement disclosures since
all future references to authoritative accounting literature will be referenced
in accordance with ASC 105.


32





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.





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
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. 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.





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.





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.


33





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 September 30, 2009, approximately 13% of our accounts receivable
were past due over 180 days.  To reserve for potentially uncollectible
accounts receivable, for the period ended September 30, 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 September 30 and June 30, 2009, the Company
had $905,997 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 September 30, 2009 and 2008 were $117,117 and
nil, 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 September 30 and June 30, 2009, the Company had
allowances for advances to suppliers of $1,632,609 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 September 30, 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.





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.


34





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 for 50 years 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 September 30, 2009 and no
impairment charges were recognized for the relevant periods. As of September 30,
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
September 30, 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.





Off-Balance
Sheet Arrangements





For the
period ended September 30, 2009, we did not have any off-balance sheet
arrangements.





ITEM
      3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.





Not
Applicable.


35





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 September 30, 2009.  Based on our
assessment, Mr. Li and Ms. Li determined that, as of September 30, 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.





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:


36





Exhibit No.
            
            Description31.1
            
            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.


37





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:
      November 16, 2009
              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)


38